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****UNITED STATES******SECURITIES AND EXCHANGE COMMISSION******Washington, D.C. 20549****

 

**FORM 10-Q**

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

** **

**For the transition period from                to                **

 

**Commissionfile number 001-33133**

 

**METABOLIX, INC.**

 

| **Delaware**                                                    | ** ** | **04-3158289**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) | ** ** | (I.R.S. Employer  Identification No.) |
| ** **                                                      | ** ** | ** **                            |
| **21 Erie Street  Cambridge, MA**                               |       | **02139**                             |
| (Address of principal executive offices)                        |       | (Zip Code)                            |

 

**(617)583-1700**

(Registrant’stelephone number, including area code)

 

 

(Formername, former address and former fiscal year, if changed since last report.)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.  Yes x  No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

 

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

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).  Yes o  No x

 

Thenumber of shares outstanding of the registrant’s common stock as of November 4,2008 was 22,954,051.

 

 

 

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**Metabolix, Inc.Form 10-QFor the Quarter Ended September 30, 2008**

 

**Table ofContents**

 
|                                    |   |                                                                                                                  | **Page**   |
|-----------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------|------------|
| **Part I.  Financial Information** |   |
|                                    |   |                                                                                                                  |       |
| Item                                    |   |                                                                                                                  | ** ** |
| 1.                                      |   | Condensed Consolidated  Financial Statements (Unaudited)                                                              | 1          |
|                                    |   | Condensed Consolidated Balance Sheets at  September 30, 2008 and December 31, 2007                          | 1          |
|                                    |   | Condensed Consolidated Statements of Operations for  the three and nine months ended September 30, 2008 and 2007 | 2          |
|                                    |   | Condensed  Consolidated Statements of Cash Flows for the nine months ended  September 30, 2008 and 2007          | 3          |
|                                    |   | Notes to the Condensed Consolidated Financial  Statements                                                             | 4          |
| 2.                                      |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                           | 11         |
| 3.                                      |   | Quantitative  and Qualitative Disclosures About Market Risk                                                           | 21         |
| 4.                                      |   | Controls and  Procedures                                                                                              | 21         |
|                                    |   |                                                                                                                  |       |
| **Part II.  Other Information**    | 22     |
|                                    |   |                                                                                                                  |       |
| Item                                    |   |                                                                                                                  |       |
| 1.                                      |   | Legal Proceedings                                                                                                     | 22         |
| 1A.                                     |   | Risk Factors                                                                                                          | 22         |
| 2.                                      |   | Unregistered  Sales of Equity Securities and Use of Proceeds                                                          | 23         |
| 3.                                      |   | Defaults  Upon Senior Securities                                                                                      | 23         |
| 4.                                      |   | Submission  of Matters to a Vote of Security Holders                                                                  | 24         |
| 5.                                      |   | Other Information                                                                                                     | 24         |
| 6.                                      |   | Exhibits                                                                                                              | 24         |
|                                    |   |                                                                                                                  |       |
| **SIGNATURES**                          | 25     |

 

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**PART I. FINANCIAL INFORMATION**

 

**ITEM 1.  CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

 

**METABOLIX,INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**UNAUDITED**

**(inthousands, except share and per share data)**

** **
| ** **                                                                                                                                                                                                                                                    | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                    | ** ** | **2008**               | ** ** | **2007**              | ** ** |
| **Assets**                                                                                                                                                                                                                                                    |       |                   |       |                  |       |
| Current assets:                                                                                                                                                                                                                                               |       |                   |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                                                                                     |       | $                      | 27,288     |                  | $          | 22,686 |   |
| Short-term investments                                                                                                                                                                                                                                        |       | 67,320                 |       | 86,640                |       |
| Accounts receivable                                                                                                                                                                                                                                           |       | 88                     |       | 133                   |       |
| Due from related parties                                                                                                                                                                                                                                      |       | 207                    |       | 1,216                 |       |
| Unbilled receivable                                                                                                                                                                                                                                           |       | 95                     |       | 198                   |       |
| Prepaid expenses and other current assets                                                                                                                                                                                                                     |       | 399                    |       | 673                   |       |
| Total current assets                                                                                                                                                                                                                                          |       | 95,397                 |       | 111,546               |       |
| Restricted cash                                                                                                                                                                                                                                               |       | 494                    |       | 498                   |       |
| Property and equipment, net                                                                                                                                                                                                                                   |       | 5,135                  |       | 6,890                 |       |
| Other assets                                                                                                                                                                                                                                                  |       | 98                     |       | 70                    |       |
| Total assets                                                                                                                                                                                                                                                  |       | $                      | 101,124    |                  | $          | 119,004 |   |
|                                                                                                                                                                                                                                                          |       |                   |       |                  |       |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                                                                                 |       |                   |       |                  |       |
| Current liabilities:                                                                                                                                                                                                                                          |       |                   |       |                  |       |
| Accounts payable                                                                                                                                                                                                                                              |       | $                      | 153        |                  | $          | 299 |   |
| Accrued liabilities                                                                                                                                                                                                                                           |       | 4,378                  |       | 4,195                 |       |
| Current portion of deferred rent                                                                                                                                                                                                                              |       | 165                    |       | 165                   |       |
| Deferred revenue                                                                                                                                                                                                                                              |       | 134                    |       | —                |       |
| Total current liabilities                                                                                                                                                                                                                                     |       | 4,830                  |       | 4,659                 |       |
| Deferred rent and other long-term  liabilities                                                                                                                                                                                                                |       | 844                    |       | 963                   |       |
| Long-term deferred revenue                                                                                                                                                                                                                                    |       | 29,051                 |       | 24,180                |       |
| Total liabilities                                                                                                                                                                                                                                             |       | 34,725                 |       | 29,802                |       |
|                                                                                                                                                                                                                                                          |       |                   |       |                  |       |
| Commitments and contingencies (Note 11)                                                                                                                                                                                                                       |       |                   |       |                  |       |
|                                                                                                                                                                                                                                                          |       |                   |       |                  |       |
| Stockholders’ Equity:                                                                                                                                                                                                                                    |       |                   |       |                  |       |
| Preferred stock ($0.01 par value per  share); 5,000,000 shares authorized; no shares issued or outstanding                                                                                                                                                    |       | —                 |       | —                |       |
| Common stock ($0.01 par value per share);  100,000,000 shares authorized at September 30, 2008 and December 31,  2007; 22,940,243 and 22,576,111 shares issued and outstanding at  September 30, 2008 and December 31, 2007, respectively |       | 229                    |       | 226                   |       |
| Additional paid-in capital                                                                                                                                                                                                                                    |       | 187,240                |       | 182,852               |       |
| Accumulated other comprehensive income                                                                                                                                                                                                                        |       | 143                    |       | 236                   |       |
| Accumulated deficit                                                                                                                                                                                                                                           |       | (121,213               | )          | (94,112               | )          |
| Total stockholders’ equity                                                                                                                                                                                                                               |       | 66,399                 |       | 89,202                |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                                                               |       | $                      | 101,124    |                  | $          | 119,004 |   |

 

*The accompanying notes are an integral part of these consolidatedfinancial statements*

 

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**METABOLIX,INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**UNAUDITED**

**(inthousands, except share and per share data)**

 
| ** **                                                    | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                    | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                    | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenue:                                                      |       |                             |       |                            |       |   |   |   |   |
| Research and development revenue                              |       | $                                | 27         |                            | $          | 73 |   | $ | 106 |   | $ | 73 |   |
| License fee and royalty revenue from  related parties         |       | 25                               |       | 25                              |       | 95 |   | 132 |   |
| Grant revenue                                                 |       | 299                              |       | 82                              |       | 955 |   | 590 |   |
| Total revenue                                                 |       | 351                              |       | 180                             |       | 1,156 |   | 795 |   |
| Operating expenses:                                           |       |                             |       |                            |       |   |   |   |   |
| Research and development expenses,  including cost of revenue |       | 6,571                            |       | 5,695                           |       | 18,513 |   | 14,528 |   |
| Selling, general, and administrative  expenses                |       | 4,048                            |       | 4,267                           |       | 12,193 |   | 11,466 |   |
| Total operating expenses                                      |       | 10,619                           |       | 9,962                           |       | 30,706 |   | 25,994 |   |
|                                                          |       |                             |       |                            |       |   |   |   |   |
| Loss from operations                                          |       | (10,268                          | )          | (9,782                          | )          | (29,550 | ) | (25,199 | ) |
|                                                          |       |                             |       |                            |       |   |   |   |   |
| Other income:                                                 |       |                             |       |                            |       |   |   |   |   |
| Interest income, net                                          |       | 540                              |       | 1,484                           |       | 2,449 |   | 4,546 |   |
|                                                          |       |                             |       |                            |       |   |   |   |   |
| Net loss                                                      |       | $                                | (9,728     | )                               | $          | (8,298 | ) | $ | (27,101 | ) | $ | (20,653 | ) |
|                                                          |       |                             |       |                            |       |   |   |   |   |
| Net loss per share:                                           |       |                             |       |                            |       |   |   |   |   |
| Basic and Diluted                                             |       | $                                | (0.42      | )                               | $          | (0.37 | ) | $ | (1.19 | ) | $ | (0.95 | ) |
|                                                          |       |                             |       |                            |       |   |   |   |   |
| Number of shares used in per share  calculations:             |       |                             |       |                            |       |   |   |   |   |
| Basic and Diluted                                             |       | 22,942,898                       |       | 22,314,063                      |       | 22,793,456 |   | 21,828,278 |   |

 

*The accompanying notes are an integral part of these consolidatedfinancial statements*

 

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**METABOLIX, INC.**

**CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

**UNAUDITED**

**(in thousands)**

*** ***
| ** **                                                               | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                               | ** ** | **September 30,**          | ** ** |
| ** **                                                               | ** ** | **2008**                        | ** ** | **2007** | ** ** |
| **Cash flows from operating activities**                                 |       |                            |       |   |   |
| Net loss                                                                 |       | $                               | (27,101    | ) | $ | (20,653 | ) |
| Adjustments to reconcile net loss to cash  used in operating activities: |       |                            |       |   |   |
| Depreciation                                                             |       | 2,764                           |       | 820 |   |
| Stock-based compensation                                                 |       | 3,233                           |       | 3,142 |   |
| Charge for 401(k) company common stock  match                       |       | 347                             |       | 256 |   |
| Changes in operating assets and  liabilities:                            |       |                            |       |   |   |
| Receivables (billed and unbilled)                                        |       | 148                             |       | 28 |   |
| Due from related party                                                   |       | 120                             |       | 521 |   |
| Prepaid expenses, other assets, and  restricted cash                     |       | 250                             |       | 142 |   |
| Accounts payable                                                         |       | (146                            | )          | (886 | ) |
| Accrued liabilities                                                      |       | (89                             | )          | 2,618 |   |
| Deferred rent and other long-term  liabilities                           |       | (119                            | )          | (118 | ) |
| Deferred revenue                                                         |       | 5,896                           |       | 6,900 |   |
| Net cash used in operating activities                                    |       | (14,697                         | )          | (7,230 | ) |
|                                                                     |       |                            |       |   |   |
| **Cash flows from investing activities**                                 |       |                            |       |   |   |
| Purchase of property and equipment                                       |       | (746                            | )          | (3,865 | ) |
| Purchase of short-term investments                                       |       | (91,478                         | )          | (144,679 | ) |
| Proceeds from sale and maturity of  short-term investments               |       | 110,735                         |       | 149,180 |   |
| Net cash provided by investing activities                                |       | 18,511                          |       | 636 |   |
|                                                                     |       |                            |       |   |   |
| **Cash flows from financing activities**                                 |       |                            |       |   |   |
| Proceeds from exercise of options and  warrants                          |       | 788                             |       | 2,115 |   |
| Net cash provided by financing activities                                |       | 788                             |       | 2,115 |   |
|                                                                     |       |                            |       |   |   |
| Net increase (decrease) in cash and cash  equivalents                    |       | 4,602                           |       | (4,479 | ) |
| Cash and cash equivalents at beginning of  period                        |       | 22,686                          |       | 25,182 |   |
| Cash and cash equivalents at end of period                               |       | $                               | 27,288     |   | $ | 20,703 |   |

