**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM10-K**

 

**ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF****THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the fiscal year ended September 30, 2005**

 

**Commission File Number 1-14430**

 

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**MAXIM PHARMACEUTICALS, INC.**

(Exact name of registrant as specified in its charter)

 
| **Delaware**                                                    | ** ** | **87-0279983**                          |
|-----------------------------------------------------------------|------------|-----------------------------------------|
| (State or other jurisdiction of incorporation or  organization) | ** ** | (I.R.S. Employer Identification Number) |

 

**8899 University Center Lane, Suite 400**

**San Diego, California 92122**

**(858) 453-4040**

(Address, including zip code, and telephone number,

including area code, of Registrant’s principal executive offices)

 

Securitiesregistered pursuant to Section 12(b) of the Act: **None**

 

Securitiesregistered pursuant to Section 12(g) of the Act:

 
| **Title of class**            |       |       |
|-------------------------------|------------|------------|
| Common Stock, $.001 Par Value | ** ** | ** ** |

 

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Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act. oYes     ý No

Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act.oYes     ý No

 

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 of 1934during 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 ý  No  o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to thebest of registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. ý

 

Indicateby check mark whether the registrant is an accelerated filer (as defined in theExchange Act Rule 12b-2).Yes ý No o

 

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

 

Theaggregate market value of the voting common equity held by persons consideredby the registrant for this purpose to be non-affiliates of the registrant wasapproximately $49,830,000 on March 31, 2005, when the closing price ofsuch stock, as reported on the Nasdaq National Market, was $1.76. This numberis provided only for the purposes of this report and does not represent anadmission by either the Registrant or any such person as to the status of suchperson.

 

Thenumber of outstanding shares of the registrant’s Common Stock, $.001 par value,as of December 8, 2005 was 28,402,808.

 

 

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**This Form 10-K contains forward-looking statements thatinvolve risks and uncertainties. Such forward-looking statements arecharacterized by future or conditional verbs and include, but are not limitedto, statements regarding the results of product development efforts, clinicaltrials and applications for marketing approval of pharmaceutical products, andthe scope and success of future operations. Such statements are onlypredictions and our actual results may differ materially from those anticipatedor projected in these forward-looking statements. Factors that may cause suchdifferences include, but are not limited to, those discussed under «Risk Factors»and elsewhere in this Form 10-K for the year ended September 30,2005, as filed with the Securities and Exchange Commission, including theuncertainties associated with product development, the risk that products thatappeared promising in early clinical trials do not demonstrate efficacy inlarger-scale clinical trials, the risk that we will not obtain approval tomarket our products, the risks associated with dependence upon key personnel,the need for additional financing, the dependence upon collaborative partners,and the risk that we may not be able to complete the proposed transaction withEpiCept Corporation. We do not assume any obligation to update forward-lookingstatements as circumstances change.**

 

**PART I**

 

**ITEM 1.BUSINESS**

 

MaximPharmaceuticals, Inc. is referred to throughout this report as “Maxim”,the “Company”, “we” or “us.”

 

**Overview**

 

Weare a biopharmaceutical company dedicated to developing innovative cancertherapeutics.  Our lead drug candidate isCepleneTM (histamine dihydrochloride), which in combination with Interleukin-2,or IL-2, has shown a statistically significant improvement in leukemia freesurvival in a Phase 3 clinical trial as a remission maintenance therapy forpatients with acute myeloid leukemia, or AML, the most common form of adultleukemia.  Ceplene is designed to preventor reverse damage associated with oxidative stress, thereby protecting criticalcells and tissues.  Because Ceplenemodulates basic immune functions, it has the potential to be used in thetreatment of a broad range of diseases in which oxidative stress plays animportant role.  More than 2,000 patientshave participated in 17 clinical trials of Ceplene, conducted in 20 countries.  We are currently seeking a strategicpartnership to further develop Ceplene in AML and other indications andcomplete commercialization.  Clinicaltrials completed to date suggest that Ceplene can be safely self-administeredby most patients in their own homes.

 

Weare discovering and developing a series of novel cancer drug candidates thatare potent inducers of apoptosis, or programmed cell death.  The apoptosis program is focused ondiscovering and developing small-molecule apoptosis inducers to treat cancerusing a proprietary high-throughput screening technology and our chemicalgenetics approach.  The most advancedcandidate from this program is in a Phase 1 human clinical trial beingdeveloped by our exclusive, worldwide licensee, Myriad Genetics.  We anticipate that three additional leadcandidates identified through this program will advance towards clinical trialsindependently and through collaborations over the next 12 to 18 months.

 

Althoughfocused on cancer, the apoptosis program has wider applicability sinceapoptosis is relevant to a broad range of diseases and conditions.  Converse to the apoptosis inducer candidateswe have identified several families of novel compounds capable of inhibitingthe apoptotic process, which may have applications in degenerative disordersincluding myocardial infarction, stroke or liver disease.

 

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Ourproprietary live cell high throughput screening technology can screen over30,000 compounds per day to identify small-molecule compounds that modulate –either positively or negatively – the caspase cascade leading to apoptosis.  This technology has high specificity and isamenable to most cell lines.  Thecell-based assay allows for the identification of compounds that induce orinhibit apoptosis regardless of stimuli, mode of action or mechanism.  Approximately one million compounds have beenscreened to date.  We have recentlyacquired additional compounds for our compound library and have initiated a newscreening campaign.  Our screeningtechnology is particularly versatile and can be adapted for use in a widevariety of primary and cultured cell lines. This assay system can measure caspase modulation inside multiple celltypes including cancer cells, immune cells, or cell lines from different organsystems or genetically engineered cells. This allows the researchers to find potential drug candidates that areselective for specific cancer types, which may help identify candidates thatprovide increased therapeutic benefit and reduced toxicity.  For example, we are developing an assay toidentify compounds that are selective for the myc oncogene, which isover-expressed in many types of cancers. The versatility of the platform also allows for application beyondcancer, such as inflammatory disease where we have developed an assay toidentify immunosuppressive agents selective for B and T cells.

 

*Corporate Update*

 

During2005, we have devoted substantially all of our resources to the histaminetherapy and apoptosis modulator product development programs.  We conduct our research and other productdevelopment efforts through a combination of internal efforts and collaborativeprograms with universities, other clinical research sites, contract researchorganizations and pharmaceutical companies. Oversight of all external and collaborative programs is conducted by ourexecutive officers and other staff located primarily at our headquarters in SanDiego, California.

 

InSeptember 2005, we announced that we entered into a definitive mergeragreement with EpiCept Corporation, or EpiCept. The closing of the transaction is subject to satisfaction of certaincustomary closing conditions, including the approval of our stockholders.  We have scheduled a special meeting ofstockholders on December 21, 2005, for the purpose of voting on a proposalto adopt and approve the merger agreement and approve the merger.  We anticipate closing the transaction inJanuary 2006.

 

Thenew company, to be called EpiCept Corporation, combines a late stage productportfolio of commercially promising pain therapies, a planned cancer productregistration filing in Europe and an early stage discovery program forapoptosis inducers and inhibitors designed to address unmet medical needs inthe areas of oncology and degenerative diseases.  We believe the transaction will combine twocompanies to create a specialty pharmaceutical company with a balancedportfolio of pain management and oncology product candidates.  EpiCept is focused on the development andcommercialization of topically-delivered prescription pain managementtherapeutics.  EpiCept has six productcandidates in clinical development; three in late-stage development thatEpiCept believes are ready to enter, or have entered, Phase 2b or Phase 3clinical trials, and three that have completed initial Phase 2 clinicaltrials.  All of EpiCept’s productcandidates target moderate-to-severe pain that is influenced, or mediated, bynerve receptors located just beneath the skin’s surface.  EpiCept’s product candidates utilizeproprietary formulations and several topical delivery technologies toadminister United Stated Food and Drug Administration, or FDA approved painmanagement therapeutics, or analgesics. EpiCept will continue Maxim’s research operations in San Diego followingthe proposed merger.

 

Uponcompletion of the merger, we will become a wholly owned subsidiary ofEpiCept.  The terms of the mergeragreement provide for EpiCept to issue shares of its common stock to ourstockholders in exchange for all of our outstanding shares.  The merger will result in EpiCeptstockholders owning approximately 72%, and our stockholders owningapproximately 28%, of the

 

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outstandingshares of EpiCept’s common stock.  Weanticipate that concurrent with the closing of the merger, EpiCept’s shareswill be listed for trading on the Nasdaq National Market and on theStockholmsbörsen AB under the symbol “*EPCT*”.

 

InMay 2004, we announced the results of our international Phase 3 clinicaltrial testing the combination of Ceplene plus IL-2 in 320 patients with AML incomplete remission.  The primary endpointof the Phase 3 trial was achieved using an intent-to-treat analysis.  Patients treated with the Ceplene/IL-2combination therapy experienced a statistically significant (p=0.0096) increasein leukemia-free survival compared to patients in the control arm of the trialas assessed by the stratified log-rank test. AML patients are typically treated with chemotherapy to achieve diseaseremission, but the majority of patients will ultimately relapse.  The prognosis for AML patients after relapseis dismal, with few long-term survivors. The Ceplene/IL-2 combination therapy treats patients during remission(after chemotherapy) with the goal to increase their remission period andprevent relapses.

 

OnJanuary 18, 2005, we announced that based on correspondence with the FDAthat an additional Phase 3 clinical trial will be necessary to further evaluateCeplene/IL-2 combination therapy for the treatment of AML patients in completeremission before applying for regulatory approval with the FDA in the UnitedStates.  Given the time and costsrequired to conduct another Phase 3 clinical trial, we believe that any suchtrial would need to be done in collaboration with a corporate partner.  Based upon consultations with externaladvisors and meetings with European Union, or EU regulatory authoritiesregarding the AML clinical results, we currently intend to file an applicationfor approval in Europe during the first half of 2006 based on the above AMLclinical trial.  We are seeking astrategic partner to advance the development and potential commercialization ofCeplene in AML and other indications.  Wewill continue to evaluate strategic options related to its regulatoryevaluations and partnering efforts.

 

InSeptember 2004, we announced that the confirmatory Phase 3 trial, or M0104trial, for the treatment of advanced malignant melanoma patients with livermetastases failed to demonstrate an improvement in overall patient survival.  As a result, we withdrew our United StatesNew Drug Application, or NDA, seeking approval of Ceplene therapy to treatadvanced malignant melanoma patients with liver metastases and closed thetreatment protocol approved by the FDA in April 2004.  In addition, in October 2004 weimplemented a restructuring plan that included a reduction of approximately 50%of our workforce, primarily in the area of research and development, to allowsufficient funds to support our operations.  In February 2005, we further reduce ourworkforce by 12 employees, primarily in areas associated with Ceplenedevelopment.

 

**Histamine:  Broad Therapeutic Potential**

 

*Overview*

 

Asubstantial body of research suggests that the immune system’s ability todestroy virally infected cells and cancer cells is suppressed by oxygen freeradicals released by certain immune cells. This process is commonly referred toas oxidative stress.  Oxidative stress,which is implicated in numerous diseases, not only can suppress the immunesystem, but it can cause tissue damage, including liver damage in patients withhepatitis and other chronic liver diseases. Research has demonstrated that histamine can help prevent the productionand release of oxygen free radicals, thereby reducing oxidative stress.  Accordingly, histamine based treatment hasthe potential to prevent or reverse damage induced by oxidative stress, therebyprotecting critical cells and tissue, including immune cells.

 

Becausehistamine based treatment can potentially modulate basic immune functions, ithas the potential to be used in a broad range of diseases in which oxidativestress plays an important role.  Morethan 2,000 patients have participated in 17 completed clinical trials ofCeplene.  The results of our

 

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completedclinical trials, which have been conducted in 20 countries, suggest thatCeplene can be safely self-administered by most patients in their own homes.

 

Researchand clinical results regarding Ceplene and related topics have been the subjectof more than 80 presentations at major scientific and clinical meetings andhave been published in more than 300 scientific and clinical articles.

 

Cepleneis an investigational drug and has not been approved by the FDA or anyinternational regulatory agency.

* *

*Ceplene Mechanism of Action*

 

Ceplene,based on the naturally occurring molecule histamine, prevents the productionand release of oxygen free radicals, thereby reducing oxidative stress.  Research suggests that treatment with Ceplenehas the potential to protect critical cells and tissues, and prevent or reversethe cellular damage induced by oxidative stress.  This body of research has demonstrated thatthe primary elements of Ceplene’s proposed mechanism of action are as follows:

 

*Reversing Immune Suppression.* Two kinds of immune cells, Natural Killer,or NK, cells and cytotoxic T cells, possess an ability to kill and support thekilling of cancer cells and virally infected cells.  Natural Killer/T cells, or NK/T cells, a formof NK cells that are commonly found in the liver, also have anti-cancer andanti-viral properties.  Much of thecurrent practice of immunotherapy is based on treatment with cytokines such asinterferon, or IFN, and IL-2, proteins that stimulate NK, T and NK/T cells.

 

Researchhas shown that phagocytic cells (including monocytes, macrophages andneutrophils), a type of white blood cell typically present in large quantitiesin virally infected liver tissue and in sites of malignant cell growth, releasereactive oxygen free radicals and have been shown to inhibit the cell-killingactivity of human NK cells and T cells. In preclinical studies, human NK, T, and liver-type NK/T cells have beenshown to be sensitive to oxygen free radical-induced apoptosis when theseimmune cells were exposed to phagocytes. The release of free radicals by phagocytes results in apoptosis, orprogrammed cell death, of NK, T and NK/T cells, thereby destroying theircytotoxic capability and rendering the immune response against the tumor orvirus largely ineffective.  In addition,the liver-type NK/T cells have been shown to be particularly susceptible tooxygen free radical induced apoptosis.

 

Histamine,a natural molecule present in the body, and other molecules in the class knownas histamine type-2, or H2, receptor agonists, bind to the H2 receptor on the phagocytes, temporarilypreventing the production and release of oxygen free radicals.  By preventing the production and release ofoxygen free radicals, histamine based therapeutics may protect NK, T, andliver-type NK/T cells.  This protectionmay allow immune-stimulating agents, such as IL-2 and IFN-alpha, to activate NKcells, T cells and NK/T cells more effectively, thus enhancing the killing oftumor cells or virally infected cells.

 

*Preventing Oxidative Damage.*Most acute and chronic liver diseases haveoxidative damage as a common feature of their pathology.  Phagocytic cells and Kupffer cells, bothtypically present in large quantities in virally infected liver tissue, releaseoxygen free radicals in response to infections or other factors.  Research suggests that oxygen free radicalscause much of the cell damage in the liver common to hepatitis, alcohol-inducedliver damage and other liver diseases. By preventing the production and release of oxygen free radicals byphagocytic and Kupffer cells, histamine based therapeutics may prevent andreverse oxidative damage to the liver.

 

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Theintellectual property protection surrounding our histamine technology nowincludes 33 United States patents issued or allowed and 17 pending UnitedStates patent applications, with corresponding patents issued or pending in theinternational markets.  Claims includethe therapeutic administration of histamine or any H2 receptor agonist in the treatment of cancer,infectious diseases and other diseases, either alone or in combinationtherapies, the novel synthetic method for the production ofpharmaceutical-grade histamine dihydrochloride, the mechanism of action includingthe binding receptor and pathway, and the rate and route of administration.

 

*Potential Benefits of Histamine Based Therapy*

 

Theresults from our clinical development program and other research suggest thathistamine based therapeutics, such as Ceplene, may be integral in the growingtrend toward combination therapy for certain cancers and infectious diseasesand may offer a number of important clinical and commercial advantages relativeto current therapies or approaches, including:

 

•                  *Extending leukemia freesurvival in AML.*  Our Phase 3 acute myeloid leukemia trial, orM0201 trial, of Ceplene has provided potential evidence of improved therapeuticbenefit over the standard of care.

 

•                  *Outpatient administration.*  Inclinical trials conducted to date, Ceplene has been self-administered at homeby most patients, in contrast to the in-hospital administration required formany other therapies.

 

•                  *Cost effectiveness.*  Thedelivery of combination therapy with Ceplene on an outpatient basis mayeliminate the costs associated with in-hospital patient care.  These factors, combined with the potentialimprovements in efficacy, may contribute favorably to the assessment of benefitversus cost for this therapy.

