Tableof Contents

 

 

 

**UNITEDSTATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

----

 

**FORM 10-Q**

 

**(Mark One)**

 
| **x**      | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                                                         |
|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                           |
| ** ** | ** ** | **For the quarterly period ended  September 30, 2008.**                                                                                                                                                                                                                                                                                                                                                   |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                           |
|       |       | **OR**                                                                                                                                                                                                                                                                                                                                                                                                         |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                           |
| **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:  0-27718**

 

**NEOSE TECHNOLOGIES, INC.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                                     | ** ** | **13-3549286**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification No.) |
|                                                             |       |                                  |
| **102  Rock Road  Horsham, Pennsylvania**                        |       | **19044**                             |
| (Address of  principal executive offices)                        |       | (Zip Code)                            |

 

**(215)315-9000**

(Registrant’stelephone number, including area code)

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 

Yes   x    No   o

 

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

 
| Large accelerated filer o |   | Accelerated filer x |   | Non-accelerated filer o                       |   | Smaller reporting  company o |
|---------------------------|--------|---------------------|--------|-----------------------------------------------|--------|------------------------------|
|                      |   |                |   | (Do not check if a smaller reporting company) |   |                         |
|                           |        |                     |        |                                               |        |                              |  |  |  |  |

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).

 

Yes   x    No   o

 

Indicate thenumber of shares outstanding of each of the issuer’s classes of common stock,as of the latest practicable date:  54,473,919shares of common stock, $.01 par value, were outstanding as of November 7,2008.

 

 

 

----

Table of Contents

 

**NEOSE TECHNOLOGIES, INC.**

 

**INDEX**

 
| ** **    | **Page**                                                                                        |
|---------------|-------------------------------------------------------------------------------------------------|
| PART I.  | FINANCIAL INFORMATION:                                                                          |   |
|          |                                                                                            |   |
| Item 1.       | Financial Statements (unaudited)                                                                |   |
|          |                                                                                            |   |
|          | Balance Sheets as of  September 30, 2008 and December 31, 2007                        | 3 |
|          |                                                                                            |   |
|          | Statements of  Operations for the three and nine months ended September 30, 2008 and  2007 | 4 |
|          |                                                                                            |   |
|          | Statements of  Cash Flows for the nine months ended September 30, 2008 and 2007            | 5 |
|          |                                                                                            |   |
|          | Notes  to Financial Statements                                                                  | 6 |
|          |                                                                                            |   |
| Item 2.       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations     | 25 |
|          |                                                                                            |   |
| Item 3.       | Quantitative  and Qualitative Disclosures About Market Risk                                     | 41 |
|          |                                                                                            |   |
| Item 4.       | Controls and  Procedures                                                                        | 42 |
|          |                                                                                            |   |
| PART II. | OTHER INFORMATION:                                                                              |   |
|          |                                                                                            |   |
| Item 1A.      | Risk Factors                                                                                    | 43 |
|          |                                                                                            |   |
| Item 6.       | Exhibits                                                                                        | 46 |
|          |                                                                                            |
| SIGNATURES    | 47                                                                                              |

 

2

----

Table of Contents

 

**PART I.     FINANCIALINFORMATION**

 

**Item 1.        FinancialStatements**

 

**Neose Technologies, Inc.**

 

**Balance Sheets**

(unaudited)

(in thousands, except per share amounts)

 
| ** **                                                                                                | ** ** | **September 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| **Assets**                                                                                                |       |                         |       |                        |       |
| Current assets:                                                                                           |       |                         |       |                        |       |
| Cash and cash  equivalents                                                                                |       | $                            | 7,097      |                        | $          | 19,282 |   |
| Accounts  receivable, net                                                                                 |       | 1,758                        |       | 1,758                       |       |
| Prepaid expenses  and other current assets                                                                |       | 425                          |       | 1,564                       |       |
| Total current  assets                                                                                     |       | 9,280                        |       | 22,604                      |       |
| Property and  equipment, net                                                                              |       | 12,612                       |       | 13,564                      |       |
| Other assets                                                                                              |       | 71                           |       | 71                          |       |
| Total assets                                                                                              |       | $                            | 21,963     |                        | $          | 36,239 |   |
| **Liabilities and Stockholders’ Equity**                                                             |       |                         |       |                        |       |
| Current  liabilities:                                                                                     |       |                         |       |                        |       |
| Note payable                                                                                              |       | $                            | 136        |                        | $          | — |   |
| Current portion  of long-term debt and capital lease obligations                                          |       | 68                           |       | 658                         |       |
| Accounts payable                                                                                          |       | 629                          |       | 1,309                       |       |
| Accrued  compensation                                                                                     |       | 1,107                        |       | 872                         |       |
| Accrued expenses                                                                                          |       | 1,919                        |       | 2,977                       |       |
| Deferred revenue                                                                                          |       | 938                          |       | 1,517                       |       |
| Total current  liabilities                                                                                |       | 4,797                        |       | 7,333                       |       |
| Warrant  liability                                                                                        |       | 993                          |       | 4,205                       |       |
| Long-term debt  and capital lease obligations                                                             |       | 137                          |       | 182                         |       |
| Deferred revenue                                                                                          |       | 7,538                        |       | 5,055                       |       |
| Other  liabilities                                                                                        |       | 571                          |       | 548                         |       |
| Total liabilities                                                                                         |       | 14,036                       |       | 17,323                      |       |
| Contingencies  (See Note 16)                                                                              |       |                         |       |                        |       |
| Stockholders’  equity:                                                                               |       |                         |       |                        |       |
| Preferred stock,  par value $.01 per share, 5,000 shares authorized, none issued                          |       | —                       |       | —                      |       |
| Common stock,  par value $.01 per share, 150,000 shares authorized; 54,468 shares issued and  outstanding |       | 545                          |       | 545                         |       |
| Additional  paid-in capital                                                                               |       | 313,576                      |       | 313,216                     |       |
| Accumulated  deficit                                                                                      |       | (306,194                     | )          | (294,845                    | )          |
| Total  stockholders’ equity                                                                          |       | 7,927                        |       | 18,916                      |       |
| Total  liabilities and stockholders’ equity                                                          |       | $                            | 21,963     |                        | $          | 36,239 |   |

 

The accompanying notes arean integral part of these financial statements.

 

3

----

Tableof Contents

 

**Neose Technologies, Inc.**

 

**Statements of Operations**

(unaudited)

(in thousands,except per share amounts)

 
| ** **                                                                                  | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                  | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenue from  collaborative agreements                                                      |       | $                                                    | 2,003      |                                                | $          | 2,631 |   | $ | 7,688 |   | $ | 6,099 |   |
|                                                                                        |       |                                                 |       |                                                |       |   |   |   |   |
| Operating  expenses:                                                                        |       |                                                 |       |                                                |       |   |   |   |   |
| Research and  development                                                                   |       | 3,354                                                |       | 10,735                                              |       | 15,035 |   | 28,289 |   |
| General and administrative                                                                  |       | 2,744                                                |       | 2,560                                               |       | 7,785 |   | 8,073 |   |
| Total operating  expenses                                                                   |       | 6,098                                                |       | 13,295                                              |       | 22,820 |   | 36,362 |   |
| Operating loss                                                                              |       | (4,095                                               | )          | (10,664                                             | )          | (15,132 | ) | (30,263 | ) |
| (Increase)  decrease in fair value of warrant liability                                     |       | (355                                                 | )          | 7,772                                               |       | 3,212 |   | 3,342 |   |
| Interest income                                                                             |       | 56                                                   |       | 421                                                 |       | 303 |   | 1,195 |   |
| Interest expense                                                                            |       | (6                                                   | )          | (35                                                 | )          | (35 | ) | (123 | ) |
| Loss before  income tax benefit                                                             |       | (4,400                                               | )          | (2,506                                              | )          | (11,652 | ) | (25,849 | ) |
| Income tax  benefit                                                                         |       | —                                               |       | —                                              |       | 303 |   | 533 |   |
| Net loss                                                                                    |       | $                                                    | (4,400     | )                                                   | $          | (2,506 | ) | $ | (11,349 | ) | $ | (25,316 | ) |
| Basic and  diluted net loss per share                                                       |       | $                                                    | (0.08      | )                                                   | $          | (0.05 | ) | $ | (0.21 | ) | $ | (0.52 | ) |
|                                                                                        |       |                                                 |       |                                                |       |   |   |   |   |
| Weighted-average  shares outstanding used in computing basic and diluted net loss per share |       | 54,468                                               |       | 54,449                                              |       | 54,468 |   | 48,844 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

4

----

Table of Contents

 

**Neose Technologies, Inc.**

 

**Statements of Cash Flows**

(unaudited)

(in thousands)

 
| ** **                                                                   | ** ** | **Nine months ended  September 30,** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| Cash flows from  operating activities:                                       |       |                                                |       |   |   |
| Net loss                                                                     |       | $                                                   | (11,349    | ) | $ | (25,316 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                                                |       |   |   |
| Decrease in fair  value of warrant liability                                 |       | (3,212                                              | )          | (3,342 | ) |
| Depreciation and  amortization expense                                       |       | 1,221                                               |       | 1,467 |   |
| Non-cash  compensation expense                                               |       | 360                                                 |       | 1,681 |   |
| Non-cash rent  expense                                                       |       | —                                              |       | 130 |   |
| Loss on  disposition of property and equipment                               |       | 4                                                   |       | 4 |   |
| Changes in  operating assets and liabilities:                                |       |                                                |       |   |   |
| Accounts  receivable                                                         |       | —                                              |       | (1,570 | ) |
| Prepaid expenses  and other current assets                                   |       | 1,139                                               |       | 188 |   |
| Other assets                                                                 |       | —                                              |       | (13 | ) |
| Accounts payable                                                             |       | (920                                                | )          | (695 | ) |
| Accrued  compensation                                                        |       | 235                                                 |       | (247 | ) |
| Accrued expenses                                                             |       | (1,058                                              | )          | 3,117 |   |
| Deferred revenue                                                             |       | 1,904                                               |       | 1,230 |   |
| Other  liabilities                                                           |       | 23                                                  |       | 29 |   |
| Net cash used in  operating activities                                       |       | (11,653                                             | )          | (23,337 | ) |
|                                                                         |       |                                                |       |   |   |
| Cash flows from  investing activities:                                       |       |                                                |       |   |   |
| Purchases of  property and equipment                                         |       | (33                                                 | )          | (3,417 | ) |
| Net cash used in  investing activities                                       |       | (33                                                 | )          | (3,417 | ) |
|                                                                         |       |                                                |       |   |   |
| Cash flows from  financing activities:                                       |       |                                                |       |   |   |
| Proceeds from  issuance of debt                                              |       | 370                                                 |       | 367 |   |
| Repayments of  debt                                                          |       | (869                                                | )          | (1,315 | ) |
| Proceeds from  issuance of common stock and warrants, net                    |       | —                                              |       | 40,486 |   |
| Payment of  withholding taxes related to restricted stock units              |       | —                                              |       | (49 | ) |
| Net cash (used  in) provided by financing activities                         |       | (499                                                | )          | 39,489 |   |
|                                                                         |       |                                                |       |   |   |
| Net (decrease)  increase in cash and cash equivalents                        |       | (12,185                                             | )          | 12,735 |   |
| Cash and cash  equivalents, beginning of period                              |       | 19,282                                              |       | 16,388 |   |
| Cash and cash  equivalents, end of period                                    |       | $                                                   | 7,097      |   | $ | 29,123 |   |

 

The accompanying notes arean integral part of these financial statements.

 

5

----

Tableof Contents

 

**NeoseTechnologies, Inc.**

 

**Notes to Financial Statements**

**(unaudited)**

(in thousands,except per share amounts)

 

**1.****              Background**

** **

Neose Technologies, Inc.is a clinical-stage biopharmaceutical company focused on the development ofnext-generation therapeutic proteins, which we believe will be competitive withbest-in-class protein drugs currently on the market. We have two therapeuticprotein candidates in clinical trials: GlycoPEG-GCSF and GlycoPEG-FVIIa, andtwo therapeutic protein candidates in the research stage: GlycoPEG-FVIII andGlycoPEG-FIX.

 

GlycoPEG-GCSF is along-acting version of granulocyte colony stimulating factor (G-CSF) that weare co-developing with BioGeneriX AG, a company of the ratiopharm Group. G-CSFis prescribed to stimulate production of neutrophils (a type of white bloodcell) and is approved for sale in major markets around the world for treatmentof neutropenia associated with myelosuppressive chemotherapy.  In June 2008, BioGeneriX initiated aPhase II study to evaluate the safety and efficacy of GlycoPEG-GCSF for thetreatment of neutropenia associated with myelosuppressive chemotherapy. We expect completion of this Phase II study during the first half of2009.  In November 2007, wereported data from two Phase I clinical trials. That data demonstrated that GlycoPEG-GCSF is a potent stimulator ofneutrophils and mobilizer of peripheral blood progenitor cells, and that atcomparable doses to Neulasta® (Amgen’s marketed, long-acting G-CSF),GlycoPEG-GCSF demonstrated a 60% greater bioavailability, leading to a 30%increase in the generation of neutrophils.

 

GlycoPEG-FVIIa is along-acting form of recombinant Factor VIIa that is being developed by ourpartner, Novo Nordisk A/S, utilizing our GlycoPEGylation technology.  Factor VIIa is used in the treatment ofbleeding episodes and for the prevention of bleeding during surgery or invasiveprocedures in patients with congenital hemophilia with inhibitors tocoagulation Factors VIII or IX.  In June 2008,Novo Nordisk completed an initial Phase I clinical study that assessed thesafety and pharmacokinetics of GlycoPEG-FVIIa in healthy volunteers.  In the trial, a significant prolongation ofthe half-life of GlycoPEG-FVIIa was observed. Novo Nordisk is also developing long-acting forms of recombinant FactorVIII and recombinant Factor IX using our GlycoPEGylation technology. FactorVIII products are used in the treatment of Hemophilia A, and Factor IX productsare used in the treatment of Hemophilia B.

 

In January 2008, weannounced the discontinuation of further development of GlycoPEG-EPO (NE-180),our product candidate intended forthe treatment of anemia in patients with chronic kidneydisease and cancer patients receiving chemotherapy.  The decision to discontinue development wasnot due to any safety or efficacy concerns about NE-180, but was based on ourevaluation of commercial prospects and the likelihood of entering into a timelycollaboration for the compound in the context of increased safety concerns inthe erythropoiesis-stimulating agent (ESA) category. In connection with thediscontinuation of the NE-180 program, we reduced our workforce byapproximately 35% (see Note 14).

 

In September 2008,we announced that we had signed definitive asset purchase agreements with NovoNordisk and BioGeneriX, providing for the sale of substantially all of our 

 

6

----

Table of Contents

 

**NeoseTechnologies, Inc.**

 

**Notes to Financial Statements**

**(unaudited)**

(in thousands,except per share amounts)

 

intellectual propertyassets in all-cash transactions for an aggregate purchase price of $43,000 (theAsset Sales).  The consummations of theAsset Sales are subject to certain customary closing conditions, includingapproval by our stockholders.  The AssetSales are the initial step in our contemplated liquidation and dissolution (theLiquidation) pursuant to a plan of complete liquidation and dissolution (thePlan of Liquidation).  The approval andadoption of the Plan of Liquidation by our stockholders will be required forthe implementation of the Liquidation (see Note 16).  We expect to hold a special meeting ofstockholders in late 2008 or early 2009.