 

*The accompanying notes are an integral part of these consolidatedfinancial statements*

 

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**METABOLIX,INC.**

**NOTES TOTHE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**UNAUDITED**

 

*(Alldollar amounts are stated in thousands)*

 

**1.  BASIS OF PRESENTATION**

 

The accompanying condensed consolidated financial statements areunaudited and have been prepared by Metabolix, Inc. (the “Company”) inaccordance with accounting principles generally accepted in the United Statesof America (“GAAP”) and pursuant to the rules and regulations of the U.S.Securities and Exchange Commission (“SEC”). Certain information and footnotedisclosures normally included in the Company’s annual consolidated financialstatements have been condensed or omitted. The year-end condensed consolidatedbalance sheet data was derived from audited financial statements, but does notinclude all disclosures required by GAAP. The condensed consolidated financialstatements, in the opinion of management, reflect all adjustments (consistingonly of normal recurring adjustments) necessary for a fair statement of thefinancial position and results of operations for the interim periods ended September 30,2008 and 2007.

 

The results of operations for the interim periods are not necessarilyindicative of the results of operations to be expected for any future period orthe entire fiscal year. These interim condensed consolidated financialstatements should be read in conjunction with the audited consolidatedfinancial statements for the year ended December 31, 2007, which arecontained in the Company’s Annual Report on Form 10-K filed with the SEC.

 

**2. ACCOUNTING POLICIES**

 

Except as indicated below, there have been no material changes inaccounting policies since the Company’s fiscal year ended December 31,2007, as described in Note 3 to the consolidated financial statements includedin its Annual Report on Form 10-K for the year then ended.

 

**Fair Value Measurements**

 

The Company adopted the provisions of Financial Accounting StandardsBoard (“FASB”) Statement of Financial Accounting Standard (“SFAS”) No. 157,*Fair Value Measurements* (“SFAS 157”)on January 1, 2008. As permitted by FASB Staff Position (“FSP”) No. SFAS157-2, *Effective Date of FASB Statement No. 157*(“FSP SFAS 157-2”), the Company elected to defer the adoption of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, exceptthose that are recognized or disclosed at fair value in the financialstatements on a recurring basis, until January 1, 2009. SFAS 157establishes a framework for measuring fair value and expands financialstatement disclosures about fair value measurements. There was no cumulativeeffect of adoption related to SFAS 157 and the adoption did not have animpact on the Company’s financial position, results of operations, or cashflows. The Company is studying SFAS 157 with respect to nonfinancialassets and nonfinancial liabilities falling under the scope of FSP SFAS 157-2and has not yet determined the expected impact on the financial position,results of operations, or cash flows. FSP No. 157-3 clarifies theapplication of SFAS No. 157 as it relates to the valuation of financialassets in a market that is not active for those financial assets. This FSP iseffective immediately and includes those periods for which financial statementshave not been issued. As of September 30, 2008, the Company currently doesnot have any financial assets that are valued using inactive markets, and assuch are not currently impacted by the issuance of this FSP.  See Note 12 for a discussion of the Company’sadoption of SFAS 157.

 

TheCompany adopted the provisions of SFAS No. 159, *The FairValue Option for Financial Assets and Financial Liabilities, including anamendment of FASB Statement No. 115* (“SFAS 159”) on January 1,2008. SFAS 159 permits entities to choose, at specified election dates, tomeasure eligible items at fair value (the “fair value option”). Under thispronouncement, a business entity must report unrealized gains and losses onitems for which the fair value option has been elected in earnings at eachsubsequent 

 

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reportingperiod. The Company has not elected the fair value option under SFAS 159 forany items on its balance sheet.

 

**3. RECENT ACCOUNTING PRONOUNCEMENTS**

 

In December 2007, theFASB issued SFAS No. 141(R), *Business Combinations*(“SFAS141(R)”), which replaces SFAS No. 141. This revised standard requiresassets, liabilities and non-controlling interests acquired to be measured atfair value and requires that costs incurred to effect the acquisition berecognized separately from the business combination. In addition, thisstatement expands the scope to include all transactions and other events inwhich one entity obtains control over one or more businesses. This statement iseffective for all business combinations for which the acquisition date is on orafter the beginning of the first annual reporting period beginning on or after December 15,2008. The Company is in the process of evaluating whether the adoption of thisstandard will have a material effect on its financial position, results ofoperations or cash flows. SFAS 141(R) is effective for the Company’sfiscal year beginning January 1, 2009.

 

In December 2007, the FASB issued SFAS 160, *Noncontrolling Interests in Consolidated FinancialStatements*(“SFAS 160”). SFAS 160 amends Accounting ResearchBulletin 51 to establish accounting and reporting standards for the noncontrolling(minority) interest in a subsidiary and for the deconsolidation of asubsidiary. It clarifies that a noncontrolling interest in a subsidiary is anownership interest in the consolidated entity that should be reported as equityin the consolidated financial statements. SFAS 160 is effective for the Company’sfiscal year beginning January 1, 2009. The Company is in the process ofevaluating whether the adoption of this standard will have a material effect onits financial position, results of operations or cash flows.

 

In December 2007, the Emerging Issues Task Force (“EITF”) reacheda consensus on EITF Issue 07-01, *Accountingfor Collaborative Arrangements Related to the Development and Commercializationof Intellectual Property*(“EITF 07-01”).EITF 07-01 prescribes the accounting for collaborations. It requirescertain transactions between collaborators to be recorded in the incomestatement on either a gross or net basis when certain characteristics exist inthe collaboration relationship. EITF 07-01 is effective for all of theCompany’s collaborations existing after January 1, 2009. The Company is inthe process of evaluating whether the adoption of this standard will have amaterial effect on its financial position, results of operations or cash flows.

 

In May 2008, the FASB issued SFAS No. 162, “*The Hierarchy of Generally Accepted Principles*”(“SFAS 162”). SFAS 162 identifies the sources of accounting principles and theframework for selecting the principles used in the preparation of financialstatements of nongovernmental entities that are presented in conformity withthe GAAP hierarchy. SFAS 162 will become effective 60 days following the SEC’sapproval of the Public Company Accounting Oversight Board amendments to AU 411,“*the Meaning of Present Fairly in ConformityWith Generally Accepted Accounting Principles*.” The Company does notexpect the adoption of SFAS 162 to have a material effect on its financialposition, results of operations or cash flows.

 

In June 2008, the FASBissued FSP EITF 03-6-1, *Determining WhetherInstruments Granted in Share-Based Payment Transactions Are ParticipatingSecurities* (“FSP EITF 03-6-1”) FSP EITF 03-6-1 addresses whetherinstruments granted in share-based payment transactions are participatingsecurities prior to vesting and, therefore, need to be included in the earningsallocation in computing earnings per share under the two-class method asdescribed in SFAS No. 128, *Earnings per Share*.Under the guidance in FSP EITF 03-6-1, unvested share-based payment awards thatcontain non-forfeitable rights to dividends or dividend equivalents (whetherpaid or unpaid) are participating securities and shall be included in thecomputation of earnings per share pursuant to the two-class method. FSP EITF03-6-1 is effective for financial statements issued in fiscal years beginningafter December 15, 2008, and interim periods within those years. Allprior-period earnings per share data presented shall be adjustedretrospectively. Early application is not permitted. The Company is in theprocess of evaluating whether the adoption of this standard will have amaterial effect on its financial position, results of operations or cash flows.

 

**4. COMPREHENSIVE LOSS**

 

Comprehensiveloss is comprised of net loss and net unrealized gains or losses on marketablesecurities. Total comprehensive gain (loss) for the three and nine months endedSeptember 30, 2008 and 2007 is as follows:

 

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| ** **                                       | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|--------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                       | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                       | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net loss                                         |       | $                                | (9,728     | )                               | $          | (8,298 | ) | $ | (27,101 | ) | $ | (20,653 | ) |
| Other comprehensive income:                      |       |                             |       |                            |       |   |   |   |   |
| Change in unrealized gain (loss) on  investments |       | 99                               |       | 79                              |       | (93 | ) | 144 |   |
| Total other comprehensive income                 |       | 99                               |       | 79                              |       | (93 | ) | 144 |   |
| Comprehensive loss                               |       | $                                | (9,629     | )                               | $          | (8,219 | ) | $ | (27,194 | ) | $ | (20,509 | ) |

 

**5. BASIC AND DILUTED NET LOSS PERSHARE**

 

In accordance with SFAS No. 128,*Earnings Per Share*, basic net loss per share is computed by dividingnet loss by the weighted-average number of common shares outstanding andwarrants outstanding during the period that were previously issued for littleor no consideration, excluding the dilutive effects of common stockequivalents. Common stock equivalents include stock options and certainwarrants. Diluted net loss per share is computed by dividing net loss by theweighted-average number of dilutive common shares outstanding during theperiod. Diluted shares outstanding is calculated by adding to the weightedshares outstanding any potential (unissued) shares of common stock fromoutstanding stock options and warrants based on the treasury stock method. Inperiods when a net loss is reported, all common stock equivalents are excludedfrom the calculation because they would have an anti-dilutive effect, meaningthe loss per share would be reduced. Therefore, in periods when a loss isreported the calculation of basic and dilutive loss per share results in thesame value.

