**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**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 March 31, 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 filenumber:  0-27718**

 

| **NEOSE TECHNOLOGIES, INC.**                           |
|--------------------------------------------------------|
| (Exact name of registrant as specified in its charter) |

 

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

 

| **(215) 315-9000**                                        |
|-----------------------------------------------------------|
| (Registrant’s telephone number, including area code) |

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements 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 the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date:  54,468,181 shares of common stock, $.01 parvalue, were outstanding as of May 5, 2008.

 

 

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**NEOSE TECHNOLOGIES, INC.**

 

**INDEX**

 
| ** **    | ** ** | ** **                                                                                  | **Page** |
|---------------|------------|---------------------------------------------------------------------------------------------|----------|
|          |       |                                                                                        |     |
| PART I.  |       | FINANCIAL INFORMATION:                                                                      |     |
|          |       |                                                                                        |     |
|          | Item 1.    | Financial Statements (unaudited)                                                            |     |
|          |       |                                                                                        |     |   |
|          |       | Balance Sheets as of  March 31, 2008 and December 31, 2007                        | 3        |
|          |       |                                                                                        |     |   |
|          |       | Statements of  Operations for the three months ended March 31, 2008 and 2007           | 4        |
|          |       |                                                                                        |     |   |
|          |       | Statements of  Cash Flows for the three months ended March 31, 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                                 | 32       |
|          |       |                                                                                        |     |   |
|          | Item 4.    | Controls and  Procedures                                                                    | 33       |
|          |       |                                                                                        |     |   |
| PART II. |       | OTHER INFORMATION:                                                                          |     |
|          |       |                                                                                        |     |   |
|          | Item 6.    | Exhibits                                                                                    | 34       |
|          |       |                                                                                        |     |   |
| SIGNATURES    |       | 35                                                                                          |
|               |            |                                                                                             |          |  |  |

 

2

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**PART I. FINANCIAL INFORMATION**

 

**Item 1.           Financial Statements**

** **

**Neose Technologies, Inc**

 

**Balance Sheets**

(unaudited)

(in thousands, except per share amounts)

 
| ** **                                                                                                | ** ** | **March 31,   2008** | ** ** | **December 31,   2007** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|-----------------------------------|------------|
| **Assets**                                                                                                |       |                           |       |                              |       |
| Current assets:                                                                                           |       |                           |       |                              |       |
| Cash and cash  equivalents                                                                                |       | $                              | 15,954     |                              | $          | 19,282 |   |
| Accounts  receivable, net                                                                                 |       | 1,983                          |       | 1,758                             |       |
| Prepaid expenses  and other current assets                                                                |       | 868                            |       | 1,564                             |       |
| Total current  assets                                                                                     |       | 18,805                         |       | 22,604                            |       |
| Property and  equipment, net                                                                              |       | 13,166                         |       | 13,564                            |       |
| Other assets                                                                                              |       | 71                             |       | 71                                |       |
| Total assets                                                                                              |       | $                              | 32,042     |                              | $          | 36,239 |   |
| **Liabilities and Stockholders’ Equity**                                                             |       |                           |       |                              |       |
| Current  liabilities:                                                                                     |       |                           |       |                              |       |
| Note payable                                                                                              |       | $                              | 338        |                              | $          | — |   |
| Current portion  of long-term debt and capital lease obligations                                          |       | 380                            |       | 658                               |       |
| Accounts payable                                                                                          |       | 896                            |       | 1,309                             |       |
| Accrued  compensation                                                                                     |       | 606                            |       | 872                               |       |
| Accrued expenses                                                                                          |       | 3,552                          |       | 2,977                             |       |
| Deferred revenue                                                                                          |       | 1,379                          |       | 1,517                             |       |
| Total current  liabilities                                                                                |       | 7,151                          |       | 7,333                             |       |
| Warrant  liability                                                                                        |       | 410                            |       | 4,205                             |       |
| Long-term debt  and capital lease obligations                                                             |       | 162                            |       | 182                               |       |
| Deferred revenue                                                                                          |       | 7,107                          |       | 5,055                             |       |
| Other  liabilities                                                                                        |       | 556                            |       | 548                               |       |
| Total  liabilities                                                                                        |       | 15,386                         |       | 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                                                                               |       | 313,312                        |       | 313,216                           |       |
| Accumulated  deficit                                                                                      |       | (297,201                       | )          | (294,845                          | )          |
| Total  stockholders’ equity                                                                          |       | 16,656                         |       | 18,916                            |       |
| Total  liabilities and stockholders’ equity                                                          |       | $                              | 32,042     |                              | $          | 36,239 |   |

 

The accompanying notes arean integral part of these financial statements.

 

3

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**Neose Technologies, Inc.**

 

**Statements of Operations**

(unaudited)

(in thousands,except per share amounts)

 
| ** **                                                                                  | ** ** | **Three months ended   March 31,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                                  | ** ** | **2008**                                               | ** ** | **2007** | ** ** |
| Revenue from  collaborative agreements                                                      |       | $                                                      | 4,112      |   | $ | 1,237 |   |
|                                                                                        |       |                                                   |       |   |   |
| Operating  expenses:                                                                        |       |                                                   |       |   |   |
| Research and  development                                                                   |       | 7,761                                                  |       | 9,812 |   |
| General and  administrative                                                                 |       | 2,950                                                  |       | 2,965 |   |
| Total operating  expenses                                                                   |       | 10,711                                                 |       | 12,777 |   |
| Operating loss                                                                              |       | (6,599                                                 | )          | (11,540 | ) |
| Decrease  (increase) in fair value of warrant liability                                     |       | 3,795                                                  |       | (6,350 | ) |
| Interest income                                                                             |       | 162                                                    |       | 272 |   |
| Interest expense                                                                            |       | (17                                                    | )          | (40 | ) |
| Loss before  income tax benefit                                                             |       | (2,659                                                 | )          | (17,658 | ) |
| Income tax  benefit                                                                         |       | 303                                                    |       | — |   |
| Net loss                                                                                    |       | $                                                      | (2,356     | ) | $ | (17,658 | ) |
| Basic and  diluted net loss per share                                                       |       | $                                                      | (0.04      | ) | $ | (0.47 | ) |
|                                                                                        |       |                                                   |       |   |   |
| Weighted-average  shares outstanding used in computing basic and diluted net loss per share |       | 54,468                                                 |       | 37,493 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

4

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**Neose Technologies, Inc.**

 

**Statements of Cash Flows**

(unaudited)