 

*Ceplene Clinical Trial Status*

 

Thetable below summarizes our current and completed clinical trial activities foreach disease we have targeted or may target in the future with Ceplene.

 
| **Indication**              | ** ** | **Trial  Number**       | ** ** | **Trial Phase**      | ** ** | **Number  Patients** | ** ** | **Status** | ** ** | **Location**                                                             | ** ** |
|-----------------------------|------------|-------------------------|------------|----------------------|------------|----------------------|------------|------------|------------|--------------------------------------------------------------------------|------------|
| Acute Myeloid Leukemia      |       | MP-MA-0201              |       | Phase 3 *controlled* |       | 320                  |       | Completed  |       | United States, Europe, Australia, Canada,  Israel & New Zealand |       |
|                        |       | AML1 Investigator Study |       | Phase 2 *single arm* |       | 39                   |       | Completed  |       | Europe                                                                   |       |
|                        |       |                    |       |                 |       |                 |       |       |       |                                                                     |       |
| Advanced Malignant Melanoma |       | MP-8899-0104            |       | Phase 3 *controlled* |       | 230                  |       | Completed  |       | United States, Europe & Canada                                  |       |
|                        |       | MP-US-M01               |       | Phase 3 *controlled* |       | 305                  |       | Completed  |       | United States                                                            |       |
|                        |       | MP-MA-0102              |       | Phase 3 *controlled* |       | 241                  |       | Completed  |       | Europe, Australia, Canada & Israel                              |       |
|                        |       | MP-MA-0103              |       | Phase 2 *single arm* |       | 163                  |       | Completed  |       | United States                                                            |       |

 

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| **Indication**                  | ** ** | **Trial  Number**                  | ** ** | **Trial Phase**            | ** ** | **Number  Patients** | ** ** | **Status** | ** ** | **Location**                     | ** ** |
|---------------------------------|------------|------------------------------------|------------|----------------------------|------------|----------------------|------------|------------|------------|----------------------------------|------------|
|                            |       | MP-S01  Investigator Study    |       | Phase 2                    |       | 42                   |       | Completed  |       | Europe                           |       |
|                            |       | MM-2  Investigator Study      |       | Phase 2 low-dose           |       | 27                   |       | Completed  |       | Europe                           |       |
|                            |       | MM-1  Investigator Study      |       | Phase 2 high-dose          |       | 17                   |       | Completed  |       | Europe                           |       |
|                            |       |                               |       |                       |       |                 |       |       |       |                             |       |
| Renal Cell Carcinoma            |       | MP-MA-SO2 Investigator Study       |       | Phase 2 *controlled*       |       | 41                   |       | Completed  |       | Europe                           |       |
|                            |       | MP-MA-SO4 Investigator Study       |       | Phase 2 *controlled*       |       | 63                   |       | Completed  |       | Europe                           |       |
|                            |       | I-318-MA Investigator Study        |       | Phase 2 *single arm*       |       | 48                   |       | Completed  |       | Europe                           |       |
|                            |       |                               |       |                       |       |                 |       |       |       |                             |       |
|                            |       | Multiple Myeloma                   |       | Phase 1 *single arm*       |       | 7                    |       | Completed  |       | Europe                           |       |
|                            |       |                               |       |                       |       |                 |       |       |       |                             |       |
| Hepatitis C — Nonresponder |       | MP-8899-0406                       |       | Phase 2  *controlled* |       | 320                  |       | Completed  |       | Europe, Canada & Israel |       |
|                            |       | MP-MA-S05  Investigator Study |       | Phase 1                    |       | 18                   |       | Completed  |       | Israel                           |       |
|                            |       | NP16341  Investigator Study   |       | Phase 1                    |       | 10                   |       | Completed  |       | Sweden                           |       |
|                            |       |                               |       |                       |       |                 |       |       |       |                             |       |
| Hepatitis C — Naïve   |       | MP-MA-0405                         |       | Phase 2 *single arm*       |       | 129                  |       | Completed  |       | Europe & Israel         |       |

 

*Potential Cancer Indications for Ceplene*

 

Areport from the American Cancer Society, *2004Cancer Facts and Figures*, estimated that a total of approximately1,368,000 new cases and approximately 563,700 deaths were expected for invasivecancers in the United States in 2004. One in four deaths in the United States are from cancer. Other sourcesreport that one in five deaths in Europe are from cancer, and that theworldwide incidence of cancer exceeds 10 million per year.  The National Institutes of Health estimatesthat the direct medical cost of treating cancer in the United States isapproximately $64.2 billion annually. Predominant forms of cancer include leukemia, lymphoma, breast, lung,urinary, prostate, melanoma, ovarian, colorectal and brain cancers.

 

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Informationregarding certain cancer indications is summarized below.  The following estimates for the cancersinitially targeted by Ceplene are based upon the American Cancer Society’s *2004 Cancer Facts and Figures* for theUnited States.

 

**Estimated Incidence and Mortality for Selected Cancers for2004 for the United States**

 
| ** **                       | ** ** | **Annual**     | ** ** |
|----------------------------------|------------|----------------|------------|
| ** **                       | ** ** | **New  Cases** | ** ** | **Deaths** | ** ** |
| Acute Myeloid Leukemia           |       | 11,900         |       | 8,900 |   |
| Renal Cell Carcinoma             |       | 35,700         |       | 12,500 |   |
| Liver and Intrahepatic Bile Duct |       | 18,900         |       | 14,300 |   |
| All Invasive Cancers             |       | 1,368,000      |       | 563,700 |   |

 

Predominantmethods of treating cancer generally include surgery, radiation therapy,chemotherapy and immunotherapy.  Althoughthese techniques have achieved success for certain cancers, particularly whendetected in the early stages, each has drawbacks, which may significantly limitits success in treating certain types and stages of cancer.  For example, cancer may recur even afterrepeated attempts at surgical removal of tumors or after other treatment.  Surgery may be successful in removing visibletumors but may leave smaller undetectable nests of cancer cells in the patientthat continue to proliferate.  Radiationand chemotherapy are relatively imprecise methods for the destruction of cancercells because such therapies can kill both cancer cells and normal cells.  Radiation and chemotherapy also have toxicside effects, which may be lethal to the patient.  These toxic side effects may also restrictthe application of these treatments to less than optimal levels required toensure eradication of the cancer.

 

Thehigh number of cancer-related deaths indicates the need for more efficacioustherapies for many patients.  Manyexisting therapies have been approved on the basis that they shrink or limitthe growth of tumors for a short period of time, but they have failed todemonstrate a clinically meaningful survival benefit to patients.

 

*Ceplene—Acute Myeloid Leukemia*

 

AMLis the most common form of acute leukemia in adults.  Prospects for long-term survival are poor forthe majority of AML patients.  There areapproximately 11,900 new cases of AML and 8,900 deaths caused by this cancereach year in the United States.  Oncediagnosed with AML, patients are typically treated with chemotherapy, and themajority achieve complete remission. Approximately, 75-80% of patients who achieve their first completeremission will relapse, and the median time in remission before relapse withcurrent treatments is only 12 months. The prospects for these relapsed patients is poor, and less than 5%survive long term.  There are currentlyno effective remission therapies for AML patients.  The objective of the Ceplene/IL-2 combinationis to treat AML patients in remission to prevent relapse and prolongleukemia-free survival while maintaining a good quality of life for patientsduring treatment. The FDA has granted orphan drug status to Ceplene for thetreatment of AML.

 

InSeptember 2000, we completed enrollment of the MP-MA-0201 Phase 3 AML clinicaltrial, or M0201 trial.  This was aninternational, multi-center, randomized, open-label, Phase 3 trial thatcommenced in November 1997.  Thetrial was designed to evaluate if the combination of Ceplene and IL-2 given asa remission therapy can prolong leukemia-free survival time and prevent relapsein AML patients in first or subsequent remission compared to the currentstandard of care, which is no therapy during remission.  Accordingly, Ceplene is intended tocomplement rather than supplant chemotherapy.

 

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Priorto enrollment for remission therapy, patients were treated with induction andconsolidation therapy according to institutional practices.  Upon enrollment patients were randomized to oneof two treatment groups, either the Ceplene plus IL-2 group or the controlgroup (standard of care, no treatment). Randomization was stratified by country and complete remission status.  Complete remission status was divided intotwo groups; those in their first complete remission, or CR1, and those in theirsecond or later complete remission, or CR>1. Altogether 320 patients were entered into this study; 160 wererandomized to active treatment and 160 were randomized to standard of care (notreatment).

 

Patientson the active treatment arm received Ceplene plus IL-2 during ten 3-weektreatment periods.  After each of thefirst 3 treatment periods, there was a 3-week rest period, whereas each of theremaining cycles was followed by a 6-week rest period.  Treatment duration was approximately 18months.  IL-2 was administeredsubcutaneously, or sc, 1 μg/kg body weight twice daily, or BID, duringtreatment periods.  Ceplene was administered sc 0.5 mg BID after IL-2.  After the patient became comfortable at self-injectionunder the investigator’s supervision, both drugs could be administered at home.  Patients were followed for relapse andsurvival until at least 3 years from randomization of the last patientenrolled.

 

Safetywas assessed throughout the study by clinical symptoms, physical examinations,vital signs, and clinical laboratory tests. In addition, patients were monitored for safety for 28 days followingremoval from treatment for any reason.  Additional assessments includedbone marrow biopsies as clinically indicated and quality of life.

 

Thetwo treatment groups appear well balanced regarding baseline characteristicsand prognostic factors.  With a minimumfollow-up of 3 years a stratified log-rank test (stratified by country andfirst complete remission vs. second or later complete remission) of theKaplan-Meier, or KM, estimate of leukemia free survival of all randomizedpatients showed a statistically significant advantage for the treatment group(p =0.0096).  At three years afterrandomization, 24% of control patients were alive and free of leukemia,compared with 34% of patients treated with Ceplene plus IL-2, stratified bylog-rank.

 

Datafrom this trial were presented at the American Society of Hematology 46thAnnual Meeting and Exposition on December 6, 2004.

 

*Previous AML Clinical Trials with Ceplene plus IL-2.*  A Phase 2 investigator trial wasconducted in Sweden in which 39 AML patients in complete remission were treatedwith various combinations of Ceplene and low-dose IL-2.  The objective of the study was to determine aCeplene plus IL-2 treatment regimen that would have the least negative impacton normal living for patients in remission, and to determine the feasibility ofusing that regimen in a larger study of AML patients in complete remission in along-term, at-home, self-administration clinical trial.  Some patients were treated with chemotherapyas well as Ceplene and IL-2 therapy.

 

Resultsof the first 29 patients enrolled from this investigator trial wereencouraging:  of the 18 patients in theirfirst complete remission 67% remained in complete remission (median 23 monthsfollow-up), and of the 11 patients in their second or later complete remission,36% remained in complete remission (median 32 months follow-up).  The trial results also demonstrated that theregimen of Ceplene 0.5 mg and IL-2 1 μg/kg administered subcutaneously at homewas safe and well tolerated by most subjects. The results of this study led to the development of protocol M0201.

 

*Ceplene—Advanced Malignant Melanoma*

 

InSeptember 2004, we announced that our M0104 trial of the investigationaldrug Ceplene in combination with IL-2 for the treatment of advanced malignantmelanoma patients with liver metastases

 

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failedto demonstrate an improvement in overall patient survival, the primaryendpoint.  We also reported that thecombination therapy was generally well tolerated, and safety was consistentwith previous clinical experience. Ceplene for advanced malignant melanoma represented our most advancedclinical program with seven clinical trials in more than 1,000 patients.  Malignant melanoma is the most deadly form ofskin cancer and is one of the most rapidly increasing cancers in the developedworld.  The M0104 trial was conductedunder the Special Protocol Assessment procedure of the FDA to confirm resultsfrom an earlier Phase 3 trial, or M01 trial, which demonstrated improvedsurvival at 12 months in the subgroup of advanced malignant melanoma patientswith liver metastases treated with Ceplene and IL-2.  The M0104 trial was a multi-center,randomized, and controlled Phase 3 study evaluating Ceplene plus IL-2 againstIL-2 alone in 230 patients at 35 sites in North America and Europe.  IL-2 is an immunotherapeutic agent approvedin the United States for the treatment of advanced malignant melanoma.  The M0104 trial was conducted under the sametreatment protocol as the prior M01 trial, but enrollment was limited toadvanced malignant melanoma patients with liver metastases.  The primary endpoint of the trial wasduration of patient survival, as assessed by the stratified log-rank test inthe intent-to-treat population.

 

Basedon the failure of the M0104 trial to demonstrate an improvement in overallpatient survival, the primary endpoint, we have withdrawn the pending NDAseeking approval of Ceplene therapy to treat advanced malignant melanoma patientswith liver metastases.  We have alsowithdrawn the European Centralized Procedure Marketing Authorization Applicationfor Ceplene.

 

*Ceplene—Renal Cell Carcinoma*

 

Thereare approximately 35,700 new cases annually of renal cell carcinoma, or RCC, adeadly cancer of the kidneys, in the United States. Malignant RCC often isresistant to radiation therapy and chemotherapy and the disease results in morethan 12,500 deaths each year.  Expandingthe clinical testing of Ceplene into RCC was logical as IL-2 because is alsoapproved for the treatment of advanced RCC.

 

InFebruary 2005, we announced the results from two investigator-drivenstudies with Ceplene plus IL-2 versus IL-2 alone in patients with metastaticrenal cell carcinoma.  The studyperformed in Denmark showed a trend towards improvement in patients treatedwith Ceplene plus IL-2 versus IL-2 alone in overall survival (p=0.08), but nottumor response.  In the second studyperformed in the United Kingdom, there was no difference in overall survival ortumor response in patients treated with Ceplene plus IL-2 compared to treatmentwith IL-2 alone.

 

*Ceplene—Hepatitis C*

 

HepatitisC is the leading blood-borne infection in the United States.  The American Liver Foundation estimates thatin the United States 3.9 million people have been infected with hepatitis C,2.7 million of whom are chronically infected. The World Health Organization and other sources estimate that anestimated 170 million people are chronically infected worldwide.  Hepatitis is a viral infection in whichoxidative stress causes inflammation and tissue damage in the liver and, inmany cases, cirrhosis, or scarring.  Thecycle of disease from infection to significant liver damage can take20 years or more. Hepatitis C is a leading cause of liver cancer and theprimary reason for liver transplantation in many countries.

 

InFebruary 2005, we announced the preliminary results from our Phase 2Ceplene trial treating patients with Hepatitis C.  Our Phase 2 trial, or M0406, of Ceplene incombination with PEG-Intron® (peginterferon alfa-2b) and Rebetol® (ribavirin,USP) for the treatment of hepatitis C patients who failed to respond toprevious therapy, which was conducted in cooperation with Schering-PloughCorporation, did not improve virological response compared to treatment withthe PEG-Intron and Rebetol alone.

 

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*Histamine—Chronic Liver Diseases Pre-clinical Studies*

 

Histamine,the active agent in Ceplene, has shown the potential to prevent or inhibitoxidative stress, a condition associated with most acute and chronic liverdiseases.  The liver plays an importantrole in regulating numerous vital processes and performs many functionsessential to life.  In the United Statesalone, approximately 25 million people—approximately 1 in every 10—areafflicted with chronic liver, bile duct or gallbladder diseases. In addition,26,000 of these patients die each year from chronic liver diseases andcirrhosis.

 

Inaddition to hepatitis, some of the most common diseases of the liver include:

 

•                  Cirrhosis, in which normal liver cells aredamaged and replaced by scar tissue as a result of various chronic liverdiseases.  A common cause of cirrhosis isexcessive intake of alcohol. Alcoholic hepatitis in the severe form has agreater than 50% mortality rate.

 

•                  Fatty liver, the accumulation of fat in livercells.  Fat accumulates in the liverusually in connection with heavy use of alcohol, extreme weight gain ordiabetes mellitus.

 

•                  Nonalcoholic steatohepatitis, or NASH, asubset of fatty liver, is an inflammation of the liver associated with anincrease of fat deposits in liver cells that may lead to severe liver damageand cirrhosis.  NASH may occur inmiddle-aged, overweight, and often diabetic patients who do not drink alcohol.

 

Ourresearchers have reported at annual national meetings on the beneficial effectsof histamine in a number of different models of various disease states.  These include alcohol liver damage, liverregeneration, and liver damage models. These data provide a basis for any future studies on histamine therapyin liver diseases.

 

*Oral Formulation*

 

Weare currently developing an oral formulation of histamine for the treatment ofchronic liver diseases.  In March 2004,we reported the results from a Phase Ia pharmacokinetic clinical trial of anorally dosed histamine dihydrochloride drug candidate designated HD-O.  The trial was designed to help determine asafe dose range and initial pharmacokinetics for orally administeredhistamine.  In February 2005, wecompleted a Phase Ib pharmacokinetics clinical trial that was designed todetermine the safety and pharmacokinetics of multiple doses of HD-O.  These studies provide a basis for potentialcontinued clinical research of HD-O in the treatment of chronic liver diseases.

 

**MX8899 Topical Gel—Cancer Supportive Care**

 

OurMX8899 topical gel is a potential treatment for patients who suffer from oralmucositis and other significant side effects of certain cancer therapies.

 

Histaminedihydrochloride, the active agent in the MX8899 gel, has been shown inpreclinical work to reduce inflammation by preventing the production andrelease of oxygen free radicals and proinflamatory cytokines such as TNF-alphaand IL-1b, thereby reducing oxidative stress and inflammation.  In addition, it has been reported thathistamine may improve blood circulation and assist in wound healing.  Accordingly, histamine-based gels have thepotential to be useful in situations where free-radical damage and excessiveinflammation are involved, thereby facilitating the healing processes.

 

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MX8899topical gel has been evaluated in early-stage clinical studies as a treatmentfor certain debilitating side effects of chemotherapy including oral mucositisand radiation dermatitis.  Preliminaryresults from the trials suggest that MX8899 can be safely administered inpatients, although no conclusion regarding the potential efficacy of MX8899could be drawn from the small patient populations.  The current continued development of thisprogram remains under consideration.

 

**Novel Cancer Drug Candidates**

 

*Small-Molecule Apoptosis Inducers*

 

Allcells have dedicated molecular processes required for cell growth andexpansion, but also have programmed pathways specific for inducing cell death.  Cancer is a group of diseases characterizedby uncontrolled cellular growth (e.g., tumor formation) without any differentiationof those cells.  One reason for uncheckedgrowth in cancer cells is the disabling, or absence, of the natural process ofprogrammed cell death called apoptosis. Apoptosis is normally activated to destroy a cell when it outlives itspurpose or it is seriously damaged.  Oneof the most promising approaches in the fight against cancer is to selectivelyinduce apoptosis in cancer cells, thereby checking, and perhaps reversing, theimproper cell growth.  Using chemicalgenetics and its proprietary high-throughput cell-based screening technology,our researchers can effectively identify new cancer drug candidates andmolecular targets with the potential to induce apoptosis selectively in cancercells.

 

Chemicalgenetics is a research approach that investigates the effect of small moleculeson the cellular activity of a protein, enabling researchers to determineprotein function.  By combining chemicalgenetics with its proprietary live cell high-throughput caspase screeningtechnology, our researchers can specifically investigate the cellular activityof a small molecule drug candidate and its relationship to apoptosis.  Screening for the activity of caspases, afamily of protein-degrading enzymes with a central role in cleaving otherimportant proteins necessary for inducing apoptosis, is an effective method forresearchers to efficiently discover and rapidly test the effect of smallmolecules on pathways and molecular targets crucial to apoptosis.