 

The number of shares of potentially dilutive common stock related tooptions and warrants that were excluded from the calculation of dilutive sharessince the inclusion of such shares would be anti-dilutive for the three andnine months ended September 30, 2008 and 2007, respectively, are shownbelow:

 
| ** ** | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** ** | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** ** | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| Options    |       | 2,438,423                        |       | 2,271,307                       |       | 2,438,423 |   | 2,271,307 |   |
|       |       |                             |       |                            |       |   |   |   |   |
| Warrants   |       | 4,086                            |       | 69,343                          |       | 4,086 |   | 69,343 |   |
| Total      |       | 2,442,509                        |       | 2,340,650                       |       | 2,442,509 |   | 2,340,650 |   |

 

**6. STOCK-BASED COMPENSATION**

 

On January 1, 2006, the Company adopted Statement of FinancialAccounting Standards No. 123(R), *Share-BasedPayment* (“SFAS 123(R)”). Under the provisions ofSFAS 123(R), compensation cost recognized for the three and nine monthsended September 30, 2008 and 2007 included compensation cost for stockoptions granted to employees subsequent to January 1, 2006, based on thegrant date fair value estimated in accordance with the provisions ofSFAS 123(R) and recognized over the vesting period of the applicableaward on a straight-line basis. The effect of SFAS 123(R) for thethree and nine months ended September 30, 2008 was an expense of $1,003 and$3,337, respectively. The increase in basic and diluted net loss per share forthe three and nine months ended September 30, 2008 was $0.04 and $0.15,respectively. For the three and nine months ended September 30, 2007 theeffect of SFAS 123(R) was an increase in net loss of $1,508 and $2,680,respectively. The increase in basic and diluted net loss per share for thethree and nine months ended September 30, 2007 was $0.07 and $0.12,respectively. There is no expense recorded for options which were granted priorto January 1, 2006 under the minimum value method if the exercise pricewas equal to the fair value of common stock and the measurement date was fixedat the time of grant.

 

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A summary of option activity for the nine months ended September 30,2008 and 2007 is as follows:

 
| ** **                                                                   | ** ** | **Nine months ended** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                   | ** ** | **September 30,**          | ** ** |
| ** **                                                                   | ** ** | **2008**                        | ** ** | **2007** | ** ** |
| ** **                                                                   | ** ** | **Number**                      | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Number** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
|                                                                         |       |                            |       |   |   |   |   |   |   |
| Outstanding at beginning of period                                           |       | 2,151,784                       |       | $ | 10.70 |   | 2,717,244 |   | $ | 4.60 |   |
| Granted                                                                      |       | 844,000                         |       | 12.24 |   | 547,713 |   | 22.62 |   |
| Exercised                                                                    |       | (335,055                        | )          | 2.36 |   | (858,950 | ) | 2.43 |   |
| Canceled                                                                     |       | (222,306                        | )          | 15.08 |   | (134,700 | ) | 4.47 |   |
| Outstanding at end of period                                                 |       | 2,438,423                       |       | 11.98 |   | 2,271,307 |   | 9.77 |   |
|                                                                         |       |                            |       |   |   |   |   |   |   |
| Options exercisable as of  September 30,                                |       | 1,180,664                       |       |   |   | 1,057,884 |   |   |   |
|                                                                         |       |                            |       |   |   |   |   |   |   |
| Weighted average grant date fair value of  options granted during the period |       |                            |       | $ | 7.25 |   |   |   | $ | 14.08 |   |

 

**Non-employee Stock Option Awards**

 

The compensation expense related to non-employee stock options isgenerally recognized over a period of four years. The grants generally vestquarterly and such vesting is contingent upon future services provided by theconsultants to the Company. The Company recorded consultant related stock-basedcompensation expense of $38 for the three months ended September 30, 2008and recorded a benefit of $104 for the nine months ended September 30,2008. Consultant related stock-based compensation expense of $462 was recordedfor the nine months ended September 30, 2007. There was no consultantrelated stock-based compensation expense recorded for the three months ended September 30,2007. Options remaining unvested for non-employees are subject to remeasurementeach reporting period prior to vesting in full. Since the fair market value ofthe options issued to non-employees are subject to changes in the future, thecompensation expense recognized in each quarter may not be indicative of futurecompensation charges.

 

**7. SIGNIFICANT COLLABORATIONS**

 

**ADM Agreement**

 

On November 3, 2004, the Company signed an agreement with ADMPolymer Corporation (“ADM”), a subsidiary of Archer Daniels Midland Company, toestablish an alliance whereby the Company would provide technology and licensesthereto and research and development services, and ADM would providemanufacturing services and capital necessary to produce**Mirel*TM* biobasedplastic on a commercial scale basis. This agreement was amended by theparties on September 8, 2005 to define certain cost sharing activitiesrelated to pre-commercial manufacturing, to change certain milestones and tomake other minor modifications.

 

On July 12, 2006, ADM exercised an option (the “Option”) to enterinto a commercial alliance for further research, development, manufacture, useand sale of Mirel on the terms and conditions set forth in the CommercialAlliance Agreement.

 

***CommercialAlliance Agreement***

 

The Commercial Alliance Agreement specifies the terms and structure ofthe relationship between the Company and ADM. The primary function of thisagreement is to establish the activities and obligations of the Company and ADMby which the parties will commercialize**Mirel. These activities include: theestablishment of a joint sales company, which has been named Telles, to marketand sell Mirel, the construction of a manufacturing facility capable ofproducing 110 million pounds of material annually (the “CommercialManufacturing Facility”), the licensing of technology to Telles and to ADM, andthe conducting of various research, development, manufacturing, sales andmarketing, compounding and administrative services by the parties.

 

Telles is a limited liability company, formed and equally owned by theCompany and ADM, and is intended to: (i) serve as the commercial entity toestablish and develop the commercial market for Mirel, and conduct themarketing and sales in accordance with the goals of the commercial alliance, (ii) assistin the coordination and integration of the manufacturing, compounding andmarketing activities, and 

 

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(iii) administerand account for financial matters on behalf of the parties. The Company and ADMeach have 50% ownership and voting interest in Telles.

 

A summary of the key activities under this agreement is as follows: (i) ADMwill arrange for, finance the construction of, and own, a facility in which itwill manufacture**Mirel under contract to Telles; (ii) theCompany will either arrange for and finance the acquisition or construction ofa facility in which it will compound Mirel or it will arrange for third partiesto compound  Mirel; (iii) theCompany, acting in the name and on behalf of Telles, will establish the initialmarket for Mirel. The Company will also continue its research and developmentefforts to further advance the technology and expand and enhance the commercialpotential of**Mirel. Subject to certain limitations, ADM will finance the working capitalrequirements of Telles.

 

Telles will make up to twelve payments of $1,575 per calendar quarterto the Company to support these activities during the construction of theCommercial Manufacturing Facility. In the event construction is completed andsale of commercial product commences prior to Telles making all twelve suchpayments, the quarterly payments will cease and Telles will pay the Company alump sum equal to the number of remaining unpaid payments multiplied by $250.Through September 30, 2008, support payments totaling $15,750 have beenreceived by the Company and recorded as deferred revenue.

 

During the construction period of the Commercial Manufacturing Facilityall pre-commercial material production expenses incurred by ADM and the Companyare shared equally. Accordingly, from the execution of this agreement in July 2006through September 30, 2008, ADM has reimbursed the Company $6,888. At September 30,2008, net reimbursements of $204 were due from ADM. All amounts due or receivedfrom ADM relating to this agreement are recorded as deferred revenue.

 

Upon the commencement of commercial sales, Telles will pay the Companyroyalties on sales as well as reimburse it for the cost of services providedpursuant to the Commercial Alliance Agreement.

 

While Telles is a fifty-fifty joint venture, ADM will be advancing adisproportionate share of the financial capital needed to construct themanufacturing plant and to fund its activities. Therefore, a preferentialdistribution of cash flow will be used, whereby all profits (after payment ofall royalties, reimbursements and fees) from Telles will be distributed to ADMuntil ADM’s disproportionate investment in the alliance has been returned infull. Once ADM has recouped such amounts, the profits of Telles will bedistributed in equal amounts to the parties.

 

The Commercial Alliance Agreement provides for expansion of theoperations of Telles beyond the initial license of 110 million poundsannual production through an equally-owned joint venture. While certainprinciples of the joint venture have been agreed to, the detailed terms andconditions will not be determined until a later date.

 

Revenue recognition for amounts deferred through September 30,2008 is expected to commence approximately at the time of the first commercialsale of Mirel**and the amounts will berecognized proportionately over the period that the final services are providedover the estimated remaining term of the Commercial Alliance Agreement.

 

The Commercial Alliance Agreement and related agreements includedetailed provisions setting out the rights and obligations of the parties inthe event of a termination of the Commercial Alliance Agreement. Theseprovisions include the right for either party to terminate the CommercialAlliance Agreement upon a material default of a material obligation by theother party after a notice and cure period has expired. The parties are alsopermitted to terminate the Commercial Alliance Agreement if a change incircumstances that is not reasonably within the control of a party makes theanticipated financial return from the project inadequate or too uncertain.Finally, the parties have specific obligations to fulfill in the event oftermination or if they file for bankruptcy protection.

 

** 8. INCOME TAXES**

 

TheCompany adopted the provisions of FASB Interpretation No. 48 (“FIN 48”) *Accounting for Uncertainty in Income Taxes, an interpretationof FASB Statement No. 109*(“SFAS 109”)**on January 1,2007. As a result of the implementation of FIN 48, the Company recorded noadjustment for unrecognized income tax benefits. At the date of adoption of January 1,2007, and also at September 30, 2008, the Company had no unrecognized taxbenefits. The Company does not expect the total amount of unrecognized taxbenefits to significantly increase in the next twelve months.

 

The tax years 2005 through 2007 remain open to examination by majortaxing jurisdictions to which the Company is subject, which are primarily inthe U.S.

 

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The Company’s policy is to record estimated interest and penaltiesrelated to uncertain tax positions in income tax expense. As of September 30,2008 and December 31, 2007, the Company had no accrued interest or penaltiesrecorded related to uncertain tax positions.

 

At December 31, 2007 the Company had net operating losscarryforwards for federal and state income tax purposes of $33,620 and $23,822,respectively. The Company’s federal and state net operating loss carryforwardsbegan to expire in 2008. The Company also had available research anddevelopment credits for federal and state income tax purposes of $2,082 and$1,662 respectively. The federal and state research and development creditswill begin to expire in 2012 and 2015, respectively. As of December 31,2007 the Company also had available investment tax credits for state income taxpurposes of $124 which began to expire in 2008. Management of the Company hasevaluated the positive and negative evidence bearing upon the realizability ofits deferred tax assets, which are comprised principally of net operating losscarryforwards and research and development credits. Under the applicableaccounting standards, management has considered the Company’s history of lossesand concluded that it is more likely than not that the Company will notrecognize the benefits of federal and state deferred tax assets. Accordingly, afull valuation allowance has been established against the deferred tax assets.