(in thousands)

 
| ** **                                                                   | ** ** | **Three months ended   March 31,** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2008**                                               | ** ** | **2007** | ** ** |
| Cash flows from  operating activities:                                       |       |                                                   |       |   |   |
| Net loss                                                                     |       | $                                                      | (2,356     | ) | $ | (17,658 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                                                   |       |   |   |
| (Decrease)  increase in fair value of warrant liability                      |       | (3,795                                                 | )          | 6,350 |   |
| Depreciation and  amortization expense                                       |       | 416                                                    |       | 580 |   |
| Non-cash  compensation expense                                               |       | 96                                                     |       | 466 |   |
| Non-cash rent  expense                                                       |       | —                                                 |       | 130 |   |
| Loss on  disposition of property and equipment                               |       | 4                                                      |       | 3 |   |
| Changes in  operating assets and liabilities:                                |       |                                                   |       |   |   |
| Accounts  receivable                                                         |       | (225                                                   | )          | (460 | ) |
| Prepaid expenses  and other current assets                                   |       | 696                                                    |       | (259 | ) |
| Other assets                                                                 |       | —                                                 |       | (16 | ) |
| Accounts payable                                                             |       | (413                                                   | )          | 320 |   |
| Accrued  compensation                                                        |       | (266                                                   | )          | (312 | ) |
| Accrued expenses                                                             |       | 575                                                    |       | 1,397 |   |
| Deferred revenue                                                             |       | 1,914                                                  |       | (162 | ) |
| Other  liabilities                                                           |       | 8                                                      |       | 10 |   |
| Net cash used in  operating activities                                       |       | (3,346                                                 | )          | (9,611 | ) |
|                                                                         |       |                                                   |       |   |   |
| Cash flows from  investing activities:                                       |       |                                                   |       |   |   |
| Purchases of  property and equipment                                         |       | (22                                                    | )          | (2,636 | ) |
| Net cash used in  investing activities                                       |       | (22                                                    | )          | (2,636 | ) |
|                                                                         |       |                                                   |       |   |   |
| Cash flows from  financing activities:                                       |       |                                                   |       |   |   |
| Proceeds from  issuance of debt                                              |       | 370                                                    |       | 366 |   |
| Repayments of  debt                                                          |       | (330                                                   | )          | (378 | ) |
| Proceeds from  issuance of common stock and warrants, net                    |       | —                                                 |       | 40,459 |   |
|                                                                         |       |                                                   |       |   |   |
| Net cash  provided by financing activities                                   |       | 40                                                     |       | 40,447 |   |
|                                                                         |       |                                                   |       |   |   |
| Net (decrease)  increase in cash and cash equivalents                        |       | (3,328                                                 | )          | 28,200 |   |
| Cash and cash  equivalents, beginning of period                              |       | 19,282                                                 |       | 16,388 |   |
| Cash and cash  equivalents, end of period                                    |       | $                                                      | 15,954     |   | $ | 44,588 |   |

 

The accompanying notes are an integral part of thesefinancial statements.

 

5

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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 November 2007,we reported data from two Phase I clinical trials. That data demonstrated thatGlycoPEG-GCSF is a potent stimulator of neutrophils and mobilizer of peripheralblood progenitor cells, and that at comparable doses to Neulasta® (Amgen’smarketed, long-acting G-CSF), GlycoPEG-GCSF demonstrates a 60% greaterbioavailability, leading to a 30% increase in the generation of neutrophils. Weexpect BioGeneriX to commence a Phase II study in the first half of 2008.

 

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 2007, Novo Nordisk initiated aPhase I clinical study to assess the safety and pharmacokinetics ofGlycoPEG-FVIIa in healthy volunteers. During 2007, poster presentations of preclinical data for GlycoPEG-FVIIawere presented at annual meetings of the International Society on Thrombosisand Haemostasis and the American Society of Hematology. Novo Nordisk is alsodeveloping long-acting forms of recombinant Factor VIII and recombinant Factor IXutilizing 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, weannounced the discontinuation of further development of GlycoPEG-EPO (NE-180),our product candidateintended for the 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) 

 

6

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** **

**Neose Technologies, Inc.**

 

**Notes to Financial Statements**

**(unaudited)**

(in thousands,except per share amounts)

 

to, carbohydrate structuresat specific sites on the proteins.  Weare using 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 March 31, 2008, we had an accumulated deficitof $297,201. 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’s continuedlisting criteria and have 180 calendar days, or until August 18, 2008, toregain compliance.  The notice has noeffect on the listing of our common stock at this time, and our shares willcontinue to trade on the NASDAQ Global Market during the 180-day period.  We have not yet determined what action, ifany, we will take in response to this notice, although we intend to monitor thebid price of our listed securities between now and August 18, 2008, andconsider available options if our common stock does not trade at a levelnecessary to regain compliance with the NASDAQ minimum closing bid pricerequirement.

 

7

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** **

**Neose Technologies, Inc.**

 

**Notes to Financial Statements**

**(unaudited)**

(in thousands,except per share amounts)

 

We have not yet developedany products or commercialized any products or technologies, and we may neverbe able 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 FinancialInformation**

 

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 three monthsended March 31, 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.

 

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

 

*Use of Estimates*

 

The preparation of financial statements in conformitywith U.S. generally accepted accounting principles requires us to makeestimates and assumptions. Those estimates and assumptions affect the reportedamounts of assets and liabilities as of the date of the financial statements,the disclosure of contingent assets and liabilities as of the date of thefinancial statements, and the reported amounts of revenues and expenses duringthe reporting period. Actual results could differ from those estimates.

 

8

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** **

**Neose Technologies, Inc.**

 

**Notes to Financial Statements**

**(unaudited)**

(in thousands,except per share amounts)

 

*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 investors and shares issuable upon exercise of thewarrants. We are required under an agreement to use commercially reasonableefforts to cause the registration statement to be declared effective by theSEC, which we accomplished in May 2007, and to remain continuouslyeffective until such time when all of the registered shares are sold. In theevent we fail to meet various legal requirements in regards to the registrationstatement, we will be obligated to pay the investors, as partial liquidateddamages and not as a penalty, an amount in cash equal to 1% of the aggregatepurchase price paid by investors for each monthly period that the registrationstatement is not effective, up to 24%. We follow Financial Accounting StandardsBoard (FASB) Staff Position No. EITF 00-19-2, *Accountingfor Registration Payment Arrangements*(EITF 00-19-2), whichspecifies that registration payment arrangements should play no part indetermining the initial classification of, and subsequent accounting for,securities to which the payments 

 

9

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** **

**Neose Technologies, Inc.**

 

**Notes to Financial Statements**

**(unaudited)**

(in thousands,except per share amounts)

 

relate. Contingentobligations in a registration payment arrangement are separately analyzed underStatement of Financial Accounting Standards (SFAS) No. 5, *Accounting for Contingencies,* and FASB Interpretation No. 14,*Reasonable Estimation of the Amount of a Loss*. Ifwe determine a registration payment arrangement in connection with thesecurities issued in March 2007 is probable and can be reasonablyestimated, a liability will be recorded. As of March 31, 2008, weconcluded the likelihood of having to make any payments under the arrangementswas remote, and therefore did not record any related liability.