 

Our common stockis currently traded on The NASDAQ Stock Market LLC (NASDAQ) under the symbol “NTEC.”  Since February 2008, we have receivedcorrespondence from the NASDAQ Listing Qualifications Department (theDepartment) indicating our non-compliance with various NASDAQ MarketplaceRules.  We are currently in the processof appealing these determinations before the NASDAQ Listing QualificationsPanel (the Panel).  A date for the appealhearing has not yet been determined. There can be no assurance that the Panel will grant our request forcontinued listing, particularly in view of our previously announced Asset Salesand Liquidation.  In the event that thePanel denies our request for continued listing, we expect that our common stockwill be eligible for quotation on the Pink OTC Markets Inc. (Pink Sheets) orthe OTC Bulletin Board (OTC BB) or both.

 

We have incurred losses eachyear since inception. As of September 30, 2008, we had an accumulateddeficit of $306,194.  If the Asset Salesare not consummated, we believe that our existing cash and cash equivalents,expected proceeds from collaborations and license arrangements and interestincome should be sufficient to meet our operating and capital requirements(including payment of all costs and potential expense reimbursements related tothe Asset Sales) through the second quarter of 2009, although changes in ourcollaborative relationships or our business, whether or not initiated by us,may cause us to deplete our cash and cash equivalents earlier than the secondquarter of 2009. Assuming neither Asset Sale is consummated, we must obtainadditional financing in order to continue our operations beyond the secondquarter of 2009.  There are no assurancesthat funding will be available when we need it on terms we that we findfavorable, if at all.  If we are unableto secure additional financing on terms acceptable to us and on a timely basis,we may seek further stockholder approval to dissolve or we may file for, or beforced to resort to, bankruptcy protection. Any decision to seek further stockholder approval to dissolve or to filefor, or be forced to resort to bankruptcy protection, may occur at any point duringor before the second quarter of 2009.

 

We have not yet developedany products or commercialized any products or technologies, and we may neverbe able to do so.  Even if we aresuccessful in developing products that are approved for marketing, we will notbe successful unless our products, and products incorporating our technology,gain market acceptance.  Our operationsare subject to risks and uncertainties in addition to those mentioned above,such as, among others, the uncertainty of product development, including ourdependence upon third parties to conduct our clinical trials and to manufactureour product candidates and the materials used to make them, and unexpecteddelays or unfavorable results in our clinical trials; our limited productdevelopment and 

 

7

----

Tableof Contents

 

**NeoseTechnologies, Inc.**

 

**Notes to Financial Statements**

**(unaudited)**

(in thousands,except per share amounts)

 

manufacturing experience; ourdependence upon collaborative partners to develop and commercialize productsincorporating our technology and the success of collaborative relationships;the uncertainty of intellectual property rights; the possibility of developmentand commercialization of competitive products by others that are moreeffective, less costly, or otherwise gain greater market acceptance; theuncertainty of the impact of government regulation on our operations, includingachieving regulatory approvals for our products or products incorporating ourtechnology, and changes in health care reimbursement policies; the uncertaintyof the consummations of the Asset Sales; and the uncertainty of theimplementation of the Liquidation.

 

**2.****              Interim FinancialInformation**

** **

The accompanyingunaudited financial statements have been prepared in accordance with U.S.generally accepted accounting principles for presentation of interim financialstatements and on a going concern basis and do not reflect any impact of thecontemplated Plan of Liquidation that is subject to stockholder approval.  Accordingly, the unaudited financialstatements do not include all the information and footnotes necessary for acomprehensive presentation of the financial position, results of operations,and cash flows for the periods presented. In our opinion, however, the unaudited financial statements include allthe normal recurring adjustments that are necessary for a fair presentation ofthe financial position, results of operations, and cash flows for the periodspresented.  You should not base yourestimate of our results of operations for 2008 solely on our results ofoperations for the nine months ended September 30, 2008.  You should read these unaudited financialstatements in combination with the other Notes in this section; the sectionentitled “Management’s Discussion and Analysis of Financial Condition andResults of Operations” appearing in Item 2 of this Form 10-Q; and theFinancial Statements, including the Notes to the Financial Statements, includedin our Annual Report on Form 10-K for the year ended December 31,2007.

 

**3.****             ****Summaryof Significant Accounting Policies**

** **

*Use of Estimates*

* *

##### The preparation of financialstatements in conformity with U.S. generally accepted accounting principlesrequires us to make estimates and assumptions. Those estimates and assumptions affect the reported amounts of assetsand liabilities as of the date of the financial statements, the disclosure ofcontingent assets and liabilities as of the date of the financial statements,and the reported amounts of revenues and expenses during the reportingperiod.  Actual results could differ fromthose estimates.

#####  

*Accounts Receivable*

* *

Werecord accounts receivable net of an allowance for doubtful accounts.  We establish an allowance for doubtfulaccounts that we believe is adequate to cover anticipated losses on the 

 

8

----

Tableof Contents

 

**NeoseTechnologies, Inc.**

 

**Notes to Financial Statements**

**(unaudited)**

(in thousands,except per share amounts)

 

collectionof all outstanding accounts receivable. The adequacy of the allowance for doubtful accounts is based onhistorical information and management’s assessment of our collaborators’ability and intent to pay.  We recognizerevenue based on proportional performance of research and development workperformed on behalf of our collaborators, which recognition may not correspondwith how our collaborators are billed. We review the unbilled accounts receivable from our collaborators todetermine that such amounts are expected to become billable andcollectible.  All unbilled receivablesare expected to be billed within six months.

 

*Warrant Liability*

* *

We follow Emerging IssuesTask Force (EITF) No. 00-19, *Accounting for DerivativeFinancial Instruments Indexed to, and Potentially Settled in, a Company’s OwnStock*(EITF 00-19), which provides guidance for distinguishing amongpermanent equity, temporary equity and assets and liabilities.  EITF 00-19 requires liability classificationof warrants that may be settled in cash at the option of warrant holders.  The warrants issued in our March 2007equity financing permit net cash settlement in certain change of controlcircumstances at the option of the warrant holders, and are, therefore,classified as a liability on our Balance Sheets (the Warrants) (see Note 10).

 

We record the Warrantliability at its fair value using the Black-Scholes option-pricing model andrevalue it at each reporting date until the Warrants are exercised orexpire.  Changes in the fair value of theWarrants are reported in our Statements of Operations as non-operating incomeor expense.  The fair value of theWarrants is subject to significant fluctuation based on changes in our stockprice, expected volatility, remaining contractual life and the risk-freeinterest rate.  The market price for ourcommon stock has been and may continue to be volatile.  Consequently, future fluctuations in the priceof our common stock may cause significant increases or decreases in the fairvalue of the Warrants.

 

Inconnection with our March 2007 equity financing, we were obligated to filea registration statement with the SEC for the registration of the total numberof shares sold to the investors and shares issuable upon exercise of theWarrants (the Registration Statement). We are also required under an agreement (the Registration RightsAgreement) to use commercially reasonable efforts to cause the RegistrationStatement to be declared effective by the SEC, which we accomplished in May 2007,and to remain continuously effective until such time when all of the registeredshares are sold. In the event we fail to meet various legal requirements inregards to the registration statement, we will be obligated to pay theinvestors, as partial liquidated damages and not as a penalty, an amount incash equal to 1% of the aggregate purchase price paid by the investors for eachmonthly period that the Registration Statement is not effective, up to24%.  We follow Financial AccountingStandards Board (FASB) Staff Position No. EITF 00-19-2, *Accounting for Registration Payment Arrangements*(EITF00-19-2), which specifies that registration payment arrangements should play nopart in determining the initial classification of, and subsequent accountingfor, securities to which the payments relate. Contingent obligations in a registration payment arrangement areseparately analyzed under Statement of Financial 

 

9

----

Tableof Contents

 

**NeoseTechnologies, Inc.**

 

**Notes to Financial Statements**

**(unaudited)**

(in thousands,except per share amounts)

 

AccountingStandards (SFAS) No. 5, *Accounting forContingencies,* and FASB Interpretation No. 14, *Reasonable Estimation of the Amount of a Loss*.  If we determine a registration paymentarrangement in connection with the securities issued in our March 2007equity financing is probable and can be reasonably estimated, a liability willbe recorded.

 

On October 6, 2008, we entered into anamendment to the Registration Rights Agreement with the investors from our March 2007equity financing.  The amendment reducedthe potential maximum payment of liquidated damages by 50% in connection withthe Asset Sales and the Liquidation.

 

Pursuant to the terms of the RegistrationRights Agreement, as amended, the holders of shares and Warrant shares subjectto the Registration Rights Agreement, as amended, have the right to liquidateddamages mentioned above, if among other things, their shares remain outstandingafter we cease to keep effective with the SEC the Registration Statement.  If we liquidate following the consummationsof the Asset Sales and contemporaneously cease to keep effective theRegistration Statement, the holders at such time of shares and Warrant sharessubject to the Registration Rights Agreement, as amended, would be entitled tothese liquidated damages.  As the AssetSales and the Plan of Liquidation require stockholder approval, which has notoccurred as of September 30, 2008, we have concluded the likelihood ofhaving to make any payments under the arrangements is not probable, andtherefore, did not record any related liability.

 

*Net Loss Per Share*

* *

Basic net loss per share is computed by dividing netloss by the weighted-average number of common shares outstanding for theperiod.  Diluted net loss per share iscomputed by dividing net loss by the sum of the weighted-average number ofcommon shares outstanding for the period and the number of additional sharesthat would have been outstanding if dilutive potential common shares had beenissued.  Potential common shares areexcluded from the calculation of diluted net loss per share if the effect onnet loss per share is antidilutive. Because the exercise of outstanding stock options and Warrants orsettlement of restricted stock units (RSUs) would have an antidilutive effectin the computation of diluted net loss per share, our diluted net loss pershare is equal to basic net loss per share for all reporting periodspresented.  See Note 12 for a summary ofoutstanding options and a description of our RSUs.

 

*Comprehensive Loss*

* *

Comprehensiveincome (loss) is comprised of net income (loss) and other comprehensive income(loss). Other comprehensive income (loss) includes certain changes to equitythat are not included in net income (loss). Our comprehensive loss for the three and nine months ended September 30,2008 was comprised only of our net loss, and was $4,400 and $11,349,respectively.  Our comprehensive loss forthe three and nine months ended September 30, 2007 was comprised only ofour net loss, and was $2,506 and $25,849, respectively.

 

10

----

Tableof Contents

 

**NeoseTechnologies, Inc.**

 

**Notes to Financial Statements**

**(unaudited)**

(in thousands,except per share amounts)

 

*Fair Value of Financial Instruments*

* *

Thefair value of financial instruments is the amount for which instruments couldbe exchanged in an orderly transaction between market participants.  As of September 30, 2008, the carryingvalues of cash and cash equivalents, accounts receivable, prepaid expenses andother current assets, accounts payable, accrued expenses, and accruedcompensation equaled or approximated their respective fair values because ofthe short duration of these instruments. The fair value of our debt and capital lease obligations was estimatedby discounting the future cash flows of each instrument at rates recentlyoffered to us for similar debt instruments. As of September 30, 2008, the fair and carrying values of our debtand capital lease obligations were each $341.

 

*Recent AccountingPronouncements*

* *

In December 2007,the FASB issued EITF 07-01, *Accounting forCollaborative Arrangements*(EITF 07-01).  EITF 07-01 provides guidance as towhether an arrangement constitutes a collaborative arrangement, how costsincurred and revenue generated on sales to third parties and payments betweenparticipants pursuant to a collaboration agreement should be presented in theresults of operations and what participants should disclose in the notes to thefinancial statements about a collaborative arrangement.  EITF 07-01 is effective for fiscal yearsbeginning after December 15, 2008. We are currently evaluating the impact that the adoption of EITF 07-01will have, if any, on our financial statements and related disclosures.

 

In June 2007,the FASB issued EITF 07-03, *Accounting forNonrefundable Advance Payments for Goods or Services to Be Used in FutureResearch and Development Activities-*(EITF 07-03)*. *EITF07-03 specifies that nonrefundable advance payments for future research anddevelopment activities should be deferred and capitalized and should berecognized as an expense as the related goods are delivered or the relatedservices are performed.  If, subsequentto an advance payment, an entity no longer expects the goods to be delivered orservices to be rendered, the capitalized advance payment should be charged toexpense.  EITF 07-03 is effective forfiscal years beginning after December 15, 2007.  The adoption of EITF 07-03 did not have anyimpact on our financial statements and related disclosures.

 

In February 2007,the FASB issued SFAS No. 159,*The Fair Value Option for Financial Assets andFinancial Liabilities – Including an amendment of FASB Statement No. 115*(SFAS No. 159), which allows companies to choose, at specific electiondates, to measure eligible financial assets and liabilities at fair value thatare not otherwise required to be measured at fair value.  If a company elects the fair value option foran eligible item, changes in that item’s fair value in subsequent reporting periodsmust be recognized in current earnings. SFAS No. 159 is effective forfiscal years beginning after November 15, 2007.  Adoption of SFAS No. 159 has had noeffect on our financial statements and related disclosure because, as permittedunder 

 

11

----

Table of Contents

 

**NeoseTechnologies, Inc.**

 

**Notes to Financial Statements**

**(unaudited)**

(in thousands,except per share amounts)

 

SFASNo. 159, we have not elected to apply the fair value option to any of ourfinancial assets and liabilities.

 

In September 2006, theFASB issued SFAS No. 157, *Fair Value Measurements*(SFASNo. 157). SFAS No. 157 defines fair value,establishes a framework for measuring fair value in generally acceptedaccounting principles and expands disclosures about fair value measurements. SFAS No. 157 applies under otheraccounting pronouncements that require or permit fair value measurements, theFASB having previously concluded in those accounting pronouncements that fairvalue is the relevant measurement attribute. Although SFAS No. 157 does not require any new fair valuemeasurements, its application may, for some entities, change current practicesrelated to the definition of fair value, the methods used to measure fairvalue, and the expanded disclosures about fair value measurements.  In February 2008, the FASB issued FASBStaff Position 157-1, *Application of FASBStatement No. 157 to FASB Statement No. 13 and Other AccountingPronouncements That Address Fair Value Measurements for Purposes of LeaseClassification or Measurement under Statement 13*(FSP FAS 157-1) andFASB Staff Position 157-2, *Effective Date of FASBStatement No. 157*(FSP FAS 157-2).  FSP FAS 157-1 amends SFAS No. 157 toremove certain leasing transactions from its scope.  FSP FAS 157-2 defers the effective date ofSFAS No. 157 for all non-financial assets and non-financial liabilities,except for items that are recognized or disclosed at fair value in thefinancial statements on a recurring basis. We adopted SFAS No. 157, as it applies to our financialinstruments, effective January 1, 2008 and the adoption has had no effecton our financial statements and related disclosures.