 

Utilization of Net Operating Loss (“NOL”) and Research &Development, (“R&D”) credit carryforwards may be subject to a substantialannual limitation due to ownership change limitations that have occurredpreviously or that could occur in the future as provided by Section 382and 383 of the Internal Revenue Code of 1986, as well as similar state provisions.These ownership changes may limit the amount of NOL and R&D creditcarryforwards that can be utilized annually to offset future taxable income andtax, respectively. In general, an ownership change, as defined by Section 382,results from transactions increasing the ownership of certain shareholders orpublic groups in the stock of a corporation by more than 50 percentagepoints over a three year period. Since the Company’s formation, the Company hasraised capital through the issuance of capital stock which, combined with thepurchasing shareholders’ subsequent disposition of those shares, may haveresulted in a change of control, as defined by Section 382, or couldresult in a change of control in the future upon subsequent disposition. TheCompany has not currently completed a study to assess whether there have beenmultiple changes of control since the Company’s formation due to thesignificant complexity and cost associated with such study. If the Company hasexperienced a change in control at any time since the Company’s formation,utilization of the Company’s NOL or R&D credit carryforwards would besubject to an annual limitation under Section 382 and 383. Any limitationmay result in expiration of a portion of the NOL or R&D credit carryforwardsbefore utilization. Until a study is completed and any limitation known, noamounts are being presented as uncertain tax positions under FIN 48.

 

**9.ACCRUED LIABILITIES**

 

Accruedliabilities consisted of the following at:

 
| ** **                         | ** ** | **September 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Employee compensation and benefits |       | $                                | 1,918      |                            | $          | 1,985 |   |
| Pre-commercial manufacturing costs |       | 446                              |       | 443                             |       |
| Professional services              |       | 408                              |       | 407                             |       |
| Other                              |       | 1,606                            |       | 1,360                           |       |
| Total accrued expenses             |       | $                                | 4,378      |                            | $          | 4,195 |   |

 

**10. SEGMENT INFORMATION**

 

The Company operates in one segment. There have been no changes in thesegment information since the fiscal year ended December 31, 2007, asdescribed in Note 3 to the financial statements included in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2007.

 

**11.COMMITMENTS AND CONTINGENCIES**

 

**Legal Proceedings**

 

From time to time, the Company may be subject to legal proceedings andclaims in the ordinary course of business. The Company is not currently awareof any such proceedings or claims that it believes will have, individually orin the aggregate, a material adverse effect on the business, financialcondition or results of operations.

 

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**License Agreement withMassachusetts Institute of Technology (“MIT”)**

 

The Company’s exclusive license agreement with MIT requires the Companyto pay annual license fees of $25 and additional potential royalty payments toMIT based on a percentage of net sales of products or services covered bypatents that are subject to the license. As of September 30, 2008, and December 31,2007, the Company had accrued $2 for license fees and royalties attributable tothis agreement.

 

**Joint Research Agreement with The Cooperative Research Centre for SugarIndustry Innovation through Biotechnology**

 

The Companyentered a joint research arrangement, known as the Cooperative Research Centrefor Sugar Industry Innovation through Biotechnology, with the Commonwealth ofAustralia and various other parties for the purpose of developing and gainingaccess to certain intellectual property. The Commonwealth of Australiaestablished the program to enhance the transfer of research outputs into commercialor other outcomes of economic, environmental or social benefit to Australia.The terms of the contract stipulate that the contract commenced on January 1,2007, and the Company’s funding obligation continues until July 1, 2010.In connection with this agreement Metabolix was obligated at the beginning ofthe contract to provide funding in the form of cash in the amount of $805Australian dollars and in kind contribution in the amount of $2,287 Australiandollars. As of September 30, 2008 the remaining cash portion of theCompany’s obligation, denominated in U.S. dollars, is $378 and the total remainingamount of in kind contribution the Company is committed to is $963, denominatedin U.S. dollars. The in kind contribution consists of salaries and overheadattributable to research associated with the joint research agreement. The cashand in kind contributions are recorded as research and development expense asincurred, in the consolidated statement of operations.

 

**12. FAIRVALUE MEASUREMENTS**

 

OnJanuary 1, 2008, the Company adopted Statement of Financial AccountingStandards No. 157, *Fair Value Measurements,*(“SFAS 157”) for financial assets and liabilities. In accordance with theprovisions of FASB Staff Position No. FAS 157-2, *EffectiveDate of FASB Statement No. 157*, the Company elected to deferthe adoption of SFAS 157 for all nonfinancial assets and nonfinancialliabilities, except those that are recognized or disclosed at fair value in thefinancial statements on a recurring basis until January 1, 2009. SFAS 157provides a framework for measuring fair value under GAAP and requires expandeddisclosures regarding fair value measurements. SFAS 157 defines fair value as the exchange price that would be receivedfor an asset or paid to transfer a liability (an exit price) in the principalor most advantageous market for the asset or liability in an orderlytransaction between market participants on the measurement date. SFAS 157 alsoestablishes a fair value hierarchy which requires an entity to maximize the useof observable inputs, where available, and minimize the use of unobservableinputs when measuring fair value. The standard describes three levels of inputsthat may be used to measure fair value:

** **
| **Level 1** |   | Quoted prices in active  markets for identical assets or liabilities.                                                                                                                                                                                                                                      |
|-------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **  |   |                                                                                                                                                                                                                                                                                                       |
| **Level 2** |   | Observable inputs other  than Level 1 prices, such as quoted prices for similar assets or liabilities;  quoted prices in markets that are not active; or other inputs that are  observable or can be corroborated by observable market data for substantially  the full term of the assets or liabilities. |
| ** **  |   |                                                                                                                                                                                                                                                                                                       |
| **Level 3** |   | Unobservable inputs  that are supported by little or no market activity and that are significant  to the fair value of the assets or liabilities.                                                                                                                                                          |

 

The following table sets forth the financial assets (cash equivalentsand short-term investments) that were measured at fair value on a recurringbasis as of September 30, 2008 by level within the fair value hierarchy.The Company did not have any financial liabilities, nonfinancial assets, ornonfinancial liabilities that were measured or disclosed at fair value on arecurring basis as of September 30, 2008. As required by SFAS 157, assetsmeasured at fair value are classified in their entirety based on the lowestlevel of input that is significant to the fair value measurement. Theassessment of the significance of a particular input to the fair valuemeasurement in its entirety requires judgment and considers factors specific tothe asset or liability.

 

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| ** **                       | ** ** | **Fair Value Measurements at Reporting Date Using**                   | ** ** | ** **                                                         | ** ** |
|----------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **Description**                  | ** ** | **Quoted Prices in  Active Markets for  Identical Assets  (Level 1)** | ** ** | **Significant Other  Observable Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** | **Balance as of  9/30/08** | ** ** |
| Cash equivalents:                |       |                                                                                                |       |                                                               |       |   |   |   |   |
| Money Market funds               |       | —                                                                                              |       | $                                                                  | 23,493     |   | — |   | $ | 23,493 |   |
| Commercial paper                 |       | —                                                                                              |       | 1,609                                                              |       | — |   | 1,609 |   |
| Short-term investments:          |       |                                                                                                |       |                                                               |       |   |   |   |   |
| Treasuries                       |       | —                                                                                              |       | 14,643                                                             |       | — |   | 14,643 |   |
| Commercial paper                 |       | —                                                                                              |       | 37,040                                                             |       | — |   | 37,040 |   |
| Government-sponsored enterprises |       | —                                                                                              |       | 15,637                                                             |       | — |   | 15,637 |   |
| Total                            |       | —                                                                                              |       | $                                                                  | 92,422     |   | — |   | $ | 92,422 |   |

 

**13. CHANGE IN ACCOUNTING ESTIMATE**

 

In the first quarter of 2008, due to an extended construction periodand revised estimated completion date of the Commercial Manufacturing Facility,the Company determined it would extend the period of use of its pre-commercialmanufacturing plant by six months to June 2009 from December 2008. Inconnection with this, the useful lives of the leasehold improvements connectedto the pre-commercial manufacturing plant were increased by six months. Thischange in accounting estimate was adopted prospectively from January 1,2008. The effect of the change in accounting estimate on the financialstatements for the three and nine months ended September 30, 2008 is adecrease in loss from operations and net loss of $363 and $1,075, respectively.Loss per share decreased by $0.02 and $0.05 for the three and nine months endedSeptember 30, 2008.

 

**ITEM 2.****         MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

*(All dollar amounts are stated in thousands)*

 

**Forward Looking Statements**

 

This quarterly report on Form 10-Q contains “forward-lookingstatements” within the meaning of 27A of the Securities Act of 1933, asamended, and Section 21E of the Securities Exchange Act of 1934, asamended. In particular, statements contained in the Form 10-Q, includingbut not limited to, statements regarding our future results of operations andfinancial position, business strategy and plan prospects, projected revenue orcosts and objectives of management for future research, development oroperations, are forward-looking statements. These statements relate to ourfuture plans, objectives, expectations and intentions and may be identified bywords such as “may,” “will,” “should,” “expects,” “plans,” “anticipate,” “intends,”“target,” “projects,” “contemplates,” “believe,” “estimates,” “predicts,” “potential,”and “continue,” or similar words.

 

Although we believe that our expectations are based on reasonableassumptions within the limits of our knowledge of our business and operations,the forward-looking statements contained in this document are neither promisesnor guarantees. Our business is subject to significant risk and uncertaintiesand there can be no assurance that our actual results will not differmaterially from our expectations. These forward looking statements include, butare not limited to, statements concerning: future financial performance andposition, management’s strategy, plans and objectives for future operations,plans and objectives for product development and commercialization, plans andobjectives for present and future research and development and results of suchresearch and development, plans and objectives for manufacturing, thecommercialization of environmentally sustainable, economically attractivealternatives to petroleum-based plastics, chemicals and energy, the commercializationof MirelTM biobased plastic (“Mirel”) through our alliance with Archer DanielsMidland Company (“ADM”), sales of Mirel as an alternative to petroleum-basedplastics, the construction of the Commercial Manufacturing Facility, theproduction of Mirel at the Commercial Manufacturing Facility, the commercialsuccess of Mirel, the feasibility of extractin*g*Mirel from plant crops, the commercial viability of plant-produced plastics, 

 

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recognitionof revenue, and management’s plans and expectations for revenue from governmentgrants, research and development revenue, research and development expenses andcapital and working capital requirements. Such forward-looking statements aresubject to a number of risks and uncertainties that could cause actual resultsto differ materially from those anticipated including, without limitation, thefollowing risks: (1) we may not be successful at manufacturing biobasedplastics on a commercial scale in a timely and economical manner, (2) wemay not be successful in the development of our products, including Mirel, (3) wedepend on ADM for the construction of the Commercial Manufacturing Facility, (4) ifADM does not build the Commercial Manufacturing Facility on time and on budget,our revenues and the distribution of profits, if any, to us will be delayed, (5) wemay not be able to develop manufacturing capacity sufficient to meet demand inan economical manner or at all, (6) we may not achieve market acceptanceof our products, (7) we have limited marketing and sales experience andcapabilities, which may make the commercialization of our products difficult, (8) werely heavily on ADM and will rely heavily on future collaborative partners, (9) oursuccess will be influenced by the price of petroleum relative to corn sugar (10) ourfuture profitability is uncertain, and we have a limited operating history onwhich you can base your evaluation of our business, (11) we may need tosecure additional funding and may be unable to raise additional capital onfavorable terms or at all, (12) if we lose key personnel or are unable toattract and retain necessary talent, we may be unable to develop orcommercialize our products, (13) confidentiality agreements with employeesand others may not adequately prevent disclosure of our trade secrets and otherproprietary information and may not adequately protect our intellectualproperty, which could limit our ability to compete, (14) patent protectionfor our products is important and uncertain, (15) a substantial portion ofthe technology used in our business is owned by or subject to retained rightsof third parties, (16) third parties may claim we infringe theirintellectual property, and we could suffer significant litigation or licensingexpense as a result, (17) if we are unable to manage our growtheffectively, our business could be adversely affected, (18) we may not besuccessful in identifying market needs for new technologies and developing newproducts to meet those needs, (19) Mirel may be, or may be perceived asbeing, harmful to human health or the environment, (20) we face and willface substantial competition in several different markets that may adverselyaffect our results of operations, (21) we are subject to significantforeign and domestic government regulations, including environmental and healthand safety regulations, and compliance or failure to comply with these regulationscould harm our business, (22) our government grants may subject us togovernment audits, which could materially harm our business and results ofoperations, (23) we face risks associated with our international business,(24) each segment of our operations is currently conducted at a singlelocation which makes us susceptible to disruptions, and (25) we may besubject to product liability claims based on products sold by us, our customersand/or our licensees.