 

*Net Loss Per 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 orsettlement of restricted stock units (RSUs) would have been antidilutive.  See Note 12 for a summary of outstandingoptions and a description of our RSUs.

 

*Comprehensive Loss*

 

SFASNo. 130, *Reporting Comprehensive Income,*requiresdisclosure of comprehensive income (loss) in the financial statements.Comprehensive income (loss) is comprised of net income (loss) and othercomprehensive income (loss). Other comprehensive income (loss) includes changesto equity that are not included in net income (loss). Our comprehensive lossfor the three months ended March 31, 2008 and 2007 was comprised only ofour net loss, and was $2,356 and $17,658, respectively.

 

*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 March 31,2008, 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 March 31, 2008, the fair andcarrying values of our debt and capital lease obligations were $878 and $880respectively.

 

10

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** **

**Neose Technologies, Inc.**

 

**Notesto Financial Statements**

**(unaudited)**

(in thousands,except per share amounts)

 

*RecentAccounting Pronouncements*

 

In December 2007,the FASB issued EITF 07-01, *Accounting forCollaborative Arrangements*(EITF 07-01).  EITF 07-01 provides guidanceconcerning determining whether an arrangement constitutes a collaborativearrangement, how costs incurred and revenue generated on sales to third partiesand payments between participants pursuant to a collaboration agreement shouldbe presented in the results of operations and what participants should disclosein the notes to the financial statements about a collaborative arrangement.EITF 07-01 is effective for fiscal years beginning after December 15,2008. We are currently evaluating the impact that the adoption of EITF 07-01will have, if any, on our financial statements and related disclosures.

 

In June 2007,the FASB issued EITF 07-03, *Accounting forNonrefundable Advance Payments for Goods or Services to Be Used in FutureResearch and Development Activities-*(EITF 07-03)*. *EITF07-03 specifies that nonrefundable advance payments for future research anddevelopment activities should be deferred and capitalized and should berecognized as an expense as the related goods are delivered or the relatedservices are performed. If, 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 for Financial Assets andFinancial Liabilities — Including an amendment of FASB Statement No. 115*(SFAS No. 159), which allows companies to choose, at specific electiondates, to measure eligible financial assets and liabilities at fair value thatare not otherwise required to be measured at fair value.  If a company elects the fair value option foran eligible item, changes in that item’s fair value in subsequent reportingperiods must be recognized in current earnings. SFAS No. 159 is effectivefor 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.

 

In September 2006, theFASB issued SFAS No. 157, *Fair Value Measurements*(SFASNo. 157). SFAS No. 157 defines fair value,establishes a framework for measuring fair value in generally acceptedaccounting principles and expands disclosures about fair value measurements. SFAS No. 157 applies under otheraccounting pronouncements that require or permit fair value measurements, theFASB having previously concluded in those accounting pronouncements that fairvalue is the relevant measurement attribute. Although SFAS No. 157 doesnot require any new fair value measurements, its application may, for someentities, change current practices related to the definition of fair value, themethods used to measure fair value, and the expanded disclosures about fairvalue 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 Lease*

 

11

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** **

**Neose Technologies, Inc.**

 

**Notes to Financial Statements**

**(unaudited)**

(in thousands,except per share amounts)

 

*Classification or Measurement under Statement 13*(FSPFAS 157-1) and FASB 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.****              SupplementalDisclosure of Cash Flow Information**

 

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

 
| ** **                                                                                             | ** ** | **Three months ended   March 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                                             | ** ** | **2008**                                               | ** ** | **2007** | ** ** |
| Supplemental  disclosure of cash flow information: Cash paid for interest, net of amounts  capitalized |       | $                                                      | 19         |   | $ | 41 |   |
| Non-cash  investing activities:                                                                        |       |                                                   |       |   |   |
| Decrease in  accrued property and equipment included in accounts payable and accrued  expenses         |       | $                                                      | —     |   | $ | (1,235 | ) |
| Assets acquired  under capital leases                                                                  |       | $                                                      | —     |   | $ | 374 |   |
| Non-cash  financing activities:                                                                        |       |                                                   |       |   |   |
| Initial  measurement of warrant liability (see Note 10)                                                |       | $                                                      | —     |   | $ | 10,765 |   |

 

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

 

Accounts receivableconsisted of the following:

 
| ** **                            | ** ** | **March 31,   2008** | ** ** | **December 31,   2007** | ** ** |
|---------------------------------------|------------|--------------------------------|------------|-----------------------------------|------------|
| Billed  receivables                   |       | $                              | 1,018      |                              | $          | 670 |   |
| Unbilled  receivables                 |       | 984                            |       | 1,107                             |       |
|                                  |       | 2,002                          |       | 1,777                             |       |
| Less allowance  for doubtful accounts |       | (19                            | )          | (19                               | )          |
|                                  |       | $                              | 1,983      |                              | $          | 1,758 |   |

 

12

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** **

**Neose Technologies, Inc.**

 

**Notes to Financial Statements**

**(unaudited)**

(in thousands,except per share amounts)

 

**6.****             ****Prepaid Expenses and OtherCurrent Assets paid Expenses and Other Current Assets**

 

Prepaidexpenses and other current assets consisted of the following:

 
| ** **                                          | ** ** | **March 31,   2008** | ** ** | **December 31,   2007** | ** ** |
|-----------------------------------------------------|------------|--------------------------------|------------|-----------------------------------|------------|
| Prepaid  insurance                                  |       | $                              | 354        |                              | $          | 57 |   |
| Prepaid  maintenance agreements                     |       | 147                            |       | 159                               |       |
| Prepaid clinical  trials and non-clinical studies   |       | 88                             |       | 113                               |       |
| Prepaid contract  research and development services |       | 66                             |       | 1,008                             |       |
| Prepaid rent                                        |       | 66                             |       | 66                                |       |
| Other prepaid  expenses                             |       | 144                            |       | 158                               |       |
| Other current  assets                               |       | 3                              |       | 3                                 |       |
|                                                |       | $                              | 868        |                              | $          | 1,564 |   |

#### ** **

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

#### ** **

Property and equipment consisted of the following:

 
| ** **                                       | ** ** | **March 31,   2008** | ** ** | **December 31,   2007** | ** ** |
|--------------------------------------------------|------------|--------------------------------|------------|-----------------------------------|------------|
| Leasehold  improvements                          |       | $                              | 12,984     |                              | $          | 12,984 |   |
| Laboratory,  manufacturing, and office equipment |       | 6,973                          |       | 6,960                             |       |
|                                             |       | 19,957                         |       | 19,944                            |       |
| Less accumulated  depreciation and amortization  |       | (6,791                         | )          | (6,380                            | )          |
|                                             |       | $                              | 13,166     |                              | $          | 13,564 |   |

 

Asof March 31, 2008 and December 31, 2007, laboratory, manufacturing,and office equipment included $495 of assets acquired under capital leases.Accumulated depreciation and amortization as of March 31, 2008 and December 31,2007 included $176 and $148, respectively, related to assets acquired undercapital leases. Depreciation expense, which includes amortization of assetsacquired under capital leases, was $416 and $457 for the three months ended March 31,2008 and 2007, respectively. During the three months ended March 31, 2007,we capitalized $9 of interest expense in connection with our facilityimprovement projects.  We did notcapitalize any interest expense incurred during the three months ended March 31,2008.