 

**4.****              SupplementalDisclosure of Cash Flow Information**

** **

The following table contains additional cash flowinformation for the periods reported:

 
| ** **                                                                                                | ** ** | **Nine months ended   September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                                                                | ** ** | **2008**                                                  | ** ** | **2007** | ** ** |
| Supplemental  disclosure of cash flow information:                                                        |       |                                                      |       |   |   |
| Cash paid for  interest, net of amounts capitalized                                                       |       | $                                                         | 39         |   | $ | 124 |   |
| Non-cash  investing activities:                                                                           |       |                                                      |       |   |   |
| Increase  (decrease) in accrued property and equipment included in accounts payable and  accrued expenses |       | $                                                         | 240        |   | $ | (1,730 | ) |
| Assets acquired  under capital leases                                                                     |       | $                                                         | —     |   | $ | 373 |   |
| Non-cash  financing activities:                                                                           |       |                                                      |       |   |   |
| Initial  measurement of warrant liability (see Note 10)                                                   |       | $                                                         | —     |   | $ | 10,765 |   |

 

12

----

Tableof Contents

 

**NeoseTechnologies, Inc.**

 

**Notesto Financial Statements**

**(unaudited)**

(in thousands,except per share amounts)

 

**5.****             ****Accounts Receivable**

** **

Accounts receivable consistedof the following:

 
| ** **                            | ** ** | **September 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|---------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Billed  receivables                   |       | $                            | 447        |                        | $          | 670 |   |
| Unbilled  receivables                 |       | 1,311                        |       | 1,107                       |       |
|                                  |       | 1,758                        |       | 1,777                       |       |
| Less allowance  for doubtful accounts |       | —                       |       | (19                         | )          |
|                                  |       | $                            | 1,758      |                        | $          | 1,758 |   |

 

**6.****             ****Prepaid Expenses and OtherCurrent Assets**

 

Prepaidexpenses and other current assets consisted of the following:

 
| ** **                                          | ** ** | **September 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|-----------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Prepaid  insurance                                  |       | $                            | 152        |                        | $          | 57 |   |
| Prepaid  maintenance agreements                     |       | 95                           |       | 159                         |       |
| Prepaid contract  research and development services |       | —                       |       | 1,008                       |       |
| Prepaid clinical  trials and non-clinical studies   |       | —                       |       | 113                         |       |
| Other prepaid  expenses                             |       | 178                          |       | 227                         |       |
|                                                |       | $                            | 425        |                        | $          | 1,564 |   |

 

#### **7.**              Property and Equipment

#### ** **

Property and equipment consisted of the following:

 
| ** **                                       | ** ** | **September 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|--------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Leasehold  improvements                          |       | $                            | 12,996     |                        | $          | 12,984 |   |
| Laboratory,  manufacturing, and office equipment |       | 7,171                        |       | 6,960                       |       |
|                                             |       | 20,167                       |       | 19,944                      |       |
| Less accumulated  depreciation and amortization  |       | (7,555                       | )          | (6,380                      | )          |
|                                             |       | $                            | 12,612     |                        | $          | 13,564 |   |

 

Asof September 30, 2008 and December 31, 2007, laboratory,manufacturing, and office equipment included $495 of assets acquired undercapital leases.  Accumulated depreciationand 

 

13

----

Table of Contents

 

**NeoseTechnologies, Inc.**

 

**Notesto Financial Statements**

**(unaudited)**

(in thousands,except per share amounts)

 

amortizationas of September 30, 2008 and December 31, 2007 included $232 and$148, respectively, related to assets acquired under capital leases.  Depreciation expense, which includesamortization of assets acquired under capital leases, was $1,221 and $1,344 forthe nine months ended September 30, 2008 and 2007, respectively.  During the nine months ended September 30,2008, we disposed of fully depreciated assets that had original acquisitionvalues of $43.  We recorded losses ondisposition of property and equipment of $4 each during the nine months ended September 30,2008 and 2007, for which we did not receive any proceeds from thedispositions.  During the nine monthsended September 30, 2007, we capitalized $9 of interest expense inconnection with our facility improvement projects.  We did not capitalize any interest expenseincurred during the nine months ended September 30, 2008.

 

**8.****              Debt and CapitalLease Obligations**

** **

Debt and capital lease obligations consisted of thefollowing:

 
| ** **                                                                                                                                                    | ** ** | **September 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Note payable,  secured by insurance policies, annual interest at 4.1%, due January 2009                                                                  |       | $                            | 136        |                        | $          | — |   |
| Notes payable to  equipment lender, secured by equipment and facility improvements, interest  rates from 9.1% to 9.5%, final payment made September 2008 |       | 3⁄4                       |       | 327                         |       |
| Term loan from  landlord (unsecured), annual interest at 13.0%, final payment made  June 2008                                                            |       | 3⁄4                       |       | 195                         |       |
| Subtotal                                                                                                                                                      |       | 136                          |       | 522                         |       |
| Capital lease  obligations                                                                                                                                    |       | 205                          |       | 318                         |       |
| Total debt                                                                                                                                                    |       | 341                          |       | 840                         |       |
| Less note  payable, secured by insurance policies                                                                                                             |       | (136                         | )          | 3⁄4                      |       |
| Less current  portion                                                                                                                                         |       | (68                          | )          | (658                        | )          |
| Total debt, net  of current portion                                                                                                                           |       | $                            | 137        |                        | $          | 182 |   |

 

*Note Payable Secured by Insurance Policies*

* *

InMarch 2008, we borrowed $370 to finance insurance policy premiums due oncertain insurance policies. The insurance policy premiums, net of amortization,are included in prepaid expenses and other current assets on our Balance Sheetsat September 30, 2008 (see Note 6). We are required to pay $34 of principal and interest during each of theeleven months beginning on March 15, 2008 and ending on January 15,2009.  To secure payment of the amounts financed, we granted thelender a security interest in (i) all unearned premiums or dividendspayable under the policies, (ii) loss payments which may reduce theunearned premiums, subject to any 

 

14

----

Tableof Contents

 

**NeoseTechnologies, Inc.**

 

**Notesto Financial Statements**

**(unaudited)**

(in thousands,except per share amounts)

 

mortgageeor loss payee interests, and (iii) any interest in any state guaranteefund relating to the policies.

 

**9.****             ****AccruedExpenses**

 

Accrued expenses consistedof the following:

 
| ** **                                  | ** ** | **September 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|---------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Clinical trials  and non-clinical studies   |       | $                            | 963        |                        | $          | 1,544 |   |
| Professional  fees                          |       | 710                          |       | 788                         |       |
| Contract  research and development services |       | 218                          |       | 390                         |       |
| Other expenses                              |       | 28                           |       | 255                         |       |
|                                        |       | $                            | 1,919      |                        | $          | 2,977 |   |

 

**10.****       WarrantLiability**

 

In March 2007, we sold, through a private placement, 21,415 sharesof our common stock and Warrants to purchase 9,637 shares of our common stock(see Note 11).  The Warrants have anexercise price of $1.96 per share, a five-year term, and are immediatelyexercisable. The Warrants contain a net cash settlement feature, which is availableto the Warrant holders at their option, in certain change of controlcircumstances, including upon the consummations of the Asset Sales described inNote 16.  Under the net cash settlementfeature, each Warrant holder has the option to receive, in exchange for each ofits Warrants, an amount of cash equal to the value of such holder’s Warrants asof the trading day immediately prior to the public announcement of theconsummations of the Asset Sales, determined in accordance with theBlack-Scholes option pricing formula (the Warrant Value).  As of September 30, 2008, the net cashsettlement value of the Warrants was $2,530. This value is not fixed.  TheWarrant Value changes under the Black-Scholes option pricing formula with the volatilityof the price of our stock.

 

As a result of the net cash settlement provision, under EITF 00-19, theWarrants are required to be classified as a liability at their current fairvalue in our Balance Sheets, estimated using the Black-Scholes option-pricingmodel.  Warrants that are classified as aliability are revalued at each reporting date until the Warrants are exercisedor expire with changes in the fair value reported in our Statements ofOperations as non-operating income or expense. Therefore, we recordednon-operating expense of $355 during the three months ended September 30,2008 and non-operating income of $3,212 during the nine months ended September 30,2008.  We recorded non-operating incomeof $7,772 and $3,342 during the three and nine months ended September 30,2007, respectively.  The aggregate fairvalue and the assumptions used for the Black-Scholes option-pricing models asof March 13, 2007, September 30, 2007, December 31, 2007 and September 30,2008 were as follows:

 

15

----

Tableof Contents

 

**NeoseTechnologies, Inc.**

 

**Notesto Financial Statements**

**(unaudited)**

(in thousands,except per share amounts)

 
| ** **                          | ** ** | **March 13,  2007** | ** ** | **September 30,  2007** | ** ** | **December 31,  2007** | ** ** | **September 30,  2008** | ** ** |
|-------------------------------------|------------|--------------------------|------------|------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| Aggregate fair  value               |       | $                        | 10,765     |                         | $          | 7,423                       |       | $                            | 4,205      |   | $ | 993 |   |
| Expected  volatility                |       | 75                       | %          | 66                           | %          | 69                          | %          | 100                          | %          |
| Remaining  contractual term (years) |       | 5.0                      |       | 4.4                          |       | 4.2                         |       | 3.4                          |       |
| Risk-free  interest rate            |       | 4.4                      | %          | 4.2                          | %          | 3.3                         | %          | 2.5                          | %          |
| Expected  dividend yield            |       | 0                        | %          | 0                            | %          | 0                           | %          | 0                            | %          |
| Common stock  price                 |       | $                        | 1.79       |                         | $          | 1.54                        |       | $                            | 1.07       |   | $ | 0.32 |   |

 

**11.****       Stockholders’ Equity**

 

In March 2007, we sold,through a private placement, 21,415 shares of our common stock and Warrants topurchase 9,637 shares of our common stock, including 4,950 shares of our commonstock and Warrants to purchase 2,228 shares of our common stock to investmentfunds affiliated with certain members of our board of directors, at a price of$2.02 per unit, generating net proceeds of $40,459.  Each unit consisted of one share of commonstock and a Warrant to purchase 0.45 shares of our common stock.  The Warrants have a five-year term and anexercise price of $1.96 per share.

 

**12.****       Equity-based Compensation**

** **

The following tablesummarizes the status of stock options as of September 30, 2008 andchanges during the nine months then ended:

 
| ** **                                              | ** ** | **Shares** | ** ** | **Weighted-  average  exercise  price** | ** ** | **Aggregate  intrinsic  value** | ** ** | **Weighted-  average  remaining  contractual  life (years)** | ** ** |
|---------------------------------------------------------|------------|------------|------------|-----------------------------------------|------------|---------------------------------|------------|-------------------------------------------------------------------|------------|
| Outstanding at  January 1, 2008                    |       | 4,568      |       | $                                       | 8.07       |                            |       |                                                              |       |   |
| Granted                                                 |       | 942        |       | 0.68                                    |       |                            |       |                                                              |       |
| Exercised                                               |       | 3⁄4     |       | 3⁄4                                  |       |                            |       |                                                              |       |
| Forfeited                                               |       | (385       | )          | 2.71                                    |       |                            |       |                                                              |       |
| Expired                                                 |       | (943       | )          | 9.38                                    |       |                            |       |                                                              |       |
| Outstanding at  September 30, 2008                 |       | 4,182      |       | $                                       | 6.61       |                            | $          | —                                                            |       | 6.6 |   |
| Vested at  September 30, 2008 and expected to vest |       | 3,444      |       | $                                       | 7.64       |                            | $          | —                                                            |       | 6.2 |   |
| Exercisable at  September 30, 2008                 |       | 2,958      |       | $                                       | 8.67       |                            | $          | —                                                            |       | 5.7 |   |

 

16

----

Tableof Contents

 

**NeoseTechnologies, Inc.**

 

**Notesto Financial Statements**

**(unaudited)**

(in thousands,except per share amounts)

 

*Fair Value Disclosures*

 

During thethree and nine months ended September 30, 2008, we recorded $136 and $360of compensation cost for share-based payments, respectively, in our Statements ofOperations.  During the three and ninemonths ended September 30, 2007, we recorded $574 and $1,681 ofcompensation cost for share-based payments in our Statement of Operations.  There were no stock options granted duringthe three months ended September 30, 2008. The weighted-average fair value of stock options granted during thethree months ended September 30, 2007 was $1.16.  The weighted-average fair value of stockoptions granted during the nine months ended September 30, 2008 and 2007was $0.46 and $1.83, respectively.  Therewere no stock options exercised during the nine months ended September 30,2008.  The total intrinsic values ofstock options exercised during the nine months ended September 30, 2007was $4.

 

The fair value of share-based awards isrecognized as expense over the requisite service period, net of estimatedforfeitures. We rely primarily on historical experience to estimate expectedforfeitures and adjust the annualized forfeiture rate if our historicalexperience indicates that an adjustment is necessary. During the first quarterof each year, we re-evaluate our forfeiture rate. For the three and nine monthsended September 30, 2008, based on our historical experience of optionpre-vesting cancellations, we have assumed an annualized forfeiture rate of 34%for our stock options granted to individuals not terminated as a result of arestructuring of our operations (see Note 14). For employees terminated as aresult of the restructurings in 2008, 2007 and 2006, we have assumed an annualizedforfeiture rate of 100%. For the three and nine months ended September 30,2007, we assumed an annualized forfeiture rate of 17% for our stock optionsgranted to individuals not terminated as a result of a restructuring of ouroperations (see Note 14).  Under theprovisions of SFAS No. 123R, we will record additional expense if theactual forfeiture rate is lower than we estimated, and will record a recoveryof prior expense if the actual forfeiture is higher than we estimated.

 

Asof September 30, 2008, there was $329 of total unrecognized compensationcost, which includes the impact of expected forfeitures, related to unvestedshare-based compensation arrangements. That cost is expected to be recognizedover a weighted-average period of 1.9 years.

 

*Restricted Stock Units*

* *

Asummary of the status of RSUs as of September 30, 2008, and changes duringthe nine months then ended, is presented in the following table:

 

17

----

Tableof Contents

 

**NeoseTechnologies, Inc.**

 

**Notesto Financial Statements**

**(unaudited)**

(in thousands,except per share amounts)

 
| ** **                                              | ** ** | **Shares** | ** ** | **Weighted-  average  grant-date  fair value** | ** ** | **Aggregate  intrinsic  value** | ** ** |
|---------------------------------------------------------|------------|------------|------------|-----------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at  January 1, 2008                    |       | 34         |       | $                                                   | 2.44       |                            |       |   |
| Awarded                                                 |       | 3⁄4     |       | 3⁄4                                              |       |                            |       |
| Settled                                                 |       | 3⁄4     |       | 3⁄4                                              |       |                            |       |
| Forfeited                                               |       | 3⁄4     |       | 3⁄4                                              |       |                            |       |
| Outstanding at  September 30, 2008                 |       | 34         |       | $                                                   | 2.44       |                            | $          | 11 |   |
| Vested at  September 30, 2008 and expected to vest |       | 34         |       | $                                                   | 2.44       |                            | $          | 11 |   |

 

During the nine months endedSeptember 30, 2007, we recorded $6 of expense for RSUs. All RSUs werevested as of December 31, 2007.

 

**13.****       Collaborative Agreementsand Significant Customer Concentration**

** **

Asummary of revenue recognized under our collaborative agreements during thethree and nine months ended September 30, 2008 and 2007 is presented inthe following table:

 
| ** **                        | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|-----------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                        | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Novo Nordisk                      |       |                                                 |       |                                                |       |   |   |   |   |
| Research and  development funding |       | $                                                    | 339        |                                                | $          | 1,740 |   | $ | 3,829 |   | $ | 3,874 |   |
| License fees                      |       | 221                                                  |       | 216                                                 |       | 607 |   | 529 |   |
|                              |       | 560                                                  |       | 1,956                                               |       | 4,436 |   | 4,403 |   |
| BioGeneriX                        |       |                                                 |       |                                                |       |   |   |   |   |
| Research and  development funding |       | 1,429                                                |       | 661                                                 |       | 3,210 |   | 1,654 |   |
| License fees                      |       | 14                                                   |       | 14                                                  |       | 42 |   | 42 |   |
|                              |       | 1,443                                                |       | 675                                                 |       | 3,252 |   | 1,696 |   |
|                              |       | $                                                    | 2,003      |                                                | $          | 2,631 |   | $ | 7,688 |   | $ | 6,099 |   |

 

*        NovoNordisk**A/S Agreements*

* *

Wehave agreements with Novo Nordisk to use our proprietary GlycoPEGylationtechnology to develop and commercialize next-generation versions of recombinantFactors VIIa, VIII and IX, one of which, Factor VIIa, is currently marketed byNovo Nordisk. Under these 

 

18

----

Tableof Contents

 

**NeoseTechnologies, Inc.**

 

**Notesto Financial Statements**

**(unaudited)**

(in thousands,except per share amounts)

 

agreements,we received a non-refundable, upfront fee of $4,300, which is being amortizedto revenue over the expected performance period. Novo Nordisk is responsiblefor funding our research and development activities under the agreements.