 

The forward-looking statements and risks factors presented in thisdocument are made only as of the date hereof and we do not intend to update anyof these risk factors or to publicly announce the results of any revisions toany of our forward-looking statements other than as required under the federalsecurities laws.

 

**Overview**

 

We are a bioscience company that develops and plans to commercializeenvironmentally sustainable, economically attractive alternatives topetroleum-based plastics, chemicals and energy. Our strategy is to developtechnology platforms that integrate advanced biotechnology with currentindustrial practice and to commercialize these platforms with industry leadingstrategic partners.

 

Our first platform, which we are commercializing through Telles, ajoint venture with Archer Daniels Midland Company (“ADM”), is a proprietary,large-scale microbial fermentation system for producing a versatile family ofpolymers known as polyhydroxyalkanoates, which we have branded under the nameMirelTM. Through Telles, we intend to sell Mirel as environmentally friendly,but functionally equivalent, alternatives to petroleum-based plastics in a widerange of commercial applications, including packaging, compostable bags,consumer products including cosmetics and gift cards, business equipment, productsused in agriculture and horticulture, and marine and water applications. Mirelwill be produced in a commercial scale plant, or Commercial ManufacturingFacility, which is presently under construction by ADM in Clinton, Iowa. TheCommercial Manufacturing Facility is designed to have a 110 million poundannual capacity.  We expect thatcommercial quantities of Mirel from the Commercial Manufacturing Facility willbe available for customers in the second quarter of 2009. ADM is currently inthe process of reviewing the estimated capital cost and timeline for completionof the Commercial Manufacturing Facility and is also examining a variety ofoptions to manage the capital cost and schedule. The Commercial ManufacturingFacility will produce biobased, sustainable and biodegradable Mirel plastic outof corn 

 

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sugar,an agriculturally-produced renewable resource. We are currently producingpre-commercial quantities of Mirel jointly with ADM at a small scalepre-commercial manufacturing facility.

 

Our second technology platform, which is in an early stage, is abiomass biorefinery system using plant crops to co-produce both bioplastics andbioenergy. For this system, we intend to extract polymer from the engineeredplant crop, so that the remaining plant material can be used as a biomassfeedstock for the production of bioenergy products including electricity and biofuel.We are engineering switchgrass to produce bioplastics in the leaf and stem ofthe plant. We have also collaborated with the Australian Cooperative ResearchCentre to do the same in sugarcane. In addition we have established a strategicresearch collaboration with the Donald Danforth Plant Science Center to developan advanced industrial oilseed crop for co-production of bioplastics along withvegetable oil, biodiesel fuel, or oleochemicals. Switchgrass is a commerciallyand ecologically attractive non-food energy crop that is indigenous to NorthAmerica. It is generally considered to be a leading candidate forcellulose-derived production of ethanol and other biofuels. Sugarcane is anestablished energy crop that is well suited for tropical regions of the world.We believe that using these crops to co-produce bioplastics with bioenergyproducts can offer superior economic value and productivity as compared tosingle product systems that produce them individually. We have been working onour biomass biorefinery platform using switchgrass for several years, and webelieve that we are a scientific leader in this field. Our goal for thisprogram is to have commercially viable plant varieties in pre-commercial fieldtrials in three to four years. We may also seek to establish alliances withpartners to commercially exploit this platform.

 

As demonstrated by our first two technology platforms, we take anintegrated systems approach to our technology development. We are focused ondeveloping entire production systems from gene to end product as opposed todeveloping specific technologies (for example, gene sequencing, shuffling ordirected evolution) or singular aspects of a product’s production (for example,providing a key enzyme, catalyst or ingredient). We believe this systemsapproach optimizes manufacturing productivity and, when commercialized, willenable us to capture more economic value from any platform we pursue. We havecore capabilities in microbial genetics, fermentation process engineering,chemical engineering, polymer science, plant genetics and botanical science. Wehave assembled these capabilities in a way that has allowed us to integratebiotechnology with chemical engineering and industrial practice. We believethat our approach can be applied to chemicals and other products to helpestablish and grow environmentally sustainable plastics, chemicals and energyindustries.

 

We intend to apply our core capabilities in microbial engineering andplant transformation to develop biological routes to other chemicals andchemical intermediates. In September 2007 the U.S. Department of Commerce’sNational Institute of Standards and Technology approved a $2 million awardfor us to develop a commercially viable process for producing biobasedchemicals from renewable agricultural products. This award is funding ourintegrated bio-engineered chemicals program, which is beginning development ofsustainable solutions for widely used four-carbon industrial chemicals.

 

To exploit our first technology platform, we are working with ADM tobuild the Commercial Manufacturing Facility in Clinton, Iowa. The bioplasticsthis facility will produce are highly versatile and range in properties fromhard and strong to soft and flexible. These properties allow for a wide varietyof commercial applications, offering an environmentally-friendly alternative topetroleum-derived synthetic materials which are not biodegradable. ThroughTelles we intend to initially position Mirel as a premium priced specialtymaterial catering to customers who want to match the functionality ofpetroleum-based plastic, but add the dimension of environmental responsibilityto their products and brands.

 

As of September 30, 2008, we had anaccumulated deficit of $121,213 and total stockholders’ equity was $66,399.

 

**Collaborative Arrangements**

 

Our strategy for collaborative arrangements is to retain substantialparticipation in the future economic value of our technology while receivingcurrent cash payments to offset research and development costs and workingcapital needs. By their nature, these agreements are complex and have multipleelements that cover a variety of present and future activities. In addition,certain elements of these agreements are intrinsically difficult to separateand treat as separate units for accounting purposes. Consequently, we expect todefer recognizing most, if not all, of the payments we receive from partners asrevenue until future years.

 

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We entered into our alliance with ADM in 2004. As of September 30,2008, all payments received from ADM have been recorded as deferred revenue onour balance sheet. We expect that future payments from ADM, through at leastthe construction phase of the Commercial Alliance Agreement, including tworemaining quarterly operating payments of $1,575 made on behalf of Telles andother payments, will be classified as deferred revenue as well. We expect tobegin recognizing revenue at the time of the first commercial sale of Mirel.All amounts will be recognized proportionally over the period in which ourcommercial obligations are fulfilled in accordance with the terms of theCommercial Alliance Agreement.

 

We received the following payments from these arrangements to offsetoperating cash needs:

 
| · |   | upfront  payment of $3,000 from ADM in November 2004;                                                                |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                      |
| · |   | milestone  payments of $2,000 from ADM in May 2006;                                                                  |
|   |   |                                                                                                                      |
| · |   | support  payments of $15,750 from ADM, on behalf of Telles, through  September 30, 2008; and                    |
|   |   |                                                                                                                      |
| · |   | cumulative  cost sharing payments from ADM for pre-commercial manufacturing plant  construction and operations of $8,096. |

 

During the commercial alliance phase, ADM will construct, finance, own andoperate the Commercial Manufacturing Facility through a manufacturing agreementwith Telles and we will provide or procure compounding services to convert theoutput from the Commercial Manufacturing Facility into forms that are suitablefor various commercial applications.

 

Telles is a limited liability company, formed and equally owned by usand ADM, and is intended to: (i) serve as the commercial entity toestablish and develop the commercial market for Mirel, and conduct themarketing and sales in accordance with the goals of the commercial alliance, (ii) assistin the coordination and integration of the manufacturing, compounding andmarketing activities, and (iii) administer and account for financialmatters on behalf of the parties. We and ADM each have 50% ownership and votinginterest in Telles.

 

Even though Telles is a separate legal entity owned equally by us andADM, ADM will disproportionately fund the activities of the joint venture.Specifically, the cost of the Commercial Manufacturing Facility, the workingcapital requirements of the joint venture and the support payments to us willexceed the investments made by us to establish compounding operations for thejoint venture. In order to rebalance the respective investments made by the parties,a preferential distribution of cash flow will be used, whereby all profits,after payment of all royalties, reimbursements and fees, from the jointventure, will be distributed to ADM until ADM’s disproportionate investment inthe joint venture, and the costs of constructing the Commercial ManufacturingFacility, have been returned to ADM. Once ADM has recouped such amounts, theprofits of the joint venture will be distributed in equal amounts to theparties. In order to track the disproportionate investments ADM has made, aLedger Account has been established to record the respective investments madeby the parties. As of September 30, 2008, the balance of the ADM LedgerAccount was $229,862 and this balance is expected to increase as theconstruction of the Commercial Manufacturing Facility progresses and Tellesbecomes operational.

 

**United States Government Contractsand Grants**

 

Asof September 30, 2008, expected gross proceeds of  $1,627 remain tobe received under our  governmentcontracts and grants, which include amounts for reimbursement to oursubcontractors, as well as reimbursement for our employees’ time, benefits andother expenses related to future performance under the various contracts.