 

13

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** **

**Neose Technologies, Inc.**

 

**Notes to Financial Statements**

**(unaudited)**

(in thousands,except per share amounts)

 

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

 

Debt and capital lease obligations consisted of thefollowing:

 
| ** **                                                                                                                      | ** ** | **March 31,   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 |       | $                              | 193        |                              | $          | 327 |   |
| Term loan from  landlord (unsecured), annual interest at 13.0%, due June 2008                                              |       | 79                             |       | 195                               |       |
| Note payable,  secured by insurance policies, annual interest at 4.1%, due January 2009                                    |       | 338                            |       | 3⁄4                            |       |
| Subtotal                                                                                                                        |       | 610                            |       | 522                               |       |
| Capital lease  obligations                                                                                                      |       | 270                            |       | 318                               |       |
| Total debt                                                                                                                      |       | 880                            |       | 840                               |       |
| Less note  payable, secured by insurance policies                                                                               |       | (338                           | )          | 3⁄4                            |       |
| Less current  portion                                                                                                           |       | (380                           | )          | (658                              | )          |
| Total debt, net  of current portion                                                                                             |       | $                              | 162        |                              | $          | 182 |   |

 

*Note Payable Secured by Insurance Policies*

 

InMarch 2008, we borrowed $370 to finance insurance policy premiums due oncertain insurance policies. The insurance policy premiums, net of amortization,are included in prepaid expenses and other current assets on our Balance Sheetsat March 31, 2008 (see Note 6). We are required to pay $34 of principaland interest during each of the eleven months beginning on March 15, 2008and ending on January 15, 2009.  To secure payment of theamounts financed, we granted the lender a security interest in (a) allunearned premiums or dividends payable under the policies, (b) losspayments which may reduce the unearned premiums, subject to any mortgagee orloss payee interests, and (c) any interest in any state guarantee fundrelating to the policies.

 

14

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** **

**Neose Technologies, Inc.**

 

**Notes to Financial Statements**

**(unaudited)**

(in thousands,except per share amounts)

 

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

 

Accrued expenses consistedof the following:

 
| ** **                                  | ** ** | **March 31,   2008** | ** ** | **December 31,   2007** | ** ** |
|---------------------------------------------|------------|--------------------------------|------------|-----------------------------------|------------|
| Clinical trials  and non-clinical studies   |       | $                              | 2,285      |                              | $          | 1,544 |   |
| Professional  fees                          |       | 1,066                          |       | 788                               |       |
| Contract  research and development services |       | 146                            |       | 390                               |       |
| Other expenses                              |       | 55                             |       | 255                               |       |
|                                        |       | $                              | 3,552      |                              | $          | 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 feature, which is available to the warrant holders at their option,in certain change of control circumstances. As a result, 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 the fairvalue reported in our Statements of Operations as non-operating income orexpense. Accordingly, we recorded non-operating income of $3,795 during thethree months ended March 31, 2008 and non-operating expense of $6,350during the three months ended March 31, 2007.  The aggregate fair value and the assumptionsused for the Black-Scholes option-pricing models as of March 13, 2007, March 31,2007, December 31, 2007 and March 31, 2008 were as follows:

 
| ** **                          | ** ** | **March 13,   2007** | ** ** | **March 31,   2007** | ** ** | **December 31,  2007** | ** ** | **March 31,   2008** | ** ** |
|-------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|-----------------------------|------------|--------------------------------|------------|
| Aggregate fair  value               |       | $                              | 10,765     |                           | $          | 17,115                      |       | $                              | 4,205      |   | $ | 410 |   |
| Expected  volatility                |       | 75                             | %          | 75                             | %          | 69                          | %          | 74                             | %          |
| Remaining  contractual term (years) |       | 5.0                            |       | 4.9                            |       | 4.2                         |       | 3.9                            |       |
| Risk-free  interest rate            |       | 4.4                            | %          | 4.5                            | %          | 3.3                         | %          | 2.1                            | %          |
| Expected  dividend yield            |       | 0                              | %          | 0                              | %          | 0                           | %          | 0                              | %          |
| Common stock  price                 |       | $                              | 1.79       |                           | $          | 2.57                        |       | $                              | 1.07       |   | $ | 0.28 |   |

 

15

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** **

**Neose Technologies, Inc.**

 

**Notes to Financial Statements**

**(unaudited)**

(in thousands,except per share amounts)

 

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

 

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

 

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

 

The following tablesummarizes the status of stock options as of March 31, 2008 and changesduring the three 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                                           |       | (304       | )          | 2.92                                          |       |                            |       |                                                                    |       |
| Expired                                             |       | (56        | )          | 4.75                                          |       |                            |       |                                                                    |       |
| Outstanding at  March 31, 2008                 |       | 5,150      |       | $                                             | 7.06       |                            | $          | —                                                                  |       | 6.2 |   |
| Vested at  March 31, 2008 and expected to vest |       | 4,298      |       | $                                             | 8.12       |                            | $          | —                                                                  |       | 5.7 |   |
| Exercisable at  March 31, 2008                 |       | 3,550      |       | $                                             | 9.57       |                            | $          | —                                                                  |       | 4.9 |   |

 

*Fair Value Disclosures*

 

During thethree months ended March 31, 2008 and 2007, we recorded $96 and $466 ofcompensation cost for share-based payments, respectively, in our Statements ofOperations. The weighted-average fair value of stock options granted during thethree months ended March 31, 2008 and 2007 was $0.46 and $1.64,respectively. There were no stock options exercised during the three monthsended March 31, 2008 and 2007.