 

Ourscreening technology is particularly versatile, since it can adapt its assaysfor use in a wide variety of primary cells or cultured cancer cell lines.  This platform technology can monitoractivation of caspases inside living cells and is versatile enough to measurecaspase activity across multiple cell types including cancer cells, primaryimmune cells, cell lines from different organ systems or genetically engineeredcells.  This allows us to find potentialdrug candidates that are selective for specific cancer types, permitting theability to focus on identifying potential cancer-specific drugs that will haveincreased therapeutic benefit and reduced toxicity or for immunosuppressiveagents selective for activated B/T cells. Our high-throughput screening capabilities allow us to screen approximately30,000 compounds per day.  To date, thisprogram has identified more than 40 in vitro lead compounds with potentiallynovel mechanisms that induce apoptosis in cancer cells.  Four lead oncology candidates, which varyfrom pre-clinical to Phase I/II clinical programs, are being developedindependently or through strategic collaborations.  The assays underlying the screeningtechnology are protected by multiple United States and international patentsand patent applications.

 

InNovember 2003, the capabilities and proprietary nature of our screeningtechnology were presented at the 2003 Cancer Drugs Research and Developmentconference.  As reported at theconference, the efficacy-based characteristics inherent to our screeningtechnology have allowed researchers to identify compounds that selectivelyinduce apoptosis through a wide variety of underlying mechanisms of action,both known and unknown.  Accordingly, the portfolio of potential drugcandidates identified through the screening technology includes a number ofcompounds that induce apoptosis

 

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throughmolecular targets not previously described for the purpose of treating cancer,as highlighted with the lead candidates summarized below:

 
| **Candidate**      | ** ** | **Description**                                                         | ** ** | **Highlights**                                                                                                                                                                                                                                      | ** ** |
|--------------------|------------|-------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| MX2167             |       | Novel transferrin receptor associated apoptosis  activator              |       | Preclinical results presented at 2003 AACR Annual  Meeting reporting on anticancer activity in multiple cell lines.                                                                                                                                 |       |
|               |       |                                                                    |       |                                                                                                                                                                                                                                                |       |
|               |       |                                                                    |       | Presentation at 2004 AACR-EORTC-NCI International  Conference on Molecular Targets and Cancer Therapeutics reporting that MX2167  rapidly activates apoptosis through the transferrin receptor by employing a  previously unknown mechanism.        |       |
|               |       |                                                                    |       |                                                                                                                                                                                                                                                |       |
|               |       |                                                                    |       | August 2005 publication in the Proceedings of  the National Academy of Sciences, entitled “A Role for Transferrin Receptor  in Triggering Apoptosis When Targeted With Gambogic Acid”                                                |       |
|               |       |                                                                    |       |                                                                                                                                                                                                                                                |       |
| MX128504           |       | Novel, intracellular target selective for breast and  colorectal cancer |       | Patent filed covering novel mechanism and target  Preclinical results presented at 2003 AACR Annual Meeting                                                                                                                                         |       |
|               |       |                                                                    |       |                                                                                                                                                                                                                                                |       |
|               |       |                                                                    |       | March 2005 publication in Molecular Cancer  Therapeutics, entitled “The discovery and mechanism of action of novel  tumor-selective and apoptosis-inducing 3,5-diaryl-[1,2,4]-oxadiazole series  using a chemical genetics approach” |       |
|               |       |                                                                    |       |                                                                                                                                                                                                                                                |       |
| MX128495 (MPC6827) |       | Broad activity                                                          |       | Exclusive worldwide collaboration with Myriad  Genetics announced in November 2003                                                                                                                                                             |       |
|               |       |                                                                    |       |                                                                                                                                                                                                                                                |       |
|               |       |                                                                    |       | Announcement of pre-clinical results against  pancreatic tumors in a xenograft mouse model demonstrating a statistically  significant inhibition of tumor growth, with efficacy twice that of  gemcitabine at a significantly lower dose.           |       |
|               |       |                                                                    |       |                                                                                                                                                                                                                                                |       |
|               |       |                                                                    |       | Presentations at AACR Annual Meeting                                                                                                                                                                                                                |       |
|               |       |                                                                    |       |                                                                                                                                                                                                                                                |       |
|               |       |                                                                    |       | Initiation of Phase 1 studies in March 2005                                                                                                                                                                                                    |       |
|               |       |                                                                    |       |                                                                                                                                                                                                                                                |       |
| MX2407             |       | Anti-vascular targeting agent Broad activity                            |       | Preclinical results presented at 2003 AACR-NCI-EORTC  International Conference on Molecular Targets and Cancer Therapeutics                                                                                                                         |       |

 

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| **Candidate** | ** ** | **Description** | ** ** | **Highlights**                                                                                                                                                                                                                                                                                                                                                                                                                 | ** ** |
|---------------|------------|-----------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|          |       |            |       | Reacquisition of rights to this family of compounds  from Shire Pharmaceuticals.                                                                                                                                                                                                                                                                                                                                               |       |
|          |       |            |       |                                                                                                                                                                                                                                                                                                                                                                                                                           |       |
|          |       |            |       | Preclinical results presented at 2004 AACR Annual  Meeting demonstrating that MX2407, the lead compound from this family,  produced tumor regression in lung cancer animal models as a single  agent.  Data was also presented demonstrating that MX2407 enhanced the  anti-tumor activity in combination with existing cytotoxic agents that were  superior to other vascular targeting agents currently in development. |       |

 

*Apoptosis Inducer Compound #1: MX2167*

 

Preclinicalresults from MX2167 were presented at the American Association for CancerResearch, or AACR Annual Meeting in Washington, D.C. in July, 2003.  Researchers reported that MX2167 demonstratedattractive pharmacokinetic properties and potent efficacy in rat syngeneicprostate cancer models, with 90% inhibition of tumor growth using moderatedosing schedules.  The MX2167 series featurescompounds whose apoptosis-inducing anti-tumor activities are mediated throughthe transferrin receptor via a novel molecular mechanism different from theactions of traditional cancer drugs.  Inpreclinical testing MX2167 has been shown to induce apoptosis in cancer cellsin multiple cell lines, including prostate, breast, colorectal, non-small celllung and small cell lung cancers and leukemia. During 2004, we identified and filed United States patents covering thenovel mechanism of action of the MX2167 series and the use of the transferrinreceptor for the induction of apoptosis for the treatment of cancer.

 

Additionalpre-clinical results for MX2167 were reported at the September 2004AACR-European Organization for Research and Treatment of Cancer, orEORTC-National Cancer Institute, or NCI International Conference “MolecularTargets and Cancer Therapeutics” in Geneva, Switzerland.  Researchers reported that MX2167 targets thetransferrin receptor leading to a previously unknown rapid induction ofprogrammed cell death in preclinical tumor models. The transferrin receptor islocated on the surface of cells and is over expressed in several types ofcancer.  Although it is a known andvalidated oncology target, this was the first evidence describing its role as arapid inducer of apoptosis when targeted with MX2167.

 

InAugust 2005, a manuscript in the Proceedings of the National Academy ofSciences, (*PNAS*, “A Role forTransferrin Receptor in Triggering Apoptosis When Targeted With Gambogic Acid”,Shailaja Kasibhatla, Katayoun A. Jessen, Sergei Maliartchouk, Jean Yu Wang,Nicole, M. English, John Drewe, Ling Qiu. Shannon P. Archer, Anthony E. Ponce,Nilantha Sirisoma, Songchun Jiang, Han-Zhong Zhang, Kurt R. Gehlsen, Sui XiongCai, Douglas R. Green & Ben Tseng, PNAS.  August 23, 2005, Vol. 102, No. 34,pp. 12095-12100) describing the role of the transferrin receptor and itsassociation with the induction of apoptosis was published.  The article describes the transferrinreceptor as a target for gambogic acid, a substance used in traditional Chinesemedicine, and a previously undiscovered link between the receptor and the rapidactivation of apoptosis in tumor cells.

 

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*Apoptosis Inducer Compound #2: MX128504*

 

MX128504is a novel, cell-cycle dependent inducer of apoptosis that is selective in itsmechanism and targets only breast and colorectal cancer cells.  The molecular target is the Insulin GrowthFactor 2 Receptor Binding Protein, or IGF2R BP, also known as TIP47.  This molecule affects the Insulin GrowthFactor I, or IGF1, growth regulation pathway and has demonstrated efficacy as asingle agent and in combination with existing chemotherapeutic agents, includinga significant reduction in tumor growth in combination with Taxol, ananticancer drug.

 

InMay 2005, a manuscript in the Journal of Molecular Cancer Therapeutics,(MCT, “The discovery and mechanism of action of novel tumor-selective andapoptosis-inducing 3,5-diaryl [1,2,4]-oxadiazole series using a chemicalgenetics approach”, Katayoun A. Jessen, Nicole M. English, Jean Yu Wang, SergeiMaliartchouk, Ling Qiu, Regina Brand, Jared Kuemmerle, Han-Zhong Zhang, KurtGehlsen, John Drewe, Ben Tseng, Sui Xiong Cai, and Shailaja Kasibhatla,Molecular Cancer Therapeutics 2005; 4(5):1—11) describing the tail-interactingprotein 47, or TIP-47, as the target for this class of compounds waspublished.  The data indicates thatMX128504 is tumor-selective and further support the discovery of novel drugsand drug targets using chemical genetics.

 

*Apoptosis Inducer Compound #3, MX2407*

 

InNovember 2004, two manuscripts in the Journal of Molecular CancerTherapeutics (*Journal of Molecular CancerTherapeutics*, “Discovery and mechanism of action of a novel seriesof apoptosis inducers with potential vascular targeting activity”, Kasibhatla,S., Gourdeau, H., Meerovitch, K., Drewe, J., Reddy, S., Qiu, L., Zhang, H.,Bergeron, F., Bouffard, D., Yang, Q., Herich, J., Lamothe, S., Cai, S. X.,Tseng, B., Mol. Cancer Ther. 2004 3: pp. 1365-1374;  “Antivascular andantitumor evaluation of 2-amino-4-(3-bromo-4,5-dimethoxy-phenyl)-3-cyano-4*H*-chromenes, a novel series of anticanceragents”, Henriette Gourdeau, Lorraine Leblond, Bettina Hamelin, ClemenceDesputeau, Kelly Dong, Irenej Kianicka, Dominique Custeau, Chantal Boudreau,Lilianne Geerts, Sui-Xiong Cai, John Drewe, Denis Labrecque, ShailajaKasibhatla, and Ben Tseng, Mol. Cancer Ther. 2004 3: pp. 1375-1384) describingits MX2407 anticancer drug candidate as part of a novel class of microtubuleinhibitors were published.  Themanuscripts characterize MX2407 as a potent caspase activator demonstratingvascular targeting activity and potent antitumor activity in pre-clinical *in vitro*and*in vivo studies*.  MX2407 appeared highly effective inmouse tumor models, producing tumor necrosis at doses that correspond to only25% of the maximum tolerated dose. Moreover, in combination treatment, MX2407 significantly enhanced theantitumor activity of cisplatin, resulting in tumor-free animals.

 

*Apoptosis Inducer Compound #4: MX128495*

 

InDecember 2003, we announced the exclusive license of our MX90745 series ofpreclinical apoptosis inducer compounds for the treatment of cancer to MyriadGenetics, Inc.  The lead compound inthat series, MX128495, otherwise know as MPC6827, has shown potency inpreclinical testing in multiple cancer types including prostate cancer, breastcancer, colorectal cancer, non-small cell lung cancer, small cell lung cancerand leukemia.  Under the terms of the agreement,we granted an exclusive worldwide license to Myriad for the development andcommercialization of the MX90745 family of compounds.  Myriad is responsible for the clinicaldevelopment and commercialization of MX128495, with oversight provided by a jointdevelopment committee comprised of Myriad and Maxim personnel.  We provided research services to Myriad for aone-year period to assist with the development of MX128495.  The license agreement included $27 million tous in the form of milestone payments, license fees and research supportassuming successful commercialization of any compound within the MX128495series, as well as a royalty to us on sales of MX128495-related products.  In March 2005, Myriad initiated a Phase1 clinical trial in patients with advanced solid tumors resulting in usreceiving a $1 million milestone payment.

 

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Inaddition to collaborations related to specific compound families, the capacityof our high-through screening assays (the ability to screen more than 30,000compounds per day) enable us to collaborate on earlier-stage discovery effortsas well.  Under a collaboration with Celera Genomics, we have screenedapproximately 700,000 of Celera’s proprietary compounds to identify inducers ofapoptosis.  We expect to seek additionalcorporate collaborators to augment its internal development efforts toaccelerate the clinical development of our apoptosis inducer drug candidates.

 

Wealso have plans to choose one or more of the compounds discovered through ourapoptosis research efforts and independently advance the chosen compound(s)into human clinical trials.

 

*Apoptosis and Protease Inhibitors*

 

Wehave discovered 5 families, consisting of over 150 compounds, of highly potent,small molecule caspase inhibitors that inhibit apoptotic cell death *in vivo*. Intravenous administration of these compounds is highly efficacious inanimal models of acute degenerative diseases, particularly myocardialinfarction, stroke, hepatitis induced liver failure and sepsis.  These compounds are also non-toxic *in vivo* and may also have applications inbiodefense.

 

MX1013,our lead clinical development candidate, has been shown in preclinical studiesto effectively protect the heart muscle following an ischemic event such asmyocardial infarction from ischemia-reperfusion injury.  This compound was also shown to be highlyactive in preclinical models of acute liver failure associated with FAS-inducedhepatitis, as well as in models of sepsis and stroke.  In addition, several chemical families ofanalogues with equally good or better efficacy and safety have also beenidentified.  These compounds areprotected with composition of matter and use patents issued or applied for.

 

Oursmall molecule apoptosis inhibitor MX1013, or a related analog, may provide asafe and effective countermeasure for biodefense applications.  Specifically these include treatment foranthrax exposure, as well as treatment for excessive exposure to radiation,such as nuclear detonation or radiological attack.

 

Becausenuclear detonation or radiological attack represent real and present threats tonational security, the development of effective medical countermeasures are ofcritical importance.  Excessive exposureto high dose radiation leads to bone marrow suppression with death due to theinduction of apoptosis in hematopoietic stem and progenitor cells.  Our lead development candidate, MX1013, ishighly efficacious in animal studies (via intravenous or intraperitonealinjection) and has been shown to protect bone marrow cells from apoptosisinduced by radiation and to extend the life of rodents exposed to lethal dosesof radiation.

 

Exposureto anthrax or other biological weapons are also significant threats to nationalsecurity.  Since anthrax lethal toxin isknown to reduce the viability of cultured human endothelial cells and to inducecaspase-dependent endothelial apoptosis, an agent like MX1013 may provideprotection against human endothelial cell apoptosis induced by anthrax lethaltoxin.  Recent preliminary resultsindicate that our caspase inhibitor MX1013 increased survival to 20% in miceexposed to lethal doses of anthrax.

 

Anotherpromising series of protease inhibitor compounds is the MX128533 series.  This series of small molecules discovered byour researchers inhibits the SARS coronavirus, or SARS-CoV.  They have been tested for antiviral activityby the National Institute of Allergy and Infectious Diseases, or NIAID, part ofthe National Institutes of Health, at the Institute for Antiviral Research,Utah State University, by Dr. Dale Barnard and Dr. Robert Sidwell.

 

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Thelead compound demonstrated inhibition of the SARS-CoV in cell culture at verylow concentrations, 0.02 microg/mL. In-vitro studies with the compound has demonstrated no toxic effect onuninfected cells even at the highest concentration tested, resulting in aselectivity index, or SI, greater than 500. An SI of greater than 10 is considered significant by NIAIDcriteria.  This series of compounds isbeing further evaluated in-vitro and in preclinical animal models under theagreement with NIAID to select a potential development candidate.

 

Aswith our apoptosis inducing compounds for which we are seeking partners, we arealso seeking to partner its apoptosis and SARS virus protease inhibitors.

 

**Product Development and Collaborative Relationships**

 

Weconduct our research, clinical trials and other product development activitiesthrough a combination of efforts by internal personnel and collaborativeprograms.  For Ceplene and the otherresearch and development programs we rely upon our clinical managementpersonnel in collaboration with universities and other clinical research sites,contract research organizations and other similar service providers andpersons.  Earlier-stage research anddevelopment efforts related to the apoptosis modulator technology havehistorically been conducted in our laboratories, although we recently enteredinto a collaborative agreement for one of our compound families and we expectto rely on pharmaceutical company collaborative relationships to advance theclinical development of certain other compounds and indications encompassed bythis technology while we contemporaneously work to independently advance atleast one compound into human clinical development.  We have relied upon licensing and othertransactions to provide access to certain proprietary technologies.

 

*Ceplene Collaborations*

 

Weare seeking a strategic partnership for the filing of European registration andcommercialization of CepleneTM for the treatment of AML.  Based upon recent discussions with therapporteur and co-rapporteur assigned to the MAA, regulators at the EMEA andEuropean regulatory experts engaged by us, we have concluded that anapplication should be filed to seek approval for CepleneTM in AML based upon therecent successful phase 3 trial results. AML is the most common form of adult leukemia and there is no presenttherapy for treating patients during remission that was the focus of our trial.

 

Wewill continue to evaluate strategic options related to Ceplene’s regulatoryevaluations and partnering efforts in other potential indications.

 

*Apoptosis Modulator and Other Collaborations*

 

InJuly 2000, we licensed our MX2105 series of anti-cancer compounds toBiochem Pharma, subsequently becoming Shire BioChem, or Shire.  This agreement required that Shire makelicensing, research and milestone payments to us totaling up to$55 million assuming the successful commercialization of the compound forthe treatment of two cancer indications, as well as pay a royalty on productsales resulting from this collaboration. Shire was to provide the preclinical testing, manufacturing developmentand clinical development of the compound. In July 2003, following the combination of Shire and BiochemPharma, Shire announced that oncology would no longer be a therapeutic focus ofthe company’s research and development efforts. In March 2004, we entered into a license agreement reacquiring therights to the MX2105 series of apoptosis inducer anti-cancer compounds fromShire.  Under the agreement all rightsand obligations of the parties under the July 2000 agreement wereterminated and Shire agreed to assign and/or license rights we owned under orshared under the prior research program. The agreement did not require any up-front payments, however, it

 

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doesrequire that we provide Shire a portion of any sublicensing payments we receiveif we relicense the series of compounds or make milestone payments to Shiretotaling up to $26 million, assuming the successful commercialization of thecompound by us for the treatment of a cancer indication, as well as pay aroyalty on product sales.

