Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

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**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  June 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  o       No  x

 

Indicate thenumber of shares outstanding of each of the issuer’s classes of common stock,as of the latest practicable date: 54,468,181 shares of common stock, $.01 par value, were outstanding asof August 01, 2008.

 

 

 

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**NEOSE TECHNOLOGIES, INC.**

 

**INDEX**

 
| ** **    | ** **                                                                                  | **Page** |
|---------------|---------------------------------------------------------------------------------------------|----------|
|          |                                                                                        |     |
| PART I.  | FINANCIAL INFORMATION:                                                                      |     |
|          |                                                                                        |     |
| Item 1.       | Financial Statements (unaudited)                                                            |     |
|          |                                                                                        |     |
|          | Balance Sheets as of June 30, 2008 and  December 31, 2007                         | 3        |
|          |                                                                                        |     |
|          | Statements of Operations for the three  and six months ended June 30, 2008 and 2007    | 4        |
|          |                                                                                        |     |
|          | Statements of Cash  Flows for the six months ended June 30, 2008 and 2007              | 5        |
|          |                                                                                        |     |
|          | Notes to Financial Statements                                                               | 6        |
|          |                                                                                        |     |
| Item 2.       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 21       |
|          |                                                                                        |     |
| Item 3.       | Quantitative  and Qualitative Disclosures About Market Risk                                 | 34       |
|          |                                                                                        |     |
| Item 4.       | Controls and  Procedures                                                                    | 35       |
|          |                                                                                        |     |
| PART II. | OTHER INFORMATION:                                                                          |     |
|          |                                                                                        |     |
| Item 1A.      | Risk Factors                                                                                | 36       |
|          |                                                                                        |     |
| Item 6.       | Exhibits                                                                                    | 37       |
|          |                                                                                        |     |
| SIGNATURES    | 38                                                                                          |

 

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| **PART I.** | **FINANCIAL  INFORMATION** |
|------------------|----------------------------|
|             |                       |
| **Item 1.**      | **Financial  Statements**  |

 

**Neose Technologies, Inc.**

 

**BalanceSheets**

(unaudited)

(in thousands, except per share amounts)

 
| ** **                                                                                                | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **Assets**                                                                                                |       |                    |       |                        |       |
| Current assets:                                                                                           |       |                    |       |                        |       |
| Cash and cash  equivalents                                                                                |       | $                       | 11,430     |                        | $          | 19,282 |   |
| Accounts  receivable, net                                                                                 |       | 1,695                   |       | 1,758                       |       |
| Prepaid expenses  and other current assets                                                                |       | 525                     |       | 1,564                       |       |
| Total current  assets                                                                                     |       | 13,650                  |       | 22,604                      |       |
| Property and  equipment, net                                                                              |       | 12,774                  |       | 13,564                      |       |
| Other assets                                                                                              |       | 71                      |       | 71                          |       |
| Total assets                                                                                              |       | $                       | 26,495     |                        | $          | 36,239 |   |
| **Liabilities and Stockholders’ Equity**                                                             |       |                    |       |                        |       |
| Current  liabilities:                                                                                     |       |                    |       |                        |       |
| Note payable                                                                                              |       | $                       | 237        |                        | $          | — |   |
| Current portion  of long-term debt and capital lease obligations                                          |       | 158                     |       | 658                         |       |
| Accounts payable                                                                                          |       | 929                     |       | 1,309                       |       |
| Accrued  compensation                                                                                     |       | 843                     |       | 872                         |       |
| Accrued expenses                                                                                          |       | 2,076                   |       | 2,977                       |       |
| Deferred revenue                                                                                          |       | 938                     |       | 1,517                       |       |
| Total current  liabilities                                                                                |       | 5,181                   |       | 7,333                       |       |
| Warrant  liability                                                                                        |       | 638                     |       | 4,205                       |       |
| Long-term debt  and capital lease obligations                                                             |       | 150                     |       | 182                         |       |
| Deferred revenue                                                                                          |       | 7,772                   |       | 5,055                       |       |
| Other  liabilities                                                                                        |       | 563                     |       | 548                         |       |
| Total  liabilities                                                                                        |       | 14,304                  |       | 17,323                      |       |
| 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                                                                               |       | 313,440                 |       | 313,216                     |       |
| Accumulated  deficit                                                                                      |       | (301,794                | )          | (294,845                    | )          |
| Total  stockholders’ equity                                                                          |       | 12,191                  |       | 18,916                      |       |
| Total  liabilities and stockholders’ equity                                                          |       | $                       | 26,495     |                        | $          | 36,239 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

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**Neose Technologies, Inc.**

 

**Statements of Operations**

(unaudited)

(in thousands,except per share amounts)

 
| ** **                                                                                  | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                  | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenue from  collaborative agreements                                                      |       | $                                               | 1,573      |                                          | $          | 2,231 |   | $ | 5,685 |   | $ | 3,468 |   |
| Operating  expenses:                                                                        |       |                                            |       |                                          |       |   |   |   |   |
| Research and  development                                                                   |       | 3,920                                           |       | 7,742                                         |       | 11,681 |   | 17,554 |   |
| General and administrative                                                                  |       | 2,091                                           |       | 2,548                                         |       | 5,041 |   | 5,513 |   |
| Total operating  expenses                                                                   |       | 6,011                                           |       | 10,290                                        |       | 16,722 |   | 23,067 |   |
| Operating loss                                                                              |       | (4,438                                          | )          | (8,059                                        | )          | (11,037 | ) | (19,599 | ) |
| (Increase)  decrease in fair value of warrant liability                                     |       | (228                                            | )          | 1,920                                         |       | 3,567 |   | (4,430 | ) |
| Interest income                                                                             |       | 85                                              |       | 502                                           |       | 247 |   | 774 |   |
| Interest expense                                                                            |       | (12                                             | )          | (48                                           | )          | (29 | ) | (88 | ) |
| Loss before  income tax benefit                                                             |       | (4,593                                          | )          | (5,685                                        | )          | (7,252 | ) | (23,343 | ) |
| Income tax  benefit                                                                         |       | —                                          |       | 533                                           |       | 303 |   | 533 |   |
| Net loss                                                                                    |       | $                                               | (4,593     | )                                             | $          | (5,152 | ) | $ | (6,949 | ) | $ | (22,810 | ) |
| Basic and  diluted net loss per share                                                       |       | $                                               | (0.08      | )                                             | $          | (0.09 | ) | $ | (0.13 | ) | $ | (0.50 | ) |
| Weighted-average  shares outstanding used in computing basic and diluted net loss per share |       | 54,468                                          |       | 54,402                                        |       | 54,468 |   | 45,995 |   |

 

The accompanying notes are an integral part of these financial statements.

 

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**Neose Technologies, Inc.**

 

**Statements of Cash Flows**

(unaudited)

(in thousands)

 
| ** **                                                                   | ** ** | **Six months ended ** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                   | ** ** | **June 30,**                    | ** ** |
| ** **                                                                   | ** ** | **2008**                             | ** ** | **2007** | ** ** |
| Cash  flows from operating activities:                                       |       |                                 |       |   |   |
| Net  loss                                                                    |       | $                                    | (6,949     | ) | $ | (22,810 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities: |       |                                 |       |   |   |
| (Decrease)  increase in fair value of warrant liability                      |       | (3,567                               | )          | 4,430 |   |
| Depreciation  and amortization expense                                       |       | 819                                  |       | 1,034 |   |
| Non-cash  compensation expense                                               |       | 224                                  |       | 1,107 |   |
| Non-cash  rent expense                                                       |       | —                               |       | 130 |   |
| Loss  on disposition of property and equipment                               |       | 4                                    |       | 4 |   |
| Changes  in operating assets and liabilities:                                |       |                                 |       |   |   |
| Accounts  receivable                                                         |       | 63                                   |       | (3,771 | ) |
| Prepaid  expenses and other current assets                                   |       | 1,039                                |       | (208 | ) |
| Other  assets                                                                |       | —                               |       | (16 | ) |
| Accounts  payable                                                            |       | (380                                 | )          | (702 | ) |
| Accrued  compensation                                                        |       | (29                                  | )          | (676 | ) |
| Accrued  expenses                                                            |       | (901                                 | )          | 1,463 |   |
| Deferred  revenue                                                            |       | 2,138                                |       | 1,459 |   |
| Other  liabilities                                                           |       | 15                                   |       | 19 |   |
| Net  cash used in operating activities                                       |       | (7,524                               | )          | (18,537 | ) |
| Cash  flows from investing activities:                                       |       |                                 |       |   |   |
| Purchases  of property and equipment                                         |       | (33                                  | )          | (3,389 | ) |
| Net  cash used in investing activities                                       |       | (33                                  | )          | (3,389 | ) |
| Cash  flows from financing activities:                                       |       |                                 |       |   |   |
| Proceeds  from issuance of debt                                              |       | 370                                  |       | 367 |   |
| Repayments  of debt                                                          |       | (665                                 | )          | (856 | ) |
| Proceeds  from issuance of common stock and warrants, net                    |       | —                               |       | 40,486 |   |
| Net  cash (used in) provided by financing activities                         |       | (295                                 | )          | 39,997 |   |
| Net  (decrease) increase in cash and cash equivalents                        |       | (7,852                               | )          | 18,071 |   |
| Cash  and cash equivalents, beginning of period                              |       | 19,282                               |       | 16,388 |   |
| Cash  and cash equivalents, end of period                                    |       | $                                    | 11,430     |   | $ | 34,459 |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

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**Neose Technologies, 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 utilizing 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).