 

The fair value of share-based awards isrecognized as expense over the requisite service period, net of estimatedforfeitures. We rely primarily on historical experience to estimate expectedforfeitures and adjust the annualized forfeiture rate if our historicalexperience indicates that an adjustment is necessary. During the first quarterof each year, we re-evaluate our 

 

16

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** **

**Neose Technologies, Inc.**

 

**Notes to Financial Statements**

**(unaudited)**

(in thousands,except per share amounts)

 

forfeiture rate. For the three months ended March 31, 2008, basedon our historical experience of option pre-vesting cancellations, we haveassumed an annualized forfeiture rate of 34% for our stock options granted toindividuals not terminated as a result of a restructuring of our operations(see Note 14). For employees terminated as a result of the restructurings in2008, 2007 and 2006, we have assumed an annualized forfeiture rate of 100%. Forthe three months ended March 31, 2007, we assumed an annualized forfeiturerate of 17% for our stock options granted to individuals not terminated as aresult of a restructuring of our operations (see Note 14).  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.

 

Asof March 31, 2008, there was $545 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 2.1 years.

 

*Restricted Stock Units*

 

Asummary of the status of RSUs as of March 31, 2008, and changes during thethree months then ended, is presented 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  March 31, 2008                 |       | 34         |       | $                                                   | 2.44       |                            | $          | 9 |   |
| Vested at  March 31, 2008 and expected to vest |       | 34         |       | $                                                   | 2.44       |                            | $          | 9 |   |

 

During the three month endedMarch 31, 2007, we recorded $6 of expense for RSUs. All RSUs were vestedas of December 31, 2007.

 

17

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** **

**Neose Technologies, Inc.**

 

**Notes to Financial Statements**

**(unaudited)**

(in thousands,except per share amounts)

 

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

 

Asummary of revenue recognized under our collaborative agreements during thethree months ended March 31, 2008 and 2007 is presented in the followingtable:

 
| ** **                        | ** ** | **Three months ended   March 31,** | ** ** |
|-----------------------------------|------------|--------------------------------------------------------|------------|
| ** **                        | ** ** | **2008**                                               | ** ** | **2007** | ** ** |
| Novo Nordisk                      |       |                                                   |       |   |   |
| Research and  development funding |       | $                                                      | 2,681      |   | $ | 556 |   |
| License fees                      |       | 174                                                    |       | 148 |   |
|                              |       | 2,855                                                  |       | 704 |   |
| BioGeneriX                        |       |                                                   |       |   |   |
| Research and  development funding |       | 1,243                                                  |       | 519 |   |
| License fees                      |       | 14                                                     |       | 14 |   |
|                              |       | 1,257                                                  |       | 533 |   |
|                              |       | $                                                      | 4,112      |   | $ | 1,237 |   |

 

*Novo Nordisk**A/S Agreements*

 

Wehave agreements with Novo Nordisk A/S to use our GlycoPEGylation technology todevelop and commercialize next-generation versions of recombinant Factors VIIa,VIII and IX, one of which, Factor VIIa, is currently marketed by Novo Nordisk.Under these agreements, we received a non-refundable, upfront fee of $4,300,which is being amortized to revenue over the expected performance period. NovoNordisk is responsible for funding our research and development activitiesunder the agreements, and we may receive up to $52,200 in milestone paymentsbased on the progress of the programs.

 

*BioGeneriX**AG Agreements*

 

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.

 

18

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** **

**Neose Technologies, Inc.**

 

**Notes to Financial Statements**

**(unaudited)**

(in thousands,except per share amounts)

 

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

 

*2008 Restructuring*

 

In January 2008, we announced thediscontinuation of further development of NE-180 our product candidateintended for the treatment ofanemia in patients with chronic kidney disease and cancer patients receivingchemotherapy. The decision to discontinue development was not due to any safetyor efficacy concerns about NE-180, but was based on an evaluation of commercialprospects and the likelihood of entering into a timely collaboration for thecompound in the context of increased safety concerns in the ESA category. Inconnection with the discontinuation of the NE-180 program, we reduced ourworkforce by approximately 35% (2008 Restructuring). Our net loss for the threemonths ended March 31, 2008 included $872 of employee severance costsrelated to the workforce reduction, of which $221 was included in research anddevelopment expenses and $651 was included in general and administrativeexpenses.  Of these amounts, $172remained unpaid and was included in accrued compensation on our Balance Sheetsas of March 31, 2008. The employee severance costs for the 2008Restructuring were payable pursuant to an employee severance plan establishedin August 2005 except for one employee who’s severance costs were payablepursuant to her change of control agreement.

 

In connection with the 2008 Restructuring, wecommitted to pay future cash retention bonuses to certain employees who werenot given notice of termination in January 2008, contingent on their notvoluntarily terminating their employment prior to November 28, 2008. Ournet loss for the three months ended March 31, 2008 included $43 of expenserelated to these cash retention bonuses, of which $28 was included in researchand development expense and $15 was included in general and administrativeexpenses. We also granted stock options to all employees as part of an employeeretention program. These options will vest 50% on August 4, 2008 for allholders who had not voluntarily terminated their employment prior to that date,and will vest 50% on February 4, 2009 for all holders who have notvoluntarily terminated their employment prior to that date. The aggregate fairmarket value of the options was $247, which is being recognized ratably, net offorfeitures, as compensation 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 2007 Restructuring were payablepursuant to an employee severance plan established in August 2005. Our netloss for the three months ended March 31, 2007 included $644 of employeeseverance costs related to the 2007 Restructuring, of which $568 was includedin research and development expenses and $76 was included in general andadministrative expenses. All employee severance costs related to the 2007Restructuring were paid by December 31, 2007.

 

19

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** **

**Neose Technologies, Inc.**

 

**Notes to Financial Statements**

**(unaudited)**

(in thousands,except per share amounts)

 

In connection with the 2007 Restructuring, wecommitted to pay future cash retention bonuses to certain employees who werenot given notice of termination in March 2007, contingent on their notvoluntarily terminating their employment prior to December 31, 2007. Ournet loss for the three months ended March 31, 2007 included $353 ofexpense related to these cash retention bonuses, of which $236 was included inresearch and development expense and $117 was included in general andadministrative expenses. All of these cash retention bonuses were paid by December 31,2007. We also granted stock options to all employees as part of an employeeretention program. These options vested 50% on September 27, 2007 for allholders who had not voluntarily terminated their employment prior to that date,and 50% on March 27, 2008 for all holders who had not voluntarilyterminated their employment prior to that date. The aggregate fair market valueof the options was $1,332, which was recognized ratably, net of forfeitures, ascompensation expense over the vesting period.

 

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

 

Duringthe three months ended March 31, 2008, we sold Pennsylvania research anddevelopment tax credits, resulting in the recognition of $303 of income taxbenefit.