 

*BioGeneriX**AGAgreements*

 

*Collaboration and SupplyAgreements*

* *

We have an agreement withBioGeneriX to use our proprietary GlycoPEGylation technology to develop along-acting version of G-CSF (the Collaboration Agreement).  In connection with the CollaborationAgreement, we received from BioGeneriX a non-refundable, upfront fee, which isbeing recognized to revenue over the expected performance period of 18 years.** **In October 2006,we entered into an amendment of the Collaboration Agreement.  Under the Collaboration Agreement, asamended, we and BioGeneriX shared the expenses of preclinical development,BioGeneriX is responsible for supplying the protein and funding the clinicaldevelopment program and we are responsible for supplying reasonable quantitiesof chemicals, enzymes and process reagents covered by certain technologydeveloped by us (Process Reagents).  Asof January 1, 2007, BioGeneriX became responsible for the cost of suchProcess Reagents.

 

In October 2008, weentered into a second amendment to the Collaboration Agreement and a SupplyAgreement with BioGeneriX.  Under theseagreements, the parties agreed to begin transitioning responsibility for thesupply of the Process Reagents from us to BioGeneriX.

 

**14.****       Restructurings and EmployeeSeverance Costs**

** **

*2008 Restructuring*

* *

InJanuary 2008, we announced the discontinuation of further development ofNE-180 our product candidate intended forthe treatment of anemia in patients with chronic kidneydisease and cancer patients receiving chemotherapy.  In connection with the discontinuation of theNE-180 program, we reduced our workforce by approximately 35% (the 2008Restructuring).  Our net loss for thenine months ended September 30, 2008 included $868 of employee severancecosts related to the workforce reduction, of which $217 was included inresearch and development expenses and $651 was included in general andadministrative expenses. Substantially all the employee severance costs werepaid as of September 30, 2008.

* *

In connection with the 2008 Restructuring, wecommitted to pay future cash retention bonuses to certain employees who werenot given notice of termination in January 2008, contingent on their notvoluntarily terminating their employment prior to November 28, 2008. Ournet loss for the three and nine months ended September 30, 2008 included$64 and $172, respectively, of expense related to these cash retention bonuses,of which $44 and $114, respectively, was included in research and developmentexpense, and $20 and $58, respectively, 

 

19

----

Table of Contents

 

**NeoseTechnologies, Inc.**

 

**Notesto Financial Statements**

**(unaudited)**

(in thousands,except per share amounts)

 

wasincluded in general and administrative expenses.  We also granted stock options to allemployees as part of an employee retention program.  These options vested 50% on August 4, 2008for all holders who had not voluntarily terminated their employment prior tothat date, and will vest 50% on February 4, 2009 for all holders who havenot voluntarily terminated their employment prior to that date.  The aggregate fair market value of theoptions was $247, which is being recognized ratably, net of forfeitures, ascompensation expense over the vesting period.

 

        *2007 Restructuring*

* *

InMarch 2007, we implemented a restructuring of operations (the 2007Restructuring), which included a workforce reduction of approximately 40%.  The employee severance costs incurred for the2007 Restructuring were payable pursuant to an employee severance planestablished in August 2005.  Our netloss for the nine months ended September 30, 2007 included $619 ofemployee severance costs related to the 2007 Restructuring, of which $543 wasincluded in research and development expenses and $76 was included in generaland administrative expenses.  Allemployee severance costs related to the 2007 Restructuring were paid by December 31,2007.

 

In connection with the 2007 Restructuring, wecommitted to pay future cash retention bonuses to certain employees who werenot given notice of termination in March 2007, contingent on their notvoluntarily terminating their employment prior to December 31, 2007. Ournet loss for the three and nine months ended September 30, 2007 included$110 and $230, respectively, of expense related to these cash retentionbonuses, of which $68 and $147, respectively, was included in research anddevelopment expense, and $42 and $83, respectively, was included in general andadministrative expenses.  All of thesecash retention bonuses were paid by December 31, 2007.  We also granted stock options to allemployees as part of an employee retention program. These options vested 50% onSeptember 27, 2007 for all holders who had not voluntarily terminatedtheir employment prior to that date, and 50% on March 27, 2008 for allholders who had not voluntarily terminated their employment prior to that date.  The aggregate fair market value of theoptions was $1,332, which was recognized ratably, net of forfeitures, ascompensation expense over the vesting period.

 

**15.****      ****Income Tax Benefit**

** **

Duringthe nine months ended September 30, 2008 and 2007, we sold Pennsylvaniaresearch and development tax credits, resulting in the recognition of $303 and$533, respectively, of income tax benefits.

 

**16.****      ****Proposed Asset Sales and Plan of Liquidation**

** **

In September 2008,we announced that we had signed definitive asset purchase agreements with NovoNordisk and BioGeneriX, providing for the sale of substantially all of ourintellectual property assets in all-cash transactions for an aggregate purchaseprice of $43,000.  

 

20

----

Table of Contents

 

**NeoseTechnologies, Inc.**

 

**Notesto Financial Statements**

**(unaudited)**

(in thousands,except per share amounts)

 

The consummations of theAsset Sales are subject to certain customary closing conditions, includingapproval by our stockholders.  The AssetSales are the initial step in our contemplated Liquidation.  Stockholder approval and adoption of the Planof Liquidation will also be required for our Liquidation.  Assuming stockholder approval of the AssetSales and the Plan of Liquidation, we anticipate that, following the closing ofthe Asset Sales, our principal activity would be winding down our business.

 

*NovoNordisk Asset Purchase Agreement* - Our agreement with NovoNordisk (the Novo Asset Purchase Agreement) provides for the sale to NovoNordisk (the Novo Asset Sale) of (i) substantially all of our intellectualproperty assets, including substantially all of our intellectual property whichrelates to the discovery, research, development, commercialization or otherexploitation of any compound or product developed for the use in the preventionor treatment of acquired or hereditary hemorrhagic disorders, (ii) ourbooks, records, files and documents related to such assets, and (iii) ourinventory of reagents related to the use of such assets or manufactured by usin connection with our collaboration with Novo Nordisk, for $21,000 in cash.

 

Our Board of Directorsunanimously approved the proposed transactions set forth in the Novo AssetPurchase Agreement.  The closing of theproposed Novo Asset Sale is expected to occur in late 2008****orearly 2009****and is subjectto customary closing conditions, including stockholder approval and the closingof the BioGeneriX Asset Sale (as defined below).  We may, however, terminate the Novo AssetSale under certain circumstances.  In connection with such termination, wemust pay a termination fee of $1,000 to Novo Nordisk plus reimbursement ofout-of-pocket expenses up to $500.  If theNovo Asset Sale is not consummated because our stockholders do not approve theNovo Asset Sale, we are required to reimburse Novo Nordisk for itsout-of-pocket expenses up to an aggregate of $500.  In addition, the Novo Asset Sale containscertain other termination rights for Novo Nordisk and provides that, underspecified circumstances, we may nonetheless be required to reimburse NovoNordisk for its out-of-pocket expenses up to an aggregate of $500.

 

*BioGeneriXAsset Purchase Agreement* - Our agreement with BioGeneriX(the BGX Asset Purchase Agreement, and jointly with the Novo Asset PurchaseAgreement, the Asset Purchase Agreements) provides for the sale to BioGeneriX(the BGX Asset Sale) of (i) certain intellectual property which relates tothe discovery, research, development, commercialization or other exploitationof any compound or product developed relating to G-CSF and intellectualproperty assets used to modify peptides and proteins for all indications,except for the right to use such intellectual property for use in theprevention or treatment of acquired or hereditary hemorrhagic disorders, (ii) ourbooks, records, files and documents related to such assets, and (iii) ourinventory of materials related to the use of such assets, for $22,000 in cash.  The BGX Asset Purchase Agreement alsocontemplates that we and BioGeneriX will enter into a license agreement and asublicense agreement immediately prior to the closing of the Asset Sales,pursuant to which we will license or sublicense to BioGeneriX certainintellectual property to be acquired by Novo Nordisk from us pursuant to theNovo Asset Purchase Agreement.  At the 

 

21

----

Table of Contents

 

**NeoseTechnologies, Inc.**

 

**Notesto Financial Statements**

**(unaudited)**

(in thousands,except per share amounts)

 

closing of the Novo AssetSale, we will assign such license agreement and sublicense agreement to NovoNordisk.

 

Our Board of Directorsunanimously approved the proposed transactions set forth in the BGX AssetPurchase Agreement.  The closing of theproposed BGX Asset Sale is expected to occur in late 2008 or early 2009,****andis subject to customary closing conditions, including stockholder approval andthe closing of the Novo Asset Sale.  Wemay, however, terminate the BGX Asset Sale under certain conditions.  In connection with such termination, we mustpay a termination fee of $1,000 to BioGeneriX plus reimbursement of BioGeneriX’sout-of-pocket expenses up to $500.  Ifthe BGX Asset Sale is not consummated because our stockholders do not approvethe BGX Asset Sale, we are required to reimburse BioGeneriX for itsout-of-pocket expenses up to an aggregate of $500.  In addition, the BGX Asset Sale containscertain other termination rights for BGX and provides that, under specifiedcircumstances, we may nonetheless be required to reimburse BioGeneriX for itsout-of-pocket expenses in connection with the proposed transaction up to an aggregateof $500.

 

*Plan ofComplete Liquidation and Dissolution* - The AssetSales are the initial step in our contemplated Liquidation, which was disclosedin further detail in our preliminary proxy statement filed with the SEC on October 16,2008 in connection with the solicitation of stockholder approval of the AssetSales and the Plan of Liquidation.  OurLiquidation is contingent upon the approval and consummations of the AssetSales.  Assuming stockholder approval ofthe Asset Sales and stockholder approval and adoption of the Plan ofLiquidation, we anticipate that, following the consummations of the AssetSales, our principal activity would be winding down our business.  Liquidating distributions, in an amount to bedetermined, are expected to begin shortly following the completion of the AssetSales, but in no event earlier than 30 days after the closing of the AssetSales.

 

*        Liquidating Distributions*

* *

Ifthe Plan of Liquidation is approved and adopted and the Asset Sales areconsummated, no earlier than 30 days after the closing of the Asset Sales wewill file a certificate with the Delaware Secretary of State to dissolve theCompany as a legal entity, complete the liquidation of our remaining assets,and satisfy (or make provisions to satisfy) our remaining obligations.  We would take all steps necessary to reduceour operating expenses through the termination of employees and othercost-cutting measures.  We anticipatethat an initial distribution of liquidation proceeds, if any, would be made toour stockholders no earlier than 30 days after the closing of the AssetSales.  We estimate that the aggregateamount ultimately distributed to our stockholders would be between $17,400 and$27,600, or $0.32 and $0.51 per share of our common stock.  The most significant variables in the amountwould be due to our contractual liability claims related to our real estateleases and the Warrants.

 

We are unable to concludeat this time that it is probable that the Asset Sales will be consummated andthat the Liquidation will be implemented due in part to the stockholders 

 

22

----

Table of Contents

 

**NeoseTechnologies, Inc.**

 

**Notesto Financial Statements**

**(unaudited)**

(in thousands,except per share amounts)

 

approval requirementsmentioned above.  If and when it becomesprobable that the Asset Sales will be consummated and the Liquidation will beimplemented, we may be required to recognize liabilities for severancepayments, lease termination costs, impairment of long-lived assets, andobligations under the Registration Rights Agreement and the Warrants.

 

*Severance Payments*

* *

The amount of severance benefits that would be payable to our officersand employees pursuant to their employment agreements or an employee severanceplan established in August 2005, would be approximately $5,400, plus $200of associated payroll taxes.

 

*Lease Termination Costs*

* *

We lease officespace for our corporate headquarters and operations in Horsham, Pennsylvania,consisting of approximately 40,000 square feet. We entered into the lease agreement for the facility in February 2002.  The initial term of the lease ends in July 2022.  In addition, in January 2007, we enteredinto a five-year lease agreement for approximately 6,800 square feet of officeand warehouse space in Horsham, Pennsylvania. We have initiated negotiations to terminate the leases with ourlandlord.  We currently do not know theamount of money we will be required to pay if terminations of the leases can benegotiated.  If we are unable tonegotiate terminations of our leases at acceptable terms, we may seek tosublease our corporate headquarters facility. Any sublease would require landlord consent, which may not beunreasonably withheld, conditioned or delayed pursuant to the leaseagreement.  We do not know whether wewould be successful in identifying a subtenant and negotiating a sublease onacceptable terms, or if successful, how long it would take to complete such atransaction.

 

As of September 30,2008, our minimum future lease payments were approximately $11,100 (includingrelated operating expenses).  As of March 31,2009, the anticipated date to vacate our facilities assuming the Asset Salesare consummated and the Liquidation is implemented, the remaining rentalexpense under the leases through the end of their respective initial terms isanticipated to be approximately $10,700 (including related operatingexpenses).  In accordance with SFAS 146, *Accounting for Accounting for Costs Associated withExit or Disposal Activities*, we will need to record aliability for the fair value of any costs that will continue to be incurredunder our leases for their remaining terms without economic benefit to us at suchtime that we cease using the right conveyed by the contract (Cease-UseDate).  For each operating lease, thefair value of the liability at the Cease-Use Date shall be determined based onthe remaining lease rentals, reduced by estimated sublease rentals that couldbe reasonably obtained for the property, even if we do not intend to enter intoa sublease.

 

*Long-Lived Tangible Assets*

* *

If and when it becomes more likely than not that ourlong-lived tangible assets will be disposed of prior to their estimated usefullives, or other events or changes in circumstances 

 

23

----

Tableof Contents

 

**NeoseTechnologies, Inc.**

 

**Notesto Financial Statements**

**(unaudited)**

(in thousands,except per share amounts)

 

indicate that their carrying amounts may not berecoverable, we will need to test those assets for recoverability in accordancewith SFAS No. 144, *Accounting for theImpairment of Disposal of Long-Lived Assets*.  As of September 30, 2008, the carryingvalue of our property and equipment was $12,612.

 

*RegistrationPayment Arrangements for Outstanding Shares and Warrant Shares*

* *

Pursuant to theterms of the Registration Rights Agreement entered into in connection with our March 2007equity financing, and the amendment thereto, the holders of shares and Warrantshares subject to the Registration Rights Agreement, as amended, have the rightto certain liquidated damages from us if, among other things, their sharesremain outstanding after we cease to keep effective with the SEC a registrationstatement which allows such holders to sell such shares.  If we liquidate following the consummationsof the Asset Sales, the estimated contingent liability would be approximately$3,800.  This amount may be reduced basedupon the holdings of investors in our March 2007 equity financing as ofthe date we file a certificate with the Delaware Secretary of State to dissolvethe Company as a legal entity.