 

We believe that ourenzymatic pegylation technology, GlycoPEGylation, can improve the drugproperties of therapeutic proteins by building out, and attaching polyethyleneglycol (PEG) 

 

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**Neose Technologies, Inc.**

 

**Notesto Financial Statements**(unaudited)

(in thousands,except per share amounts)

 

to, carbohydrate structuresat specific sites on the proteins.  We areusing our technology to develop proprietary versions of protein drugs withproven safety and efficacy and to improve the therapeutic profiles of proteinsbeing developed by our partners.  Weexpect these modified proteins to offer significant advantages, including lessfrequent dosing and possibly improved efficacy, over the original versions ofthe drugs now on the market, as well as to meet or exceed the pharmacokineticprofile of next-generation versions of the drugs now on the market.  We believe this strategy of targeting drugswith proven safety and efficacy allows us to lower the risk profile of ourproprietary development portfolio as compared to *de novo*protein drug development.  We intend tocontinue to focus our research and development resources on therapeuticproteins that we believe have the greatest probability of achieving clinicallymeaningful therapeutic improvements from our technology and are in commerciallyattractive categories.

 

We have incurred losses eachyear since inception. As of June 30, 2008, we had an accumulated deficitof $301,794. We expect to spend significant amounts on research and developmentfor our proprietary drug candidates and technology, maintenance of ourintellectual property position, and our business development andcommercialization efforts. Given our planned level of operating expenses, weexpect to continue incurring losses for some time.

 

We believe that our existingcash and cash equivalents, expected proceeds from collaborations and licensearrangements, and interest income should be sufficient to meet our operatingand capital requirements at least into the third quarter of 2009, althoughchanges in our collaborative relationships or our business, whether or notinitiated by us, may cause us to deplete our cash and cash equivalents soonerthan the above estimate. We will require significant amounts of additionalcapital in the future to fund our operations, and we do not have any assurancethat funding will be available when we need it on terms that we find favorable,if at all. If we are unable to raise additional capital when required, we mayneed to delay, scale back, or eliminate some or all of our research anddevelopment programs.

 

On February 19, 2008, we received notice from TheNASDAQ Stock Market LLC (“NASDAQ”) stating that for 30 consecutive businessdays the bid price for our common stock has closed below the minimum $1.00 pershare required for continued listing on the NASDAQ Global Market.  As a result, we no longer meet NASDAQ’scontinued listing criteria and have 180 calendar days, or until August 18,2008, to regain compliance.  Our shareswill continue to trade on the NASDAQ Global Market during the 180-dayperiod.  We may receive an additional180-day compliance period if we meet all of the initial listing requirementsfor the NASDAQ Capital Market, except for the bid price requirement.  We currently intend to submit an applicationto transfer to the NASDAQ Capital Market prior to August 18, 2008.  If NASDAQ approves the transfer application,we will be afforded the additional compliance period of 180 calendar daysfollowing August 18, 2008, or until February 16, 2009, to regaincompliance with the minimum bid price requirement of the NASDAQ CapitalMarket.  If we fail to regain compliancewith the minimum bid price requirement prior to February 16, 2009, or ifwe fail to meet the initial listing requirements for inclusion on the NASDAQCapital Market on August 18, 

 

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**Neose Technologies, Inc.**

 

**Notesto Financial Statements**(unaudited)

(in thousands,except per share amounts)

 

2008, NASDAQ will provide us with written notificationthat our common stock will be delisted from NASDAQ.  At that time, we may appeal the delistingdetermination to a NASDAQ Listings Qualification Panel pursuant to applicableNASDAQ rules, and our common stock would remain listed until completion of theappeal process.  We intend to pursue allavailable options to regain compliance with the NASDAQ continued listingrequirements during the applicable compliance or appeal periods.

 

We have not yet developedany products or commercialized any products or technologies, and we may never beable to do so. Even if we are successful in developing products that areapproved for marketing, we will not be successful unless our products, andproducts 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 manufacturing experience; our dependence upon collaborativepartners to develop and commercialize products incorporating our technology andthe success of collaborative relationships; the uncertainty of intellectualproperty rights; the possibility of development and commercialization ofcompetitive products by others that are more effective, less costly, orotherwise gain greater market acceptance; and the uncertainty of the impact ofgovernment regulation on our operations, including achieving regulatoryapprovals for our products or products incorporating our technology, andchanges in health care reimbursement policies.

 

**2.****             ****Interim Financial Information**

 

The accompanyingunaudited financial statements have been prepared in accordance with U.S.generally accepted accounting principles for presentation of interim financialstatements. Accordingly, the unaudited financial statements do not include allthe information and footnotes necessary for a comprehensive presentation of thefinancial position, results of operations, and cash flows for the periodspresented. In our opinion, however, the unaudited financial statements includeall the normal recurring adjustments that are necessary for a fair presentationof the financial position, results of operations, and cash flows for theperiods presented. You should not base your estimate of our results ofoperations for 2008 solely on our results of operations for the six monthsended June 30, 2008. You should read these unaudited financial statementsin combination with the other Notes in this section; the section entitled “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”appearing in Item 2 of this Form 10-Q; and the Financial Statements,including the Notes to the Financial Statements, included in our Annual Reporton Form 10-K for the year ended December 31, 2007.

 

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**Neose Technologies, Inc.**

 

**Notesto Financial Statements**(unaudited)

(in thousands,except per share amounts)

 

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

 

*Use of Estimates*

 

##### The preparation of financial statements in conformity withU.S. generally accepted accounting principles requires us to make estimates andassumptions. Those estimates and assumptions affect the reported amounts ofassets and liabilities as of the date of the financial statements, thedisclosure of contingent assets and liabilities as of the date of the financialstatements, and the reported amounts of revenues and expenses during thereporting period. Actual results could differ from those estimates.

#####  

*Accounts Receivable*

 

We record accounts receivable net of an allowance for doubtfulaccounts.  We establish an allowance fordoubtful accounts that we believe is adequate to cover anticipated losses onthe collection of all outstanding accounts receivable.  The adequacy of the allowance for doubtfulaccounts is based on historical information and management’s assessment of ourcollaborators’ ability and intent to pay. We recognize revenue based on proportional performance of research anddevelopment work performed on behalf of our collaborators, which recognitionmay not correspond with how our collaborators are billed.  We review the unbilled accounts receivablefrom our collaborators to determine that such amounts are expected to becomebillable and collectible.  All unbilledreceivables are 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 00-19requires liability classification of warrants that may be settled in cash atthe option of warrant holders.  Ourwarrants issued in March 2007 permit net cash settlement in certain changeof control circumstances at the option of the warrant holders, and are,therefore, classified as a liability on our Balance Sheets (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 the warrants are reported in ourStatements of Operations as non-operating income or expense. The fairvalue of the warrants is subject to significant fluctuation based on changes inour stock price, expected volatility, remaining contractual life and therisk-free interest rate. The market price for our common stock has been and maycontinue 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 the 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 

 

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**Neose Technologies, Inc.**

 

**Notesto Financial Statements**(unaudited)

(in thousands,except per share amounts)

 

investorsand shares issuable upon exercise of the warrants. We are required under anagreement 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 investors for eachmonthly period that the registration statement is not effective, up to 24%. Wefollow Financial Accounting Standards Board (FASB) Staff Position No. EITF00-19-2, *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 aregistration payment arrangement are separately analyzed under Statement ofFinancial Accounting Standards (SFAS) No. 5, *Accountingfor Contingencies,* and FASB Interpretation No. 14, *Reasonable Estimation of the Amount of a Loss*. If wedetermine a registration payment arrangement in connection with the securitiesissued in March 2007 is probable and can be reasonably estimated, aliability will be recorded. As of June 30, 2008, we concluded thelikelihood of having to make any payments under the arrangements was remote,and therefore did not record any related liability.

 

*Net LossPer Share*

 

Basic net loss per shareis computed by dividing net loss by the weighted-average number of commonshares outstanding for the period. Diluted net loss per share is computed bydividing net loss by the sum of the weighted-average number of common sharesoutstanding for the period and the number of additional shares that would havebeen outstanding if dilutive potential common shares had been issued. Potentialcommon shares are excluded from the calculation of diluted net loss per shareif the effect on net loss per share is antidilutive. Our diluted netloss per share is equal to basic net loss per share for all reportingperiods presented because giving effect in the computation of diluted net lossper share to the exercise of outstanding stock options and warrants or settlementof restricted stock units (RSUs) would have been antidilutive.  See Note 12 for a summary of outstandingoptions 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 thethree and six months ended June 30, 2008 was comprised only of our netloss, and was $4,593 and $6,949, respectively. Our comprehensive loss for thethree and six months ended June 30, 2007 was comprised only of our netloss, and was $5,152 and $22,810, respectively.