 

In2000, we entered into a collaboration with Celera Genomics under which we havescreened approximately 700,000 compounds from Celera’s proprietary librariesusing our high-throughput screening technology. We performed research regarding the mechanisms of action for anypromising compounds identified during the screening process.  The agreement called for Celera to performthe preclinical work for such compounds. Under the agreement we retain the option to elect, at our solediscretion, to jointly develop with Celera any compounds that are taken intoclinical trials and to share equally the development costs and commercialrevenues.  We completed the screening ofthese compounds.  Celera is carrying outevaluation of the leads.

 

InDecember 2003, we announced the exclusive worldwide license of our MX90745family of preclinical apoptosis inducer compounds for the treatment of cancerto Myriad Genetics, Inc, or Myriad. Myriad will be responsible for the clinical development andcommercialization of the lead compound, MX128495, with oversight to be providedby a joint development committee comprised of Myriad and Maxim personnel.  We provided research services to Myriad for aone-year period to assist with the development of MX128495.  The license agreement included up to $27million to us in the form of milestone payments, license fees and researchsupport assuming successful commercialization of any compound within theMX128495 series, as well as a royalty to us on sales of MX128495-relatedproducts.

 

**Marketing and Sales**

 

Ifwe are successful in attaining approval to market Ceplene from regulatoryauthorities in the European Union, we plan to enter into a territory specificmarketing collaboration with a company with relevant experience in marketingoncology drugs.  The option forco-marketing of Ceplene in the United States and other territories would benegotiated with any such partner.

 

In1999, we entered into an agreement granting F. H. Faulding &Co., Ltd. (now Mayne Pharmaceuticals) the right to market Ceplene inAustralia and New Zealand. Also during 1999, we entered into an agreementgranting MegaPharm, Ltd. the right to market Ceplene in Israel.

 

Ourmarketing strategies for the initial apoptosis modulators will rely uponout-licensing and other collaborative relationships.  For example, in November 2003 ourMX128495 series of anti-cancer compounds was licensed to Myriad under anagreement that calls for Myriad to market any products within this series thatattain regulatory approval.

 

**Manufacturing**

 

Wedo not intend to acquire or establish our own dedicated manufacturingfacilities for Ceplene in the foreseeable future.  There are a number of facilities incompliance with FDA Good Manufacturing Practice available for contractmanufacturing, and we have contracted with established pharmaceuticalmanufacturers for the production of Ceplene. These manufacturers supply the Ceplene as required for our clinicaltrial activities and have demonstrated the capability to supply commercialquantities of the product for any potential market launch.

 

Webelieve that, in the event of the termination of an agreement with any singlesupplier or manufacturer, we would likely be able to enter into agreements withother suppliers or manufacturers on

 

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similarterms.  We currently rely upon similarrelationships for the manufacturing of our apoptosis modulator and topical geldrug candidates and expect to continue to rely upon such relationships in thefuture.

 

**Patents, Licenses and Proprietary Rights**

 

Weown or have the rights to 58 issued or allowed United States patents and 47United States patent applications. Corresponding patent applications have been filed, and in a number ofinstances patents have been issued, in major international markets, includingEurope, Australia and Japan.  Our policyis to file, where possible, patent applications to protect technologies,inventions and improvements that are important to the development of ourbusiness.  We have devoted substantialattention and resources to our patent and license portfolio.  Maintaining patents and licenses andconducting an assertive patent prosecution strategy is a priority for us.

 

*Granted Patents and Pending Applications in Key Areas*

 

Weown or have rights to 27 issued or allowed United States patents and 16 UnitedStates patent applications related to Ceplene, a technology platform based uponhistamine, a naturally occurring H2 receptor agonist.  These patents encompass various topicsrelating to use, composition, methods, and manufacture of histamine, H2 receptor agonists, or radical scavengers in avariety of disease states.  A number ofcorresponding patents have also issued in international markets.

 

Weown or have rights to 6 issued or allowed United States patents and 1 UnitedStates patent application for material compositions and other rights underlyingthe histamine topical gel technology.  Wealso own or have rights to 2 issued United States patents on HTLV peptides fordiagnostics or therapeutic uses. Corresponding patents have also been filed in international markets.

 

Wehold or have rights to 23 issued or allowed United States patents and 30 UnitedStates patent applications related to drug screening methodology and reagents,and compounds that induce apoptosis or inhibit apoptosis.  Corresponding patent applications related tothe above have also been filed internationally in most cases.

 

*Technology Rights*

 

In1993, we entered into a technology transfer agreement under which we purchasedcertain intellectual property and patent rights related to our Ceplenetechnology.  The technology transferagreement required us to pay certain royalty obligations to the two inventorsof the technology, although one of the inventors waived his royalty rights aspart of a subsequent agreement with us. In October 1999, we entered into a new royalty agreement with theremaining inventor under which we agreed to pay $1 million over threeyears in exchange for a reduced royalty rate. We have also filed a large number of additional patent applications andreceived a substantial number of additional patents encompassing the Ceplenetechnology as described above.

 

In1998, we entered into a license agreement with Professional Pharmaceuticals, Inc.,or PPI, for an exclusive, worldwide license to technology related to materialcompositions and other patent rights underlying the topical geltechnology.  The license agreementrequires that we pay certain royalty obligations to PPI.

 

In2000, we acquired Cytovia, Inc., a privately held biopharmaceuticalresearch company.  The technology rightsassociated with our apoptosis modulator program were acquired in thistransaction.

 

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InMarch 2004, we reacquired the rights to the MX2105 series of vasculartargeting agent cancer drug candidates from Shire.  The MX2105 series was licensed in July 2000to BioChem Pharma, a company that was subsequently acquired by ShirePharmaceuticals.  The new agreement callsfor us to pay Shire certain milestone and royalty payments upon the successfuladvancement of any drug candidates within the MX2105 series.

 

**Government Regulation**

 

Regulationby governmental authorities in the United States, the European Union and othercountries is a significant factor in the development, manufacture and marketingof our proposed products and in our ongoing research and product developmentactivities.  The nature and extent towhich such regulation applies to us will vary depending on the nature of anyproducts we may develop.  We anticipatethat many, if not all, of our products will require regulatory approval bygovernmental agencies prior to commercialization. In particular, humantherapeutic and vaccine products are subject to rigorous preclinical andclinical testing and other approval procedures of the FDA, the EMEA and similarregulatory authorities in other countries. Various governmental statutes and regulations also govern or influencetesting, manufacturing, safety, labeling, storage and record-keeping related tosuch products and their marketing.  Theprocess of obtaining these approvals and the subsequent compliance withappropriate statutes and regulations require the expenditure of substantialtime and money.  Any failure by us or ourcollaborators to obtain, or any delay in obtaining, regulatory approval couldadversely affect the marketing of any products we develop and prevent us fromgenerating product revenues and obtaining adequate cash to continue present andplanned operations.

 

*FDA Approval Process*

 

Priorto commencement of clinical studies involving humans, preclinical testing ofnew pharmaceutical products is generally conducted on animals in the laboratoryto evaluate the potential efficacy and the safety of the product.  The results of these studies are submitted tothe FDA as a part of an Investigational New Drug application, which must becomeeffective before clinical testing in humans can begin.  Typically, human clinical evaluation involvesa time consuming and costly three-phase process.  In Phase 1, clinical trials are conductedwith a small number of people to assess safety and to evaluate the pattern ofdrug distribution and metabolism within the body.  In Phase 2, clinical trials are conductedwith groups of patients afflicted with a specific disease in order to determinepreliminary efficacy, optimal dosages and expanded evidence of safety.  In Phase 3, large-scale, multi-center,comparative trials are conducted with patients afflicted with a target diseasein order to provide enough data to demonstrate the efficacy and safety requiredby the FDA.  The FDA closely monitors theprogress of each of the three phases of clinical testing and may, at itsdiscretion, re-evaluate, alter, suspend or terminate the testing based upon thedata which have been accumulated to that point and its assessment of therisk/benefit ratio to the patient. Monitoring of all aspects of the study to minimize risks is a continuingprocess. Reports of all adverse events must be made to the FDA.

 

Theresults of the preclinical and clinical testing on a non-biologic drug andcertain diagnostic drugs are submitted to the FDA in the form of an NDA forapproval prior to commencement of commercial sales.  In responding to an NDA, the FDA may grantmarketing approval, request additional information or deny the application ifthe FDA determines that the application does not satisfy its regulatoryapproval criteria.  There can be noassurance that approvals will be granted on a timely basis, if at all, for anyof our potential products. Similar procedures are in place in countries outsidethe United States.

 

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*European and Other Regulatory Approval*

 

Whetheror not FDA approval has been obtained, approval of a product by comparableregulatory authorities in Europe and other regions is necessary prior tocommencement of marketing the product in such countries.  The regulatory authorities in each region mayimpose their own requirements and may refuse to grant, or may requireadditional data before granting, an approval even though the relevant producthas been approved by the FDA or another authority.  As with the FDA, the regulatory authoritiesin the EU and other developed regions have lengthy approval processes forpharmaceutical products.  The process forgaining approval in particular regions varies, but generally follows a similarsequence to that described above for FDA approval.  In Europe, the European Committee for HumanMedicinal Products provides a mechanism for EU member states to exchangeinformation on all aspects of product licensing.  The EU has established a European agency forthe evaluation of medical products, with both a centralized community procedureand a decentralized procedure, the latter being based on the principle oflicensing within one member country followed by mutual recognition by the othermember countries.

 

*Other Regulations*

 

Weare also subject to various United States federal, state, local andinternational laws, regulations and recommendations relating to safe workingconditions, laboratory manufacturing practices and the use and disposal ofhazardous or potentially hazardous substances, including radioactive compoundsand infectious disease agents, used in connection with our research work. Theextent of government regulation that might result from future legislation oradministrative action cannot be predicted accurately.

 

**Third-Party Reimbursement**

 

Thebusiness and financial condition of pharmaceutical and biotechnology companieswill continue to be affected by the efforts of government and third-partypayors to contain or reduce the cost of health care through various means.  For example, in certain European markets,pricing negotiations are often required in each country, even if approval tomarket the drug under the European Medical Evaluation Authority’s centralizedprocedure is obtained.  In the UnitedStates, there have been, and we expect that there will continue to be, a numberof federal and state proposals to implement similar government control.  Our industry is currently facing concernsrelated to the re-importation into the United States of pharmaceuticalproducts, manufactured in the United States, that are sold in other countriesat prices significantly below their United States prices.

 

Inaddition, an increasing emphasis on managed care in the United States has andwill continue to increase the pressure on pharmaceutical pricing.  While we cannot predict whether any suchlegislative or regulatory proposals will be adopted or the effect suchproposals or managed care efforts may have on our business, the announcement ofsuch proposals or efforts could have a material adverse effect on our abilityto raise capital, and the adoption of such proposals or efforts could have amaterial adverse effect on our business, financial condition, and results ofoperations.  Further, to the extent thatsuch proposals or efforts have a material adverse effect on otherpharmaceutical companies that are prospective corporate partners for us, our abilityto establish corporate collaborations may be adversely affected.  In addition, in both the United States andelsewhere, sales of prescription pharmaceuticals are dependent in part on theavailability of reimbursement to the consumer from third-party payors, such asgovernment and private insurance plans that mandate predetermined discountsfrom list prices.  Third-party payors areincreasingly challenging the prices charged for medical products andservices.  If we succeed in bringing oneor more products to the market, we cannot assure you that these products willbe considered cost effective and that reimbursement to the consumer will beavailable or will be sufficient to allow us to sell our products on acompetitive basis.

 

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**Competition**

 

Competitionin the discovery and development of methods for treating or preventing canceris intense.  Numerous pharmaceutical,biotechnology and medical companies and academic and research institutions inthe United States and elsewhere are engaged in the discovery, development,marketing and sale of products for the treatment of cancer.  These include surgical approaches, newpharmaceutical products and new biologically derived products.  We expect to encounter significantcompetition for the principal pharmaceutical products we plan to develop.  Companies that complete clinical trials,obtain regulatory approvals and commence commercial sales of their productsbefore we do, may achieve a significant competitive advantage.  A number of pharmaceutical companies aredeveloping new products for the treatment of the same diseases we aretargeting.  In some instances, ourcompetitors already have products in late-stage clinical trials.  In addition, certain pharmaceutical companiesare currently marketing drugs for the treatment of the same diseases we aretargeting, and may also be developing new drugs to address these disorders.

 

Inthe area of immunotherapy, the impact of competition for Ceplene may be reducedas the drug may be complementary to many other immunotherapeutic agents.  Our current clinical testing combines theadministration of Ceplene with the administration of cytokines, certainimmunotherapeutic agents. Accordingly, Ceplene and these immunotherapeutic agentsmay not be competitive but may play complementary and synergistic roles inenhancing the immune system.  For thisreason, we believe that continuing advancements in the overall field ofimmunotherapy may create new opportunities for Ceplene.

 

Manyof our competitors have substantially greater financial, clinical testing,regulatory compliance, manufacturing, marketing, human and otherresources.  Additional mergers andacquisitions in the pharmaceutical industry may result in even more resourcesbeing concentrated with our competitors. We believe that our competitive success will be based on our ability tocreate and maintain scientifically advanced technology, develop proprietaryproducts, attract and retain scientific personnel, obtain patent or otherprotection for our products, obtain required regulatory approvals, obtainorphan drug status for certain products and manufacture and successfully marketour products either independently or through outside parties.

 

**Employees and Consultants**

 

Asof November 1, 2005, we had 32 full-time employees, all of whom were basedat our three facilities in San Diego, California, 14 of whom comprise the coreresearch team for the apoptosis program, 6 in drug development, primarilyclinical and regulatory, and 12 in general and administrative, business developmentand management positions.  We believe ourrelationships with our employees are satisfactory.

 

Inaddition to our employees, we have engaged a number of experienced consultantsin North America, Europe, Israel and Australia with pharmaceutical and businessbackgrounds to assist in product development efforts.  We plan to leverage our key personnel bymaking extensive use of contract laboratories, development consultants andcollaborations with pharmaceutical companies to expand our preclinical and clinicaltrials.

 

**RISK FACTORS**

 

*You should carefully consider the following risk factors andthe other information included herein as well as the information included inour other reports and filings made with the Securities and*

 

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* *

*Exchange Commission before investing in our common stock. Ifany of the following risks actually occurs, our business, financial conditionor results of operations could be harmed. The trading price of our common stockcould decline due to any of these risks, and you may lose part or all of yourinvestment.*

 

**Risks relating to the proposed merger with EpiCeptCorporation.**

 

InMarch 2005, we retained Piper Jaffray & Co. to advise and assistin identifying and evaluating our strategic options.  Piper Jaffray & Co. is a leadinginvestment bank serving the life science industry.  In September 2005, we announced that weentered into a definitive merger agreement with EpiCept.  The closing of the transaction is subject tosatisfaction of certain customary closing conditions, including the approval ofour stockholders.  We have scheduled aspecial meeting of stockholders on December 21, 2005 for the purpose ofvoting on a proposal to adopt and approve the merger agreement and approve themerger.  We anticipate closing thetransaction in January 2006.  If and atthe time the transaction closes we will owe Piper Jaffray & Co.$600,000 for their services.  There canbe no assurance that we will be able to close our business combination withEpiCept.  In the event that the mergeragreement is terminated by EpiCept or us due to the failure of our stockholdersto adopt the merger agreement, we are required to pay all reasonable expensesof EpiCept up to $650,000.  Under certainother conditions as described in the merger agreement if the transaction is notcompleted, we could be required to make payments to EpiCept totaling up to $1.4million.  Also, if the proposedtransaction does not close, there can be no assurance that existing sources ofliquidity will be sufficient to complete an alternative strategictransaction.  In addition, thetransaction will require us to incur charges or incur other substantialfinancial obligations and may pose significant integration challenges withrespect to our business including the development of our product candidates,and business disruptions, any of which could materially and adversely affectour business and financial results. Should we be required to seek additional capital to complete such atransaction, there can be no assurance that such additional financing, ifrequired, will be available when needed or, if available, will be onsatisfactory terms.  The combined company’sboard of directors will consist of five current EpiCept directors and two ofour current directors.  Further, if theproposed transaction is completed, our stockholders will own approximately 28%of the combined company.  Consequently,our stockholders will be able to exercise less influence over the managementand policies of EpiCept than they currently exercise over our management andour policies.

 

**The development of our drug candidates is subject touncertainties, many of which are beyond our control. If we fail to successfullydevelop our drug candidates, our ability to generate revenues will besubstantially impaired.**

 

Potentialproducts based on our Ceplene technology, oral histamine, apoptosis modulatorand topical histamine gel technologies will require, dependent upon thespecific drug candidate, extensive research and development, preclinicaltesting, clinical testing, collaborative partners to conduct certain clinicaltrials, regulatory approval and substantial additional investment before we canmarket them. We cannot assure you that any of our drug candidates will:

 

•                                          be successfully developed;

 

•                                          prove to be safe and effective in clinicaltrials;

 

•                                          meet applicable United States orinternational regulatory standards;

 

•                                          be capable of being produced in commercialquantities at acceptable costs;

 

•                                          be commercially viable;

 

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•                                          be eligible for third party reimbursementfrom governmental or private insurers; or

 

•                                          achieve market acceptance.

 

Forexample, in September 2004, we announced that our confirmatory M0104 trialof Ceplene in combination with IL-2 for the treatment of advanced malignantmelanoma patients with liver metastases failed to demonstrate an improvement inoverall patient survival, the primary endpoint. As a result, we withdrew our pending NDA seeking approval of Ceplenetherapy to treat advanced malignant melanoma patients with liver metastases.