 

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The status of our United States government contracts and grants is asfollows:

 
| **Program Title**               | ** ** | **Funding  Agency**    | ** ** | **Total  government  funds** | ** ** | **Total received  through  September 30, 2008** | ** ** | **Remaining amount  available under various  government contracts as of  September 30, 2008** | ** ** | **Contract/Grant  Expiration** | ** ** |
|--------------------------------------|------------|------------------------|------------|------------------------------|------------|----------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                           | ** ** | ** **             | ** ** | ** **                   | ** ** | ** **                                                     | ** ** | ** **                                                                                                                            | ** ** | ** **                     | ** ** |
| PHA Bioplastic  Packaging Materials  |       | SERDP (1) (2)     |       | $                            | 1,005      |                                                           | $          | 785                                                                                                                                   |       | $                              | 220        |   | Feb. 2009 |   |
|                                 |       |                   |       |                         |       |                                                           |       |                                                                                                                                  |       |                           |       |
| Integrated  Bio-Engineered Chemicals |       | Department of Commerce |       | 2,000                        |       | 593                                                            |       | 1,407                                                                                                                                 |       | Sept. 2009                     |       |
|                                 |       |                   |       |                         |       |                                                           |       |                                                                                                                                  |       |                           |       |
| Total                                |       |                   |       | $                            | 3,005      |                                                           | $          | 1,378                                                                                                                                 |       | $                              | 1,627      |   |   |   |

 

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| (1)    |   | Strategic  Environmental Research and Development Program.                                                                                              |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                    |
| (2)    |   | Funding  of this government contract beyond the United States government’s current  fiscal year is subject to annual congressional appropriations. |

 

**Critical Accounting Estimates andJudgments**

 

Thediscussion and analysis of our financial condition and results of operationsare based upon our condensed consolidated financial statements, which have beenprepared in accordance with accounting principles generally accepted in theUnited States of America (“GAAP”) for interim financial information. Thepreparation of these financial statements requires us to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses, and related disclosure of contingent assets and liabilities. On anongoing basis, we evaluate our estimates, including those related to revenuerecognition and stock-based compensation. We base our estimates on historicalexperience and on various other assumptions that we believe to be reasonableunder the circumstances, the results of which form the basis for makingjudgments about the carrying value of assets and liabilities that are notreadily apparent from other sources. Actual results may differ from theseestimates. The significant accounting policies used in preparation of thesecondensed consolidated financial statements for the three and nine months endedSeptember 30, 2008 are consistent with those discussed in Note 3 to theconsolidated financial statements in our Annual Report on Form 10-K forthe year ended December 31, 2007. The critical accounting policies and thesignificant judgments and estimates used in the preparation of our condensedconsolidated financial statements for the three and nine months ended September 30,2008 are consistent with those discussed in our Annual Report on Form 10-Kfor the year ended December 31, 2007 in the section captioned “Management’sDiscussion and Analysis of Financial Condition and Results ofOperations—Critical Accounting Estimates and Judgments.”

 

In the first quarter of 2008, due to an extended construction periodand revised estimated completion date of the Commercial Manufacturing Facility,the Company determined it would extend the period of use of its pre-commercialmanufacturing plant by six months to June 2009 from December 2008. Inconnection with this, the useful lives of the leasehold improvements connectedto the pre-commercial manufacturing plant were increased by six months. Thischange in accounting estimate was adopted prospectively from January 1,2008. The effect of the change in accounting estimate on the financialstatements for the three and nine months ended September 30, 2008 is adecrease in loss from operations and net loss of $363 and $1,075, respectively.Loss per share decreased by $0.02 and $0.05 for the three and nine months endedSeptember 30, 2008, respectively. The estimated annual impact of thischange in accounting estimate for the year ended December 31, 2008 is adecrease in loss from operations and net loss of $1,422 and a decrease in lossper share of $0.06, based on the number of shares used in the earnings pershare calculations for the nine months ended September 30, 2008.

 

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**Resultsof Operations**

 

**Comparisonof the Three Months Ended September 30, 2008 and 2007**

 

**Revenue**

 
| ** **                                            | ** ** | **Three Months ended** | ** ** | ** ** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|------------|------------|
| ** **                                            | ** ** | **September 30,**           | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **2008**                         | ** ** | **2007**   | ** ** | **Change** | ** ** |
| Research and development revenue                      |       | $                                | 27         |       | $          | 73 |   | $ | (46 | ) |
| License fee and royalty revenue from  related parties |       | 25                               |       | 25         |       | 0 |   |
| Grant revenue                                         |       | 299                              |       | 82         |       | 217 |   |
| Total revenue                                         |       | $                                | 351        |       | $          | 180 |   | $ | 171 |   |

 

Total revenue was$351 and $180 for the three months ended September 30, 2008 and 2007,respectively. During the three months ended September 30, 2008 werecognized $27 of research and development revenue compared to $73 for therespective period in 2007. Research and development revenue is derived fromresearch and development services and delivery of sample product produced fromresearch and development services. Grant revenue increased mainly as a resultof an increase of activity relating to the Department of Commerce and StrategicEnvironmental Research Development Program grants. This was partially offset bythe completion of the Department of Energy program grant during the secondquarter of 2007.

 

We expect revenuesfrom government grants to fluctuate due to the availability of funding from thegovernment.

 

**Expenses**

 
| ** **                                                    | ** ** | **Three Months ended** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|------------|------------|
| ** **                                                    | ** ** | **September 30,**           | ** ** | ** ** | ** ** |
| ** **                                                    | ** ** | **2008**                         | ** ** | **2007**   | ** ** | **Change** | ** ** |
| Research and development expenses,  including cost of revenue |       | $                                | 6,571      |       | $          | 5,695 |   | $ | 876 |   |
| Selling, general, and administrative  expenses                |       | 4,048                            |       | 4,267      |       | (219 | ) |
| Total operating expenses                                      |       | $                                | 10,619     |       | $          | 9,962 |   | $ | 657 |   |

 

***Research anddevelopment expenses***

 

Research and Development expenses were $6,571and $5,695 for the three months ended September 30, 2008 and 2007,respectively. The increase of $876 was primarily due to the expansion ofproduct development activities associated with developing new product gradesand formulations for prospective customers and increases in research anddevelopment personnel to support our microbial and plant research programs.Employee payroll and benefits related expenses for the three months ended September 30,2008 were $2,576 compared to $1,851 for the respective period in 2007. Payrolland benefits primarily increased as a result of increased headcount. Expensesrelated to product development services were $519 and $425 for the three monthsended September 30, 2008 and 2007, respectively. Product developmentservices primarily consist of outside testing and services and sponsoredresearch. Depreciation expense increased to $789 for the three months ended September 30,2008 from $243 for the respective period in 2007. The increase in depreciationis primarily derived from increased leasehold improvements in ourpre-commercial manufacturing facility and increases in equipment to support ourmicrobial and plant research.

 

We expect to incur higher research anddevelopment expenses in future periods for pre-commercial manufacturing andproduct development activities as we continue to develop, test and refineproduct to meet the specification requirements of our customers. We expect thatour personnel related costs will increase to support our microbial and plant researchprograms.

 

***Selling,general, and administrative expenses***

 

Selling, general, and administrative expenseswere $4,048 and $4,267 for the three months ended September 30, 2008 and2007, respectively. The decrease of $219 was primarily due to a decrease inemployee and benefits related expenses. Payroll and benefits related expensesdecreased to $2,087 from $2,408 for the three months ended September 30,2008 and 2007, respectively. Included in payroll and benefits is stock-basedcompensation expense, which decreased to $729 for the three months ended

 

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September 30, 2008 compared to $1,295 for therespective period in 2007. Stock-based compensation expense decreased mainly asa result of the completion in May 2008 of the vesting period for optionsgranted to our board of directors and an officer of the company. The decreasein stock-based compensation expense was partially offset by increased expensesrelating to the expansion of our facilities, growth in administrative structureto support the growth of the company and increased sales and marketingactivities to prepare for the commercialization of Mirel.

 

We expect that selling, general, andadministrative expenses will increase through the construction period of theADM agreement due to increasing payroll and expanding infrastructure to supportsales and marketing efforts for commercializing Mirel. Upon the commencement ofthe commercial phase of the agreement, selling, general, and administrativeexpenses are expected to decrease as the cost of sales and marketing effortswill be transferred to Telles.

 

**Other Income (Net)**

 
| ** **               | ** ** | **Three Months ended** | ** ** | ** ** | ** ** |
|--------------------------|------------|----------------------------------|------------|------------|------------|
| ** **               | ** ** | **September 30,**           | ** ** | ** ** | ** ** |
| ** **               | ** ** | **2008**                         | ** ** | **2007**   | ** ** | **Change** | ** ** |
| Total other income (net) |       | $                                | 540        |       | $          | 1,484 |   | $ | (944 | ) |
|                          |            |                                  |            |            |            |  |  |  |  |  |

 

Other income (net) consists of investmentincome of $540 and $1,484 for the three months ended September 30, 2008and 2007, respectively. The decrease of $944 was due to a decrease in interestrates during the quarter, a shift towards more conservative investments withlower interest rates, and a decrease in the average cash and short-terminvestments held during the comparative three month periods.

 

**Resultsof Operations**

 

**Comparisonof the Nine Months Ended September 30, 2008 and 2007**

 

**Revenue**

 
| ** **                                            | ** ** | **Nine Months ended** | ** ** | ** ** | ** ** |
|-------------------------------------------------------|------------|---------------------------------|------------|------------|------------|
| ** **                                            | ** ** | **September 30,**          | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **2008**                        | ** ** | **2007**   | ** ** | **Change** | ** ** |
| Research and development revenue                      |       | $                               | 106        |       | $          | 73 |   | $ | 33 |   |
| License fee and royalty revenue from  related parties |       | 95                              |       | 132        |       | (37 | ) |
| Grant revenue                                         |       | 955                             |       | 590        |       | 365 |   |
| Total revenue                                         |       | $                               | 1,156      |       | $          | 795 |   | $ | 361 |   |

 

Total revenue was$1,156 and $795 for the nine months ended September 30, 2008 and 2007,respectively. During the nine months ended September 30, 2008 werecognized $106 of research and development revenue compared to $73 for therespective period in 2007. Research and development revenue is derived fromresearch and development services and delivery of sample product produced fromresearch and development services. License fee and royalty revenue from relatedparties decreased primarily as the result of receipt of a $50 milestone paymentduring the nine months ended September 30, 2007. Grant revenue increasedas a result of increased activity relating to the Department of Commerce andStrategic Environmental Research Development Program grants. This was partiallyoffset by the completion of the Department of Energy program grant during thesecond quarter of 2007.

 

We expect revenuesfrom government grants to fluctuate due to the availability of funding from thegovernment.

 

**Expenses**

 
| ** **                                                    | ** ** | **Nine Months ended** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------|------------|------------|------------|
| ** **                                                    | ** ** | **September 30,**          | ** ** | ** ** | ** ** |
| ** **                                                    | ** ** | **2008**                        | ** ** | **2007**   | ** ** | **Change** | ** ** |
| Research and development expenses,  including cost of revenue |       | $                               | 18,513     |       | $          | 14,528 |   | $ | 3,985 |   |
| Selling, general, and administrative  expenses                |       | 12,193                          |       | 11,466     |       | 727 |   |
| Total operating expenses                                      |       | $                               | 30,706     |       | $          | 25,994 |   | $ | 4,712 |   |

 

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***Research anddevelopment expenses***

 

Research and development expense was $18,513and $14,528 for the nine months ended September 30, 2008 and 2007,respectively. The increase of $3,985 was primarily due to the expansion ofproduct development activities associated with developing new product gradesand formulations for prospective customers, and increases in research anddevelopment personnel to support our microbial and plant research programs.Employee payroll and benefits related expenses for the nine months ended September 30,2008 were $6,965 compared to $5,150 for the respective period in 2007. Expenserelating to product development services were $1,259 for the nine months ended September 30,2008 compared to $695 for the respective period in 2007. The expenses relatedto pre-commercial manufacturing increased to $5,279 for the nine months ended September 30,2008 compared to $5,007 for the respective period in 2007. Depreciation expenseincreased to $1,969 for the nine months ended September 30, 2008 comparedto $677 for the respective period in 2007. The increase in depreciation isprimarily attributable to increased leasehold improvements in ourpre-commercial manufacturing facility and increases in equipment to support ourmicrobial and plant research.