 

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**Neose Technologies, Inc.**

 

**Notesto 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 a current transaction between willing parties. As of June 30,2008, the carrying values of cash and cash equivalents, accounts receivable,prepaid expenses and other current assets, accounts payable, accrued expenses,and accrued compensation equaled or approximated their respective fair valuesbecause of the short duration of these instruments. The fair value of our debtand capital lease obligations was estimated by discounting the future cashflows of each instrument at rates recently offered to us for similar debtinstruments offered by our lenders. As of June 30, 2008, the fair andcarrying values of our debt and capital lease obligations were $543 and $545,respectively.

 

*Recent AccountingPronouncements*

 

In December 2007,the FASB issued EITF 07-01, *Accounting forCollaborative Arrangements*(EITF 07-01).  EITF 07-01 provides guidance concerning determining whether anarrangement constitutes a collaborative arrangement, how costs incurred andrevenue generated on sales to third parties and payments between participantspursuant to a collaboration agreement should be presented in the results ofoperations and what participants should disclose in the notes to the financialstatements about a collaborative arrangement. EITF 07-01 is effective forfiscal years beginning after December 15, 2008. We are currentlyevaluating the impact that the adoption of EITF 07-01 will have, if any, on ourfinancial 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, subsequent to an advance payment, an entity nolonger expects the goods to be delivered or services to be rendered, thecapitalized advance payment should be charged to expense. EITF 07-03 iseffective for fiscal 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 forFinancial Assets and Financial Liabilities – Including an amendment of FASBStatement No. 115* (SFAS No. 159), which allows companiesto choose, at specific election dates, to measure eligible financial assets andliabilities at fair value that are not otherwise required to be measured atfair value.  If a company elects the fairvalue option for an eligible item, changes in that item’s fair value insubsequent reporting periods must be recognized in current earnings. SFAS No. 159is effective for fiscal years beginning after November 15, 2007.  Adoption of SFAS No. 159 has had noeffect on our financial statements and related disclosure because, as permittedunder SFAS No. 159, we have not elected to apply the fair value option toany of our financial assets and liabilities.

 

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**Neose Technologies, Inc.**

 

**Notesto Financial Statements**(unaudited)

(in thousands,except per share amounts)

 

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 appliesunder other accounting pronouncements that require or permit fair valuemeasurements, the FASB having previously concluded in those accountingpronouncements that fair value is the relevant measurement attribute. AlthoughSFAS No. 157 does not require any new fair value measurements, itsapplication may, for some entities, change current practices related to thedefinition of fair value, the methods used to measure fair value, and theexpanded disclosures about fair value measurements.  In February 2008,the FASB issued FASB Staff 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 theeffective date of SFAS No. 157 for all non-financial assets andnon-financial liabilities, except for items that are recognized or disclosed atfair value in the financial statements on a recurring basis.  We adopted SFAS No. 157, as it appliesto our financial instruments, effective January 1, 2008 and the adoptionhas had no effect on our financial statements and related disclosures.

 

**4.****             ****Supplemental Disclosure of CashFlow Information**

 

The following tablecontains additional cash flow information for the periods reported:

 
| ** **                                                                                     | ** ** | **Six months ended ** | ** ** |
|------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                     | ** ** | **June 30,**                    | ** ** |
| ** **                                                                                     | ** ** | **2008**                             | ** ** | **2007** | ** ** |
| Supplemental  disclosure of cash flow information:                                             |       |                                 |       |   |   |
| Cash paid for  interest, net of amounts capitalized                                            |       | $                                    | 31         |   | $ | 88 |   |
| Non-cash  investing activities:                                                                |       |                                 |       |   |   |
| Decrease in  accrued property and equipment included in accounts payable and accrued  expenses |       | $                                    | —     |   | $ | (1,747 | ) |
| Assets acquired  under capital leases                                                          |       | $                                    | —     |   | $ | 373 |   |
| Non-cash  financing activities:                                                                |       |                                 |       |   |   |
| Initial  measurement of warrant liability (see Note 10)                                        |       | $                                    | —     |   | $ | 10,765 |   |

 

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**Neose Technologies, Inc.**

 

**Notesto Financial Statements**

**(unaudited)**

(in thousands,except per share amounts)

 

**5.****             ****AccountsReceivable**

 

                Accounts receivable consisted ofthe following:

 
| ** **                            | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|---------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Billed  receivables                   |       | $                       | 786        |                        | $          | 670 |   |
| Unbilled  receivables                 |       | 909                     |       | 1,107                       |       |
|                                  |       | 1,695                   |       | 1,777                       |       |
| Less allowance  for doubtful accounts |       | —                  |       | (19                         | )          |
|                                  |       | $                       | 1,695      |                        | $          | 1,758 |   |

 

**6.****             ****PrepaidExpenses and Other Current Assets**

 

Prepaid expenses and other current assets consisted ofthe following:

 
| ** **                                          | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|-----------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Prepaid  insurance                                  |       | $                       | 253        |                        | $          | 57 |   |
| Prepaid  maintenance agreements                     |       | 100                     |       | 159                         |       |
| Prepaid contract  research and development services |       | 16                      |       | 1,008                       |       |
| Prepaid clinical  trials and non-clinical studies   |       | —                  |       | 113                         |       |
| Other prepaid  expenses                             |       | 156                     |       | 227                         |       |
|                                                |       | $                       | 525        |                        | $          | 1,564 |   |

#### ** **

#### **7.**              Propertyand Equipment

#### ** **

Property and equipmentconsisted of the following:

 
| ** **                                       | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Leasehold improvements                           |       | $                       | 12,996     |                        | $          | 12,984 |   |
| Laboratory,  manufacturing, and office equipment |       | 6,935                   |       | 6,960                       |       |
|                                             |       | 19,931                  |       | 19,944                      |       |
| Less accumulated  depreciation and amortization  |       | (7,157                  | )          | (6,380                      | )          |
|                                             |       | $                       | 12,774     |                        | $          | 13,564 |   |

 

Asof June 30, 2008 and December 31, 2007, laboratory, manufacturing,and office equipment included $495 of assets acquired under capital leases.Accumulated depreciation and 

 

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**Neose Technologies, Inc.**

 

**Notesto Financial Statements**

**(unaudited)**

(in thousands,except per share amounts)

 

amortizationas of June 30, 2008 and December 31, 2007 included $204 and $148,respectively, related to assets acquired under capital leases. Depreciationexpense, which includes amortization of assets acquired under capital leases,was $819 and $911 for the six months ended June 30, 2008 and 2007,respectively. During the six months ended June 30, 2008, we disposed of fullydepreciated assets that had original acquisition values of $40.  We recorded losses on disposition of propertyand equipment of $4 each during the six months ended June 30, 2008 and2007, for which we did not receive any proceeds from the dispositions.  During the six months ended June 30,2007, we capitalized $9 of interest expense in connection with our facilityimprovement projects.  We did notcapitalize any interest expense incurred during the six months ended June 30,2008.

 

**8.****             ****Debt and Capital LeaseObligations**

 

Debt and capital leaseobligations consisted of the following:

 
| ** **                                                                                                                      | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Notes payable to  equipment lender, secured by equipment and facility improvements, interest  rates from 9.1% to 9.5%, due 2008 |       | $                       | 78         |                        | $          | 327 |   |
| Term loan from  landlord (unsecured), annual interest at 13.0%, final payment made  June 2008                              |       | 3⁄4                  |       | 195                         |       |
| Note payable,  secured by insurance policies, annual interest at 4.1%, due January 2009                                    |       | 237                     |       | 3⁄4                      |       |
| Subtotal                                                                                                                        |       | 315                     |       | 522                         |       |
| Capital lease  obligations                                                                                                      |       | 230                     |       | 318                         |       |
| Total debt                                                                                                                      |       | 545                     |       | 840                         |       |
| Less note  payable, secured by insurance policies                                                                               |       | (237                    | )          | 3⁄4                      |       |
| Less current  portion                                                                                                           |       | (158                    | )          | (658                        | )          |
| Total debt, net  of current portion                                                                                             |       | $                       | 150        |                        | $          | 182 |   |

 

*Note Payable Secured by InsurancePolicies*

 

In March 2008, we borrowed$370 to finance insurance policy premiums due on certain insurance policies.The insurance policy premiums, net of amortization, are included in prepaidexpenses and other current assets on our Balance Sheets at June 30, 2008(see Note 6). We are required to pay $34 of principal and interest during eachof the eleven 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 (a) all unearned premiums or dividendspayable under the policies, (b) loss payments which may reduce theunearned premiums, subject to any mortgagee or loss payee interests, and (c) anyinterest in any state guarantee fund relating to the policies.