 

Wehave not completed final testing for efficacy or safety in humans for thediseases we propose to treat with Ceplene and our other drug candidates.Failure to ultimately obtain approval for Ceplene and our other drugcandidates, any delay in our expected testing and development schedules, thefailure to engage a collaborative partner, or any elimination of a productdevelopment program in its entirety, will negatively impact our ability togenerate revenues in the future from the sale of our product candidates.

 

**We may not obtain regulatory clearance to market our drugcandidates on a timely basis, or at all.**

 

Ourdrug candidates are subject to extensive government regulations related todevelopment, clinical trials, manufacturing and commercialization. The processof obtaining FDA, European Agency for the Evaluation of Medicinal Products, orEMEA, and other governmental and similar international regulatory approvals iscostly, time consuming, uncertain and subject to unanticipated delays. Even ifwe believe that preclinical and clinical data are sufficient to supportregulatory approval for a drug candidate, the FDA, EMEA and similarinternational regulatory authorities may not ultimately approve the candidatefor commercial sale in any jurisdiction. The FDA, EMEA or similar internationalregulators may refuse to approve an application for approval of a drugcandidate if they believe that applicable regulatory criteria are not satisfied.The FDA, EMEA or similar international regulators may also require additionaltesting for safety and efficacy.  Forexample, in May 2004, we announced the results of an international Phase 3clinical trial testing the combination of Ceplene plus IL-2 in patients withAML in complete remission.  The primaryendpoint of the Phase 3 trials was achieved using intent-to-treat analysis, aspatients treated with the Ceplene plus IL-2 combination therapy experienced astatistically significant increase in leukemia-free survival compared topatients in the control arm of the trial. In January 2005, we announced that based on ongoing correspondencewith the FDA, as well as consultations with external advisors, we determinedthat an additional Phase 3 clinical trial will be necessary to further evaluateCeplene plus IL-2 combination therapy for the treatment of AML patients incomplete remission before applying for regulatory approval in the UnitedStates.  We currently anticipate filingan application for approval in Europe during the first half of 2006 based onthe results of the AML clinical trial. However, we have no assurance that (i) the EMEA or similarregulatory agencies will not require an additional Phase 3 trial, (ii) theEMEA or similar regulatory agencies would approve regulatory filings for drugapproval, or (iii) if an additional Phase 3 trial is required, that theresults from such additional Phase 3 trial would confirm the results from thefirst Phase 3 trial.

 

Inaddition, manufacturing facilities operated by the third party manufacturerswith whom we contract to manufacture our drug candidates may not pass a FDA,EMEA or similar international regulatory pre-approval inspection. Moreover, ifthe FDA, EMEA or similar international regulatory agency grants regulatoryapproval of a product candidate, the approval may be limited to specificindications or limited with respect to its distribution. Similar internationalregulatory authorities may apply similar limitations or may refuse to grant anyapproval.

 

Anyfailure or delay in obtaining these approvals could prohibit or delay us frommarketing our

 

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drugcandidates. If our drug candidates do not meet applicable regulatoryrequirements for approval, we may not have the financial resources to continueresearch and development of these candidates, and we may not generate revenuesfrom the commercial sale of any of our products.

 

**Delays in the commencement, conduct or completion of ourclinical trials would negatively impact our business.**

 

Wemay encounter problems with any of our completed, ongoing or planned clinicalstudies, including having inadequate resources to conduct clinical trialsnecessary to obtain regulatory approval. For example, we may encounter delaysin commencing studies or enrolling volunteers, lower than anticipated retentionrate of volunteers in a trial or serious side effects experienced by studyparticipants relating to the drug candidate. Factors that could affect patientenrollment include the size of the patient enrollment population for thetargeted disease, eligibility criteria, proximity of eligible patients toclinical sites, clinical trial protocols and the existence of competingprotocols, including competitive financial incentives for patients andclinicians, and existing approved drugs. If we encounter any delay in thecommencement, conduct or completion of our clinical studies for our drugcandidates, we may experience the following consequences:

 

•                                          the analysis of data from our clinicalstudies and the reporting of results may be delayed;

 

•                                          the submission of our applications forregulatory approval of our drug candidates with regulatory authorities in NorthAmerica, Europe and elsewhere in the world may be delayed;

 

•                                          regulatory approval of our drug candidatesmay be delayed and may not occur on a timely basis, delaying the generation ofrevenues from the commercial sale of any of our marketed product candidates;

 

•                                          we may not have the financial resources tocontinue and complete research and development of any of our productcandidates; and

 

•                                          we may not be able to enter into collaborativearrangements relating to any potential product as a result of the delay inclinical development or regulatory filings.

 

**Because we are dependent on clinical research centers andother contractors for clinical testing and for certain research and developmentactivities, the results of our clinical trials and such research activitiesare, to a certain extent, beyond our control.**

 

Thenature of clinical trials and our business strategy requires us to rely onclinical research centers and our other contractors to assist us with clinicaltesting and certain research and development activities. As a result, oursuccess is dependent upon the success of these outside parties in performingtheir responsibilities. Although we believe our contractors are economicallymotivated to perform on their contractual obligations, we cannot directlycontrol the adequacy and timeliness of the resources and expertise applied tothese activities by our contractors. If our contractors do not perform theiractivities in an adequate or timely manner, the development andcommercialization of our drug candidates could be delayed.

 

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**We expect to rely on collaborative partners for research anddevelopment and commercialization of certain potential products.**

 

Weexpect to rely on collaborative arrangements for research and development andcommercialization of certain drug candidates discovered and developed by us,such as our agreement with Myriad related to the MX90745 series ofapoptosis-inducer anti-cancer compounds. With respect to any additionalclinical trials of Ceplene for the treatment of patients with AML, as well asother applications of our histamine technology, the Company also believes thatfurther clinical development would need to be conducted in collaboration with acorporate partner, and we intend to pursue such partnering opportunities.  We cannot be certain that we will be able tomaintain these collaborations or enter into any future collaborativearrangements, that any of our collaborations will be successful or that we willreceive revenues from any of these collaborations. The success of these and anyfuture collaborations will depend, in significant part, on our partners’development and strategic considerations, including the relative advantages ofalternative products being developed or marketed by competitors. If ourpartners fail to conduct their activities in a timely manner, or at all,preclinical or clinical development of drug candidates under thosecollaborations could be delayed or terminated. The suspension or termination ofour collaborations, the failure of our collaborations to be successful or thedelay in the development or commercialization of drug candidates pursuant toour collaborations could harm our business.

 

**Our planned business may expose us to product, clinical trialand other liability claims.**

 

Ourdesign, testing and development of potential products involves an inherent riskof exposure to clinical trial and product liability claims and related adversepublicity. Insurance coverage is expensive and difficult to obtain, and we maybe unable to obtain coverage in the future on acceptable terms, if at all.Although we currently maintain clinical trial insurance for our drug candidatesin the amounts we believe to be commercially reasonable, we cannot be certainthat the coverage limits of our insurance policies or those of our strategicpartners will be adequate. If we are unable to obtain sufficient insurance atan acceptable cost or if a claim is brought against us, whether fully coveredby insurance or not, our business, results of operations and financialcondition could be materially adversely affected.

 

**Our products may not be accepted, purchased or used bydoctors, patients or payors.**

 

Ourdrug candidates may not achieve market acceptance even if they are approved bythe FDA, EMEA and similar international regulatory agencies. We cannotguarantee that physicians, patients, payors or the medical community in generalwill accept and utilize any products that we develop. The degree of marketacceptance of our potential products will depend on a number of factors,including:

 

•                                          the scope of regulatory approvals;

 

•                                          the establishment and demonstration of theclinical efficacy, safety and advantages of our product candidates by clinicaltrial results, and the acceptance of such results by the medical community;

 

•                                          the potential advantages of our products overexisting treatment methods; and

 

•                                          reimbursement policies of government andother third-party payors.

 

**We have yet to market or sell any of our product candidates.**

 

Wecurrently intend to rely on collaborative partners to market and sell our drugcandidates in the United States and in international markets, if approved forsale in such markets. We have not yet entered

 

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intoany collaborative arrangement with respect to marketing or selling Ceplene withthe exception of agreements relating to Australia, New Zealand and Israel. Wecannot guarantee that we will be able to enter into any additional sucharrangements on terms favorable to us, or at all for Ceplene or any other drugcandidate. If we are able to enter into marketing and selling arrangements withcollaborative partners, we cannot assure you that such marketing collaboratorswill apply adequate resources and skills to their responsibilities, or thattheir marketing efforts will be successful. If we are unable to enter intocollaborative arrangements, or our marketing collaborators efforts are notsuccessful, our ability to generate revenue from product sales will suffer.

 

**We will be dependent on third party manufacturers of ourproduct candidates.  Our ability to sellour product candidates may be harmed if adequate quantities of our productcandidates are not manufactured on a timely basis.**

 

Wedo not intend to acquire or establish our own dedicated manufacturing facilitiesfor our drug candidates in the foreseeable future. We have contracted andexpect to continue to contract with established pharmaceutical manufacturersfor the production of our drug candidates. If we are unable to continue tocontract with third-party manufacturers on acceptable terms or ourmanufacturers do not comply with applicable regulatory requirements, ourability to conduct clinical testing and to produce commercial quantities of ourproduct candidates will be adversely affected. If we cannot adequatelymanufacture our product candidates, it could result in delays in submissionsfor regulatory approval and in commercial product launches, which in turn couldmaterially impair our competitive position and the possibility of achievingprofitability. We cannot guarantee that we will be able to maintain ourexisting contract manufacturing relationships, or acquire or establish new,satisfactory third-party relationships to provide adequate manufacturingcapabilities in the future.

 

**We are not profitable and expect to continue to incur losses.If we do not become profitable, we may ultimately be forced to discontinue ouroperations.**

 

Weare a development-stage enterprise. We have experienced net losses every yearsince our inception. Our net losses applicable to common stock were $27.7million, $45.0 million and $45.5 million for the years ended September 30,2005, 2004 and 2003.  As of September 30,2005, we had an accumulated deficit of approximately $379.2 million. Weanticipate incurring substantial additional losses over at least the nextseveral years related to developing and testing our drug candidates andpreparing for commercialization and planned market launches of our products. Ifwe do not become profitable, our stock price will be negatively affected, andwe may ultimately be forced to discontinue our operations. We may nevergenerate product revenues or become profitable. We expect to havequarter-to-quarter fluctuations in revenues, expenses and losses, some of whichcould be significant.

 

**We will need to raise additional funds in the future. If weare unable to obtain the funds necessary to continue our operations, we will berequired to delay, scale back or eliminate one or more of our drug developmentprograms.**

 

Wehave already spent substantial funds developing our potential products andbusiness. We expect to continue to have negative cash flow from our operationsfor at least the next several years.  Wewill have to raise additional funds to complete the development of our drugcandidates and to bring them to market. Our future capital requirements willdepend on numerous factors, including:

 

•                                          the results of our clinical trials;

 

•                                          the timing and scope of any additionalclinical trials undertaken;

 

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•                                          the scope and results of our research anddevelopment programs;

 

•                                          the time required to obtain regulatoryapprovals;

 

•                                          our ability to establish marketing alliancesand collaborative agreements;

 

•                                          the cost of our internal marketing activities;and

 

•                                          the cost of filing, prosecuting and, ifnecessary, enforcing patent claims.

 

Additionalfinancing may not be available on acceptable terms, if at all. If adequatefunds are not available, we will be required to delay, scale back or eliminateone or more of our drug development programs or obtain funds througharrangements with collaborative partners or others that may require us torelinquish rights to certain of our technologies or product candidates that wewould not otherwise relinquish.

 

**We compete against many companies and research institutionsthat are developing products to treat the same diseases as our drug candidates.To the extent these competitors are successful in developing and marketing suchproducts, our future potential market share and revenues could be reduced.**

 

Thereare many companies, both publicly and privately held, including well-knownpharmaceutical companies and academic and other research institutions, engagedin developing pharmaceutical products for the treatment of life-threateningcancers and liver diseases. Products developed by any of these companies orinstitutions may demonstrate greater safety or efficacy than our drugcandidates or be more widely accepted by doctors, patients or third-partypayors. Many of our competitors and potential competitors have substantiallygreater capital resources, research and development capabilities and humanresources than we do. Many of these competitors also have significantly greaterexperience than we do in undertaking preclinical testing and clinical trials ofnew pharmaceutical product candidates and obtaining FDA, EMEA and otherregulatory approvals. If any of our drug candidates are approved for commercialsale, we will also be competing with companies that have greater resources andexperience in manufacturing, marketing and selling pharmaceutical products. Tothe extent that any of our competitors succeed in developing products that aremore effective, less costly or have better side effect profiles than ourproducts, then our future potential market share could decrease, which may havea negative impact on our business.

 

**If we fail to secure adequate protection of our intellectualproperty or the right to use certain intellectual property of others, we maynot be able to protect our product candidates and technologies fromcompetitors.**

 

Oursuccess depends in large part on our ability to obtain, maintain and protectpatents, trademarks and trade secrets and to operate without infringing uponthe proprietary rights of others. If we are unable to do so, our productcandidates and technologies may not provide us with any competitive advantage.

 

Thepatent positions of biotechnology and pharmaceutical companies are highlyuncertain and involve complex legal and factual questions, and the breadth ofclaims allowed in biotechnology and pharmaceutical patents cannot be predicted.As a result, patents may not issue from any of our patent applications. Patentscurrently held by us or issued to us in the future, or to licensors from whomwe have

 

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licensedtechnology rights, may be challenged, invalidated or circumvented so that ourintellectual property rights may not protect our technologies or providecommercial advantage to us. In addition, we also rely on unpatented tradesecrets and proprietary know-how, and we cannot be sure that others will notobtain access to or independently develop such trade secrets and know-how.Enforcement of our intellectual property rights against any infringers of ourpatents relating to our product candidates and technologies will be costly andtime-consuming. Because of the nature of those patents, we could be required tobring lawsuits against many different entities such as hospitals or clinics. Thiswould have the effect of increasing the costs of enforcing our rights.

 

Thepharmaceutical industry has experienced extensive litigation regarding patentand other intellectual property rights. Although to date we are not aware ofany intellectual property claims against us, in the future we could be forcedto incur substantial costs in defending ourselves in lawsuits that are broughtagainst us claiming that we have infringed on the patent rights of others or inasserting our patent rights in lawsuits against other parties. We may also berequired to participate in interference proceedings declared by the UnitedStates Patent and Trademark Office or international patent authorities for thepurpose of determining the priority of inventions in connection with our patentapplications or other parties’ patent applications. Adverse determinations inlitigation or interference proceedings could require us to seek licenses thatmay not be available on commercially reasonable terms or subject us tosignificant liabilities to third parties.

 

**The technology in our sector is developing rapidly, and ourfuture success depends on our ability to keep abreast of technological change.**

 

Weare engaged in the pharmaceutical field, which is characterized by extensiveresearch efforts and rapid technological progress. New developments inoncology, cancer therapy, medicinal pharmacology, biochemistry and other fieldsare expected to continue at a rapid pace. Research and discoveries by othersmay render some or all of our proposed programs or product candidatesnoncompetitive or obsolete. Our business strategy is subject to the risksinherent in the development of new product candidates using new technologiesand approaches. Unforeseen problems may develop with these technologies orapplications, and we may not be able to successfully address technologicalchallenges we encounter in our research and development programs. This mayresult in our inability to develop commercially feasible products.

 

**Our future success depends on our ability to attract andretain key personnel.**

 

Oursuccess will depend, to a great extent, upon the experience, abilities andcontinued services of our executive officers, and key personnel for research,development and commercialization. If we lose the services of any of theseofficers or key research and development personnel, our business could beharmed. Our success also will depend upon our ability to attract and retainother highly qualified research and development, managerial, manufacturing andsales personnel and our ability to develop and maintain relationships withqualified clinical researchers. Competition for these personnel andrelationships is intense and we compete with numerous pharmaceutical andbiotechnology companies as well as with universities and non-profit researchorganizations. We may not be able to continue to attract and retain qualifiedpersonnel or develop and maintain relationships with clinical researchers.

 

**The marketability of our product candidates may depend onreimbursement and reform measures in the health care industry.**

 

Oursuccess may depend, in part, on the extent to which reimbursement for the costsof therapeutic product candidates and related treatments will be available fromthird-party payors such as United States and similar international governmenthealth administration authorities, private health

 

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insurers,managed care programs and other organizations. Over the past decade, the costof health care has risen significantly, and there have been numerous proposalsby legislators, regulators and third-party health care payors to curb thesecosts. Some of these proposals have involved limitations on the amount ofreimbursement for certain products and product candidates.  We cannot guarantee that similar UnitedStates federal or state or similar international health care legislation andpolicies will not be adopted in the future or that any product candidatessought to be commercialized by us will be considered cost-effective or thatadequate third-party insurance coverage will be available for us to establishand maintain price levels sufficient for realization of an appropriate returnon our investment in product development. Moreover, the existence or threat ofcost control measures could have an adverse effect on the willingness ofpotential collaborators to pursue research and development programs related toour product candidates.

 

**We have been named as a defendant in litigation that couldresult in substantial costs and divert management’s attention and resources.**

 

InOctober 2001 and May 2002, certain former shareholders of Cytoviafiled complaints in California Superior Court in San Diego, against us and twoof our officers, alleging fraud and negligent misrepresentation in connectionwith our acquisition of Cytovia.  Abinding arbitration proceeding with the American Arbitration Association washeld in May 2003.  The three-memberarbitration panel rejected all of the plaintiffs’ claims, determined that wehave no liability for such claims and awarded us recovery of our reasonableattorneys’ fees and costs of approximately $922,000 as prevailing party in theproceedings. In December 2003, the decision was confirmed by the SuperiorCourt, which entered a judgment to this effect. In June 2004, the plaintiffs filed an Appeal.  In December 2004, the Court of Appealreversed the judgment of the Superior Court and remanded the lawsuit to thetrial court for further proceedings. In September 2005, plaintiffs filedan amended complaint adding state law securities claims against the defendants.  In October 2005, we demurred to thisamended complaint on the grounds that the complaint failed to allege any untruestatements, thus rendering each asserted cause of action deficient.  The demurrer will be heard in January 2006.  In the meantime, the case continues in thediscovery stages.  We intend tovigorously defend ourselves against these claims.