 

We expect to incur increasing research anddevelopment expenses in future periods for pre-commercial manufacturing andproduct development activities as we continue to develop, test and refineproduct to meet the specification requirements of our customers. We expect thatour personnel related costs will increase to support our microbial and plantresearch programs.

 

***Selling,general, and administrative expenses***

 

Selling, general, and administrative expenseswere $12,193 and $11,466 for the nine months ended September 30, 2008 and2007, respectively. The increase of $727 was primarily due to the expansion ofour facilities, growth in administrative structure to support the growth of thecompany and increased sales and marketing activities to prepare for the commercializationof Mirel. Depreciation expense increased to $795 for the nine months comparedto $144 for the respective period in 2007. The increase in depreciation expenseis related to an increase in equipment needed to support the expansion of ourfacilities and growth in administrative structure.

 

We expect that selling, general, andadministrative expenses will increase through the construction period of theADM agreement due to increasing payroll and expanding infrastructure to supportsales and marketing efforts for commercializing Mirel. Upon the commencement ofthe commercial phase of the agreement, selling, general, and administrativeexpenses are expected to decrease as the cost of sales and marketing effortswill be transferred to Telles.

 

**Other Income (Net)**

 
| ** **               | ** ** | **Nine Months ended** | ** ** | ** ** | ** ** |
|--------------------------|------------|---------------------------------|------------|------------|------------|
| ** **               | ** ** | **September 30,**          | ** ** | ** ** | ** ** |
| ** **               | ** ** | **2008**                        | ** ** | **2007**   | ** ** | **Change** | ** ** |
| Total other income (net) |       | $                               | 2,449      |       | $          | 4,546 |   | $ | (2,097 | ) |
|                          |            |                                 |            |            |            |  |  |  |  |  |

 

Other income (net) consists of investmentincome of $2,449 and $4,546 for the nine months ended September 30, 2008 and2007, respectively. The decrease of $2,097 was due to a decrease in interestrates during the nine months ended September 30, 2008, a shift towardsmore conservative investments with lower interest rates, and a decrease in theaverage cash and short-term investments held during the comparative nine monthperiods.

 

**Liquidity and Capital Resources**

 

Currently, we require cash to fund ourworking capital needs, to purchase capital assets and to pay our operatinglease obligations.

 

We fund our cash requirements primarily through thefollowing methods:

 

· our strategicalliance with ADM;

 

· governmentgrants;

 

· equityfinancing; and

 

· interest earnedon cash and short-term investments.

 

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Currently our products are in the pre-commercial stage of development,and large-scale commercial sales have not begun. In addition, we have incurredsignificant expenses relating to our research and development efforts. As aresult, we have incurred net losses since our inception. As of September 30,2008, we had an accumulated deficit of $121,213. Our total unrestricted cash,cash equivalents and short-term investments as of September 30, 2008 were$94,608 as compared to $109,326 at December 31, 2007. As of September 30,2008, we had no outstanding debt.

 

Our cash, cash equivalents and short-term investments at September 30,2008 are held for working capital purposes. We do not enter into investmentsfor trading or speculative purposes. The primary objective of our investmentactivities is to preserve our capital. Restricted cash of $494 was held at September 30,2008 in connection with the lease agreement for one of our facilities inCambridge, Massachusetts. Short-term investments are made in accordance withour corporate investment policy, as approved by our Board of Directors.Investments are limited to high quality corporate debt, U.S. Treasury bills andnotes, bank debt obligations, municipal debt obligations and asset-backedsecurities. The policy establishes maturity limits, concentration limits, andliquidity requirements. At September 30, 2008, we were in compliance withthis policy.

 

We believe that our cash, cash equivalents and short-term securities,the interest we earn on these balances, as well as cash expected fromgovernment grants and our ADM alliance will be sufficient to meet ouranticipated cash requirements, including cash requirements with respect to thecommercial launch of Mirel, for at least the next 24 months. If ouravailable cash, cash equivalents, and short-term securities are insufficient tosatisfy our liquidity requirements, or if we develop additional products, wemay need to sell additional equity or debt securities or obtain a creditfacility. The sale of additional equity and debt securities may result inadditional dilution to our stockholders. If we raise additional funds throughthe issuance of debt securities or preferred stock, these securities could haverights senior to those of our common stock and could contain covenants thatwould restrict our operations. We may require additional capital beyond ourcurrently forecasted amounts. Any such required additional capital may not beavailable on reasonable terms, if at all. If we are unable to obtain additionalfinancing, we may be required to reduce the scope of, delay, or eliminate someor all of our planned research, development and commercialization activities,which could harm our business.

 

Net cash used in operating activities was $14,697 and $7,230 for thenine months ended September 30, 2008 and 2007, respectively. The net cashused during the first nine months of 2008 primarily reflects the net loss forthe period offset by an increase in deferred revenue of $5,896, and non-cashexpenses including depreciation expense of $2,764, stock-based compensationexpense of $3,233, and 401(k) company common stock matching expense of$347. The increase in deferred revenue was due to an increase in pre-commercialplant construction and operations that are subject to our cost sharingcollaborative arrangement with ADM and continued support payments from ADM,made on behalf of Telles.

 

Net cash provided by investing activities was $18,511 and $636 for thenine months ended September 30, 2008 and 2007, respectively. Net cashprovided by investing activities during the nine months ended September 30,2008 represents net cash of $19,257 provided from the sale, maturity andpurchase of investments offset by a cash outflow of $746 used for the purchaseof property and equipment. Property and equipment purchases during the ninemonths ended September 30, 2008 mainly consisted of equipment for researchand development purposes. Net cash flows from investing activities mayfluctuate from period to period due to the timing of our capital expendituresand other investments.

 

Net cash provided by financing activities was $788 and $2,115 for thenine months ended September 30, 2008 and 2007, respectively. The cashprovided by financing activities during the nine months ended September 30,2008 was solely attributable to the proceeds from the exercise of stock optionsand warrants.

 

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**Contractual Obligations**

 

The following table summarizes our contractual obligations at September 30,2008 and the effects such obligations are expected to have on our liquidity andcash flows in future periods:

 
| ** **                  | ** ** | **Payment Due by Period** | ** ** |
|-----------------------------|------------|------------------------------------------|------------|
| ** **                  | ** ** | ** **                               | ** ** | **Less Than** | ** ** | **2-3** | ** ** | **4-5** | ** ** | **More Than** | ** ** |
| ** **                  | ** ** | **Total**                                | ** ** | **1 year** | ** ** | **Years** | ** ** | **Years** | ** ** | **5 years** | ** ** |
| Operating lease obligations |       | $                                        | 6,460      |   | $ | 1,342 |   | $ | 2,429 |   | $ | 2,113 |   | $ | 576 |   |
| Purchase obligations        |       | 648                                      |       | 301 |   | 272 |   | 50 |   | 25 |   |
|                        |       |                                     |       |   |   |   |   |   |   |   |   |
| Total                       |       | $                                        | 7,108      |   | $ | 1,643 |   | $ | 2,701 |   | $ | 2,163 |   | $ | 601 |   |

 

On April 30,2008 we signed a rental agreement to sublease additional office space. The termof the sublease commenced on May 1, 2008 and will expire February 28,2010. The monthly rent payments of $15 are included in the operating leaseobligations.

 

**Off-BalanceSheet Arrangements**

 

As of September 30, 2008, we had no off-balance sheet arrangementsas defined in Item 303(a) (4) of the Securities and Exchange Commission’sRegulation S-K.

 

**RelatedParty Transactions**

 

We recorded $25 and $95 of license and royalty revenue from Tepha, Inc.,a related party, during the three and nine months ended September 30,2008, respectively. During the three and nine months ended September 30,2007 we recorded license and royalty revenue from Tepha, Inc. of $25 and$132, respectively. We had an outstanding receivable balance due from Tepha of$3 and $122 as of September 30, 2008 and December 31, 2007,respectively. We also had various transactions with our alliance partner ADM, arelated party, during the nine months ended September 30, 2008 and 2007.We had an outstanding receivable balance of $204 and $1,093 due from ADM at September 30,2008 and December 31, 2007 respectively. For more information on our related party transactions, please see Note10 to our audited financial statements included in our Annual Report on Form 10-Kfor the year ended December 31, 2007.

 

**Recent Accounting Pronouncements**

 

In December 2007, the Financial Accounting Standards Board (“FASB”)issued Statement of Financial Accounting Standards (“SFAS”) No. 141(R), *Business Combinations* (“SFAS 141(R)”), which replaces SFAS No. 141.This revised standard requires assets, liabilities and non-controlling interestsacquired to be measured at fair value and requires that costs incurred toeffect the acquisition be recognized separately from the business combination.In addition, this statement expands the scope to include all transactions andother events in which one entity obtains control over one or more businesses.This statement is effective for all business combinations for which theacquisition date is on or after the beginning of the first annual reportingperiod beginning on or after December 15, 2008. We are in the process ofevaluating whether the adoption of this standard will have a material effect onour financial position, results of operations or cash flows.

 

In December 2007, the FASB issued SFAS 160, *Noncontrolling Interests in Consolidated FinancialStatements*(“SFAS 160”). SFAS 160 amends Accounting ResearchBulletin 51 to establish accounting and reporting standards for thenoncontrolling (minority) interest in a subsidiary and for the deconsolidationof a subsidiary. It clarifies that a noncontrolling interest in a subsidiary isan ownership interest in the consolidated entity that should be reported asequity in the consolidated financial statements. SFAS 160 is effective for ourfiscal year beginning January 1, 2009. We are in the process of evaluatingwhether the adoption of this standard will have a material effect on ourfinancial position, results of operations or cash flows.

 

In December 2007, the Emerging Issues Task Force (“EITF”) reacheda consensus on EITF Issue 07-01, *Accountingfor Collaborative Arrangements Related to the Development and Commercializationof Intellectual Property*(“EITF 07-01”).EITF 07-01 prescribes the accounting for collaborations. It requirescertain transactions between collaborators to be recorded in the income statementon either a gross or net basis when certain characteristics exist in thecollaboration relationship. EITF 07-01 

 

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iseffective for all of our collaborations existing after January 1, 2009. Weare in the process of evaluating whether the adoption of this standard willhave a material effect on our financial position, results of operations or cashflows.

 

InMay 2008, the FASB issued SFAS No. 162, “*The Hierarchy of Generally Accepted Principles*” (“SFAS 162”).SFAS 162 identifies the sources of accounting principles and the framework forselecting the principles used in the preparation of financial statements ofnongovernmental entities that are presented in conformity with the GAAPhierarchy. SFAS 162 will become effective 60 days following the SEC’s approvalof the Public Company Accounting Oversight Board amendments to AU 411, “*the Meaning of Present Fairly in Conformity WithGenerally Accepted Accounting Principles*.” We do not expect theadoption of SFAS 162 to have a material effect on our financial position,results of operations or cash flows.