 

*Warrant Value*

* *

We sold through a private placement, 21,415 shares of our common stockand Warrants to purchase 9,637 shares of our common stock.  The Warrants have an exercise price of $1.96per share, a five-term and are immediately exercisable.  The Warrants contain a net cash settlementfeature, which is available to the Warrant holders at their option, in certainchange of control circumstances, including the consummations of the AssetSales.  Under the net cash settlement feature,each Warrant holder has the option to receive, in exchange for each of itsWarrants, an amount of cash equal to the value of such holder’s Warrants as ofthe trading day immediately prior to the public announcement of theconsummations of the Asset Sales, if it occurs, determined in accordance withthe Black-Scholes option pricing formula, using inputs defined in theWarrants.  As of September 30, 2008,the net cash settlement value of the Warrants was $2,530.  This value is not fixed.  The Warrant Value changes under theBlack-Scholes option pricing formula with the volatility of the price of ourstock.  This option would be exercisableduring the period beginning on the date of the closing of the Asset Sales andending on the date 30 days thereafter. The Warrants require use of a 100-day volatility rate to calculate theWarrant Value.  We estimate the range ofthe final aggregate Warrant Value would be between $100 and $4,600.  This range is broad due to the broad range ofreasonably possible volatility rates during the 100 days prior to the valuationdate.

 

24

----

Table of Contents

 

**Item 2.****                         Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

***CAUTIONARY STATEMENT PURSUANT TOSAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION ACT OF 1995***

 

*This report includes “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995.  These forward-lookingstatements are not historical facts and include, but are not limited to,statements about our plans, objectives, representations and contentions thattypically may be identified by use of terms such as “anticipate,” “believe,” “estimate,”“plan,” “may,” “expect,” “intend,” “could,” “potential,” and similarexpressions, although some forward-looking statements are expresseddifferently. These forward-looking statements include, among others, statementsabout our:*

 

·                            *estimate that our existing cashand cash equivalents, expected proceeds from collaborations and licenseagreements, assuming neither Asset Sale is consummated, and interest incomeshould be sufficient to meet our operating and capital requirements (includingpayment of all costs and potential expense reimbursements related to the AssetSales) through the second quarter of 2009;*

 

·                            *expected losses;*

 

·                            *expectations for future capitalrequirements;*

 

·                            *expectations regarding net cashutilization and changes in operating expenses;*

 

·                            *expectations regarding our stockprice and continued listing on NASDAQ;*

 

·                            *expectations regarding thequotation of our stock on the Pink Sheets or the OTC BB or both*

 

·                            *expectations regarding the scopeand expiration of patents;*

 

·                            *expectations regarding the timingof non-clinical activities, regulatory meetings and submissions, as well as theprogression of clinical trials, for GlycoPEG-GCSF and GlycoPEG-Factor VIIa;*

 

·                            *expectations for the developmentof long-acting versions of G-CSF, Factor VIIa, Factor VIII and Factor IX, andsubsequent proprietary drug candidates;*

 

·                            *expectations for generatingrevenue;*

 

·                            *expectations regarding the timingand character of new or expanded collaborations and for the performance of ourexisting collaboration partners in connection with the development andcommercialization of products incorporating our technology;*

 

·                            *expectations regarding the timingand amount of cash distributions of liquidation proceeds to our stockholderspursuant to the Liquidation;*

 

25

----

Table of Contents

 

·                            *expectations regardingcontractual liability claims related to our real estate leases;*

 

·                            *expectations regarding the cashpayment value for the Warrants; and*

 

·                            *expectations regarding ourability to satisfy our obligations without resorting to bankruptcy protection.*

 

*You should be aware thatthe forward-looking statements included in this report represent management’scurrent judgment and expectations, but our actual results, events andperformance could differ materially from those in the forward-lookingstatements.  Potential risks anduncertainties that could affect our actual results include the following:*

 

·                            *our ability to obtain the funds necessary for our operations;*

 

·                            *our ability to meet forecastedtimelines due to internal or external causes;*

 

·                            *unfavorable non-clinical and clinical results for our productcandidates or product categories;*

 

·                            *regulatory developments that adversely affect our ability to market ourproducts or obtain government approvals;*

 

·                            *our ability to develop commercial-scale manufacturing processes for ourproducts and reagents, either independently or in collaboration with others;*

 

·                            *the performance of our contractmanufacturers;*

 

·                            *our ability to enter into andmaintain collaborative arrangements;*

 

·                            *our ability to obtain adequatesources of proteins and reagents;*

 

·                            *our ability to develop andcommercialize products without infringing the patent or intellectual propertyrights of others;*

 

·                            *our ability to expand and protectour intellectual property and to operate without infringing the rights ofothers;*

 

·                            *our ability and our collaborators’ability to develop and commercialize therapeutic proteins and our ability tocommercialize our technology;*

 

·                            *our ability to attract and retainkey personnel;*

 

·                            *the ability of our stockholdersto trade our common stock on NASDAQ;*

 

·                            *our ability to competesuccessfully in an intensely competitive field;*

 

·                            *the risk that the Asset Saleswill not be completed;*

 

·                            *the risk that our stockholdersapprove the Asset Sales, but vote against the Plan of Liquidation; and*

 

26

----

Table of Contents

 

·                            *general economic conditions.*

 

*These and other risks anduncertainties that could affect our actual results are discussed in this reportand in our other filings with the SEC, particularly in Item 1A of Part Iof our Annual Report on Form 10-K for the year ended December 31,2007 in the section entitled “Risk Factors.”*

 

*Although we believe that the expectations reflected in theforward-looking statements are reasonable, we cannot guarantee future results,events, levels of activity, performance, or achievements. We do not assumeresponsibility for the accuracy and completeness of the forward-lookingstatements other than as required by applicable law. We do not undertake anyduty to update any of the forward-looking statements after the date of thisreport to conform them to actual results, except as required by the federalsecurities laws.*

 

*You should read this section in combination with the section entitledManagement’s Discussion and Analysis of Financial Condition and Results ofOperations for the year ended December 31, 2007, included in our AnnualReport on Form 10-K for the year ended December 31, 2007.*

 

### **Overview**

 

We are a clinical-stage biopharmaceutical company focused on thedevelopment of next-generation therapeutic proteins, which we believe will becompetitive with best-in-class protein drugs currently on the market. We have two therapeutic proteincandidates in clinical trials: GlycoPEG-GCSF and GlycoPEG-FVIIa, and twotherapeutic protein candidates in the research stage: GlycoPEG-FVIII andGlycoPEG-FIX.

 

GlycoPEG-GCSF is along-acting version of G-CSF that we are co-developing with BioGeneriX AG, acompany of the ratiopharm Group.  G-CSFis prescribed to stimulate production of neutrophils (a type of white bloodcell) and is approved for sale in major markets around the world for treatmentof neutropenia associated with myelosuppressive chemotherapy.  In June 2008, BioGeneriX initiated aPhase II study to evaluate the safety and efficacy of GlycoPEG-GCSF for thetreatment of neutropenia associated with myelosuppressive chemotherapy.  The study will compare three doses ofGlycoPEG-GCSF to the standard, fixed 6 mg dose of Neulasta®.  Inaddition to safety and tolerability, the study will evaluate the duration ofsevere neutropenia in cycle 1, defined as grade 4 neutropenia (ANC < 0.5 x109/L) and the incidence of febrile neutropenia in cycles 1, 2, 3and 4 and across all cycles.  We expectcompletion of this Phase II study during the first half of 2009.  In November 2007, we reported data fromtwo Phase I clinical trials. That data demonstrated that GlycoPEG-GCSF is apotent stimulator of neutrophils and mobilizer of peripheral blood progenitorcells, and that at comparable doses to Neulasta® (Amgen’s marketed, long-actingG-CSF), GlycoPEG-GCSF demonstrated a 60% greater bioavailability, leading to a30% increase in the generation of neutrophils.

 

GlycoPEG-FVIIa is along-acting form of recombinant Factor VIIa that is being developed by our partner,Novo Nordisk A/S, utilizing our GlycoPEGylation technology.  Factor VIIa is used in the treatment ofbleeding episodes and for the prevention of bleeding during surgery or invasiveprocedures in patients with congenital hemophilia with inhibitors to 

 

27

----

Table of Contents

 

coagulation Factors VIII orIX.  In June 2008, NovoNordisk completed an initial Phase I clinical study that assessed the safetyand pharmacokinetics of GlycoPEG-FVIIa in healthy volunteers.  In the trial a significant prolongation ofthe half-life of GlycoPEG-FVIIa was observed.  Novo Nordiskis also developing long-acting forms of recombinant Factor VIII and recombinantFactor IX utilizing our GlycoPEGylation technology.  Factor VIII products are used in thetreatment of Hemophilia A, and Factor IX products are used in the treatment ofHemophilia B.

 

In January 2008, we announced the discontinuationof further development of NE-180, our product candidate intended for the treatment of anemia in patientswith chronic kidney disease and cancer patients receiving chemotherapy.  The decision to discontinue development wasnot due to any safety or efficacy concerns about NE-180, but was based on anevaluation of commercial prospects and the likelihood of entering into a timelycollaboration for the compound in the context of increased safety concerns inthe ESA category.  In connection with thediscontinuation of the NE-180 program, we reduced our workforce byapproximately 35%.  These actions allowedus to significantly reduce our expected cash expenditures and extend our cashrunway by approximately one year.  Wepaid cash severance benefits of approximately $0.9 million in connection withthe workforce reduction, substantially all of which was paid out during thenine months ended September 30, 2008.

 

We have incurred losses eachyear since inception. As of September 30, 2008, we had an accumulateddeficit of $306,194.  If the proposedAsset Sales, described below, are not consummated, we believe that our existingcash and cash equivalents, expected proceeds from collaborations and licensearrangements and interest income should be sufficient to meet our operating andcapital requirements (including payment of all costs and potential expensereimbursements related to the Asset Sales) through the second quarter of 2009,although changes in our collaborative relationships or our business, whether ornot initiated by us, may cause us to deplete our cash and cash equivalentsearlier than the second quarter of 2009.

 

*ProposedAsset Sales and Plan of Liquidation*

 

In September 2008,we announced that we had signed definitive asset purchase agreements with NovoNordisk and BioGeneriX, providing for the sale of substantially all of ourintellectual property assets in all-cash transactions for an aggregate purchaseprice of $43.0 million.  Theconsummations of the Asset Sales are subject to certain customary closingconditions, including approval by our stockholders.  The Asset Sales are the initial step in ourcontemplated Liquidation.  Stockholderapproval and adoption will also be required for the Plan of Liquidation.

 

*NovoNordisk Asset Purchase Agreement* – Our agreement withNovo Nordisk  provides for the sale toNovo Nordisk of (i) substantially all of our intellectual property assets,including substantially all of our intellectual property which relates to thediscovery, research, development, commercialization or other exploitation ofany compound or product developed for the use in the prevention or treatment ofacquired or hereditary hemorrhagic disorders, (ii) our books, records,files and documents related to such assets, and (iii) our inventory ofreagents related to the use of such assets or manufactured by us in connectionwith our collaboration with Novo Nordisk, for $21.0 million in cash.

 

28

----

Table of Contents

 

Our Board of Directorsunanimously approved the proposed transactions set forth in the Novo AssetPurchase Agreement.  The closing of theproposed Novo Asset Sale is expected to occur in late 2008 or early 2009****and is subject to customary closingconditions, including stockholder approval and the closing of the BioGeneriXAsset Sale.  We may, however, terminatethe Novo Asset Sale under certain circumstances.  In connection with such termination, we mustpay a termination fee of $1.0 million to Novo Nordisk plus reimbursement ofout-of-pocket expenses up to $0.5 million. If the Novo Asset Sale is not consummated because our stockholders donot approve the Novo Asset Sale, we are required to reimburse Novo Nordisk forits out-of-pocket expenses up to an aggregate of $0.5 million.  In addition, the Novo Asset Sale containscertain other termination rights for Novo Nordisk and provides that, underspecified circumstances, we may nonetheless be required to reimburse NovoNordisk for its out-of-pocket expenses up to an aggregate of $0.5 million.

 

*BioGeneriXAsset Purchase Agreement*– Our agreement with BioGeneriXprovides for the sale to BioGeneriX of (i) certain intellectual propertywhich relates to the discovery, research, development, commercialization orother exploitation of any compound or product developed relating to G-CSF andintellectual property assets used to modify peptides and proteins for allindications, except for the right to use such intellectual property for use inthe prevention or treatment of acquired or hereditary hemorrhagic disorders, (ii) ourbooks, records, files and documents related to such assets, and (iii) ourinventory of materials related to the use of such assets, for $22.0 million incash.  The BGX Asset Purchase Agreementalso contemplates that we and BioGeneriX will enter into a license agreementand a sublicense agreement immediately prior to the closing of the Asset Sales,pursuant to which we will license or sublicense to BioGeneriX certainintellectual property to be acquired by Novo Nordisk from us pursuant to theNovo Asset Purchase Agreement.  At theclosing of the Novo Asset Sale, we will assign such license agreement andsublicense agreement to Novo Nordisk.

 

Our Board of Directorsunanimously approved the proposed transactions set forth in the BGX AssetPurchase Agreement.  The closing of theproposed BGX Asset Sale is expected to occur in late 2008 or early 2009**,**and is subject to customary closingconditions, including stockholder approval and the closing of the Novo AssetSale.  We may, however, terminate the BGXAsset Sale under certain conditions.  Inconnection with such termination, we must pay a termination fee of $1.0 millionto BioGeneriX plus reimbursement of BioGeneriX’s out-of-pocket expenses up to$0.5 million.  If the BGX Asset Sale isnot consummated because our stockholders do not approve the BGX Asset Sale, weare required to reimburse BioGeneriX for its out-of-pocket expenses up to anaggregate of $0.5 million.  In addition, the BGX Asset Sale containscertain other termination rights for BGX and provides that, under specifiedcircumstances, we may nonetheless be required to reimburse BioGeneriX for itsout-of-pocket expenses in connection with the proposed transaction up to anaggregate of $0.5 million.

 

*Plan ofComplete Liquidation and Dissolution* – The AssetSales are the initial step in our contemplated Liquidation, which was disclosedin further detail our preliminary proxy statement filed with the SEC on October 16,2008, in connection with the solicitation of stockholder approval of the AssetSales and approval and adoption of the Plan of Liquidation.  The Liquidation is contingent upon theapproval and consummations of the Asset Sales. Assuming stockholder approval of the Asset Sales and the approval andadoption of the Plan of Liquidation, we anticipate that, following the closingof the Asset Sales, our principal activity would be winding down our business.

 

29

----

Table of Contents

 

*Liquidating Distributions*

 

Ifthe Plan of Liquidation is approved and the Asset Sales are consummated, noearlier than 30 days after the closing of the Asset Sales we will file acertificate with the Delaware Secretary of State to dissolve the Company as alegal entity, complete the liquidation of our remaining assets, and satisfy (ormake provisions to satisfy) our remaining obligations.  We would take all steps necessary to reduceour operating expenses through the termination of employees (see SeverancePayments below), and other cost-cutting measures.  We anticipate that an initial distribution ofliquidation proceeds, if any, would be made to our stockholders no earlier than30 days after the closing of the Asset Sales. We estimate that the aggregate amount ultimately distributed to ourstockholders would be between $17.4 million and $27.6 million, or $0.32 and$0.51 per share of our common stock.  Themost significant variables in the amount would be due to our contractualliability claims related to our real estate leases and the Warrants.