 

20

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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;*

 

·                  *expectationsfor increases in operating expenses;*

 

·                  *expectationsfor increases in research and development, and marketing, general andadministrative expenses in order to develop products, procure commercialquantities of reagents and products, and commercialize our technology;*

 

·                  *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;*

 

·                  *expectationsregarding our stock price and listing qualifications;*

 

·                  *expectationsregarding net cash utilization;*

 

·                  *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.*

 

21

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*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:*

 

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

 

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

 

·                  *unfavorablenon-clinical and clinical results for our product candidates or productcategories;*

 

·                  *regulatorydevelopments that adversely affect our ability to market our products or obtaingovernment approvals;*

 

·                  *ourability to develop commercial-scale manufacturing processes for our productsand reagents, either independently or in 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*

 

22

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*forward-looking statements other than as required by applicable law. Wedo not undertake any duty to update any of the forward-looking statements afterthe date of this report to conform them to actual results, except as requiredby the federal securities laws.*

 

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

 

### **Overview**

### ** **

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

 

GlycoPEG-GCSF is along-acting version of G-CSF that we are co-developing with BioGeneriX AG, acompany of the ratiopharm Group.  G-CSFis prescribed to stimulate production of neutrophils (a type of white bloodcell) and is approved for sale in major markets around the world for treatmentof neutropenia associated with myelosuppressive chemotherapy.  In November 2006, BioGeneriX initiatedthe first of two planned Phase I clinical trials for GlycoPEG-GCSF.  In March 2007, BioGeneriX initiated thesecond Phase I clinical trial for GlycoPEG-GCSF.  In November 2007, we reported data fromboth of these Phase I clinical trials. That data demonstrated that GlycoPEG-GCSF is a potentstimulator of neutrophils and mobilizer of peripheral blood progenitor cells,and that at comparable doses to Neulasta® (Amgen’s marketed, long-actingG-CSF), GlycoPEG-GCSF demonstrates a 60% greater bioavailability, leading to a30% increase in the generation of neutrophils.We expect BioGeneriX to commence a Phase II study inthe first half of 2008.

 

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 2007,Novo Nordisk initiated a Phase I clinical study for GlycoPEG-Factor VIIa toassess the safety and pharmacokinetics of GlycoPEG-FVIIa in healthyvolunteers.  During 2007, posterpresentations of preclinical data for GlycoPEG-FVIIa were presented at annualmeetings of the International Society on Thrombosis and Haemostasis and the American Society of Hematology. NovoNordisk is also developing long-acting forms of recombinant Factor VIII andrecombinant Factor 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 intendedfor the treatment of anemia in patients with chronic kidney disease and cancerpatients receiving chemotherapy.  Thedecision to discontinue development was not due to any safety or efficacyconcerns about NE-180, but was based on an evaluation of commercial prospectsand the likelihood of entering into a timely collaboration for 

 

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the compound in the context of increased safetyconcerns in the erythropoiesis-stimulating agent (ESA) category.  In connection with the discontinuation of theNE-180 program, we reduced our workforce by approximately 35%.  These actions allowed us to significantly reduceour expected cash expenditures and extend our cash runway by approximately oneyear.  *** ***We anticipate paying cashseverance benefits of approximately $0.9 million in connection with theworkforce reduction, of which $0.7 million was paid out during the three monthsended March 31, 2008.

 

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 March 31, 2008, we had an accumulated deficit of $297.2 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 theGlobal Market 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, andconsequently we are not in compliance with the requirements for continuedlisting of our common stock.  If we failto regain compliance with the minimum bid price requirement prior to August 18,2008, or if at any time we fail to satisfy any of the other requirements forcontinued listing, our common stock could be delisted from the NASDAQ Global Market.  The delisting of our common stock wouldsignificantly affect the ability of investors to trade our securities and wouldnegatively affect the value and liquidity of our common stock.

 

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** **

**If delisted from the NASDAQ Global Market, our common stockwill likely be quoted in the over-the-counter market in the so-called “pinksheets” or quoted in the OTC Bulletin Board. In addition, our common stock would be subject to the rules promulgatedunder the Securities 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 the NASDAQ Global Market could also have other negative results, includingthe potential loss of confidence by suppliers and employees, the loss ofinstitutional investor interest and fewer business development opportunities.**

** **

**Liquidity and Capital Resources**

 

*Overview*

 

#### **We had $16.0 million in cash andcash equivalents as of March 31, 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 $2.0 million to $5.0 million to fund ouroperating activities, capital expenditures and debt repayments, without givingeffect to the 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 tocontinue financing our operations through private and public offerings ofequity securities, proceeds from debt financings, and proceeds from existingand future 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 flowfrom operations to fund our operating and investing requirements. We believethat our existing cash and cash equivalents, expected revenue fromcollaborations and license arrangements, and interest income should besufficient to meet our operating and capital requirements at least into thethird quarter of 2009. Accordingly, we will need to raise substantialadditional funds to continue our business activities and fund our operationsuntil we are generating sufficient cash flow from operations. If we are unableto raise additional capital when required, we may need to delay, scale back, oreliminate some or all of our research and development programs.

 

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#### ** **

#### ***OperatingActivities***

#### ** **

Netcash used in operating activities was $3.3 million and $9.6 million during thethree months ended March 31, 2008 and 2007, respectively. Our net loss forthe three months ended March 31, 2008 and 2007, was $2.4 million and $17.7million, respectively.  Our net loss forthe three months ended March 31, 2008 included non-cash income of $3.8million relating to a decrease in the fair value of our warrant liability.  Our net loss for the three months ended March 31,2007 included non-cash expense of $6.4 million from the increase in the fairvalue of our warrant liability. Revenues were $2.9 million higher in 2008compared to 2007 primarily due to the reimbursement of research and developmentcosts under our collaborations with Novo Nordisk and BioGeneriX. During thefirst quarter of 2008, we received a $2.2 million milestone payment from one ofour collaborators, which also contributed to the reduction of cash usedcompared to the same period in 2007. Research and development costs decreasedby $2.0 million from 2008 to 2007, due to the discontinuation of our NE-180program and were partially offset by increased costs incurred under ourcollaborations with Novo Nordisk and BioGeneriX. Fluctuations in operatingitems vary period-to-period due to, among other factors, the timing of researchand development activities, such as the initiation and progress of clinicaltrials and non-clinical studies.

 

#### ***InvestingActivities***

#### ** **

During the three months ended March 31, 2008 and2007, we invested $22,000 and $2.6 million, respectively, in property andequipment. In February 2007, we completed construction of leaseholdimprovements to a facility that we lease in Horsham, Pennsylvania (Rock RoadFacility). We anticipateadditional capital expenditures during the remainder of 2008 ofapproximately $0.5 million. We may finance some or all of these capitalexpenditures through capital leases or the issuance of new debt or equity. Theterms of any new debt could require us to maintain a minimum cash andinvestments balance, or to transfer cash into an escrow account tocollateralize some portion of the debt, or both.