 

In June 2008, the FASBissued FSP EITF 03-6-1, *Determining WhetherInstruments Granted in Share-Based Payment Transactions Are ParticipatingSecurities* (“FSP EITF 03-6-1”). FSP EITF 03-6-1 addresses whetherinstruments granted in share-based payment transactions are participatingsecurities prior to vesting and, therefore, need to be included in the earningsallocation in computing earnings per share under the two-class method asdescribed in SFAS No. 128, *Earnings per Share*.Under the guidance in FSP EITF 03-6-1, unvested share-based payment awards thatcontain non-forfeitable rights to dividends or dividend equivalents (whetherpaid or unpaid) are participating securities and shall be included in thecomputation of earnings per share pursuant to the two-class method. FSP EITF03-6-1 is effective for financial statements issued in fiscal years beginningafter December 15, 2008, and interim periods within those years. Allprior-period earnings per share data presented shall be adjustedretrospectively. Early application is not permitted. We are in the process of evaluatingwhether the adoption of this standard will have a material effect on ourfinancial position, results of operations or cash flows.

 

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

There have been no material changes in information regarding ourexposure to market risk, as described in Item 7A of our Annual Report on Form 10-Kfor the year ended December 31, 2007 and as further described below.

 

Our exposure to market risk is confined to our cash, cash equivalentsand marketable securities.  Theunrestricted cash and cash equivalents and marketable securities are held forworking capital purposes.  Our primaryinvestment objective is capital preservation, with a secondary objective ofgenerating income on such capital. We do not enter into investments for tradingor speculative purposes.

 

***Interest Rate Risk***

 

We invest in high-quality financial instruments, primarily money marketfunds, federal agency notes, U.S. treasury notes, investment-grade commercialpaper, and corporate debt securities. All of our interest-bearing securitiesare subject to interest rate risk and could decline in value if interest ratesfluctuate. Because of the short-term maturities of our cash equivalents andmarketable securities, we do not believe that an increase in market rates wouldhave any significant impact on the realized value of our marketable securities.However, in a declining interest rate environment, as short term investmentsmature, reinvestment occurs at less favorable interest rates. Given theshort-term nature of our investments, anticipated declining interest rateswould negatively impact our investment income. Exposure to market rate risk forchanges in interest rates relates to our cash, cash equivalents and investmentin marketable securities, totaling $109,824 at December 31, 2007. Based ona hypothetical 10% adverse movement in interest rates, the potential annuallosses in future earnings and cash flows are estimated to be $607.

 

**ITEM 4.**** ****CONTROLS AND PROCEDURES**

 

**Evaluation of Disclosure Controlsand Procedures**

 

Our management (with theparticipation of our Principal Executive Officer and Principal FinancialOfficer) evaluated the effectiveness of our disclosure controls and procedures(as defined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”)), as of September 30,2008. Disclosure controls and procedures are designed to ensure thatinformation required to be disclosed by the Company in the reports it files orsubmits under the Exchange Act is recorded, processed, summarized and reportedon a timely basis and that such information is accumulated and communicated tomanagement, including the Principal Executive Officer and Principal FinancialOfficer, 

 

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as appropriate, to allowtimely decisions regarding required disclosure. Based on this evaluation, ourPrincipal Executive Officer and Principal Financial Officer concluded thatthese disclosure controls and procedures are effective and designed to ensurethat the information required to be disclosed in our reports filed or submittedunder the Exchange Act is recorded, processed, summarized and reported withinthe requisite time periods.

 

**Changes in Internal Control overFinancial Reporting**

 

There was no change in ourinternal control over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act) during the quarter ended September 30,2008 that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

**PART II – OTHERINFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

From time to time, we may be subject to legal proceedings and claims inthe ordinary course of business. We are not currently aware of any suchproceedings or claims that we believe will have, individually or in theaggregate, a material adverse effect on the business, financial condition orthe results of operations.

 

**ITEM 1A. RISK FACTORS**

 

Except as indicated in Part II, Item 1A ofour Quarterly Report for the three months ended March 31, 2008 on Form 10-Qor listed below there have been no material changes in information regardingour risk factors as described in Part I, Item 1A of our Annual Report on Form 10-Kfor the year ended December 31, 2007.

 

**We may not be able to successfully manufacture Mirel atcommercial scale in a timely or economical manner.**

 

We are currently producing Mirel using our fermentationplatform in relatively small quantities, at pre-commercial scale, for use inmarketing activities, including conversion into end-products for test marketingby our customers. The current and anticipated methods for manufacturingbiobased plastics, both by fermentation and in crops, and the anticipatedmethods for producing chemicals and energy, are highly complex processes inwhich a variety of difficulties may arise. We may not be able to resolve anysuch difficulties in a timely or cost effective fashion, if at all. We cannotbe sure of the cost of producing Mirel at commercial scale by fermentation. Wecannot assure you that we will be able to successfully manufacture Mirel at acommercial scale in a timely or economical manner or that the quality of thecommercial product will be acceptable on a consistent basis.

 

Since construction of the commercial manufacturing facility for theproduction of Mirel (referred to as the Commercial Manufacturing Facility) isnot yet complete, manufacturing costs at such facility are unknown and mayultimately be higher than we expect. While we believe that manufacturing costswill be reduced over time as we gain manufacturing know-how, we cannot be surethat we can manufacture Mirel in an economical manner. If we, in connectionwith our alliance with ADM, fail to commence production in a timely manner orto develop manufacturing capacity and experience, fail to continue to contractfor manufacturing on acceptable terms, or fail to manufacture Mireleconomically on a commercial scale or in commercial volumes, ourcommercialization of Mirel and our business, financial condition and results ofoperations will be materially adversely affected.

 

**We may not achieve marketacceptance of our products.**

 

We currently have only limited customer commitments for commercialquantities of Mirel. Market acceptance of our products will depend on numerousfactors, many of which are outside of our control, including among others:

 

· publicacceptance of such products;

 

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· ability toproduce products that offer functionality comparable or superior to existing ornew polymer products;

· our ability toproduce products fit for their intended purpose;

· our ability toobtain necessary regulatory approvals for our products;

· the willingnessand speed at which potential customers qualify Mirel for use in their products;

· pricing of ourproducts compared to competitive products;

· the strategicreaction of companies that market competitive products;

· our reliance onthird parties who support or control distribution channels; and

· general marketconditions.

 

Our customer prospects are currently evaluating and performing tests onMirel prior to making any large-scale purchase decisions. We may not be able tosuccessfully demonstrate that our plastics have properties comparable orsuperior to those of environmentally sustainable competitors or similar toconventional petroleum-based plastics. There can be no assurance that productsbased on our technologies will be perceived as being comparable or superior toexisting products or new products being developed by competing companies orthat such products will otherwise be accepted by consumers. The market for ourbiobased plastics may not be willing to support premium prices to purchaseenvironmentally sustainable plastics. If there is not broad market acceptanceof our products, we may not generate significant revenues.  Delays in the availability of material forproduct development, compounding scale-up, and marketing activities could delayor slow the ramp-up of commercial sales from the Commercial Manufacturing Facility.  If such delays occur, or if we are unable toobtain the anticipated premium pricing for Mirel, there could be a materialadverse effect on the timing of the distribution of Telles profits, if any, tous.

 

**Each segment of our operations is currently conducted at asingle location, which makes us susceptible to disasters or other disruptions.**

 

Our pre-commercial manufacturing recovery operations are currentlyconducted at a single location in Fort Mill, South Carolina. As part of ourjoint venture with ADM, ADM is constructing the Commercial ManufacturingFacility at a single location in Clinton, Iowa, where we will initially conductall of our commercial manufacturing operations. Our headquarters and researchand development operations are located at a single facility in Cambridge,Massachusetts, and our product development activities are located at a singlefacility in Lowell, Massachusetts. We take precautions to safeguard ourfacilities, including insurance, health and safety protocols, and off-sitestorage of critical research results and of computer data. However, a naturaldisaster, such as a fire, flood or earthquake, or a disruption due tomechanical failure, human error, business failure of a contractor, orvandalism, could damage or destroy our equipment, inventory, our microbial strains,plants or other biological materials, or result in the loss of data from ourinformation technology systems.   Thiscould delay our research and development programs and could cause us to incuradditional expenses. The insurance we maintain against fires, floods,earthquakes and other natural disasters may not be adequate to cover our lossesin any particular case.

 

**ITEM 2.   UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

**Recent Sales of UnregisteredSecurities**

 

On July 10, 2008, the Company issued6,917 shares of common stock to participants in its Metabolix, Inc. 401(k) Planas a matching contribution. The issuance of these securities is exempt fromregistration pursuant to Section 3(a)(2) of the Securities Act of1933 as exempted securities.

 

**Use of Proceeds from RegisteredSecurities**

 

There has been no material change in theplanned use of proceeds from our initial public offering as described in ourAnnual Report on Form 10-K for the year ended December 31, 2007.

 

**Issuer Purchases of EquitySecurities**

 

During the three months ended September 30,2008, there were no repurchases made by us or on our behalf, or by any “affiliatedpurchasers,” of shares of our common stock.

 

**ITEM 3.   DEFAULTSUPON SENIOR SECURITIES**

 

None

 

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

 

None

 

**ITEM 5. OTHER INFORMATION**

 

Our policy governing transactions in our securities by our directors,officers, and employees permits our officers, directors, employees, andentities affiliated with our directors to enter into trading plans complyingwith Rule 10b5-l under the Exchange Act , as amended. We have been advisedthat during the quarter ended September 30, 2008, the Metabolix 2006 GRATI entered into a trading plan in accordance with Rule 10b5-l and ourpolicy governing transactions in our securities. We undertake no obligation toupdate or revise the information provided herein, including revisions ortermination of an established trading plan.

 

**ITEM 6. EXHIBITS**

 
| 31.1   |   | Certification  Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act  of 1934 of the Principal Executive Officer (furnished herewith). |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                           |
| 31.2   |   | Certification  Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act  of 1934 of the Principal Financial Officer (furnished herewith). |
|   |   |                                                                                                                                                           |
| 32.1   |   | Section 1350  Certification (furnished herewith).                                                                                                         |

 

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**SIGNATURES**

 

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

 
|                   | METABOLIX,  INC. |
|------------------------|------------------|
|                   |             |
|                   |             |
| November 6,  2008 | By:              | /s/  RICHARD P. ENO |
|                   |             | Richard  P. Eno |
|                   |             | *President and Chief Executive Officer* |
| * *               | * *         | *(Principal Executive Officer)* |
| * *               | * *         | * * |
| November 6,  2008 | By:              | /s/  JOSEPH D. HILL |
|                   |             | Joseph  D. Hill |
|                   | * *         | *Chief Financial Officer* |
| * *               | * *         | *(Principal Financial and Accounting Officer)* |

 

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