 

We are unable to concludeat this time that it is probable that the Asset Sales will be consummated andthat the Plan of Liquidation will be implemented due in part to thestockholders approval requirements mentioned above.  If and when it becomes probable that theAsset Sales will be consummated and the Liquidation will be implemented, we maybe required to recognize liabilities for severance payments, lease terminationscosts, impairment of long-lived assets, and obligations under the RegistrationRights Agreement and the Warrants.

 

*Severance Payments*

 

The amount of severance benefits that would be payable to our officersand employees pursuant to their employment agreements or an employee severanceplan established in August 2005, would be approximately $5.4 million, plus$0.2 million of associated payroll taxes.

 

*Lease Termination Costs*

 

We lease officespace for our corporate headquarters and operations at 102 Rock Road inHorsham, Pennsylvania, consisting of approximately 40,000 square feet.  We entered into the lease agreement for thefacility in February 2002.  Theinitial term of the lease ends in July 2022.  In addition, in January 2007, we enteredinto a five-year lease agreement for approximately 6,800 square feet of officeand warehouse space in Horsham, Pennsylvania. We have initiated negotiations to terminate the leases with ourlandlord.  We currently do not know theamount of money we will be required to pay if terminations of the leases can benegotiated.  If we are unable tonegotiate terminations of our leases at acceptable terms, we may seek tosublease our corporate headquarters facility. Any sublease would require landlord consent, which may not beunreasonably withheld, conditioned or delayed pursuant to the leaseagreement.  We do not know whether wewould be successful in identifying a subtenant and negotiating a sublease onacceptable terms, or if successful, how long it would take to complete such atransaction.

 

As of September 30,2008, our minimum future lease payments were approximately $11.1 million(including related operating expenses). As of March 31, 2009, the anticipated date to vacate our facilitiesassuming the Asset Sales are consummated and the Plan of Liquidation isimplemented, the remaining rental expense under the leases through the end oftheir respective initial terms is anticipated to be approximately $10.7 million(including related operating 

 

30

----

Table of Contents

 

expenses).  In accordance with SFAS 146, *Accounting for Accounting for Costs Associated withExit or Disposal Activities*, we will need to record aliability for the fair value of any costs that will continue to be incurredunder our leases for their remaining terms without economic benefit to us atthe Cease-Use Date.  For each operatinglease, the fair value of the liability at the Cease-Use Date shall bedetermined based on the remaining lease rentals, reduced by estimated subleaserentals that could be reasonably obtained for the property, even if we do notintend to enter into a sublease.

 

*Long-Lived Tangible Assets*

 

If and when it becomes more likely than not that ourlong-lived tangible assets will be disposed of prior to their estimated usefullives, or other events or changes in circumstances indicate that their carryingamounts may not be recoverable, we will need to test those assets forrecoverability in accordance with SFAS No. 144, *Accountingfor the Impairment of Disposal of Long-Lived Assets*.  As of September 30, 2008, the carryingvalue of our property and equipment was $12.6 million.

 

*RegistrationPayment Arrangements for Outstanding Shares and Warrant Shares*

 

Pursuant to theterms of the Registration Rights Agreement entered into in connection with our March 2007equity financing, and the amendment thereto, the holders of shares and Warrantshares subject to the Registration Rights Agreement, as amended, have the rightto certain liquidated damages from us if, among other things, their sharesremain outstanding after we cease to keep effective with the SEC a registrationstatement which allows such holders to sell such shares.  If we liquidate following the consummationsof the Asset Sales, the estimated contingent liability would be approximately$3.8 million.  This amount may be reducedbased upon the holdings of investors in our March 2007 equity financing asof the date we file a certificate with the Delaware Secretary of State todissolve the Company as a legal entity.

 

*Warrant Value*

 

We sold through a private placement, 21,415 shares of our common stockand Warrants to purchase 9,637 shares of our common stock.  The Warrants have an exercise price of $1.96per share, a five-year term and are immediately exercisable.  The Warrants contain a net cash settlementfeature, which is available to the Warrant holders at their option, in certainchange of control circumstances, including the consummations of the AssetSales.  Under the net cash settlementfeature, each Warrant holder has the option to receive, in exchange for each ofits Warrants, an amount of cash equal to the value of such holder’s Warrants asof the trading day immediately prior to the public announcement of theconsummations of the Asset Sales, if it occurs, determined in accordance withthe Black-Scholes option pricing formula, using inputs defined in theWarrants.  As of September 30, 2008,the net cash settlement value of the Warrants was $2.5 million.  This value is not fixed.  The Warrant Value changes under theBlack-Scholes option pricing formula with the volatility of the price of ourstock.  This option would be exercisableduring the period beginning on the date of the closing of the Asset Sales andending on the date 30 days thereafter. The Warrants require use of a 100-day volatility rate to calculate theWarrant Value.  We estimate the range ofthe final aggregate Warrant Value would be between $0.1 million and $4.6million.  This range is broad due to thebroad range of reasonably possible volatility rates during the 100 days priorto the valuation date.

 

31

----

Table of Contents

 

*Potential NASDAQ Delisting ofCommon Stock*

 

**Ourcommon stock is currently traded on NASDAQ under the symbol “NTEC”.  Since early 2008, we have receivedcorrespondence from the Department indicating our non-compliance with variousNASDAQ Marketplace Rules.  We arecurrently in the process of appealing these determinations before thePanel.  A date for the appeal hearing hasnot yet been determined.  There can be noassurance that the Panel will grant our request for continued listing,particularly in view of our previously announced Asset Sales andLiquidation.  In the event that the Paneldenies our request for continued listing we expect that our common stock willbe eligible for quotation on the Pink Sheets or the OTC BB or both.**

** **

**Liquidity and Capital Resources**

 

*Overview*

 

#### **We had$7.1 million in cash and cash equivalents as of September 30, 2008,compared to $19.3 million as of December 31, 2007.  The decrease was due to the continued fundingof our operating activities, including the costs associated with thediscontinuation of our NE-180 program, and debt repayments.  We anticipate the spending, net of cashexpected to be received for research and development funding reimbursement fromour collaborators, for the fourth quarter of 2008 to be approximately $4.1million.  This includes approximately$1.2 million of costs anticipated to be incurred in connection with theproposed Asset Sales and Plan of Liquidation, with the remaining amount neededto fund our operating activities, capital expenditures and debt repayments.**

#### ** **

The development ofnext-generation proprietary protein therapeutics, which we are pursuing bothindependently and in collaboration with selected partners, will requiresubstantial expenditures by us and our collaborators.  We plan to continue financing our operationsthrough private and public offerings of equity securities, proceeds from debtfinancings, and proceeds from existing and future collaborativeagreements.  Other than proceeds from ourcollaborations with Novo Nordisk and BioGeneriX, and any future collaborationswith others, we do not expect to generate significant revenues until such timeas products using our technology are commercialized, which is not expectedduring the next several years.  We expectan additional several years to elapse before we can expect to generatesufficient cash flow from operations to fund our operating and investingrequirements.  Assuming neither AssetSale is consummated, we believe that our existing cash and cash equivalents,expected revenue from collaborations and license arrangements, and interestincome should be sufficient to meet our operating and capital requirements(including payment of all costs and potential expense reimbursements related tothe Asset Sales) through the second quarter of 2009, although changes in ourcollaborative relationships or our business, whether or not initiated by us,may cause us to deplete our cash and cash equivalents.  Assuming neither Asset Sale is consummated,we must obtain additional financing in order to continue our operations beyondthe second quarter of 2009.  There are noassurances that funding will be available when we need it on terms we that wefind favorable, if at all.  If we areunable to secure additional financing on terms acceptable to us and on a timelybasis, we may seek further stockholder approval to dissolve or we may file for,or be forced to resort to, bankruptcy protection.  Any decision to seek further stockholderapproval to dissolve or 

 

32

----

Table of Contents

 

to file for, or be forced toresort to bankruptcy protection, may occur at any point during or before thesecond quarter of 2009.

 

#### ***OperatingActivities***

 

Net cash used in operatingactivities was $11.7 million and $23.3 million during the nine months ended September 30,2008 and 2007, respectively.  Our netloss for the nine months ended September 30, 2008 and 2007 was $11.3million and $25.3 million, respectively. Our net loss for the nine months ended September 30, 2008 and 2007included non-cash income of $3.2 million and $3.3 million, respectively,relating to a decrease in the fair value of our Warrant liability.  Revenues were $1.6 million higher during thenine months ended September 30, 2008 compared to the same period in 2007primarily due to the reimbursement of research and development costs under ourcollaborations with BioGeneriX.  Duringthe nine months ended September 30, 2008, we received $3.2 million ofmilestone payments from one of our collaborators, which also contributed to thereduction of cash used compared to $1.8 million received in milestone paymentsduring the same period in 2007.  Researchand development costs decreased by $13.3 million from during the nine monthsended September 30, 2008 compared to the same period in 2007, due to thediscontinuation of our NE-180 program and were partially offset by a $0.4million increase of external costs incurred under our collaborations with NovoNordisk and BioGeneriX.  Fluctuations inoperating items vary period-to-period due to, among other factors, the timingof research and development activities, such as the initiation and progress ofclinical trials and non-clinical studies.

 

*InvestingActivities*

#### ** **

During the nine months ended September 30, 2008and 2007, we invested $33,000 and $3.4 million, respectively, in property andequipment. In February 2007, we completed construction of leaseholdimprovements to a facility that we lease in Horsham, Pennsylvania (Rock RoadFacility). Weanticipate additional capital expenditures during the remainder of 2008 ofapproximately $0.2 million.

 

*Financing Activities*

 

*Equity FinancingActivities*

 

InMarch 2007, we sold, through a private placement, 21.4 million shares ofour common stock and Warrants to purchase 9.6 million shares of our commonstock, at a price of $2.02 per unit, which generated net proceeds of $40.5million.  Each unit consisted of oneshare of our common stock and a Warrant to purchase 0.45 shares of our commonstock.  The Warrants have a five-yearterm and an exercise price of $1.96 per share.

 

*Debt Financing Activities*

 

Our total debt decreased to$0.3 million as of September 30, 2008, compared to $0.8 million as of December 31,2007.  This decrease primarily resultedfrom planned debt principal repayments of $0.9 million and was partially offsetby $0.4 million in proceeds from the issuance of debt to finance insurancepolicy premiums.

 

33

----

Table of Contents

* *

*Note Payable Secured by Insurance Policies*

 

InMarch 2008, we borrowed $0.4 million to finance insurance policy premiumsdue on certain insurance policies. The insurance policy premiums, net ofamortization, are included in prepaid expenses and other current assets on ourBalance Sheet as of September 30, 2008. We are required to pay $34,000 ofprincipal and interest during each of the eleven months beginning on March 15,2008 and ending on January 15, 2009. The interest is calculated based on an annual percentage rate of4.1%.  To secure payment of the amountsfinanced, we granted the lender a security interest in (i) all unearnedpremiums or dividends payable under the policies, (ii) loss payments whichmay reduce the unearned premiums, subject to any mortgagee or loss payeeinterests, and (iii) any interest in any state guarantee fund relating tothe policies.

 

*Capital Lease Obligations*

 

The terms of our capital leases require us to makemonthly payments through February 2012. As of September 30, 2008, thepresent value of aggregate minimum lease payments under these agreements was$0.2 million. Under these agreements, we will be required to make leasepayments totaling $0.1 million during the twelve months ending September 30,2009.

 

*Operating Leases*

 

Welease laboratory, office, warehouse facilities, and equipment under operatinglease agreements. In 2002, we entered into a lease agreement for our Rock RoadFacility. The initial term of this lease ends 2022, at which time we have anoption to extend the lease for an additional five years, followed by anotheroption to extend the lease for an additional four and one-half years. Thislease contains escalation clauses, under which the base rent increases annuallyby 2%. In January 2007, we entered into a five-year lease agreement forapproximately 6,800 square feet of office and warehouse space in Horsham,Pennsylvania.

 

**Summaryof Contractual Obligations**

 

Asummary of our obligations to make future payments under contracts existing asof December 31, 2007 is included in Item 7, Management’s Discussion andAnalysis of Financial Condition and Results of Operations, of our Annual Reporton Form 10-K for the year ended December 31, 2007. The disclosure ofobligations related to operating leases included the base rent associated withour Rock Road Facility lease, but did not include the required operatingexpenses to be paid to the landlord. If those required operating expenses hadbeen included, the disclosed amount would have been increased by $3.5 million,or approximately $231,000 for each remaining year of the lease term. TheLiquidity and Capital Resources section of this Form 10-Q describesobligations from any material contracts entered into during the nine monthsended September 30, 2008.

 

**Off-Balance Sheet Arrangements**

 

We are not involved in any off-balance sheet arrangements that have orare reasonably likely to have a current or future effect that is material toinvestors on our financial condition, changes in financial condition, revenuesor expenses, results of operations, liquidity, capital expenditures, or capitalresources.

 

34

----

Table of Contents

 

**Critical Accounting Policies and Estimates**

 

Adiscussion of our critical accounting policies and estimates is included inItem 7, Management’s Discussion and Analysis of Financial Condition and Resultsof Operations, of our Annual Report on Form 10-K for the year ended December 31,2007.  Except as described below, therehave not been any changes or additions to our critical accounting policiesduring the nine months ended September 30, 2008.

 

*Stock-based Employee Compensation*

 

The fair value ofshare-based awards is recognized as expense over the requisite service period,net of estimated forfeitures. We rely primarily on historical experience toestimate expected forfeitures and adjust the annualized forfeiture rate if ourhistorical experience indicates that an adjustment is necessary. During thefirst quarter of each year, we re-evaluate our forfeiture rate. For the ninemonths ended September 30, 2008, based on our historical experience ofoption pre-vesting cancellations, we have assumed an annualized forfeiture rateof 34% for our stock options granted to individuals not terminated as a resultof a restructuring of our operations. For employees terminated as a result ofthe restructurings in 2008, 2007 and 2006, we have assumed an annualizedforfeiture rate of 100%.  For the ninemonths ended September 30, 2007, we assumed an annualized forfeiture rateof 17% for our stock options granted to individuals not terminated as a resultof a restructuring of our operations. Under the provisions of SFAS No. 123R, we will record additionalexpense if the actual forfeiture rate is lower than we estimated, and willrecord a recovery of prior expense if the actual forfeiture is higher than weestimated.

 

**Resultsof Operations**

 

We recorded a net loss of $4.4 million and$11.3 million during the three and nine months ended September 30, 2008,respectively, compared to net losses of $2.5 million and $25.3 million for thecorresponding periods in 2007.  Thefollowing sections explain the changes between the reporting periods in eachcomponent of net loss.