 

*Financing Activities*

 

*Equity FinancingActivities*

 

InMarch 2007, we sold, through a private placement, 21.4 million shares ofour common stock and warrants to purchase 9.6 million shares of our commonstock, 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 ofour common stock and a warrant to purchase 0.45 shares of our common stock. Thewarrants have a five-year term and an exercise price of $1.96 per share.

 

*Debt Financing Activities*

 

Our total debt increased to$0.9 million as of March 31, 2008, compared to $0.8 million as of December 31,2007. This increase primarily resulted from $0.4 million in proceeds from theissuance of debt to finance insurance policy premiums and was partially offsetby planned debt principal repayments of $0.3 million.

 

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*Note Payable Secured by Insurance 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 March 31, 2008. We are required to pay $34,000 of principal andinterest during each of the eleven months beginning on March 15, 2008 andending on January 15, 2009. The interest is calculated based on anannual percentage rate of 4.1%. To secure payment of the amounts financed,we granted 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.

 

*Term Loan from Landlord*

 

InMay 2004, we borrowed $1.5 million from the landlord of our leasedfacilities in Horsham, Pennsylvania. As of March 31, 2008, the outstandingprincipal balance under this agreement was $0.1 million. The terms of thefinancing require us to pay monthly principal and interest payments over 48months at an interest rate of 13%. During the twelve months ending March 31,2009, we will be required to make principal and interest payments totaling $0.1million under this agreement.

 

#### ***Equipment Loans***

#### ** **

Asof March 31, 2008, we owed $0.2 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 March 31, 2009, we will make principal andinterest payments totaling $0.2 million under these agreements.

 

*Capital Lease Obligations*

 

Theterms of our capital leases require us to make monthly payments through February 2012.As of March 31, 2008, the present value of aggregate minimum leasepayments under these agreements was $0.3 million. Under these agreements, wewill be required to make lease payments totaling $0.1 million during the twelvemonths ending March 31, 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. This leasecontains escalation clauses, under which the base rent increases annually by2%. In January 2007, we entered into a five-year lease agreement forapproximately 6,800 square feet of office and warehouse space in Horsham,Pennsylvania.

 

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**Summaryof Contractual Obligations**

 

Asummary of our obligations to make future payments under contracts existing asof December 31, 2007 is included in Item 7, Management’s Discussion andAnalysis of Financial Condition and Results of Operations, of our Annual Reporton Form 10-K for the year ended December 31, 2007. The Liquidity andCapital Resources section of this Form 10-Q describes obligations from anymaterial contracts entered into during the three months ended March 31,2008.

 

**Off-Balance Sheet Arrangements**

 

We are not involved in anyoff-balance sheet arrangements that have or are reasonably likely to have acurrent or future effect that is material to investors on our financialcondition, changes in financial condition, revenues or expenses, results ofoperations, liquidity, capital expenditures, or capital resources.

 

**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, there have not been any changes or additionsto our critical accounting policies during the three months ended March 31,2008.

 

*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 threemonths ended March 31, 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 three months ended March 31, 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 actual forfeitureis higher than we estimated.

 

**Resultsof Operations**

 

We recorded a net loss of $2.4 million and$17.7 million during the three months ended March 31, 2008 and 2007,respectively. The following sections explain the changes between the reportingperiods in each component of net loss.

 

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* *

*Revenue from Collaborative Agreements*

* *

Our revenue fromcollaborative agreements has historically been derived from a few majorcollaborators. Our collaborative agreements provide for some or all of thefollowing elements: license fees, research and development funding, milestonerevenues, and royalties on product sales. A summary of revenue recognized underour collaborative agreements during the three months ended March 31, 2008and 2007 is presented in the following table (in thousands):

 
| ** **                        | ** ** | **Three months ended** | ** **  |
|-----------------------------------|------------|----------------------------------|-------------|
| ** **                        | ** ** | **March 31,**               | ** **  |
| ** **                        | ** ** | **2008**                         | ** **  | **2007** | ** ** |
| Novo Nordisk                      |       |                             |        |   |   |
| Research and  development funding |       | $                                | 2,681       |   | $ | 556 |   |
| License fees                      |       | 174                              |        | 148 |   |
|                              |       | 2,855                            |        | 704 |   |
| BioGeneriX                        |       |                             |        |   |   |
| Research and  development funding |       | 1,243                            |        | 519 |   |
| License fees                      |       | 14                               |        | 14 |   |
|                              |       | 1,257                            |        | 533 |   |
|                              |       | $                                |  4,112 |   | $ | 1,237 |   |

 

Revenue fromcollaborative agreements increased in 2008 from 2007 primarily due to increasedresearch and development funding from our collaborations with Novo Nordisk andBioGeneriX.

 

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.

 

*Researchand Development Expense*

* *

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

 

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In January 2008, weannounced the discontinuation of further development of NE-180, our productcandidate intended for the treatment of anemia 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 ESA category.  Throughout 2007 we incurred costs for thedevelopment of NE-180, including process, non-clinical and clinicaldevelopment. During the first quarter of 2008, we incurred costs of $1.3 millionrelated to the cessation of clinical development activities for NE-180. Duringthe second quarter of 2008, we expect to complete these activities and incuradditional costs of $0.7 million.

 

We conduct exploratory research, both independently and with collaborators,on therapeutic candidates, primarily proteins, for development using ourenzymatic technologies. Successful candidates may be advanced for developmentthrough our own proprietary drug program or through our partnering andlicensing program, or a combination of the two. Although our primary focus isthe 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.

 

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

 

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.

 

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For each of our research anddevelopment projects, we incur both direct and indirect expenses. Directexpenses include salaries and other costs of personnel, raw materials, andsupplies for each project. We may also incur third-party costs related to theseprojects, such as contract research, consulting and non-clinical developmentcosts. Indirect expenses include depreciation expense and the costs ofoperating and maintaining our facilities, property, and equipment, to theextent used for our research and development projects, as well as the costs ofgeneral management of our research and development projects.