 

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**Neose Technologies, Inc.**

 

**Notesto Financial Statements**

**(unaudited)**

(in thousands,except per share amounts)

 

**9.****             ****Accrued Expenses**

 

Accruedexpenses consisted of the following:

 
| ** **                                  | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|---------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Professional  fees                          |       | $                       | 1,137      |                        | $          | 788 |   |
| Clinical trials  and non-clinical studies   |       | $                       | 733        |                        | 1,544      |   |
| Contract  research and development services |       | 206                     |       | 390                         |       |
| Other expenses                              |       | 3⁄4                  |       | 255                         |       |
|                                        |       | $                       | 2,076      |                        | $          | 2,977 |   |

 

**10.****      ****Warrant Liability**

 

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 stockwith an exercise price of $1.96 (see Note 11). The warrants have a five-yearterm and are immediately exercisable. The warrant agreement contains a net cashsettlement provision, which is available to the warrant holders at theiroption, in certain change of control circumstances. As of June 30, 2008,the net cash settlement value of the warrants was $1,887.

 

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 a liability are revalued at eachreporting date until the warrants are exercised or expire with changes in thefair value reported in our Statements of Operations as non-operating income orexpense. Accordingly, we recorded non-operating expense of $228 during thethree months ended June 30, 2008 and non-operating income of $3,567 duringthe six months ended June 30, 2008. We recorded non-operating income of $1,920 during the three months endedJune 30, 2007 and non-operating expense of $4,430 during the six monthsended June 30, 2007.  The aggregatefair value and the assumptions used for the Black-Scholes option-pricing modelsas of March 13, 2007, June 30, 2007, December 31, 2007 and June 30,2008 were as follows:

 
| ** **                          | ** ** | **March 13,  2007** | ** ** | **June 30,  2007** | ** ** | **December 31,  2007** | ** ** | **June 30,  2008** | ** ** |
|-------------------------------------|------------|--------------------------|------------|-------------------------|------------|-----------------------------|------------|-------------------------|------------|
| Aggregate fair  value               |       | $                        | 10,765     |                    | $          | 15,195                      |       | $                       | 4,205      |   | $ | 638 |   |
| Expected  volatility                |       | 75                       | %          | 68                      | %          | 69                          | %          | 84                      | %          |
| Remaining  contractual term (years) |       | 5.0                      |       | 4.7                     |       | 4.2                         |       | 3.7                     |       |
| Risk-free interest  rate            |       | 4.4                      | %          | 4.9                     | %          | 3.3                         | %          | 3.1                     | %          |
| Expected  dividend yield            |       | 0                        | %          | 0                       | %          | 0                           | %          | 0                       | %          |
| Common stock  price                 |       | $                        | 1.79       |                    | $          | 2.46                        |       | $                       | 1.07       |   | $ | 0.30 |   |

 

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**Neose Technologies, Inc.**

 

**Notesto Financial Statements**

**(unaudited)**

(in thousands,except per share amounts)

 

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

 

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,including 4,950 shares of our common stock and warrants to purchase 2,228shares of our common stock to investment funds affiliated with certain membersof our board of directors, at a price of $2.02 per unit, generating netproceeds of $40,459. Each unit consisted of one share of common stock and awarrant to purchase 0.45 shares of our common stock. The warrants have afive-year term and an exercise price of $1.96 per share.

 

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

 

The following table summarizes the status of stockoptions as of June 30, 2008 and changes during the six 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                                          |       | (318       | )          | 2.93                                    |       |                            |       |                                                              |       |
| Expired                                            |       | (866       | )          | 9.78                                    |       |                            |       |                                                              |       |
| Outstanding at  June 30, 2008                 |       | 4,326      |       | $                                       | 6.50       |                            | $          | —                                                            |       | 6.9 |   |
| Vested at  June 30, 2008 and expected to vest |       | 3,489      |       | $                                       | 7.64       |                            | $          | —                                                            |       | 6.5 |   |
| Exercisable at  June 30, 2008                 |       | 2,752      |       | $                                       | 9.38       |                            | $          | —                                                            |       | 5.8 |   |

 

*Fair Value Disclosures*

 

During the three and six months ended June 30,2008, we recorded $128 and $224 of compensation cost for share-based payments,respectively, in our Statements of Operations. During the three and six months ended June 30, 2007, we recorded$641 and $1,107 of compensation cost for share-based payments in our Statementof Operations.  There were no stockoptions granted during the three months ended June 30, 2008.  The weighted-average fair value of stockoptions granted during the three months ended June 30, 2007 was$1.54.  The weighted-average fair valueof stock options granted during the six months ended June 30, 2008 and 2007was $0.46 and $1.63, respectively.  Therewere no stock options exercised during the three months ended June 30,2008.  The total intrinsic values ofstock options exercised during the three months ended June 30, 2007 was$4.

 

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Table of Contents

 

**Neose Technologies, Inc.**

 

**Notesto Financial Statements**

**(unaudited)**

(in thousands,except per share amounts)

 

The fair value of share-based awards is recognizedas expense over the requisite service period, net of estimated forfeitures. Werely primarily on historical experience to estimate expected forfeitures andadjust the annualized forfeiture rate if our historical experience indicatesthat an adjustment is necessary. During the first quarter of each year, were-evaluate our forfeiture rate. For the three and six months ended June 30,2008, based on our historical experience of option pre-vesting cancellations,we have assumed an annualized forfeiture rate of 34% for our stock optionsgranted to individuals not terminated as a result of a restructuring of ouroperations (see Note 14). For employees terminated as a result of therestructurings in 2008, 2007 and 2006, we have assumed an annualized forfeiturerate of 100%. For the three and six months ended June 30, 2007, we assumedan annualized forfeiture rate of 17% for our stock options granted toindividuals not terminated as a result of a restructuring of our operations(see Note 14).  Under the provisions ofSFAS No. 123R, we will record additional expense if the actual forfeiturerate is lower than we estimated, and will record a recovery of prior expense ifthe actual forfeiture is higher than we estimated.

 

Asof June 30, 2008, there was $434 of total unrecognized compensation cost,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*

 

A summary of the status ofRSUs as of June 30, 2008, and changes during the six months then ended, ispresented in the following table:

 
| ** **                                         | ** ** | **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  June 30, 2008                 |       | 34         |       | $                                                   | 2.44       |                            | $          | 10 |   |
| Vested at  June 30, 2008 and expected to vest |       | 34         |       | $                                                   | 2.44       |                            | $          | 10 |   |

 

During the six months ended June 30,2007, we recorded $6 of expense for RSUs. All RSUs were vested as of December 31,2007.

 

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**Neose Technologies, Inc.**

 

**Notesto Financial Statements**

**(unaudited)**

(in thousands,except per share amounts)

 

**13.****      ****Collaborative Agreements and Significant Customer Concentration**

 

Asummary of revenue recognized under our collaborative agreements during thethree and six months ended June 30, 2008 and 2008 is presented in thefollowing table:

 
| ** **                        | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|-----------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                        | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Novo Nordisk                      |       |                                            |       |                                          |       |   |   |   |   |
| Research and  development funding |       | $                                               | 809        |                                          | $          | 1,578 |   | $ | 3,490 |   | $ | 2,134 |   |
| License fees                      |       | 212                                             |       | 165                                           |       | 386 |   | 313 |   |
|                              |       | 1,021                                           |       | 1,743                                         |       | 3,876 |   | 2,447 |   |
| BioGeneriX                        |       |                                            |       |                                          |       |   |   |   |   |
| Research and  development funding |       | 538                                             |       | 474                                           |       | 1,781 |   | 993 |   |
| License fees                      |       | 14                                              |       | 14                                            |       | 28 |   | 28 |   |
|                              |       | 552                                             |       | 488                                           |       | 1,809 |   | 1,021 |   |
|                              |       | $                                               | 1,573      |                                          | $          | 2,231 |   | $ | 5,685 |   | $ | 3,468 |   |

 

*Novo Nordisk**A/SAgreements*

 

Wehave agreements with Novo Nordisk A/S 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 agreements, we received a non-refundable, upfront feeof $4,300, which is being amortized to revenue over the expected performanceperiod. Novo Nordisk is responsible for funding our research and developmentactivities under the agreements, and we may receive up to $52,200 in milestonepayments based on the progress of the programs.

 

*BioGeneriX**AGAgreements*

 

We have an agreement withBioGeneriX AG to use our proprietary GlycoPEGylation technology to develop along-acting version of G-CSF. In connection with the agreement, we receivedfrom BioGeneriX a non-refundable, upfront fee, which is being recognized torevenue over the expected performance period of 18 years.****InOctober 2006, we entered into an amendment of this agreement. Under theagreement, as amended, we and BioGeneriX shared the expenses of preclinicaldevelopment, BioGeneriX is responsible for supplying the protein and fundingthe clinical development program and we are responsible for supplying enzymereagents and sugar nucleotides. As of January 1, 2007, BioGeneriX becameresponsible for the cost of reagent supply.