 

*Revenue from Collaborative Agreements*

* *

Our revenue from collaborative agreements hashistorically been derived from a few major collaborators. Our collaborativeagreements provide for some or all of the following elements: license fees,research and development funding, milestone revenues, and royalties on productsales. A summary of revenue recognized under our collaborative agreementsduring the three and nine months ended September 30, 2008 and 2007 ispresented in the following table (in thousands):

 

35

----

Table of Contents

 
| ** **                        | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|-----------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                        | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Novo Nordisk                      |       |                                                 |       |                                                |       |   |   |   |   |
| Research and  development funding |       | $                                                    | 339        |                                                | $          | 1,740 |   | $ | 3,829 |   | $ | 3,874 |   |
| License fees                      |       | 221                                                  |       | 216                                                 |       | 607 |   | 529 |   |
|                              |       | 560                                                  |       | 1,956                                               |       | 4,436 |   | 4,403 |   |
| BioGeneriX                        |       |                                                 |       |                                                |       |   |   |   |   |
| Research and  development funding |       | 1,429                                                |       | 661                                                 |       | 3,210 |   | 1,654 |   |
| License fees                      |       | 14                                                   |       | 14                                                  |       | 42 |   | 42 |   |
|                              |       | 1,443                                                |       | 675                                                 |       | 3,252 |   | 1,696 |   |
|                              |       | $                                                    | 2,003      |                                                | $          | 2,631 |   | $ | 7,688 |   | $ | 6,099 |   |

 

Revenue fromcollaborative agreements during the three and nine months ended September 30,2008 was $2.0 million and $7.7 million, respectively, compared to $2.6 millionand $6.1 million for the corresponding periods in 2007.  The decrease in revenue for the three monthperiod ended September 30, 2008 compared to 2007 was primarily due to a$1.4 million decrease in research and development funding from Novo Nordisk andwas partially offset by an $0.8 million increase in research and developmentfunding from BioGeneriX.  The increase inrevenue for the nine month period ended September 30, 2008 compared to2007 was due to increased research and development funding from BioGeneriX.

 

Material cash inflows from proprietary drugdevelopment projects are highly uncertain, and we cannot reasonably estimatethe period in which we will begin to receive, if ever, material net cashinflows from our major research and development projects. Cash inflows fromdevelopment-stage products are dependent on several factors, including enteringinto collaborative agreements, the achievement of certain milestones, andregulatory approvals. We may not receive milestone payments from any existingor future collaborations if a development-stage product fails to meet technicalor performance targets or fails to obtain the required regulatory approvals.Further, our revenues from collaborations will be affected by the levels ofeffort committed and made by our collaborative partners. Even if we achievetechnical success in developing drug candidates, our collaborative partners maydiscontinue development, may not devote the resources necessary to completedevelopment and commence marketing of these products, or they may notsuccessfully market potential products.

 

*Researchand Development Expense*

* *

We have two therapeuticprotein candidates in clinical trials: GlycoPEG-GCSF and GlycoPEG-FVIIa, andtwo therapeutic protein candidates in the research stage: GlycoPEG-FVIII andGlycoPEG-FIX.

 

In January 2008, we announced thediscontinuation of further development of NE-180, our product candidate intended for the treatment ofanemia in patients with chronic kidney

 

36

----

Table of Contents

 

diseaseand cancer patients receiving chemotherapy. The decision to discontinue development was not due to any safety orefficacy concerns about NE-180, but was based on an evaluation of commercialprospects and the likelihood of entering into a timely collaboration for thecompound in the context of increased safety concerns in the ESA category.  Throughout 2007, we incurred costs for thedevelopment of NE-180, including process, non-clinical and clinicaldevelopment. During the three months ended September 30, 2008, we did notincur any external costs related to the cessation of clinical developmentactivities for NE-180.  During the ninemonths ended September 30, 2008, we incurred $2.1 million of externalcosts related to the cessation of clinical development activities for NE-180.

 

A summary of research and developmentexpenses during the three and nine months ended September 30, 2008 and2007 is presented in the following table (in thousands):

 
| ** **                                                          | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|---------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                          | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                          | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Payroll                                                             |       | $                                                    | 762        |                                                | $          | 1,288 |   | $ | 3,024 |   | $ | 5,349 |   |
| Facilities                                                          |       | 411                                                  |       | 452                                                 |       | 1,226 |   | 1,457 |   |
| Clinical and  non-clinical studies (NE-180)                         |       | (51                                                  | )          | 1,926                                               |       | 2,336 |   | 4,626 |   |
| Purchased  materials:                                               |       |                                                 |       |                                                |       |   |   |   |   |
| GlycoPEG-GCSF                                                       |       | 1,355                                                |       | 526                                                 |       | 2,801 |   | 1,395 |   |
| Hemostasis  compounds                                               |       | 43                                                   |       | 1,521                                               |       | 2,315 |   | 3,302 |   |
| NE-180                                                              |       | 3⁄4                                               |       | 3,424                                               |       | 352 |   | 6,629 |   |
| Laboratory  supplies, maintenance, outside services, and consulting |       | 268                                                  |       | 733                                                 |       | 1,145 |   | 2,909 |   |
| Funded research  and license fees                                   |       | 126                                                  |       | 236                                                 |       | 570 |   | 638 |   |
| Depreciation and  stock compensation                                |       | 440                                                  |       | 629                                                 |       | 1,266 |   | 1,984 |   |
|                                                                |       | $                                                    | 3,354      |                                                | $          | 10,735 |   | $ | 15,035 |   | $ | 28,289 |   |

 

Our research and development expenses during thethree months ended September 30, 2008 were $3.4 million compared to $10.7million for the corresponding period in 2007. The decrease during the 2008 period as compared to the 2007 period wasprimarily due to $5.4 million of lower external costs incurred for the NE-180program during the 2008 period, $1.5 million of lower purchased material costsincurred for our hemostasis compound programs during the 2008 period, $0.7million of lower payroll and stock compensation resulting from therestructurings that were implemented in 2007 and 2008, and $0.5 million oflower supplies, maintenance costs and lab services related to lower staffinglevels.  These decreases were partiallyoffset by $0.8 million of additional purchased material costs incurred for ourGlycoPEG-GCSF program during the 2008 period.

 

Our research and development expenses during the nine months ended September 30,2008 were $15.0 million compared to $28.3 million for the corresponding periodin 2007.  The decrease in research anddevelopment expenses during the 2008 period as compared to the 2007 period wasprimarily due to $8.6 million of lower external costs incurred for the NE-180program 

 

37

----

Table ofContents

 

during the 2008 period, $3.3 million of lower payroll, stockcompensation and facilities costs resulting from the restructurings that wereimplemented in 2007 and 2008, $1.8 million of lower supplies, maintenance costsand lab services related to lower staffing levels, and $1.0 million of lowerpurchased material costs incurred for our hemostasis compound programs duringthe 2008 period.  These decreases werepartially offset by $1.4 million of additional purchased material costsincurred for our GlycoPEG-GCSF program during the 2008 period.

 

Our research and developmentprojects are divided between two categories: (i) GlycoPEGylation, and (ii) OtherGlycotechnology Programs, which included projects investigating opportunitiesto use our enzymatic technologies in other areas, such as glycolipids. Thefollowing chart sets forth our projects in each of these categories and thestage to which each has been developed:

 
| ** **                            | ** ** | **Development Stage** | ** ** |
|---------------------------------------|------------|----------------------------|------------|
| **GlycoPEGylation:**                  |       |                       |       |
| GlycoPEG-GCSF                         |       | Clinical (Phase II)        |       |
| GlycoPEG-FVIIa                        |       | Clinical (Phase I)         |       |
| GlycoPEG-FIX                          |       | Research                   |       |
| GlycoPEG-FVIII                        |       | Research                   |       |
| NE-180                                |       | Discontinued               |       |
| **Other Glycotechnology Programs:**   |       |                       |       |
| Non-protein  therapeutic applications |       | Discontinued               |       |

 

The process of bringingdrugs from the preclinical research and development stage through Phase I,Phase II, and Phase III clinical trials to FDA or other regulatory approval istime consuming and expensive. Because our announced product candidates arecurrently in the research or early clinical and preclinical stages, and thereare a variety of potential intermediate clinical and non-clinical outcomes thatare inherent in drug development, we cannot reasonably estimate either thetiming or costs we will incur to complete these research and developmentprojects.  In addition, the timing andcosts to complete our research and development projects will be affected by thetiming and nature of any collaboration agreements we may enter into with athird party, neither of which we can currently estimate.

 

Our research and development expenses include bothdirect expenses related to our research and development projects and indirectexpenses.  Direct expenses includesalaries and other costs of personnel, raw materials, and supplies for eachproject.  We may also incur third-partycosts related to each project, such as clinical and non-clinical developmentcosts, purchased materials, contract research, and consulting costs.  Indirect expenses include depreciationexpense and the costs of operating and maintaining our facilities, property,and equipment, to the extent used for our research and development projects, aswell as the costs of general management of our research and developmentprojects.

 

### ***GlycoPEGylation***

### ** **

Our GlycoPEGylation expenses result primarily fromdevelopment activities, including process, clinical and non-clinical development, associated with our proprietarydrug development programs. GlycoPEGylation expenses for the three months ended September 30,2008 were $2.0 million compared to $9.0 million for the corresponding 2007period.  These expenses decreased 

 

38

----

Table of Contents

 

primarily due to $6.8 million of lower payroll andexternal costs incurred for the NE-180 program, $1.3 million of lower payrolland purchased material costs incurred during the three months ended September 30,2008 for our hemostasis compound programs compared to the same period in 2007,and were partially offset by a $1.0 million increase in payroll and purchasedmaterial costs during the three month period ended September 30, 2008 forour GlycoPEG-GCSF program compared to the same period in 2007.

 

GlycoPEGylation expensesfor the nine months ended September 30, 2008 were $10.5 million comparedto $21.4 million for the corresponding 2007 period.  These expenses decreased primarily due to $12.8 million oflower payroll and external costs incurred for the NE-180 program and $0.2million of lower payroll and purchased material costs incurred during the ninemonths ended September 30, 2008 for our hemostasis compound programscompared to the same period in 2007 and were partially offset by $2.0 millionof additional payroll and purchased material costs incurred during the ninemonths ended September 30, 2008 for our GlycoPEG-GCSF program compared tothe same period in 2007.

 

*Other Glycotechnology Programs*

 

Research and developmentexpenses related to our Other Glycotechnology Programs, were $15,000 and$51,000 for the three and nine months ended September 30, 2008, respectively,compared to $9,000 and $47,000 for the corresponding periods in 2007.  In connection with the proposed Asset Sales,we discontinued further research and development work on our OtherGlycotechnology Programs during the third quarter of 2008.

 

### ***Indirectexpenses***

### ** **

The following table illustrates costs incurredduring the three and nine months ended September 30, 2008 and 2007 forindirect expenses (in thousands):

 
| ** **                           | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|--------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                           | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Indirect expenses:              | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Payroll                              |       | $                                                    | 356        |                                                | $          | 333 |   | $ | 1,251 |   | $ | 1,826 |   |
| Facilities                           |       | 411                                                  |       | 452                                                 |       | 1,226 |   | 1,457 |   |
| Funded research  and license fees    |       | 126                                                  |       | 236                                                 |       | 570 |   | 638 |   |
| Depreciation and  stock compensation |       | 440                                                  |       | 629                                                 |       | 1,266 |   | 1,984 |   |
| Other                                |       | 3⁄4                                               |       | 30                                                  |       | 150 |   | 919 |   |
|                                 |       | $                                                    | 1,333      |                                                | $          | 1,680 |   | $ | 4,463 |   | $ | 6,824 |   |

 

Indirect research and development expenses for thethree and nine months ended September 30, 2008 were $1.3 million and $4.5million, respectively, compared to $1.7 million and $6.8 million for thecorresponding periods in 2007.  Thedecrease during the three months ended September 30, 2008 compared to thecorresponding 2007 period was primarily due to $0.2 million of lower payroll,stock compensation and facilities costs resulting from the restructurings thatwere implemented in 2007 and 2008. The decrease during the nine months ended September 30,2008 compared to the corresponding 2007 period was primarily due to $1.5million of lower 

 

39

----

Table of Contents

 

payroll,stock compensation and facilities costs resulting from the restructurings thatwere implemented in 2007 and 2008, and $0.8 million of lower supplies, maintenancecosts and lab services for the 2008 period compared to corresponding 2007period related to lower staffing levels.

 

*General and Administrative Expense*

 

Asummary of general and administrative expenses during the three and nine monthsended September 30, 2008 and 2007 is presented in the following table (inthousands):

 
| ** **                           | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|--------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                           | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Payroll                              | ** ** | $                                                    | 600        |                                                | $          | 886 |   | $ | 2,702 |   | $ | 3,081 |   |
| Intellectual  Property               |       | 74                                                   |       | 559                                                 |       | 1,152 |   | 1,577 |   |
| Legal and  Accounting                |       | 779                                                  |       | 89                                                  |       | 1,532 |   | 424 |   |
| Depreciation and  Stock Compensation |       | 97                                                   |       | 378                                                 |       | 315 |   | 1,158 |   |
| Other                                |       | 1,194                                                |       | 648                                                 |       | 2,084 |   | 1,833 |   |
|                                 |       | $                                                    | 2,744      |                                                | $          | 2,560 |   | $ | 7,785 |   | $ | 8,073 |   |

 

Generaland administrative expenses increased during the three months ended September 30,2008 to $2.7 million from $2.6 million for the corresponding period in2007.  The increase for the three monthsended September 30, 2008 compared to the corresponding 2007 period wasprimarily due to $0.7 million of higher legal costs incurred in connection withthe proposed Asset Sales and Plan of Liquidation and $0.8 million of financialadvisory fees incurred in connection with the proposed Asset Sales, (includedin other general and administrative costs), and was partially offset by $0.6million of lower payroll and stock compensation related to the restructuringsthat were implemented in 2007 and 2008, $0.5 million of lower intellectualproperty costs and $0.2 million of other general and administrative expenses.

 

Generaland administrative expenses decreased during the nine months ended September 30,2008 by $0.3 million from $8.1 million for the corresponding period in2007.  The decrease for the nine monthperiod ended September 30, 2008 compared to the corresponding 2007 periodwas primarily due to $1.2 million of lower stock compensation related to therestructurings implemented in 2007 and 2008, $0.4 million of lower intellectualproperty costs, and a decrease of $0.5 million of other general andadministrative expenses (excluding the financial advisory fees mentioned below)and was partially offset by $1.1 million of higher legal costs incurred inconnection with the proposed Asset Sales and Plan of Liquidation and $0.8million of financial advisory fees incurred in connection with the proposedAsset Sales (included in other general and administrative costs).  The nine month periods ended September 30,2008 and 2007 included $0.7 million and $0.1 million, respectively, ofseverance costs related to the restructurings implemented during thoserespective periods.

 

40

----

Table ofContents

 

*Other Income and Expense*

 

Inconnection with the sale of our common stock and Warrants to purchase shares ofour common stock in March 2007, we recorded the Warrants as a liability attheir initial fair value using the Black-Scholes option-pricing model andrevalue them at each reporting date until they are exercised or expire.  Changes in the fair value of the Warrants arereported in our Statements of Operations as non-operating income orexpense.  We recorded non-operatingexpense of $0.4 million during the three months ended September 30, 2008,and non-operating income of $3.2 million during the nine months ended September 30,2008, related to the increase and decrease in fair value of these Warrantsprimarily as a result of a decrease and an increase in the market price of ourcommon stock during the three and nine months ended September 30, 2008,respectively.  We recorded non-operatingincome of $7.8 million and $3.3 million during the three and nine months ended September 30,2007, respectively.  The market price forour common stock has been and may continue to be volatile.  Consequently, future fluctuations in theprice of our common stock may cause significant increases or decreases in thefair value of these Warrants.

 

Interest income during the three and nine months endedSeptember 30, 2008 was $56,000 and $303,000, respectively, compared to$421,000 and $1,195,000 for the corresponding periods in 2007.  The decrease during the 2008 period comparedto the 2007 period was primarily due to lower cash balances for 2008.  Our interest income during the remainder of2008 is difficult to project, and will depend largely on prevailing interestrates and whether we receive cash from entering into any new collaborativeagreements or by completing any additional equity or debt financings during theyear.