 

Our research and development expenses during thethree months ended March 31, 2008 and 2007 were $7.8 million and $9.8million, respectively. The decrease in research and development expenses duringthe 2008 period as compared to the 2007 period was primarily due to lowerpayroll, consulting and facility related costs of $1.7 million resulting fromthe restructurings that were implemented in 2007 and 2008 and lower externalcosts of $1.7 million incurred for the NE-180 program during the 2008 period.These decreases were partially offset by $1.9 million of additional externalcosts incurred under our collaborative agreements with Novo Nordisk andBioGeneriX for the 2008 period. The following table illustrates research anddevelopment expenses incurred during the three months ended March 31, 2008and 2007 for our significant groups of research and development projects (inthousands):

 
| ** **                      | ** ** | **Three months ended   March 31,** | ** ** |
|---------------------------------|------------|--------------------------------------------------------|------------|
| ** **                      | ** ** | **2008**                                               | ** ** | **2007** | ** ** |
| GlycoPEGylation                 |       | $                                                      | 6,052      |   | $ | 6,492 |   |
| Other  Glycotechnology Programs |       | 13                                                     |       | 35 |   |
| Indirect  expenses              |       | 1,696                                                  |       | 3,285 |   |
|                            |       | $                                                      | 7,761      |   | $ | 9,812 |   |

 

### ***GlycoPEGylation***

### ** **

Our GlycoPEGylation expenses result primarily fromdevelopment activities, including process, non-clinical and clinical development, associated with our proprietary drugdevelopment programs. These expenses decreased during the 2008 periodcompared to 2007 primarily due to lower external costs of $1.7 million incurredfor the NE-180 program during 2008 and were partially offset by $1.9 million ofadditional external costs incurred in 2008 under our collaborative agreementswith Novo Nordisk with BioGeneriX.

 

*Other Glycotechnology Programs*

 

Research and developmentexpenses related to our Other Glycotechnology Programs, were consistent forboth the 2008 and 2007 periods.

 

### ***Indirectexpenses***

### ** **

Indirect research and development expenses decreasedduring the 2008 period primarily due to lower payroll, consulting and facilitycosts of $1.7 million related to the restructurings that were implemented in2007 and 2008.

 

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*General and Administrative Expense*

 

Generaland administrative expenses were $3.0 million for each of the three monthperiods ended March 31, 2008 and 2007. The three month periods ended March 31,2008 and 2007 includes $0.7 million and $0.1 million, respectively, ofseverance costs related to the restructuring 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 orexpire. Changes in the fair value of the warrants are reported in ourStatements of Operations as non-operating income or expense. During the threemonths ended March 31, 2008,we recorded a non-operating income of $3.8 million related to the decrease infair value of these warrants primarily as a result of a decrease in the marketprice of our common stock during the three months ended March 31,2008. The market price for our common stock has been and may continue tobe volatile.  Consequently, future fluctuations in the price of ourcommon stock may cause significant increases or decreases in the fair value ofthese warrants.

 

Interest income during the three months ended March 31,2008 and 2007 was $162,000 and $272,000, respectively. The decrease during the2008 period compared to the 2007 period was primarily due to lower cashbalances for 2008. Our interest income during the remainder of 2008 isdifficult to project, and will depend largely on prevailing interest rates andwhether we receive cash from entering into any new collaborative agreements orby completing any additional equity or debt financings during the year.

 

Interest expense during the three months ended March 31,2008 and 2007 was $17,000 and $40,000, respectively. Lower average debt balances in the 2008 periodaccounted for the decrease. Our interest expense during the remainder of 2008is difficult to project and will depend on whether we enter into any new debtagreements. See “Financing Activities – Debt Financing Activities” in theLiquidity and Capital Resources section of this Form 10-Q for adescription of the material features of our debt financings.

 

During the three months ended March 31, 2008, we sold Pennsylvaniaresearch and development tax credits, resulting in the recognition of $303,000of income tax benefit.

 

**Item 3.           Quantitative and QualitativeDisclosures 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 

 

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income or expense.  If the closing price of our common stock on March 31,2008 had been 30% higher, the fair value of our warrant liability would havebeen $268,000 higher, which would have resulted in a $268,000 increase in ournet loss for the three months ended March 31, 2008.  If the closing price of our common stock on March 31,2008 had been 30% lower, the fair value of our warrant liability would havebeen $211,000 lower, which would have resulted in a $211,000 decrease in ournet loss for the three months ended March 31, 2008.

 

*Foreign Exchange Risk*

 

We have entered into someagreements denominated, wholly or partly, in Euros or other foreign currencies,and, in the future, we may enter into additional, significant agreementsdenominated in foreign currencies. If the values of these currencies increaseagainst the dollar, our costs would increase. To date, we have not entered intoany contracts to reduce the risk of fluctuations in currency exchange rates. Inthe future, depending upon the amounts payable under any such agreements, wemay enter into forward foreign exchange contracts to reduce the risk ofunpredictable changes in these costs. However, due to the variability of timingand amount of payments under any such agreements, foreign exchange contractsmay not mitigate the potential adverse impact on our financial results.

 

**Item 4.           Controls and Procedures**

 

*Disclosure controls and procedures*

 

Our management carried out an evaluation, with theparticipation of our principal executive officer and principal financialofficer, of the effectiveness of the design and operation of our disclosurecontrols and procedures (as such term is defined under Rule 13a-15(e) promulgatedunder the Securities Exchange Act of 1934, as amended (Exchange Act)), as ofthe end of the period covered by this report on Form 10-Q.  Based on that evaluation, managementconcluded that these controls and procedures are effective to ensure thatinformation required to be disclosed by us in reports that we file or submitunder the Exchange Act is recorded, processed, summarized and reported asspecified in SEC rules and forms. There were no changes in these controls or procedures identified inconnection with the evaluation of such controls or procedures that occurredduring our last fiscal quarter, or in other factors that have materiallyaffected, or are reasonably likely to materially affect, these controls orprocedures.

 

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.

 

*Changes in internal control over financialreporting*

 

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 6.** |   | **Exhibits** |
|-------------|--------|--------------|

 
| 10.1*             |   | Commercial Insurance Premium Finance and Security Agreement between  Neose Technologies, Inc. and Cananwill, Inc. dated March 12,  2008.                   |
|-------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|              |   |                                                                                                                                                                      |
| 10.2*†† |   | Form of Change of Control Agreement between Neose  Technologies, Inc. and Certain Executive Officers.                                                           |
|              |   |                                                                                                                                                                      |
| 10.3*†† |   | Form of Non-Qualified Stock Option Award Agreement under Neose  Technologies, Inc. 2004 Equity Incentive Plan.                                                  |
|              |   |                                                                                                                                                                      |
| 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.

††                                  Compensation plans and arrangements forexecutives and others.

 

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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:  | May 8, 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) |

 

35

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**Exhibit Index**

 
| **Exhibit** | ** ** | **Description**                                                                                                                                                           |
|-------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                                                      |
| 10.1        |       | Commercial Insurance Premium Finance and Security Agreement between  Neose Technologies, Inc. and Cananwill, Inc.   dated March 12, 2008.                  |
|        |       |                                                                                                                                                                      |
| 10.2        |       | Form of Change of Control Agreement between Neose  Technologies, Inc. and Certain Executive Officers.                                                           |
|        |       |                                                                                                                                                                      |
| 10.3        |       | Form of Non-Qualified Stock Option Award Agreement under Neose  Technologies, Inc. 2004 Equity Incentive Plan.                                                  |
|        |       |                                                                                                                                                                      |
| 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.            |

 

36

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