 

OnSeptember 21, 2004, plaintiff Dr. Richard Bassin, on behalf ofhimself and purportedly on behalf of a class of others similarly situated,filed a complaint in the United States District Court for the Southern Districtof California against us, Larry G. Stambaugh, our President and Chief ExecutiveOfficer, and Anthony E. Altig, our former Vice President Finance and ChiefFinancial Officer, for alleged violations of federal securities laws related todeclines in our stock price in connection with various statements and allegedomissions to the public and to the securities markets during the class periodfrom November 11, 2002 to September 17, 2004, and seeking damagestherefore.  Thereafter two similarcomplaints were filed in the Southern District of California.  These three actions were consolidated and in March 2005,plaintiffs filed a consolidated amended complaint.  No discovery has been conducted.  In October 2005, the United StatesDistrict Court for the Southern District of California granted our motion todismiss the consolidated amended complaint, but allowed plaintiffs leave toamend.  It is possible that theplaintiffs will exercise their right to file an amended complaint.  The cases have been tendered to our insurancecarrier, which has denied coverage.  Wedispute the position taken by our insurance carrier and fully intend to enforceour rights under the policy.

 

OnOctober 7, 2004, plaintiff Jesus Putnam, purportedly on behalf of theCompany, filed a derivative complaint in the Superior Court for the State ofCalifornia, County of San Diego, against Larry G. Stambaugh, Anthony E. Altig,Kurt R. Gehlsen, former Senior Vice President and Chief Scientific Officer, andour entire Board of Directors for alleged breach of fiduciary duty, abuse ofcontrol, gross mismanagement, waste of corporate assets, unjust enrichment andviolations of the California Corporations Code, all of which arise fromallowing purported violations of federal securities laws related to declines inour stock price in connection with various statements and alleged omissions tothe public

 

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andto the securities markets, and seeking damages therefore.  No discovery has been conducted, and theparties have entered into a stipulation to stay the action pending resolutionof a motion to dismiss the federal actions. In October 2005, plaintiff attempted to file an amended complaintto include class action allegations that defendants breached their fiduciaryduties by approving the merger.  Inaddition, the plaintiff requested that the court enjoin Maxim’s directors fromcompleting the merger as presently proposed. The amended complaint was rejected by the court, pending the lifting ofthe stay.  We expect the plaintiff tore-file the amended complaint once the stay is lifted, in or about December 2005.  If the court were to grant plaintiff’srequest for an injunction, the merger could be delayed indefinitely.  The complaint has been tendered to ourinsurance carrier, which has denied coverage. We dispute the position taken by our insurance carrier and fully intendto enforce our rights under the policy.

 

OnMay 3, 2005, plaintiff Carolina Casualty Insurance Company filed acomplaint in the United States District Court for the Southern District ofCalifornia against Larry G. Stambaugh, Anthony E. Altig, Kurt R. Gehlsen, andour entire Board of Directors, seeking a declaratory judgment from the courtthat our D&O insurance policy did not cover losses arising from the stateand federal shareholder suits that were filed in 2004.  We answered the complaint and filed counterclaimsagainst Carolina Casualty.  No discoveryhas been conducted and the court has issued a stay of the entire proceedings,pending certain events in the federal suit.

 

Weintend to engage in a rigorous defense against such claims.  No assurances can be made that we will besuccessful in our defense of the pending claims. If we are not successful inour defense of such claims, we could be forced to, among other things, makesignificant payments to resolve these claims, and such payments could have a materialadverse effect on our business, financial condition and results of operationsif not covered by our insurance carrier. Further, regardless of success of thelitigation, the litigation itself may result in substantial costs and divertmanagement’s attention and resources, all of which could adversely affect ourbusiness.

 

**Our stock price may be highly volatile due to externalfactors.**

 

Ourcommon stock currently trades on the Nasdaq National Market and on theStockholmsbörsen AB. Historically, our common stock has generally experiencedrelatively low daily trading volumes in relation to the aggregate number ofshares outstanding.  Sales of substantialamounts of our common stock in the public market could adversely affect theprevailing market prices of our common stock and our ability to raise equitycapital in the future.

 

Factorsthat may have a significant impact on the market price or the liquidity of ourcommon stock also include:

 

•                                          actual or potential clinical trial resultsrelating to drug candidates under development by us or our competitors;

 

•                                          delays in our clinical testing anddevelopment schedules;

 

•                                          events or announcements relating to ourcollaborative relationships;

 

•                                          failure to enter into a collaborativepartnership to conduct additional clinical studies necessary to supportregulatory approval of Ceplene therapy in AML patients;

 

•                                          events or announcements relating to strategictransactions or our ability to successfully complete such transactions;

 

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•                                          announcementsof technological innovations or new products or drug candidates by us or ourcompetitors;

 

•                                          developmentsor disputes concerning patents or proprietary rights;

 

•                                          regulatorydevelopments in both the United States and other countries;

 

•                                          economicand other external factors, disasters or crises, as well as period-to-periodfluctuations in our financial results;

 

•                                          marketconditions for pharmaceutical and biotechnology stocks, whether or not relatedto results or news regarding us or our competitors; and

 

•                                          publicityregarding actual or potential medical results relating to products or drugcandidates under development by us or our competitors.

 

External factors may alsoadversely affect the market price for our common stock. The price and liquidityof our common stock may be significantly affected by the overall tradingactivity and market factors on the Nasdaq National Market and theStockholmsbörsen AB, and these factors may differ between the two markets. Inaddition, the securities markets have from time to time experienced significantprice and volume fluctuations that may be unrelated to the operatingperformance of particular companies. The market prices of the common stock ofmany publicly traded pharmaceutical or biotechnology companies have in the pastbeen, and can in the future be expected to be, especially volatile.

 

**Certainanti-takeover provisions in our charter, by-laws, shareholder rights plan andunder Delaware law may deter a third party from acquiring us, even though suchacquisition may be beneficial to our stockholders.**

 

Certain provisions of ourcharter and by-laws may make it more difficult for a third party to acquirecontrol of us, even though such acquisition may be beneficial to ourstockholders. These provisions include, but are not limited to:

 

•                                          astaggered or classified board;

 

•                                          theinability of stockholders to act by written consent; and

 

•                                          noright to remove directors other than for cause.

 

We have also adopted a stockholderrights plan or “poison pill”. Our stockholder rights plan is designed toprotect our stockholder in the event of an unsolicited bid to acquire theCompany. In general terms, the rights plan imposes a significant penalty uponany person or group that acquires 15% or more of our outstanding common stockwithout the approval of our board of directors. Our stockholder rights plancould discourage a third party from attempting to acquire us through anacquisition of our outstanding voting stock, even though such acquisition maybe beneficial to our stockholders.

 

Our board of directorsalso has the authority to issue, at any time, without further stockholderapproval, up to 5,000,000 shares of preferred stock, and to determine theprice, rights, privileges and preferences of those shares. These preferredshares are available to be used in connection with our shareholder rights plan.Any issuance of preferred stock could discourage a third party from acquiring amajority of our outstanding voting stock.

 

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On September 5,2005, we amended our stockholder rights agreement, dated as of June 15,2000, to ensure the proposed merger with EpiCept Corporation will not triggerthe rights under the stockholder rights agreement.  The amendment to the stockholderrights agreement provides that the rights issued under the plan will expireimmediately prior to the effective date of the proposed merger.

 

Furthermore, we aresubject to the provisions of Section 203 of the Delaware GeneralCorporations Law, an anti-takeover law, which may also dissuade a potentialacquiror, even though such acquisition may be beneficial to our stockholders.

 

**Issuingpreferred stock with rights senior to those of our common stock could adverselyaffect holders of common stock.**

 

Our charter documentsgive our board of directors the authority to issue a series of preferred stockwithout a vote or action by our stockholders. The board also has the authorityto determine the terms of preferred stock, including price, preferences andvoting rights. The rights granted to holders of preferred stock may adverselyaffect the rights of holders of our common stock. For example, a series ofpreferred stock may be granted the right to receive a liquidation preference—apre-set distribution in the event of a liquidation—that would reduce the amountavailable for distribution to holders of common stock. In addition, theissuance of preferred stock could make it more difficult for a third party toacquire a majority of our outstanding voting stock. As a result, commonstockholders could be prevented from participating in transactions that wouldoffer an optimal price for their shares.

 

**ITEM 2. PROPERTIES**

 

We currently lease approximately 69,000 rentablesquare feet of laboratory and office space in three facilities in San Diego,California.  Approximately 11,000rentable square feet of laboratory and office space is subleased to thirdparties and we are currently pursuing the sublease of an additional portion ofour office space.  We believe that ourexisting facilities will be adequate to accommodate the implementation of ourcurrent business strategies.

 

**ITEM 3. LEGAL PROCEEDINGS**

 

In October 2001and May 2002, certain former shareholders of Cytovia filed complaints inCalifornia Superior Court in San Diego, against the Company and two of itsofficers, alleging fraud and negligent misrepresentation in connection with theCompany’s acquisition of Cytovia. A binding arbitration proceeding with theAmerican Arbitration Association was held in May 2003. The three-memberarbitration panel rejected all of the plaintiffs’ claims, determined that theCompany has no liability for such claims and awarded us recovery of the Company’sreasonable attorneys’ fees and costs of approximately $922,000 as prevailingparty in the proceedings.  In December 2003,the decision was confirmed by the Superior Court, which entered a judgment tothis effect.  In June 2004, theplaintiffs filed an Appeal.  In December 2004,the Court of Appeal reversed the judgment of the Superior Court and remandedthe lawsuit to the trial court for further proceedings. In September 2005,plaintiffs filed an amended complaint adding state law securities claimsagainst the defendants.  In October 2005,the Company demurred to this amended complaint on the grounds that thecomplaint failed to allege any untrue statements, thus rendering each assertedcause of action deficient.  The demurrerwill be heard in January 2006.  Inthe meantime, the case continues in the discovery stages.  The Company intends to vigorously defenditself against these claims.

 

On September 21,2004, plaintiff Dr. Richard Bassin, on behalf of himself and purportedlyon behalf of a class of other shareholders similarly situated, filed acomplaint in the United States District 

 

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Court for the SouthernDistrict of California against the Company, one officer of the Company and oneformer officer of the Company, alleging violations of federal securities lawsrelated to declines in the Company’s stock price in connection with variousstatements and alleged omissions to the public and to the securities marketsduring the class period from November 11, 2002 to September 17, 2004,and seeking damages therefore. Thereafter two similar complaints were filed in the Southern District ofCalifornia.  These three actions wereconsolidated and in March 2005, plaintiffs filed a consolidated amendedcomplaint.  No discovery has beenconducted.  In October 2005, theUnited States District Court of the Southern District of California granted theCompany’s motion to dismiss the consolidated amended complaint, but allowedplaintiffs leave to amend.  It ispossible that the plaintiffs will exercise their right to file an amendedcomplaint.  The cases have been tenderedto the Company’s insurance carrier, which has denied coverage.  The Company disputes the position taken bythe insurance carrier and fully intends to enforce its right under the policy.

 

On October 7, 2004,plaintiff Jesus Putnam, purportedly on behalf of the Company, filed aderivative complaint in the Superior Court for the State of California, Countyof San Diego, against one officer of the Company, two former officers of theCompany and the Company’s entire Board of Directors, alleging breach offiduciary duty, abuse of control, gross mismanagement, waste of corporateassets, unjust enrichment and violations of the California Corporations Code,all of which arise from allowing purported violations of federal securitieslaws related to declines in the Company’s stock price in connection withvarious statements and alleged omissions to the public and to the securitiesmarkets, and seeking damages therefore. No discovery has been conducted, and the parties have entered into astipulation to stay the action pending resolution of the motion to dismiss thefederal actions.  In October 2005,plaintiff attempted to file an amended complaint to include class actionallegations that defendants breached their fiduciary duties by approving themerger.  In addition, the plaintiffrequested that the court enjoin Maxim’s directors from completing the merger aspresently proposed.  The amendedcomplaint was rejected by the court, pending the lifting of the stay.  The Company expects plaintiff to re-file theamended complaint once the stay is lifted, in or about December 2005.  If the court were to grant plaintiff’srequest for an injunction, the merger could be delayed indefinitely.  The complaint has been tendered to theCompany’s insurance carrier, which has denied coverage.  The Company disputes the position taken bythe insurance carrier and fully intends to enforce its rights under the policy.

 

On May 3, 2005,plaintiff Carolina Casualty Insurance Company filed a complaint in the UnitedStates District Court for the Southern District of California against oneofficer of the Company, two former officers of the Company and the Company’sentire Board of Directors, seeking a declaratory judgment from the court thatthe Company’s D&O insurance policy did not cover losses arising from thestate and federal shareholder suits that were filed in 2004.  The Company answered the complaint and filedcounterclaims against Carolina Casualty. No discovery has been conducted and the court has issued a stay of theentire proceedings, pending certain events in the federal suit.

 

The Company intends toengage in a rigorous defense against such claims.  No assurances can be made that the Companywill be successful in its defense of the pending claims. If the Company is notsuccessful in its defense of such claims, the Company could be forced to, amongother things, make significant payments to resolve these claims, and suchpayments could have a material adverse effect on the Company’s business,financial condition and results of operations if not covered by the Company’sinsurance carrier. Further, regardless of success of the litigation, thelitigation itself may result in substantial costs and divert management’sattention and resources, all of which could adversely affect the Company’sbusiness.

 

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

 

Nomatters were submitted to a vote of security holders during the quarter ended September 30,2005.

 

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**PART II**

 

**ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATEDSTOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES**

 

*PriceRange of Common Stock (Unaudited)*

 

Our common stockcurrently trades on both the Nasdaq National Market, or Nasdaq, and theStockholmsbörsen AB under the symbol “MAXM”. The following table shows the highand low sales price for our common stock by quarter, as reported by Nasdaq forthe periods indicated:

 
| ** **                                 | ** ** | **Price Range** | ** ** |
|--------------------------------------------|------------|-----------------|------------|
| **Period**                                 | ** ** | **High**        | ** ** | **Low** | ** ** |
|                                       |       |            |       |   |   |
| Fiscal Year Ended September 30,  2005 |       |            |       |   |   |
| First  Quarter                             |       | $               | 3.70       |   | $ | 1.99 |   |
| Second  Quarter                            |       | 3.09            |       | 1.61 |   |
| Third  Quarter                             |       | 1.84            |       | 1.18 |   |
| Fourth  Quarter                            |       | 1.65            |       | 1.25 |   |
|                                       |       |            |       |   |   |
| Fiscal Year Ended September 30,  2004 |       |            |       |   |   |
| First  Quarter                             |       | $               | 9.00       |   | $ | 5.85 |   |
| Second  Quarter                            |       | 10.59           |       | 7.50 |   |
| Third  Quarter                             |       | 10.45           |       | 7.46 |   |
| Fourth  Quarter                            |       | 9.60            |       | 2.45 |   |

 

On November 1,2005, the last reported sales price of our common stock, as reported by Nasdaq,was $1.24 per share. As of such date, there were approximately 280 holders ofrecord of our common stock. We have not paid cash dividends on our common stockand have no intention to do so in the foreseeable future.

 

The information regardingsecurities authorized for issuance under equity compensation plans required bythis item is incorporated by reference to Part III, Item 12 entitled “SecurityOwnership of Certain Beneficial Owners and Management, and Related StockholderMatters” in this Form 10-K.

 

**ITEM 6. SELECTED FINANCIAL DATA**

 

*The following selected historical financial information isonly a summary and you should read the following financial information togetherwith our “Management’s Discussion and Analysis of Financial Condition andResults of Operations” and our consolidated financial statements and the notesthereto included elsewhere in this report on Form 10-K.*

 

Thefollowing tables present our selected consolidated statement of operations andbalance sheet data for and as of the years ended September 30, 2005, 2004,2003, 2002 and 2001.  The selectedconsolidated financial data set forth below with respect to our consolidatedstatements of operations for the years ended September 30, 2005, 2004, and2003, and with respect to our balance sheets at September 30, 2005 and2004 are derived from our consolidated financial statements that have beenaudited by KPMG LLP, which are included elsewhere in this report, and arequalified by reference to such consolidated financial statements. Theconsolidated statement of operations data for the years ended September 30,2002 and 2001 and the balance sheet data as of September 30, 2003, 2002,and 2001 are derived from our audited 

 

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consolidatedfinancial statements that are not included in this report.

 
| ** **                               | ** ** | **Year ended September 30**          | ** ** |
|------------------------------------------|------------|-------------------------------------------|------------|
| ** **                               | ** ** | **2005**                                  | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                               | ** ** | **(in thousands, except per share data)** | ** ** |
| SELECTED  STATEMENTS OF OPERATIONS DATA: |       |                                      |       |   |   |   |   |   |   |   |   |
| Collaboration  and research revenue      |       | $                                         | 1,680      |   | $ | 4,118 |   | $ | 3,830 |   | $ | 2,153 |   | $ | 3,247 |   |
| Research  and development expenses       |       | 17,789                                    |       | 37,923 |   | 42,528 |   | 32,015 |   | 32,642 |   |
| Net  loss applicable to common stock (1) |       | (27,693                                   | )          | (44,968 | ) | (45,456 | ) | (64,323 | ) | (37,323 | ) |
| Net  loss per share of common stock      |       | (0.97                                     | )          | (1.59 | ) | (1.94 | ) | (2.76 | ) | (1.61 | ) |
| Weighted  average shares outstanding     |       | 28,563                                    |       | 28,212 |   | 23,444 |   | 23,274 |   | 23,220 |   |
|                                          |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                                                         | ** ** | **As of September 30** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                         | ** ** | **2005**                    | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                                         | ** ** | **(in thousands)**          | ** ** |
| SELECTED BALANCE SHEET  DATA:                                                      |       |                        |       |   |   |   |   |   |   |   |   |
| Cash  and cash equivalents                                                         |       | $                           | 7,560      |   | $ | 10,658 |   | $ | 32,861 |   | $ | 24,775 |   | $ | 20,439 |   |
| Investments                                                                        |       | 15,206                      |       | 38,746 |   | 58,468 |   | 83,216 |   | 122,121 |   |
| Total  assets                                                                      |       | 30,882                      |       | 64,185 |   | 107,347 |   | 125,644 |   | 190,756 |   |
| Long-term  debt and long-term capital lease obligations, excluding current portion |       | —                      |       | 96 |   | 828 |   | 1,684 |   | 1,760 |   |
| Deficit  accumulated during the development stage                                  |       | (379,165                    | )          | (351,472 | ) | (306,504 | ) | (261,048 | ) | (196,725 | ) |
| Stockholders’  equity                                                         |       | 25,630                      |       | 53,399 |   | 95,237 |   | 116,733 |   | 180,647 |   |
|                                                                                    |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1) – In 2002, thenet loss applicable to common stock includes $28,179 resulting from thecumulative effect of an accounting change from the adoption of SFAS No. 142,“Goodwill and Other Intangible Assets.”