 

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**Neose Technologies, Inc.**

 

**Notesto Financial Statements**

**(unaudited)**

(in thousands,except per share amounts)

 

**14.****      ****Restructurings and Employee Severance Costs**

 

*2008 Restructuring*

 

InJanuary 2008, we announced the discontinuation of further development of NE-180our product candidate intended forthe treatment of anemia in patients with chronic kidneydisease and cancer patients receiving chemotherapy. The decision to discontinuedevelopment was not due to any safety or efficacy concerns about NE-180, but wasbased on an evaluation of commercial prospects and the likelihood of enteringinto a timely collaboration for the compound in the context of increased safetyconcerns in the ESA category. In connection with the discontinuation of theNE-180 program, we reduced our workforce by approximately 35% (2008Restructuring). Our net loss for the six months ended June 30, 2008included $872 of employee severance costs related to the workforce reduction,of which $221 was included in research and development expenses and $651 wasincluded in general and administrative expenses.  Of these amounts, $15 remained unpaid and wasincluded in accrued compensation on our Balance Sheets as of June 30,2008. The employee severance costs for the 2008 Restructuring were payablepursuant to an employee severance plan established in August 2005 exceptfor one employee who’s severance costs were payable pursuant to her change ofcontrol agreement.

 

Inconnection with the 2008 Restructuring, we committed to pay future cashretention bonuses to certain employees who were not given notice of terminationin January 2008, contingent on their not voluntarily terminating theiremployment prior to November 28, 2008. Our net loss for the three and sixmonths ended June 30, 2008 included $65 and $108 of expense related tothese cash retention bonuses, respectively, of which $42 and $70 was includedin research and development expense, respectively, and $23 and $38 was includedin general and administrative expenses, respectively. We also granted stockoptions to all employees as part of an employee retention program. Theseoptions will vest 50% on August 4, 2008 for all holders who had notvoluntarily terminated their employment prior to that date, and will vest 50%on February 4, 2009 for all holders who have not voluntarily terminatedtheir 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 (2007Restructuring), which included a workforce reduction of approximately 40%. The employee severance costs incurred for the 2007Restructuring were payable pursuant to an employee severance plan establishedin August 2005. Our net loss for the six months ended June 30, 2007included $644 of employee severance costs related to the 2007 Restructuring, ofwhich $568 was included in research and development expenses and $76 wasincluded in general and administrative expenses. All employee severance costsrelated to the 2007 Restructuring were paid by December 31, 2007.

 

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**Neose Technologies, Inc.**

 

**Notesto Financial Statements**

**(unaudited)**

(in thousands,except per share amounts)

 

Inconnection with the 2007 Restructuring, we committed to pay future cashretention bonuses to certain employees who were not given notice of terminationin March 2007, contingent on their not voluntarily terminating theiremployment prior to December 31, 2007. Our net loss for the six monthsended June 30, 2007 included $120 of expense related to these cashretention bonuses, of which $79 was included in research and developmentexpense and $41 was included in general and administrative expenses. All ofthese cash retention bonuses were paid by December 31, 2007. We alsogranted stock options to all employees as part of an employee retentionprogram. These options vested 50% on September 27, 2007 for all holderswho had not voluntarily terminated their employment prior to that date, and 50%on March 27, 2008 for all holders who had not voluntarily terminated theiremployment prior to that date. The aggregate fair market value of the optionswas $1,332, which was recognized ratably, net of forfeitures, as compensationexpense over the vesting period.

 

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

 

Duringthe six months ended June 30, 2008, we sold Pennsylvania research anddevelopment tax credits, resulting in the recognition of $303 of income taxbenefit.  During the three months ended June 30,2007, we sold additional Pennsylvania research and development tax credits,resulting in the recognition of $533 of income tax benefit.

 

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**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:*

 

·                  *estimatethat our existing cash and cash equivalents, expected proceeds fromcollaborations and license agreements, and interest income should be sufficientto meet our operating and capital requirements at least into the third quarterof 2009;*

 

·                  *expectedlosses;*

 

·                  *expectationsfor future capital requirements;*

 

·                  *expectationsregarding net cash utilization and changes in operating expenses;*

 

·                  *expectationsregarding our stock price and continued listing on NASDAQ;*

 

·                  *expectationsregarding the scope and expiration of patents;*

 

·                  *expectationsregarding the timing of non-clinical activities, regulatory meetings andsubmissions, as well as the progression of clinical trials, for GlycoPEG-GCSFand GlycoPEG-Factor VIIa;*

 

·                  *expectationsfor the development of long-acting versions of G-CSF, Factor VIIa, Factor VIIIand Factor IX, and subsequent proprietary drug candidates;*

 

·                  *expectationsfor generating revenue; and*

 

·                  *expectationsregarding the timing and character of new or expanded collaborations and forthe performance of our existing collaboration partners in connection with thedevelopment and commercialization of products incorporating our technology.*

 

*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 ouroperations;*

 

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·                  *ourability to meet forecasted timelines due to internal or external causes;*

 

·                  *unfavorable non-clinical and clinical results forour product candidates or product categories;*

 

·                  *regulatory developments that adversely affect ourability to market our products or obtain government approvals;*

 

·                  *our ability to develop commercial-scalemanufacturing processes for our products and reagents, either independently orin collaboration with others;*

 

·                  *theperformance of our contract manufacturers;*

 

·                  *ourability to enter into and maintain collaborative arrangements;*

 

·                  *ourability to obtain adequate sources of proteins and reagents;*

 

·                  *ourability to develop and commercialize products without infringing the patent orintellectual property rights of others;*

 

·                  *ourability to expand and protect our intellectual property and to operate withoutinfringing the rights of others;*

 

·                  *ourability and our collaborators’ ability to develop and commercialize therapeuticproteins and our ability to commercialize our technology;*

 

·                  *ourability to attract and retain key personnel;*

 

·                  *ourability to satisfy the continued listing requirements of The NASDAQ StockMarket LLC;*

 

·                  *ourability to compete successfully in an intensely competitive field; and*

 

·                  *generaleconomic 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 federal securitieslaws.*

 

*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.*

 

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### **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 two therapeuticprotein candidates in the research stage: GlycoPEG-FVIII and GlycoPEG-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 ourpartner, Novo Nordisk, 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 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 GlycoPEG-EPO (NE-180), our product candidate intended for the treatment ofanemia in patients with chronic kidney disease and cancer patients receivingchemotherapy.  The decision todiscontinue development was not due to any safety or efficacy concerns aboutNE-180, but was based on an evaluation of commercial prospects and thelikelihood of entering into a timely collaboration for the compound in thecontext of increased safety concerns in the erythropoiesis-stimulating agent(ESA) category.  In connection with thediscontinuation of the NE-180 program, we reduced our workforce by approximately35%.  These actions allowed us tosignificantly reduce our expected cash expenditures and extend our cash runwayby approximately one year.  *** ***Weanticipate paying cash severance benefits of approximately $0.9 million inconnection with the workforce 

 

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reduction, all of which was paid out during the sixmonths ended June 30, 2008 except for $15,000.

 

We believe that ourenzymatic pegylation technology, GlycoPEGylation, can improve the drugproperties of therapeutic proteins by building out, and attaching polyethyleneglycol (PEG) to, carbohydrate structures at specific sites on theproteins.  We are using our technology todevelop proprietary versions of protein drugs with proven safety and efficacyand to improve the therapeutic profiles of proteins being developed by ourpartners.  We expect these modifiedproteins to offer significant advantages, including less frequent dosing andpossibly improved efficacy, over the original versions of the drugs now on themarket, as well as to meet or exceed the pharmacokinetic profile ofnext-generation versions of the drugs now on the market.  We believe this strategy of targeting drugswith proven safety and efficacy allows us to lower the risk profile of ourproprietary development portfolio as compared to *de novo*protein drug development.  We intend tocontinue to focus our research and development resources on therapeuticproteins that we believe have the greatest probability of achieving clinicallymeaningful therapeutic improvements from our technology and are in commerciallyattractive categories.

 

We have incurred operatinglosses each year since our inception.  Asof June 30, 2008, we had an accumulated deficit of $301.8 million. Weexpect additional losses over the next several years as we continue productresearch and development efforts and expand our intellectual propertyportfolio. We have financed our operations through private and public offeringsof equity securities, proceeds from debt financings, and revenues from ourcollaborative agreements.

 

We believe that our existingcash and cash equivalents, expected proceeds from collaborations and licensearrangements, and interest income should be sufficient to meet our operatingand capital requirements at least into the third quarter of 2009, althoughchanges in our collaborative relationships or our business, whether or notinitiated by us, may cause us to deplete our cash and cash equivalents soonerthan the above estimate.