 

Interest expense during the three and nine monthsended September 30, 2008 was $6,000 and $35,000, respectively, compared to$35,000 and $123,000 for the corresponding periods in 2007. Lower average debt balances in the 2008 period accounted for thedecrease.  Our interest expense duringthe remainder of 2008 is difficult to project and will depend on whether weenter into any new debt agreements.  See “FinancingActivities – Debt Financing Activities” in the Liquidity and Capital Resourcessection of this Form 10-Q for a description of the material features ofour debt financings.

 

During the nine months ended September 30, 2008 and 2007, we soldPennsylvania research and development tax credits, resulting in the recognitionof $303,000 and $533,000, respectively, of income tax benefits.

 

**Item 3.****                         Quantitativeand Qualitative Disclosures About Market Risk**

 

*Equity Price Risk*

 

We are exposed to certainrisks arising from changes in the price of our common stock, primarily due tothe potential effect of changes in fair value of the Warrant liability relatedto the Warrants. The Warrant liability is revalued at its current fair valueusing the Black-Scholes option-pricing model at each reporting date until theWarrants are exercised or expire, and is subject to significant increases ordecreases in value due to the effects of changes in the price of our commonstock at period end and the related calculation of volatility. Changes in thefair value of Warrants are reported in our Statements of Operations asnon-operating income or expense.  If theclosing price of our common stock on September 30, 2008 had been 30%higher,

 

41

----

Tableof Contents

 

the fair  value of our Warrant liability would have been$510,000 higher, which would have resulted in a $510,000 increase in our netloss for the three and nine months ended September 30, 2008.  If the closing price of our common stock on September 30,2008 had been 30% lower, the fair value of our Warrant liability would havebeen $445,000 lower, which would have resulted in a $445,000 decrease in ournet loss for the three and nine months ended September 30, 2008.

 

*Foreign Exchange Risk*

 

We have entered into someagreements denominated, wholly or partly, in Euros or other foreign currencies,and, in the future, we may enter into additional, significant agreementsdenominated in foreign currencies.  Ifthe values of these currencies increase against the dollar, our costs wouldincrease.  To date, we have not enteredinto any contracts to reduce the risk of fluctuations in currency exchangerates.  In the future, depending upon theamounts payable under any such agreements, we may enter into forward foreignexchange contracts to reduce the risk of unpredictable changes in thesecosts.  However, due to the variabilityof timing and amount of payments under any such agreements, foreign exchangecontracts may not mitigate the potential adverse impact on our financialresults.

 

**Item 4.****                         Controlsand Procedures**

 

*Disclosurecontrols and procedures*

 

Our managementcarried out an evaluation, with the participation of our principal executiveofficer and principal financial officer, of the effectiveness of the design andoperation of our disclosure controls and procedures (as such term is definedunder Rule 13a-15(e) promulgated under the Securities Exchange Act of1934, as amended (Exchange Act)), as of the end of the period covered by thisreport on Form 10-Q.  Based on thatevaluation, management concluded that these controls and procedures areeffective to ensure that information required to be disclosed by us in reportsthat we file or submit under the Exchange Act is recorded, processed,summarized and reported as specified in SEC rules and forms.  There were no changes in these controls orprocedures identified in connection with the evaluation of such controls orprocedures that occurred during our last fiscal quarter, or in other factorsthat have materially affected, or are reasonably likely to materially affect,these controls or procedures.

 

Our disclosure controls and procedures are designed toensure that information required to be disclosed by us in the reports that wefile or submit under the Exchange Act is recorded, processed, summarized andreported, within the time periods specified in the rules and forms of theSEC.  These disclosure controls andprocedures include, among other things, controls and procedures designed toensure that information required to be disclosed by us in the reports that wefile under the Exchange Act is accumulated and communicated to our management,including our principal executive officer and principal financial officer, asappropriate to allow timely decisions regarding required disclosure.

 

*Changesin internal control over financial reporting*

 

There were nochanges in our internal control over financial reporting that occurred duringour last fiscal quarter that have materially affected, or are reasonably likelyto materially affect our internal control over financial reporting.

 

42

----

Table of Contents

 

**PART II.  OTHERINFORMATION**

 

**Item 1A.         Risk Factors.**

 

***Werequire additional capital to fund our operations.  In the event that we determine that we areunable to secure additional funding when required, we will need to downsize orwind down our operations through liquidation, bankruptcy or a sale of ourassets.***

 

To date, we have fundedour operations primarily through proceeds from the public and privateplacements of equity securities. We have also funded our operations to a lesserextent from proceeds from the sale of our former Witmer Road facility, propertyand equipment financing, interest earned on investments, corporatecollaborations, and the sale of investments. As of September 30, 2008, wehad $7.1 million of cash and cash equivalents. Assuming neitherAsset Sale is consummated, we believe that our existing cash and cashequivalents, expected revenue from collaborations and license arrangements, andinterest income should be sufficient to meet our operating and capitalrequirements (including payment of all costs and potential expensereimbursements related to the Asset Sales) through the second quarter of 2009,although changes in our collaborative relationships or our business, whether ornot initiated by us, may cause us to deplete our cash and cash equivalents.Assuming neither Asset Sale is consummated, we must obtain additional financingin order to continue our operations beyond the second quarter of 2009.  There are no assurances that funding will beavailable when we need it on terms that we find favorable, if at all.  If we are unable to secure additionalfinancing on terms acceptable to us and on a timely basis, we may seek furtherstockholder approval to dissolve or we may file for, or be forced to resort to,bankruptcy protection.  Any decision toseek further stockholder approval to dissolve or to file for, or be forced toresort to bankruptcy protection, may occur at any point during or before thesecond quarter of 2009.  Ourpresent and future capital requirements, and our ability to raise additionalcapital, depend on many factors, including:

 
| · |   | the state of the capital markets for debt or equity  financing;                                                                                                                                                      |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                 |
| · |   | level of research and development investment  required to develop our therapeutic proteins, and maintain and improve our  technology position;                                                                       |
|   |   |                                                                                                                                                                                                                 |
| · |   | the costs of process development and scale-up of  proteins and reagents for research, development and at commercial scale;                                                                                           |
|   |   |                                                                                                                                                                                                                 |
| · |   | the results of non-clinical and clinical testing,  which can be unpredictable in drug development, including any failure of a  product candidate in clinical development;                                            |
|   |   |                                                                                                                                                                                                                 |
| · |   | the time and costs involved in obtaining regulatory  approvals, or the failure to obtain any necessary regulatory approvals;                                                                                         |
|   |   |                                                                                                                                                                                                                 |
| · |   | changes in product candidate development plans  needed to address any difficulties that may arise in process development,  scale-up, manufacturing, non-clinical activities, clinical studies or  commercialization; |
|   |   |                                                                                                                                                                                                                 |
| · |   | our ability to enter into new agreements with  collaborators and to extend or maintain our existing collaborations, and the  terms of these agreements;                                                              |
|   |   |                                                                                                                                                                                                                 |
| · |   | the timing of milestone and royalty payments from  our collaborators;                                                                                                                                                |

 

43

----

Table of Contents

 
| · |   | the costs and impact of filing, prosecuting,  defending, and enforcing patent claims and other intellectual property  rights, and the costs of investigating patents that might block us from  developing potential drug candidates; |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                 |
| · |   | disruptions and expenses resulting from our  workforce reductions, and the continuing costs of recruiting and retaining  qualified personnel;                                                                                        |
|   |   |                                                                                                                                                                                                                                 |
| · |   | the timing, willingness, and ability of our  collaborators to commercialize products incorporating our technology;                                                                                                                   |
|   |   |                                                                                                                                                                                                                                 |
| · |   | our need or decision to acquire or license  complementary technologies or new product candidate targets; and                                                                                                                         |
|   |   |                                                                                                                                                                                                                                 |
| · |   | the evolution of the competitive landscape.                                                                                                                                                                                          |

 

If we raise additionalcapital by issuing equity securities, our existing stockholders’ percentageownership will be reduced and they may experience substantial dilution. We mayalso issue equity securities that provide for rights, preference and privilegessenior to those of our common stock. If we raise additional funds by issuingdebt securities, these debt securities would have rights, preferences, andprivileges senior to those of our common stock, and the terms of the debtsecurities issued could impose significant restrictions on our operations. Ifwe raise additional funds through asset sales or collaborations and licensingarrangements, we may be required to relinquish some rights to our technology ordrug candidates, or to grant licenses on terms that are not favorable to us. Ifadequate funds are not available or are not available on acceptable terms, ourability to fund our operations, take advantage of opportunities, developproducts and technologies, and otherwise respond to competitive pressures couldbe significantly delayed or limited, and we may need to downsize or halt ouroperations.

 

***We cannot besure if or when the Asset Sales will be completed.***

 

The consummations of the Asset Sales issubject to the satisfaction of various conditions, many of which are beyond ourcontrol, including, but not limited to, the approval of the Asset Sales by ourstockholders, the receipt of various consents, and a termination right byeither party if the Asset Sales are not completed by January 31,2009.  We cannot guarantee that we willbe able to satisfy the closing conditions related to the Asset Sales.  If we are unable to satisfy the closingconditions in either of the Asset Sales, the purchaser in such Asset Sale willnot be obligated to complete the Asset Sale.

 

If the Asset Sales do not close, we willattempt to secure additional financing. It is uncertain whether we can secure sufficient financing to fund ourongoing operations on terms acceptable to us, if at all, within a time framenecessary to continue our ongoing operations. If we are unable to secure additional financing on terms acceptable tous and on a timely basis, we may seek further stockholder approval to dissolveor we may file for, or be forced to resort to, bankruptcy protection.  Any decision to seek further stockholderapproval to dissolve or to file for, or be forced to resort to bankruptcyprotection, may occur at any point during or before the second quarter of 2009.

 

44

----

Tableof Contents

 

***We willincur significant costs in connection with the Asset Sales, whether or not wecomplete them.***

 

We expect to incursignificant costs related to the Asset Sales. These expenses include, but are not limited to, financial advisory,legal and accounting fees and expenses, employee expenses, filing fees,printing expenses, proxy solicitation and other related charges.  We may also incur additional unanticipatedexpenses in connection with the Asset Sales. A considerable portion of the costs related to the Asset Sales, such aslegal, financial advisory and accounting fees, will be incurred regardless ofwhether it is completed.  If the AssetSales are not consummated, we are required to reimburse BioGenerix and NovoNordisk for up to an aggregate of $0.5 million each for out-of-pocket expenses(including, but not limited to, fees paid to third-party advisers).  These expenses will decrease the remainingcash available for eventual distribution to stockholders in connection with ourdissolution and liquidation or for use in connection with any future deploymentin the business.

 

***Ourstockholders could approve one of the Asset Sales, but vote against the otherAsset Sale.***

 

Neither Asset Saleis conditioned upon the approval by our stockholders of the other AssetSale.  However, each Asset PurchaseAgreement includes a condition that provides that the purchaser is notobligated to close its Asset Sale unless a closing occurs under the AssetPurchase Agreement with the other purchaser. Therefore, if only one of the Asset Sales is approved by ourstockholders, the purchaser in such approved Asset Sale has the right, but notthe obligation to close on its Asset Sale. For the purchaser in the Asset Sale not approved by our stockholders, weare required to reimburse such purchaser for up to an aggregate of $0.5 millionof out-of-pocket expenses (including, but not limited to, fees paid tothird-party advisers).

 

If only one of theAsset Sales is completed, we would evaluate all of our available options,including but limited to attempting to secure additional financing.  It is uncertain whether we can securesufficient financing to fund our ongoing operations on terms acceptable to us,if at all, within a time frame necessary to continue our ongoingoperations.  If we are unable to secureadditional financing on terms acceptable to us and on a timely basis, we mayseek further stockholder approval to dissolve or we may file for, or be forcedto resort to, bankruptcy protection. Even if we are able to secure additional financing on terms acceptableto us after completing one of the Asset Sales, it is uncertain whether ourremaining intellectual property assets would be sufficient for us to continueoperating as an ongoing business.

 

***Ourstockholders could approve the Asset Sales, but vote against the Plan ofLiquidation.***

 

The Plan of Liquidation is subject to theapproval by our stockholders and subsequent consummations of the AssetSales.  If the Asset Sales are approvedby our stockholders and subsequently consummated, but the Plan of Liquidationis not approved and adopted by our stockholders, we will still complete the AssetSales.  In that case, we will havetransferred substantially all of our assets to BioGeneriX and NovoNordisk.  With no material assets and noPlan of Liquidation approved, we intend to declare and pay to our stockholdersa cash dividend, but the amount is uncertain. If a cash dividend is paid, any cash in excess of such cash dividendwill be retained to fund ongoing operating expenses.  We would have no business or operations afterthe Asset Sales, and will retain only those employees required to maintain ourcorporate 

 

45

----

Table of Contents

 

existence.  We have no plans forour operations in such a scenario, and would evaluate all available options.

 

***Our stocktransfer books will close on the date we file the certificate of dissolutionwith the Secretary of State of the State of Delaware, after which we willdiscontinue recording transfers of shares of our common stock.***

 

We intend to close our stock transfer booksand discontinue recording transfers of shares of our common stock at the closeof business on the date we file the certificate of dissolution with theSecretary of State of the State of Delaware. Thereafter, certificates representing shares of our common stock willnot be assignable or transferable on our books. The proportionate interests of all of our stockholders will be fixed onthe basis of their respective stock holdings at the close of business on suchdate, and, after such date, any distributions made by us will be made solely tostockholders of record at the close of business on such date.

 
| **Item 6.** | **Exhibits** |
|-------------|--------------|
|        |         |   |
|        | 2.1          | Asset Purchase Agreement  by and between Neose Technologies, Inc. and Novo Nordisk A/S, dated  September 17, 2008 (Exhibit 2.1) (1) |
|        |         |   |
|        | 2.2          | Asset Purchase Agreement  by and between Neose Technologies, Inc. and BioGeneriX AG, dated  September 17, 2008 (Exhibit 2.2) (1) |
|        |         |   |
|        | 2.3          | Plan of Complete  Liquidation and Dissolution of Neose Technologies, Inc.  (Exhibit 2.3) (1) |
|        |         |   |
|        | 31.1*        | Certification of Chief  Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a), as  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|        |         |   |
|        | 31.2*        | Certification of Chief  Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a), as  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|        |         |   |
|        | 32.1*        | Certification of Chief  Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002. |
|        |         |   |
|        | 32.2*        | Certification of Chief  Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

----

(1)           Filed as an Exhibit toour Current Report on Form 8-K filed with the SEC on September 18,2008.

 

*                                         Filed herewith.

 

46

----

Table of Contents

 

**SIGNATURES**

 

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

 

 
|                                          | NEOSE TECHNOLOGIES, INC. |
|-----------------------------------------------|--------------------------|
|                                          |                     |
|                                          |                     |
| Date:   November 10, 2008 | By:                      | /s/ A. Brian  Davis |
|                                          |                     | A. Brian Davis |
|                                          |                     | Senior Vice  President and Chief Financial Officer

(Principal Financial  and Accounting Officer and

Duly Authorized  Signatory) |

 

47

----

Table ofContents

** **

**Exhibit Index**

 
| **Exhibit** | ** ** | **Description**                                                                                                                                                           |
|-------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                                                      |
| 31.1        |       | Certification of Chief  Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a), as  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|        |       |                                                                                                                                                                      |
| 31.2        |       | Certification of Chief  Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a), as  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|        |       |                                                                                                                                                                      |
| 32.1        |       | Certification of Chief  Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.            |
|        |       |                                                                                                                                                                      |
| 32.2        |       | Certification of Chief  Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.            |

 

----