 

**ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

*Maxim Pharmaceuticals, Inc. and Subsidiaries (ADevelopment Stage Company)*

 

*This Management’s Discussion and Analysis of FinancialCondition and Results of Operations contains certain forward-looking statementsthat involve risks and uncertainties. Such forward-looking statements includebut are not limited to statements regarding plans for the development andcommercialization of our drug candidates, the potential merger with EpiCeptCorporation and future cash requirements. Such statements are only predictionsand our actual results could differ materially from those anticipated orprojected in such forward-looking statements. Moreover, we assume noresponsibility for the accuracy and completeness of the forward-lookingstatements.  We are under no duty to updateany of the forward-looking statements after the date hereof to conform suchstatements to actual results or to changes in our expectations.  Factors that could cause or contribute tosuch differences include, but are not limited to, those discussed in the section entitled“Risk Factors” contained elsewhere in this Form 10-K for the year ended September 30,2005. As a result, you are cautioned not to rely on these forward-looking*

 

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*statements.*

 

*This Management’s Discussion and Analysis of FinancialCondition and Results of Operations should be read in conjunction with theconsolidated financial statements, including the related notes, appearing inthis Form 10-K for the year ended September 30, 2005.*

 

#### **OVERVIEW**

#### ** **

We are a biopharmaceutical company dedicated to developinginnovative cancer therapeutics.  Our leaddrug candidate is CepleneTM (histamine dihydrochloride), which has shown astatistically significant improvement in leukemia free survival in a Phase 3clinical trial as a remission maintenance therapy for patients with AML.  Ceplene is designed to prevent or reversedamage associated with oxidative stress, thereby protecting critical cells andtissues. Because Ceplene modulates basic immune functions, it has the potentialto be used in the treatment of a broad range of diseases in which oxidativestress plays an important role.  Morethan 2,000 patients have participated in our 17 clinical trials of Ceplene,conducted in 20 countries.  We arecurrently seeking a strategic partnership to further develop Ceplene in AML andother indications and complete commercialization.

 

In September 2004, we announced that the confirmatory Phase 3 trial,or M0104 trial, for the treatment of advanced malignant melanoma patients withliver metastases failed to demonstrate an improvement in overall survival.  As a result, we withdrew our United StatesNew Drug Application, or NDA, seeking approval of Ceplene therapy to treatadvanced malignant melanoma patients with liver metastases and closed thetreatment protocol approved by the FDA in April 2004.

 

We are also discovering and developing small-molecule apoptosisinducers to treat cancer using our proprietary high-throughput screeningtechnology and our chemical genetics approach. This program has identified four lead oncology candidates that areproceeding to clinical trials independently and through collaborations.  The most advanced candidate from the programis in a Phase 1 trial through collaboration with Myriad Genetics.

 

We have devoted substantially all of our resources to ourhistamine therapy and apoptosis modulator product development programs. Weconduct our research and other product development efforts through acombination of internal efforts and collaborative programs with universities,other clinical research sites, contract research organizations andpharmaceutical companies. Oversight of all external and collaborative programsis conducted by our executive officers and other staff located primarily at ourheadquarters in San Diego, California.

 

In March 2005, we retained Piper Jaffray & Co. toadvise and assist us in identifying and evaluating our strategic options.  Piper Jaffray & Co. is a leadinginvestment bank serving the life science industry.  In September 2005, we announced that weentered into a definitive merger agreement with EpiCept Corporation, orEpiCept.  The closing of the transactionis subject to satisfaction of certain customary closing conditions, includingthe approval of our stockholders.  Wehave scheduled a special meeting of stockholders on December 21, 2005 forthe purpose of voting on a proposal to adopt and approve the merger agreementand approve the merger.  We anticipateclosing the transaction in January 2006. There can be no assurance that we will be able to close our businesscombination with EpiCept.  Also, if suchtransaction does not close, there can be no assurance that existing sources ofliquidity will be sufficient to complete an alternative strategic transaction.  In addition, any such transactions may requireus to incur charges, or incur other substantial financial obligations and maypose significant integration challenges with respect to our business includingthe development of our product candidates, and business disruptions, any ofwhich could materially and adversely affect our business and financialresults.  Should we be required to seekadditional capital to complete such a transaction, there can be no assurancethat such additional financing, if required, will be available when needed or,if available, will be on satisfactory terms.

 

**CRITICAL ACCOUNTING POLICIES**

 

Thepreparation of consolidated financial statements in conformity with accountingprinciples 

 

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generallyaccepted in the United States of America requires us to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses as well as related disclosure of contingent assets and liabilities.These estimates include useful lives for fixed assets, useful lives forintellectual property, estimated lives for license agreements, revenuerecognition, allowance for notes receivable, valuation of intellectualproperty, and estimates for clinical trial expenses incurred but not yetbilled.  On an on-going basis, weevaluate our estimates. We base our estimates on historical experience andvarious other assumptions that are believed to be reasonable under thecircumstances. Under different assumptions or conditions these estimates mayvary significantly. In addition, actual results may differ materially fromthese estimates.

 

Webelieve the following critical accounting policies affect our more significantjudgments and estimates used in the preparation of our consolidated financialstatements.

 

*Revenue Recognition.* Revenue is generally recognized when all of the following criteria aremet: persuasive evidence that an arrangement exists; services have beenrendered and amounts paid to us are non-refundable; the price is fixed anddeterminable and collection is reasonably assured.  All multiple deliverable arrangements arereviewed by us for separability in accordance with EITF 00-21.  If the separability criteria are met,non-refundable upfront technology access fees are accounted forseparately.  Upfront technology accessfees which are not considered separable from the related research fees arerecognized as revenue over the applicable research period as researchactivities are performed. Milestone payments are recognized when earned andcollectibility is assured provided that the milestone events are substantiveand the payments approximate the fair value of the milestone. Amounts receivedbut unearned are recorded as deferred revenue. We are provided with donated materials and services pursuant to the termsof certain of our collaborative agreements. These donated materials and services are recorded as revenue and expensewhen used at the fair market value of the material received or the serviceprovided.  Grant funding is recognized asrevenue when services are performed under the grant.

 

*Clinical trial expenses.*  Weaccount for certain study drug, clinical trial site and other clinical trialcosts by estimating the services incurred but not reported for each patientenrolled in each trial. These costs and estimates vary based on the type ofclinical trial, the site of the clinical trial, the length of treatment periodfor each patient and the length of time required to receive formaldocumentation of the actual expenses incurred. As actual costs become known, wemay need to revise our estimated accrual, which could also materially affectour results of operations.

 

*Valuation of Intellectual Property.*  Weevaluate our patents and licenses for impairment whenever indicators ofimpairment exist. During this process, we review our portfolio of pendingdomestic and international patent applications, domestic and internationalissued patents, and licenses we have acquired from other parties. To determineif any impairment is present, we consider challenges or potential challenges toour existing patents, the likelihood of applications being issued, the scope ofour issued patents, the assessment of future cash flows to be generated fromthe patents and our experience. In the event that it is determined that an impairmentexists where we had previously determined that one did not exist, it may resultin a material adjustment to our financial statements.

 

**RESULTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30,2005, 2004 AND 2003**

 

*Collaboration and Research Revenue.*  Forthe year ended September 30, 2005, collaboration and research revenuetotaled $1,680,000, a decrease of $2,438,000 or 59% compared to the same periodin the prior year.  This decrease wasprimarily attributable to the completion of various collaborationagreements.  The services under theCelera Genomics Corporation, or Celera, agreement were completed in May 2004,the Schering Corporation, or Schering, agreement was completed in December 2004and the 

 

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grant from NationalInstitute of Health ended in January 2005. In addition, research services under the Myriad Genetics, Inc., orMyriad, collaboration were completed in November 2004 and thecollaboration moved into the development stage with the initiation in March 2005of a Phase 1 clinical trial in patients with advanced solid tumors resulting ina $1,000,000 milestone payment.  As aresult these agreements provided $1,379,000 and $4,118,000 of revenue in theyears ended September 30, 2005 and 2004, respectively.  For the year ended September 30, 2004,collaboration and research revenue increased by $288,000 or 8% compared to theyear ended September 30, 2003.  Thisincrease was primarily attributable to the research and license revenue fromthe Myriad collaboration that we entered into in November 2003.

 

*Research and Development Expenses. *For the year ended September 30,2005, research and development expenses were $17,789,000, a decrease of$20,134,000 or 53% over the same period in the prior year.  This decrease was primarily due to thedecrease in clinical trial activity because our Ceplene clinical trials werecompleted during the year.  For the yearended September 30, 2004, research and development expenses were$37,923,000, a decrease of $4,605,000 or 11% over the same period in the prioryear.  This decrease was primarily theresult of decreased expenses resulting from the stage of our Ceplene Phase 2M0406 trial in non-responder HCV patients and Phase 3 M0104 trial in advancedmalignant melanoma patients with liver involvement.  In the future we expect to continue incurringsubstantial research and development expenses due to:

 

•                  researchrelated to our apoptosis modulator program;

•                  preclinicaland clinical testing of our product candidates; and

•                  regulatory-relatedexpenses.

 

Costs incurred by majorprogram for each of the three years ended September 30, 2005, 2004 and2003 were as follows (in thousands):

 
| ** **                     | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Ceplene development  program   |       | $        | 8,597      |     | $          | 23,505   |       | $ | 27,502 |   |
| Apoptosis modulator  program   |       | 4,428    |       | 3,392    |       | 4,264    |       |
| HD-O (oral histamine)  program |       | 115      |       | 3,550    |       | 2,703    |       |
| Topical histamine  program     |       | 100      |       | 92       |       | 379      |       |
| Histamine research             |       | 252      |       | 1,200    |       | 1,374    |       |
| R&D support costs          |       | 4,297    |       | 6,184    |       | 6,306    |       |
| Total R&D expense          |       | $        | 17,789     |     | $          | 37,923   |       | $ | 42,528 |   |

 

TheCeplene development includes the costs of conducting clinical trials with ourlead drug candidate, Ceplene.  Histamineresearch includes studies to identify additional uses of histamine such astesting in chronic liver disease models. R&D support costs include expenses such as rent, utilities,depreciation of laboratory equipment and leasehold improvements, amortizationof our intellectual property and information technology costs.  During the years ended September 30,2005, 2004 and 2003 the R&D support costs attributable to the apoptosismodulator program totaled $2,392,000, $2,603,000 and $2,693,000, respectively.

 

Wehave several other product candidates in the research stage.  It can take many years from the initialdecision to screen product candidates, perform preclinical and safety studies,and perform clinical trials leading up to possible FDA approval of aproduct.  The outcome of the research isunknown until each stage of the testing is completed, up through and includingthe registration clinical trials. Accordingly, we are unable to predict which potential product candidateswe may proceed with, the time 

 

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and cost tocomplete development, and ultimately whether we will have a product approved bythe FDA.

 

*Business Development and Marketing Expenses.*  Businessdevelopment and marketing expenses for the year ended September 30, 2005were $2,318,000, a decrease of $2,286,000 or 50% over the same period in theprior year.  The decrease was primarilydue to work force reductions in October 2004 and February 2005 and adecrease in premarketing activities associated with the potential market launchof Ceplene.  For the year ended September 30,2005, we recorded $155,000 of restructuring expenses in business developmentand marketing expenses.  Business development and marketingexpenses for the year ended September 30, 2004 were $4,604,000, anincrease of $3,209,000 or 230% over the same period in the prior year.  This increase was due to an increase inpremarketing activities associated with the potential market launch of Ceplene.

 

*General and Administrative Expenses.*  Forthe year ended September 30, 2005, general and administrative expenseswere $9,491,000, an increase of $2,860,000 or 43% over the same period in theprior year. The increase was primarily due to legal and consulting expensesrelated to the proposed merger with EpiCept Corporation, legal expenses relatedto the litigation and accounting and consulting expenses related to compliancewith Sarbanes-Oxley. For the year ended September 30, 2004, general andadministrative expenses were $6,631,000, a decrease of $1,126,000 or 15% overthe same period in the prior year primarily as a result of a decrease in legalexpenses.

 

*Provisionfor note receivable and loan guarantee to/for officers.* For the year ended September 30, 2005, werecorded an expense of $418,000, for an allowance on a note receivable from anofficer of the Company.  During thefourth quarter of fiscal year 2005, the officer forfeited all collateralsecuring the loan, including 203,333 shares of Maxim common stock and 1,563,667options to purchase Maxim common stock resulting in the Company receiving fullconsideration for the recorded book value of the note.  For the year ended September 30, 2004,we recorded expense of $1,333,000, for an allowance on a note receivable froman officer of the Company.   We alsorecorded an expense of $900,000 during the fourth quarter of fiscal year 2002,as a reserve on a loan guarantee made on behalf of an officer.  During the fourth quarter of fiscal year2002, we determined the officers did not have the ability to fully meet theseobligations.  Accordingly, we expensedamounts considered impaired as of September 30, 2002.  During the fourth quarter of fiscal year2004, we recorded additional expense on the officer loan related to thedecrease in the value of the Company stock and stock options held by theofficer collateralizing the note, following the negative Phase 3 M0104 melanomatrial results released in September 2004, and the subsequent decrease inthe price of the Company’s common stock. We perform quarterly impairment analyses for these values.  There was no similar expense in fiscal year2003.  For further information refer tothe Liquidity and Capital Resource section of this MD&A or Footnote 6of the financial statements, Related Party Transactions.

 

*Investment Income.*  Investment income was$681,000 for the year ended September 30, 2005, a decrease of $786,000 or54% from the prior year.  Investmentincome was $1,467,000 for the year ended September 30, 2004, a decrease of$1,032,000 or 41% from the prior year. These decreases were primarily the result of the decrease in our cashand short-term securities investment balances and in the rate of interestearned on our investments.

 

*Net Loss Applicable to Common Stock. *Net loss applicable to common stock for the year ended September 30,2005 totaled $27,693,000, a decrease of $17,275,000 or 38% from the same periodin the prior year.  This decrease wasprimarily a result of decreases in research and development expenses, businessdevelopment and marketing expenses and provision for note receivable and loan guaranteeto/for officers partially offset by the increase in our general andadministrative expenses and a decrease in our investment income, as describedabove.  Net loss applicable to commonstock for the year ended September 30, 2004 totaled $44,968,000, adecrease of $488,000 or 1% from the same period in the prior 

 

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year.  This decrease was primarily a result ofdecreases in research and development expenses and general and administrativeexpenses, partially offset by the increase in our business development andmarketing expenses, provision for note receivable and loan guarantee to/forofficers and a decrease in our investment income, as described above.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Since inception, we havefinanced our operations primarily through the sale of our equity securities,providing total net proceeds of approximately $323 million, including aninitial public offering in 1996, an international follow-on public offering in1997, private offerings of preferred stock in July and November 1999,a follow-on public offering in February 2000, and a private placement ofcommon stock in September 2003.

 

Until required foroperations, our policy under established guidelines is to keep our cashreserves in bank deposits, corporate debt securities, United States governmentinstruments and other readily marketable debt instruments, all of which areinvestment-grade quality.  As of September 30,2005, cash, cash equivalents and investments (including restricted cash)totaled approximately $23.0 million compared with $52.9 million at September 30,2004.  As of September 30, 2005, wehad working capital of approximately $18.3 million compared with $41.1 millionat September 30, 2004.  The decreasein our cash, cash equivalents and short-term investments, and working capitalwas primarily due to day-to-day operating expenses relating to research anddevelopment activities.

 

In December 2000,we entered into a $2,850,000 full recourse secured revolving promissory notewith one of our officers.  The note boreinterest at an annual rate of 4.0% and was secured by the officer’s outstandingoptions and shares of common stock. During the quarter ended September 30,2002, we determined that the note due from the officer had become impairedbecause we determined that the officer did not have the ability to repay theloan in full when due and recorded an allowance on the note in the amount of$700,000.  We subsequently recorded$1,751,000 of expense including $418,000, $1,333,000 and $0 during the yearsended September 30, 2005, 2004 and 2003, respectively, to increase theallowance on the note related to the decrease in the value of the Maxim stockand stock options held by the officer collateralizing the note.  In addition, we have not recorded interestincome of $378,000 of contractually due interest on the note subsequent to June 30,2002.  The entire outstanding balance ofprincipal and interest was due in December 2002.  Since the note came due, the officer has nothad sufficient liquid assets to repay the loan in full, however, the officerhas paid us $394,000 related to the note. On August 3, 2005, the officer forfeited all collateralsecuring the loan including 203,333 shares of Maxim common stock and 1,563,667options to purchase Maxim common stock resulting in us receiving all suchshares of common stock and options.  Theofficer was insolvent and unable to repay the outstanding balance of theloan.  After extensively reviewing allrelated facts and circumstances, including our current needs, prospects andcontingency plans, the officer’s current assets and liabilities, our resultinginability to collect the loan indebtedness, and the best interests of ourstockholders and creditors, our board of directors agreed to forgive theloan.  On August 19, 2005, weentered into an agreement with the officer regarding the forgiveness of allamounts (including principal and interest) owed under the note.  The agreement relating to such forgiveness alsoprovides for the release by the officer of any and all claims that he may haveagainst us, our officers, directors, stockholders and certain of our otherrepresentatives with regard to any claims that he may have arising out of or inconnection with the loan.  In connection with the loan forgiveness, on August 19,2005, we entered into an indemnification agreement with the officer. Pursuant to the indemnification agreement, we agreed to indemnify the officerfor certain excise taxes, if any, that may arise as a result of the forgivenessof the loan under Section 280G and Section 4999 of the InternalRevenue Code of 1986, as amended.  Shouldthe officer be subject to such excise taxes, payments under the indemnificationagreement could exceed 

 

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$2 million.  On August 19,2005, the officer relinquished certain rights he had under his employmentagreement and retention agreement as further described in Item 11, “ExecutiveCompensation” under the subsection, “Employment, Termination of Employment andChange of Control Agreements” within this Form 10-K.