 

Our common stock is currently listed on the GlobalMarket of The NASDAQ Stock Market LLC. On February 19, 2008, we received a Staff Deficiency Letter fromThe NASDAQ Stock Market LLC stating that for the last 30 consecutive businessdays the bid price of our common stock has closed below the minimum $1.00 pershare required for continued inclusion on the NASDAQ Global Market.  As a result, we no longer meet NASDAQ’scontinued listing criteria and have 180 calendar days, or until August 18,2008, to regain compliance.  Our shareswill continue to trade on the NASDAQ Global Market during the 180-dayperiod.  We may receive an additional180-day compliance period if we meet all of the initial listing requirementsfor the NASDAQ Capital Market, except for the bid price requirement.  We currently intend to submit an applicationto transfer to the NASDAQ Capital Market prior to August 18, 2008.  If NASDAQ approves the transfer application,we will be afforded the additional compliance period of 180 calendar daysfollowing August 18, 2008, or until February 16, 2009, to regaincompliance with the minimum bid price requirement of the NASDAQ CapitalMarket.  If we fail to regain compliancewith the minimum bid price requirement prior to February 16, 2009, or ifwe fail to meet the initial listing requirements for inclusion on the NASDAQCapital Market on August 18, 2008, NASDAQ will provide us with writtennotification that our common stock will 

 

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bedelisted from NASDAQ.  At that time, wemay appeal the delisting determination to a NASDAQ Listings Qualification Panelpursuant to applicable NASDAQ rules, and our common stock would remain listeduntil completion of the appeal process. We intend to pursue all available options to regain compliance with theNASDAQ continued listing requirements during the applicable compliance orappeal periods.  The delisting of ourcommon stock would significantly affect the ability of investors to trade oursecurities and would negatively affect the value and liquidity of our commonstock.

 

**If delisted from NASDAQ, our common stock will likely bequoted in the over-the-counter market in the so-called “pink sheets” or quotedin the OTC Bulletin Board.  In addition,our common stock would be subject to the rules promulgated under theSecurities Exchange Act of 1934 relating to “penny stocks.”  These rules require brokers who sellsecurities that are subject to the rules, and who sell to persons other thanestablished customers and institutional accredited investors, to completerequired documentation, make suitability inquiries of investors and provideinvestors with information concerning the risks of trading in thesecurity.  These requirements could makeit more difficult to buy or sell our common stock in the open market.  In addition, the delisting of our commonstock could materially adversely affect our ability to raise capital on termsacceptable to us or at all.  Delistingfrom NASDAQ could also have other negative results, including the potentialloss of confidence by suppliers and employees, the loss of institutional investorinterest, fewer business development opportunities, and potential contractclaims.**

** **

**Liquidity and Capital Resources**

 

*Overview*

 

#### **We had $11.4 million in cash andcash equivalents as of June 30, 2008, compared to $19.3 million as of December 31,2007. The decrease was due to the continued funding of our operatingactivities, including the costs associated with the discontinuation of ourNE-180 program, and debt repayments. We anticipate the average quarterlyspending, net of cash expected to be received for research and developmentfunding reimbursement and milestone payments from our collaborators, for theremainder of 2008 to be approximately $3.0 million to fund our operatingactivities, capital expenditures and debt repayments, without giving effect tothe impact of entering into any new collaborative agreements.**

#### ** **

Thedevelopment of next-generation proprietary protein therapeutics, which we arepursuing both independently and in collaboration with selected partners, willrequire substantial expenditures by us and our collaborators. We plan to continuefinancing our operations through private and public offerings of equitysecurities, proceeds from debt financings, and proceeds from existing andfuture collaborative agreements. Because our 2008 revenues could besubstantially affected by entering into new collaborations and by the financialterms of any new collaborations, we cannot estimate our 2008 revenues. Otherthan proceeds from our collaborations with Novo Nordisk and BioGeneriX, and anyfuture collaborations with others, we do not expect to generate significantrevenues until such time as products using our technology are commercialized,which is not expected during the next several years. We expect an additionalseveral years to elapse before we can expect to generate sufficient cash flow fromoperations to fund our operating and investing requirements. We believe thatour existing cash and cash 

 

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equivalents,expected revenue from collaborations and license arrangements, and interestincome should be sufficient to meet our operating and capital requirements atleast into the third quarter of 2009. Accordingly, we will need to raisesubstantial additional funds to continue our business activities and fund ouroperations until we are generating sufficient cash flow from operations. If weare unable to raise additional capital when required, we may need to delay,scale back, or eliminate some or all of our research and development programs.

 

#### ***OperatingActivities***

#### ** **

Netcash used in operating activities was $7.5 million and $18.5 million during thesix months ended June 30, 2008 and 2007, respectively. Our net loss forthe six months ended June 30, 2008 and 2007, was $6.9 million and $22.8million, respectively.  Our net loss forthe six months ended June 30, 2008 included non-cash income of $3.6million relating to a decrease in the fair value of our warrant liability.  Our net loss for the six months ended June 30,2007 included non-cash expense of $4.4 million from the increase in the fairvalue of our warrant liability. Revenues were $2.2 million higher in 2008compared to 2007 primarily due to the reimbursement of research and developmentcosts under our collaborations with Novo Nordisk and BioGeneriX.  During the six months ended June 30,2008, we received $3.2 million of milestone payments from one of ourcollaborators, which also contributed to the reduction of cash used compared tothe same period in 2007.  Research anddevelopment costs decreased by $5.9 million from 2008 to 2007, due to thediscontinuation of our NE-180 program and were partially offset by $1.1 millionincreased external costs incurred under our collaborations with Novo Nordiskand BioGeneriX. Fluctuations in operating items vary period-to-period due to,among other factors, the timing of research and development activities, such asthe initiation and progress of clinical trials and non-clinical studies.

 

#### ***InvestingActivities***

#### ** **

During the six months ended June 30, 2008 and2007, 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 $0.1 million to $0.2 million. We may finance some or all of thesecapital expenditures through capital leases or the issuance of new debt orequity. The terms of any new debt could require us to maintain a minimum cashand investments balance, or to transfer cash into an escrow account tocollateralize some portion of the debt, or both.

 

*Financing Activities*

 

*Equity FinancingActivities*

 

In March 2007, we sold, through a private placement, 21.4 millionshares of our common stock and warrants to purchase 9.6 million shares of ourcommon stock, including 5.0 million shares of our common stock and warrants topurchase 2.2 million shares of our common stock to investment funds affiliatedwith certain members of our board of directors, at a price of $2.02 per unit,generating net proceeds of $40.5 million. Each unit consisted of one share of our common stock and a warrant topurchase 0.45 shares of our common stock. The warrants have a five-year term and an exercise price of $1.96 pershare.

 

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*Debt Financing Activities*

 

Our total debt decreased to$0.5 million as of June 30, 2008, compared to $0.8 million as of December 31,2007.  This decrease primarily resultedfrom planned debt principal repayments of $0.7 million and was partially offsetby $0.4 million in proceeds from the issuance of debt to finance insurancepolicy premiums.

 

*Note Payable Secured byInsurance Policies*

 

In March 2008, weborrowed $0.4 million to finance insurance policy premiums due on certaininsurance policies. The insurance policy premiums, net of amortization, areincluded in prepaid expenses and other current assets on our Balance Sheets asof June 30, 2008. We are required to pay $34,000 of principal and interestduring each of the eleven months beginning on March 15, 2008 and ending onJanuary 15, 2009. The interest is calculated based on an annualpercentage rate of 4.1%. To secure payment of the amounts financed, wegranted the lender a security interest in (a) all unearned premiums ordividends payable under the policies, (b) loss payments which may reducethe unearned premiums, subject to any mortgagee or loss payee interests, and (c) anyinterest in any state guarantee fund relating to the policies.

 

#### ***EquipmentLoans***

#### ** **

Asof June 30, 2008, we owed $0.1 million to an equipment lender thatfinanced the purchase of certain equipment and facility improvements, whichcollateralize the amounts borrowed. Our last payment is scheduled for September 2008,and interest rates applicable to the equipment loans range from 9.1% to 9.5%. Duringthe twelve months ending June 30, 2009, we will make principal andinterest payments totaling $0.1 million under these agreements.

 

*Capital Lease Obligations*

 

Theterms of our capital leases require us to make monthly payments through February 2012.As of June 30, 2008, the present value of aggregate minimum lease paymentsunder these agreements was $0.3 million. Under these agreements, we will berequired to make lease payments totaling $0.1 million during the twelve monthsending June 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.

 

**Summary of 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 

 

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Conditionand Results of Operations, of our Annual Report on Form 10-K for the yearended December 31, 2007. The Liquidity and Capital Resources section ofthis Form 10-Q describes obligations from any material contracts enteredinto during the six months ended June 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.

 

**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 six months ended June 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 sixmonths ended June 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. For employees terminated as a result of therestructurings in 2008, 2007 and 2006, we have assumed an annualized forfeiturerate of 100%. For the six months ended June 30, 2007, we assumed anannualized forfeiture rate of 17% for our stock options granted to individualsnot terminated as a result of a restructuring of our operations.  Under the provisions of SFAS No. 123R,we will record additional expense if the actual forfeiture rate is lower thanwe estimated, and will record a recovery of prior expense if the actualforfeiture is higher than we estimated.

 

**Resultsof Operations**

 

We recorded a net loss of $4.6 million and $6.9million during the three and six months ended June 30, 2008, respectively,compared to net losses of $5.2 million and $22.8 million for the correspondingperiods in 2007.  The following sectionsexplain the changes between the reporting periods in each component of netloss.

 

*Revenue from Collaborative Agreements*

* *

Ourrevenue from collaborative agreements has historically been derived from a fewmajor collaborators. Our collaborative agreements provide for some or all ofthe following elements: license fees, research and development funding,milestone revenues, and royalties on product sales. A summary of revenuerecognized under our collaborative agreements during the 

 

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threeand six months ended June 30, 2008 and 2007 is presented in the followingtable (in thousands):

 
| ** **                        | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|-----------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                        | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Novo Nordisk                      |       |                                            |       |                                          |       |   |   |   |   |
| Research and  development funding |       | $                                               | 809        |                                          | $          | 1,578 |   | $ | 3,490 |   | $ | 2,134 |   |
| License fees                      |       | 212                                             |       | 165                                           |       | 386 |   | 313 |   |
|                              |       | 1,021                                           |       | 1,743                                         |       | 3,876 |   | 2,447 |   |
| BioGeneriX                        |       |                                            |       |                                          |       |   |   |   |   |
| Research and  development funding |       | 538                                             |       | 474                                           |       | 1,781 |   | 993 |   |
| License fees                      |       | 14                                              |       | 14                                            |       | 28 |   | 28 |   |
|                              |       | 552                                             |       | 488                                           |       | 1,809 |   | 1,021 |   |
|                              |       | $                                               | 1,573      |                                          | $          | 2,231 |   | $ | 5,685 |   | $ | 3,468 |   |

 

Revenue fromcollaborative agreements during the three and six months ended June 30,2008 was $1.6 million and $5.7 million, respectively, compared to $2.2 millionand $3.5 million for the corresponding periods in 2007.  The decrease in revenue for the three monthperiod ended June 30, 2008 compared to 2007 was primarily due to an $0.8million decrease in research and development funding from Novo Nordisk.  The increase in revenue for the six monthperiod ended June 30, 2008 compared to 2007 was due to increased researchand development funding from both Novo Nordisk and BioGeneriX.

 

Because our 2008 revenues could be substantiallyaffected by entering into new collaborations and by the financial terms of anynew collaborations, we cannot estimate our 2008 revenues. Material cash inflowsfrom proprietary drug development projects are highly uncertain, and we cannotreasonably estimate the period in which we will begin to receive, if ever,material net cash inflows from our major research and development projects.Cash inflows from development-stage products are dependent on several factors,including entering into collaborative agreements, the achievement of certainmilestones, and regulatory approvals. We may not receive milestone paymentsfrom any existing or future collaborations if a development-stage product failsto meet technical or performance targets or fails to obtain the requiredregulatory approvals. Further, our revenues from collaborations will beaffected by the levels of effort committed and made by our collaborativepartners. Even if we achieve technical success in developing drug candidates,our collaborative partners may discontinue development, may not devote theresources necessary to complete development and commence marketing of theseproducts, or they may not successfully market potential products.

 

*Research and DevelopmentExpense*

* *

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.

 

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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.  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.  Throughout 2007 weincurred costs for the development of NE-180, including process, non-clinicaland clinical development. During the three and six months ended June 30,2008, we incurred external costs of $0.8 million and $2.1 million,respectively, related to the cessation of clinical development activities forNE-180.

 

We conduct exploratory research, both independently and withcollaborators, on therapeutic candidates, primarily proteins, for developmentusing our enzymatic technologies. Successful candidates may be advanced fordevelopment through our own proprietary drug program or through our partneringand licensing program, or a combination of the two. Although our primary focusis the development of long-acting proteins, we are also conducting research toassess opportunities to use our enzymatic technologies in other areas, such asglycopeptides and glycolipids. We expect to continue this research during 2008.

 

A summary of research anddevelopment expenses during the three and six months ended June 30, 2008and 2007 is presented in the following table (in thousands):

 
| ** **                                                          | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                          | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                |       |                                            |       |                                          |       |   |   |   |   |
| Payroll                                                             |       | $                                               | 882        |                                          | $          | 1,424 |   | $ | 2,262 |   | $ | 4,061 |   |
| Facilities                                                          |       | 417                                             |       | 386                                           |       | 815 |   | 1,005 |   |
| Clinical and  non-clinical studies (NE-180)                         |       | 656                                             |       | 1,161                                         |       | 2,387 |   | 2,700 |   |
| Purchased  materials:                                               |       |                                            |       |                                          |       |   |   |   |   |
| GlycoPEG-GCSF                                                       |       | 453                                             |       | 396                                           |       | 1,446 |   | 869 |   |
| Hemostasis  compounds                                               |       | 358                                             |       | 1,456                                         |       | 2,272 |   | 1,781 |   |
| NE-180                                                              |       | 119                                             |       | 1,114                                         |       | 352 |   | 3,205 |   |
| Laboratory  supplies, maintenance, outside services, and consulting |       | 414                                             |       | 893                                           |       | 877 |   | 2,176 |   |
| Funded research  and license fees                                   |       | 201                                             |       | 187                                           |       | 444 |   | 402 |   |
| Depreciation and  stock compensation                                |       | 420                                             |       | 725                                           |       | 826 |   | 1,355 |   |
|                                                                |       | $                                               | 3,920      |                                          | $          | 7,742 |   | $ | 11,681 |   | $ | 17,554 |   |

 

Ourresearch and development expenses during the three months ended June 30,2008 were $3.9 million compared to $7.7 million for the corresponding period in2007.  The decrease during the 2008period as compared to the 2007 period was primarily due to $1.5 million oflower external costs incurred for the NE-180 program during the 2008 period,$1.1 million of lower purchased material costs incurred for our hemostasiscompound programs during the 2008 

 

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period,$0.8 million 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.

 

Our research and development expenses during the six months ended June 30,2008 were $11.7 million compared to $17.6 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 $3.2 million of lower external costs incurred for the NE-180program during the 2008 period, $2.5 million of lower payroll, stockcompensation and facilities costs resulting from the restructurings that wereimplemented in 2007 and 2008, and $1.3 million of lower supplies, maintenancecosts and lab services related to lower staffing levels. These decreases werepartially offset by $1.1 million of additional purchased material costsincurred for our GlycoPEG-GCSF and hemostasis compound programs during the 2008period.

 

Our current research anddevelopment projects are divided between two categories: (i) GlycoPEGylationand (ii) Other Glycotechnology Programs, which includes projectsinvestigating opportunities to use our enzymatic technologies in other areas,such as glycolipids. The following chart sets forth our projects in each ofthese categories and the stage 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 |       | Research                   |

 

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 regulatoryapproval is time consuming and expensive. Because our announced productcandidates are currently in the research or early clinical and preclinicalstages, and there are a variety of potential intermediate clinical andnon-clinical outcomes that are inherent in drug development, we cannotreasonably estimate either the timing or costs we will incur to complete theseresearch and development projects. In addition, the timing and costs tocomplete our research and development projects will be affected by the timingand nature of any collaboration agreements we may enter into with a thirdparty, neither of which we can currently estimate.

 

Ourresearch and development expenses include both direct expenses related to ourresearch and development projects and indirect expenses.  Direct expenses include salaries and othercosts of personnel, raw materials, and supplies for each project.  We may also incur third-party costs relatedto each project, such as clinical and non-clinical development costs, purchasedmaterials, 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.

 

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### ***GlycoPEGylation***

### ** **

Our GlycoPEGylation expensesresult primarily from development activities, including process, clinical and non-clinical development, associatedwith our proprietary drug development programs. GlycoPEGylation expenses forthe three months ended June 30, 2008 were $2.5 million compared to $5.9million for the corresponding 2007 period. These expenses decreased primarily due to $2.9 million of lower payrolland external costs incurred for the NE-180 program, $0.8 million of lowerpayroll and purchased material costs incurred in 2008 for our hemostasiscompound programs compared to 2007, and were partially offset by $0.3 millionof increased payroll and purchased material costs incurred in 2008 for ourGlycoPEG-GCSF program compared to 2007.

 

GlycoPEGylation expense for the six months ended June 30,2008 were $8.5 million compared to $12.4 million for the corresponding 2007period.  These expenses decreasedprimarily due to $6.0 million of lower payroll and external costs incurred forthe NE-180 program and were partially offset by $1.1 million of additionalpayroll and purchased material costs incurred in 2008 for our hemostasiscompound programs compared to 2007 and $1.0 million of additional payroll andpurchased material costs incurred in 2008 for our GlycoPEG-GCSF programcompared to 2007.

 

*Other Glycotechnology Programs*

 

Research and developmentexpenses related to our Other Glycotechnology Programs, were $23,000 and$36,000 for the three and six months ended June 30, 2008, respectively,compared to $3,000 and $38,000 for the corresponding periods in 2007.

 

### ***Indirectexpenses***

### ** **

Thefollowing table illustrates costs incurred during the three and six monthsended June 30, 2008 and 2007 for indirect expenses (in thousands):

 
| ** **                           | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|--------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                           | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Indirect  expenses:                  |       |                                            |       |                                          |       |   |   |   |   |
| Payroll                              |       | $                                               | 280        |                                          | $          | 349 |   | $ | 895 |   | $ | 1,493 |   |
| Facilities                           |       | 417                                             |       | 386                                           |       | 815 |   | 1,005 |   |
| Funded research  and license fees    |       | 201                                             |       | 187                                           |       | 444 |   | 402 |   |
| Depreciation and  stock compensation |       | 420                                             |       | 725                                           |       | 826 |   | 1,355 |   |
| Other                                |       | 116                                             |       | 212                                           |       | 150 |   | 889 |   |
|                                 |       | $                                               | 1,434      |                                          | $          | 1,859 |   | $ | 3,130 |   | $ | 5,144 |   |

 

Indirectresearch and development expenses for the three and six months ended June 30,2008 were $1.4 million and $3.1 million, respectively, compared to $1.9 millionand $5.1 million for the corresponding periods in 2007.  The decrease during the three months ended June 30,2008 compared to the corresponding 2007 period was primarily due to $0.4million of lower 

 

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payroll,and stock compensation resulting from the restructurings that were implementedin 2007 and 2008. The decrease during the six months ended June 30, 2008compared to the corresponding 2007 period was primarily due to $1.1 million oflower payroll and stock compensation resulting from the restructurings thatwere implemented in 2007 and 2008, and $0.7 million of lower supplies,maintenance costs and lab services for the 2008 period compared tocorresponding 2007 period related to lower staffing levels.

 

*General and Administrative Expense*

 

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

 
| ** **                           | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|--------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                           | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Payroll                              |       | $                                               | 647        |                                          | $          | 1,022 |   | $ | 2,102 |   | $ | 2,195 |   |
| Intellectual  Property               |       | 385                                             |       | 415                                           |       | 1,078 |   | 1,018 |   |
| Legal and  Accounting                |       | 588                                             |       | 118                                           |       | 753 |   | 335 |   |
| Depreciation and  Stock Compensation |       | 112                                             |       | 371                                           |       | 218 |   | 780 |   |
| Other                                |       | 359                                             |       | 622                                           |       | 890 |   | 1,185 |   |
|                                 |       | $                                               | 2,091      |                                          | $          | 2,548 |   | $ | 5,041 |   | $ | 5,513 |   |

 

Generaland administrative expenses decreased during the three and six months ended June 30,2008 to $2.1 million and $5.0 million, respectively, from $2.5 million and $5.5million for the corresponding periods in 2007. The decrease for the three months ended June 30, 2008 compared thecorresponding 2007 period was primarily due to $0.6 million of lower payrolland stock compensation related to the restructurings that were implemented in2007 and 2008 and by $0.3 million of lower other general and administrativecosts and were partially offset by $0.5 million of higher legal costs.  The decrease for the six month periods ended June 30,2008 compared to the corresponding 2007 period was primarily due to $0.5million of lower stock compensation related to the restructurings implementedin 2007 and 2008 and $0.3 million of other general and administrative costs andwas partially offset by $0.4 million of higher legal costs.  The six month periods ended June 30,2008 and 2007 included $0.7 million and $0.1 million, respectively, ofseverance costs related to the restructurings implemented during thoserespective periods.

 

*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 $228 during the three months ended June 30, 2008 andnon-operating income of $3,567 during the six months ended June 30, 2008related to the increase and decrease in fair value of these warrants primarilyas a result of an increase and a decrease in the market price of our commonstock 

 

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duringthe three and six months ended June 30, 2008, respectively.  We recorded non-operating income of $1,920during the three months ended June 30, 2007 and non-operating expense of$4,430 during the six months ended June 30, 2007.  The market price for our common stock hasbeen and may continue to be volatile. Consequently, future fluctuations in the price of our common stock maycause significant increases or decreases in the fair value of these warrants.

 

Interest income during the three and six months ended June 30,2008 and 2007 was $85,000 and $247,000, respectively, compared to $502,000 and$774,000 for the corresponding periods in 2007. The decrease during the 2008 period compared to the 2007 period wasprimarily due to lower cash balances for 2008. Our interest income during the remainder of 2008 is difficult toproject, and will depend largely on prevailing interest rates and whether wereceive cash from entering into any new collaborative agreements or bycompleting any additional equity or debt financings during the year.

 

Interest expense during the three and six months endedJune 30, 2008 and 2007 was $12,000 and $29,000, respectively, compared to$48,000 and $88,000 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 six months ended June 30, 2008, we sold Pennsylvaniaresearch and development tax credits, resulting in the recognition of $303,000of income tax benefit.  During the threemonths ended June 30, 2007, we sold Pennsylvania research and developmenttax credits, resulting in the recognition of $533,000 of income tax benefit.

 

**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 issued in March 2007. The warrant liability is revalued atits current fair value using the Black-Scholes option-pricing model at eachreporting date until the warrants are exercised or expire, and is subject tosignificant increases or decreases in value due to the effects of changes inthe price of our common stock at period end and the related calculation ofvolatility. Changes in the fair value of warrants are reported in ourStatements of Operations as non-operating income or expense.  If the closing price of our common stock on June 30,2008 had been 30% higher, the fair value of our warrant liability would havebeen $366,000 higher, which would have resulted in a $366,000 increase in ournet loss for the three and six months ended June 30, 2008.  If the closing price of our common stock on June 30,2008 had been 30% lower, the fair value of our warrant liability would havebeen $303,000 lower, which would have resulted in a $303,000 decrease in ournet loss for the three and six months ended June 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 agreements 

 

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denominated in foreigncurrencies. If the values of these currencies increase against the dollar, ourcosts would increase. To date, we have not entered into any contracts to reducethe risk of fluctuations in currency exchange rates. In the future, dependingupon the amounts payable under any such agreements, we may enter into forwardforeign exchange contracts to reduce the risk of unpredictable changes in thesecosts. However, due to the variability of timing and amount of payments underany such agreements, foreign exchange contracts may not mitigate the potentialadverse impact on our financial results.

 

**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, thesecontrols 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.

 

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**PART II.        OTHER INFORMATION**

 

**Item 1A.         RiskFactors.**

 

***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 June 30, 2008, we had$11.4 million of cash and cash equivalents. We believe that our existing cash and cash equivalents, expectedproceeds from collaborations and license arrangements, and interest incomeshould be sufficient to meet our operating and capital requirements into thethird quarter of 2009, although changes in our collaborative relationships orour business, whether or not initiated by us, may affect the rate at which wedeplete our cash and cash equivalents.

 

We must obtainsubstantial additional financing in order to continue our operations beyond theexpected time frame referenced above.  Wemay seek to raise these funds through asset sales, public or private equity offerings,debt financings, credit facilities, or corporate collaborations and licensingarrangements. We continue to monitor the state of the capital markets, as wellas other avenues, for opportunities to raise additional financing.  There are no assurances that funding will beavailable when we need it on terms that we find favorable, if at all. In theevent that we determine that we are unable to secure additional funding whenrequired, we expect to downsize or wind down our operations throughliquidation, bankruptcy or a sale of our assets.  Any decision to downsize or wind down ouroperations may occur at any point on or before the third 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 ourtherapeutic proteins, and maintain and improve our technology position;

 

·                  the costs of process development and scale-up of proteins and reagentsfor research, development and at commercial scale;

 

·                  the results of non-clinical and clinical testing, which can beunpredictable in drug development, including any failure of a product candidatein clinical development;

 

·                  the time and costs involved in obtaining regulatory approvals, or thefailure to obtain any necessary regulatory approvals;

 

·                  changes in product candidate development plans needed to address anydifficulties that may arise in process development, scale-up, manufacturing,non-clinical activities, clinical studies or commercialization;

 

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·                  our ability to enter into new agreements with collaborators and toextend or maintain our existing collaborations, and the terms of theseagreements;

 

·                  the timing of milestone and royalty payments from our collaborators;

 

·                  the costs and impact of filing, prosecuting, defending, and enforcingpatent claims and other intellectual property rights, and the costs ofinvestigating patents that might block us from developing potential drugcandidates;

 

·                  disruptions and expenses resulting from our workforce reductions, andthe continuing costs of recruiting and retaining qualified personnel;

 

·                  the timing, willingness, and ability of our collaborators tocommercialize products incorporating our technology;

 

·                  our need or decision to acquire or license complementary technologiesor 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, develop productsand technologies, and otherwise respond to competitive pressures could besignificantly delayed or limited, and we may need to downsize or halt ouroperations.

 

**Item 6.****          ****Exhibits**

 
| 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.            |

 

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*                                         Filed herewith.

 

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**SIGNATURES**

 

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|                                        | NEOSE TECHNOLOGIES,  INC. |
|---------------------------------------------|---------------------------|
|                                        |                      |   |
|                                        |                      |   |
| Date:   August 7,  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) |

 

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**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.            |

 

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