 

At June 30, 2005, we were owed $900,000, including $4,000 ofunrecorded interest, from a former officer resulting from an unpaid loan, duein July 2004, that the individual had with a bank, which we guaranteed in July 2001.  The purpose of the bank loan was to allow thepayment of income taxes associated with the exercise of stock options.  The Board determined that it was in our bestinterest to provide the guarantee to avoid the necessity of the officer sellingpersonal holdings of Maxim securities during a period of depressed marketprices.  During the fourth quarter offiscal year 2002, we had determined that it was probable the former officerwould not have the ability to repay his bank loan.  Therefore, we recorded a provision for theguarantee and a liability in the amount of $900,000.  The former officer does not currently havethe assets necessary to repay Maxim.  Asof June 30, 2005, the recorded outstanding principal and interest balanceon the loan was $0, net of the $897,000 allowance.  On August 1, 2005, the former officerforfeited to us all 453,333 options to purchase Maxim common stock.  After extensively reviewing all related factsand circumstances, including our current needs, prospects and contingency plans,the former officer’s current assets and liabilities and our inability tocollect the loan indebtedness, and the best interests of our stockholders andcreditors our board of directors agreed to forgive the loan.  On September 5, 2005, we entered into anagreement with the officer regarding the forgiveness of all amounts (includingprincipal and interest) owed under the note.

 

In September 2005, we paid in full a term loan we had with abank releasing us from all obligations we had under the term loan agreement.  The term loan agreement contained customaryaffirmative and negative covenants, including financial covenants requiring themaintenance of specified liquidity term and the maintenance of our principaldepository and operating accounts with the bank.  In addition, we were required to maintain aminimum aggregate balance of $3,500,000 at the institution.  The terms of our facility lease require us tomaintain a letter of credit on behalf of our landlord in the amount of$264,000.  The letter of credit issecured by a $264,000 certificate of deposit at the issuing bank.

 

The following tablesummarizes our contractual obligations as of September 30, 2005, net ofsublease commitments on operating leases of $322,000 in year one, $425,000 inyears two and three, $294,000 in years four and five and none thereafter:

 
| ** **                   | ** ** | **Payments due by Period (in thousands)** | ** ** |
|------------------------------|------------|-------------------------------------------|------------|
| ** **                   | ** ** | **Total**                                 | ** ** | **Less than 1  Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More than 5  Years** | ** ** |
|                         |       |                                      |       |   |   |   |   |   |   |   |   |
| CONTRACTUAL OBLIGATIONS      |       |                                      |       |   |   |   |   |   |   |   |   |
| Debt                         |       | $                                         | 251        |   | $ | 251 |   | $ | — |   | $ | — |   | $ | — |   |
| Capital  Lease Obligations   |       | 2                                         |       | 2 |   | — |   | — |   | — |   |
| Severance  Obligations       |       | 201                                       |       | 201 |   | — |   | — |   | — |   |
| Operating  Lease Obligations |       | 7,509                                     |       | 1,542 |   | 3,526 |   | 2,441 |   | — |   |
|                              |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

In September 2004, a complaint was filed in Federal Courtagainst us, one of our officers and one former officer alleging violations offederal securities laws.  Thereafter twosimilar complaints were filed.  Theactions were consolidated and in March 2005, the plaintiffs filed aconsolidated amended complaint.  

 

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In October 2005, the FederalCourt granted our motion to dismiss the consolidated amended complaint, butallowed plaintiffs leave to amend.  In October 2004,a derivative complaint was filed against one officer, two former officers andour entire Board of Directors alleging, among other things, breach of fiduciaryduty arising from allowing purported violations of federal securitieslaws.  No discovery has been conducted.  All of the foregoing complaints were tenderedto our insurance carriers, however, our primary carrier has denied coverage forthese claims.  We dispute the positiontaken by our primary carrier and intend to enforce our rights under the policy.  In May 2005, our primary D&Oinsurance carrier filed a complaint in Federal Court against us, one officer,two former officers and our entire Board of Directors seeking declaratoryrelief as to whether our D&O insurance policy covered the losses arisingfrom the foregoing complaints.  Weanswered the complaint and filed counterclaims against the primarycarrier.  No discovery has beenconducted.  In addition, in December 2004,the California Court of Appeals reversed the judgment of the Superior Court andremanded to the trial court for further proceedings complaints filed in October 2001and May 2002 by certain former stockholders of Cytovia, a company weacquired in 2000.  The complaints, filedagainst us and two of our officers, allege fraud and negligentmisrepresentation in connection with our acquisition of Cytovia.  These complaints are more fully discussed inthe section entitled “Risk Factors” contained herein and in Note 16—”Commitmentsand Contingencies” to these Consolidated Financial Statements.  No assurances can be made as to whether wewill be successful in our defense of the pending claims. If we are notsuccessful in our defense of such claims, we could be forced to, among otherthings, make significant payments to resolve these claims.  To the extent such payments are not coveredby our insurance carrier, they would have a material adverse effect on ourliquidity and capital resources, including the possibility that such paymentscould fully deplete our cash resources.

 

As a development stage enterprise, we anticipate incurringadditional losses, at least in the near future as we continue to expend amountson our research and development activities related to our apoptosis modulatortechnology, seek a development and marketing partnership for Ceplene and ouroral histamine and topical histamine technology and pursue a strategictransaction.  From inception throughSeptember 30, 2005, the Company has incurred net losses totaling $379.2 millionand has used combined cash in operating and investing activities in excess of$312 million and does not currently have an FDA approved drug.  In addition, our cash requirements mayfluctuate in future periods as we conduct additional research and developmentactivities, including clinical trials, and undertake efforts associated withthe commercial launch of any product candidates that are approved for sale bygovernment regulatory bodies.  Thefollowing activities could result in an increase in cash requirements:  the anticipated filing of an application forEuropean regulatory approval for Ceplene in AML, costs associated with pursuinga strategic transaction and other research related to liver disease, theapoptosis modulator and topical histamine technologies. Other factors that mayimpact our cash requirements include: the results of clinical trials, the scopeof other research and development activities, the time required to obtainregulatory approvals, costs associated with defending certain lawsuitscurrently pending against us, the costs of filing, prosecuting, defending andenforcing patent claims and other intellectual property rights, and the abilityto establish marketing alliances and collaborative arrangements. As a result ofthese factors, it is difficult to predict accurately the timing and amount offuture cash requirements.

 

In March 2005, we retained Piper Jaffray & Co. toadvise and assist in identifying and evaluating our strategic options.  Piper Jaffray & Co. is a leadinginvestment bank serving the life science industry.  In September 2005, we announced that weentered into a definitive merger agreement with EpiCept.  The closing of the transaction is subject tosatisfaction of certain customary closing conditions, including the approval ofour stockholders.  We have scheduled aspecial meeting of stockholders on December 21, 2005 for the purpose ofvoting on a proposal to adopt and approve the merger agreement and approve themerger.  We anticipate closing thetransaction in January 2006.  If and atthe time the transaction closes we will owe Piper Jaffray & Co.$600,000 for their services.   There canbe no assurance that we will be able to close our business combination withEpiCept.  In the event that the mergeragreement is terminated by EpiCept or us due to the failure of our stockholdersto adopt the merger agreement, we are required to pay all reasonable expensesof EpiCept up to $650,000.  Under certainother conditions as 

 

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described in the merger agreementif the transaction is not completed, we could be required to make payments toEpiCept totaling up to $1.4 million. Also, if the proposed transaction does not close, there can be noassurance that existing sources of liquidity will be sufficient to complete analternative strategic transaction.  Inaddition, the transaction will require us to incur charges or incur othersubstantial financial obligations and may pose significant integrationchallenges with respect to our business including the development of ourproduct candidates, and business disruptions, any of which could materially andadversely affect our business and financial results.  Should we be required to seek additionalcapital to complete such a transaction, there can be no assurance that suchadditional financing, if required, will be available when needed or, ifavailable, will be on satisfactory terms.

 

We believe that our available cash, cash equivalents andinvestments at September 30, 2005 will be sufficient to satisfy ourfunding needs for at least the next 12 months, including the screening ofadditional compounds, advancement of IND enabling studies and initiation of aPhase 1 clinical trial with one lead apoptosis product candidate, andpreparation and submission of a European regulatory filing for Ceplene.  Additionally, the Company believes thatwithout additional equity or debt financing that if does not currently haveadequate funding to complete the trials to bring any drug candidates to marketand therefore will require significant funding. Our future cash requirements are dependent on numerous forward-lookingfactors.  These factors include but arenot limited to the following:

 

•                  progressin our research and development programs, as well as the magnitude of theseprograms;

•                  thetiming, receipt and amount of milestone and other payments, if any, frompresent and future collaborators, if any; as well as our ability to establishand maintain such collaborations;

•                  theresources, time and costs required to successfully initiate and complete ourpreclinical trials and initiate future clinical trials, obtain regulatoryapprovals, protect our intellectual property and obtain and maintain licensesto third-party intellectual property;

•                  thecost of preparing, filing, prosecuting, maintaining and enforcing patentclaims; and

•                  thetiming, receipt and amount of sales and royalties, if any, from our potentialproducts.

 

For instance, if, at any time, our prospects for financing ourclinical development programs decline, we may decide to further reduce researchand development expenses by delaying, discontinuing or reducing our funding ofdevelopment of one or more product candidates. Alternatively, to meet our cash requirements beyond September 30,2005, we might raise funds through public issuing additional equity securities,strategic relationships or other arrangements. The issuance of additionalequity securities, if any, could result in substantial dilution to ourstockholders. There can be no assurance that additional funding will beavailable on terms acceptable to us, if at all. Similarly, financing obtainedthrough future co-development arrangements may require us to forego certaincommercial rights to future drug candidates. The failure to fund capital requirements would have a material adverseeffect on our business, financial condition and results of operations.

 

We are currently seeking a strategic partnership to complete thedevelopment and commercialization of Ceplene in AML and other indications.  We are also seeking collaborations for thefurther development of our other histamine technologies and our apoptosismodulator drug candidates for cancer and other diseases.  We intend to independently advance oneapoptosis lead drug candidate for the treatment of cancer to an IND withinapproximately the next nine months.

 

In November 2003, we entered into an agreement with Myriadunder which we licensed our MX90745 series of caspase-inducer anti-cancercompounds to Myriad.  The agreementrequires that Myriad make licensing, research and milestone payments to ustotaling up to $27 million, assuming the successful commercialization of thecompound for the treatment of cancer, as well as pay a royalty on productsales.  In March 2005, Myriad beganhuman clinical trials with this compound, initiating a Phase 1 clinical trialin patients with advanced solid tumors, which triggered a $1 million milestonepayment that we received in April 2005. We are currently seeking collaborations to advance two additional 

 

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apoptosis lead compounds to anIND.  There can be no assurance that wewill be able to enter into any additional agreements on acceptable terms, if atall.

 

We have never paid a cash dividend on our common stock and do notcontemplate the payment of cash dividends on our common stock in theforeseeable future.

 

**IMPACT OF INFLATION**

 

Theimpact of inflation on our operations for the years ended September 30,2005, 2004, and 2003 was not material.

 

**RECENT ACCOUNTING PRONOUNCEMENTS**

 

On December 16,2004, the Financial Accounting Standards Board, or FASB, issued Statement ofFinancial Accounting Standard, or SFAS, 123(R)*,*“Share-Based Payment”, which is a revision ofSFAS 123. Generally, the approach in SFAS 123(R) is similar to theapproach described in SFAS 123. However, SFAS 123(R) requires allshare-based payments to employees, including grants of employee stock options,to be recognized in the income statement based on their fair values. Pro formadisclosure will no longer be an alternative. This statement also eliminates theability to account for share-based compensation transactions using APB Opinion No. 25.The statement, which was delayed, is effective for us as of October 1,2005, the beginning of our fiscal year. Early adoption will be permitted inperiods in which financial statements have not yet been issued.

 

        SFAS 123(R)permits public companies to adopt its requirements using one of two methods:1) A “modified prospective” method in which compensation cost isrecognized beginning with the effective date (a) based on the requirementsof SFAS 123(R) for all share-based payments granted after the effectivedate and (b) based on the requirements of SFAS 123 for all awardsgranted to employees prior to the effective date of SFAS 123(R) thatremain unvested on the effective date, 2) A “modified retrospective”method which includes the requirements of the modified prospective methoddescribed above, but also permits entities to restate based on the amountspreviously recognized under SFAS 123 for purposes of pro forma disclosureseither (a) all prior periods presented or (b) prior interim periodsof the year of adoption.

 

        Aspermitted by SFAS 123, we currently account for share-based payments toemployees using Opinion 25’s intrinsic value method and, as such, generallyrecognize no compensation cost for employee stock options. Accordingly, theadoption of SFAS 123(R)’s fair value method may have a significant impacton our results of operations.  We havenot yet determined the impact of the adoption of SFAS 123(R) as theinitial calculation will be finalized and recorded during the quarter ending December 31,2005.

 

In March 2004, theFASB’s Emerging Issues Task Force issued EITF 03-1, “The Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments”*.*  EITF 03-1, which was originallyeffective for interim and annual reporting periods beginning after June 15,2004 requires a three-step model to determine other-than-temporary impairmentsfor all current and future investments in marketable securities.  In September 2004,the FASB delayed the requirement to record impairment losses under EITF 03-1until new guidance is issued.  We do not expect that the adoption of EITF03-1 will have a material impact on our operating results and financialposition.

 

In May 2005, theFASB, issued SFAS 154,**“AccountingChanges and Error Corrections”, SFAS 154 

 

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changes the requirements for the accounting for, and reporting of, achange in accounting principle and applies to all voluntary changes in accountingprinciple, as well as changes pursuant to accounting pronouncements that do notinclude transition rules. APB 20 previously required that most voluntarychanges in accounting principle be recognized by including in net income of theperiod of the change the cumulative effect of changing to the new accountingprinciple. Under SFAS 154, changes in accounting principle must be appliedretrospectively to prior periods’ financial statements, unless it isimpracticable to determine either the period-specific effects or the cumulativeeffect of the change. The statement also provides guidance for determiningwhether retrospective application is impracticable (for example, if assumptionsabout management’s earlier intent are necessary, but cannot be independentlysubstantiated).  The statement will beeffective for accounting changes and corrections of errors made in fiscal yearsbeginning after December 15, 2005 with early adoption permitted.  We adoptedSFAS 154 on October 1, 2005. The adoption of SFAS 154 did not have a material impact on our operatingresults and financial position.

 

**ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK**

 

Our exposure to market riskis principally confined to our cash equivalents and investments that have maturitiesof less than three years. We maintain a non-trading investment portfolio ofinvestment grade, liquid debt securities that limits the amount of creditexposure to any one issue, issuer or type of instrument. The securities in ourinvestment portfolio are not leveraged, are classified as available-for-saleand are subject to interest rate risk. We currently do not hedge interest rateexposure. A hypothetical ten percent change in interest rates during theyear ended September 30, 2005 would have resulted in approximately a$65,000 change in net loss.  We have notused derivative financial instruments in our investment portfolio. There havebeen no significant changes in the types or maturities of investments held fromSeptember 30, 2004.

 

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**ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

 

REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM

 

The Board of Directorsand Stockholders

Maxim Pharmaceuticals, Inc.:

 

We have audited the accompanying consolidated balance sheetsof Maxim Pharmaceuticals, Inc. and subsidiaries (a development stagecompany) as of September 30, 2005 and 2004, and the related consolidatedstatements of operations and comprehensive loss, stockholders’ equity, and cashflows for each of the years in the three-year period ended September 30,2005, and for the period from inception (October 23, 1989) through September 30,2005. These consolidated financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on theseconsolidated financial statements based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. Anaudit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Maxim Pharmaceuticals, Inc.and subsidiaries (a development stage company) as of September 30, 2005and 2004, and the results of their operations and their cash flows for each ofthe years in the three-year period ended September 30, 2005, and for theperiod from inception (October 23, 1989) through September 30, 2005,in conformity with U.S. generally accepted accounting principles.

 

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of Maxim Pharmaceuticals Inc.’s internalcontrol over financial reporting as of September 30, 2005, based on criteriaestablished in Internal Control—Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission (COSO), and our reportdated December 12, 2005, expressed an unqualified opinion on management’sassessment of, and the effective operation of, internal control over financialreporting.

 

 
|                   | /s/ KPMG LLP |   |
|------------------------|--------------|--------|
|                   |
| San Diego, California  |
| December 12, 2005 |

 

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**CONSOLIDATED BALANCE SHEETS**

**(in thousands, except share data)**

 

*Maxim Pharmaceuticals, Inc. and Subsidiaries (ADevelopment Stage Company)*

 
| ** **                                                                                                                                                                                   | ** ** | **As of September 30  2005** | ** ** | **As of September 30  2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| **ASSETS**                                                                                                                                                                                   |       |                              |       |                              |       |
| **Current Assets:**                                                                                                                                                                          |       |                              |       |                              |       |
| Cash  and cash equivalents                                                                                                                                                                   |       | $                                 | 7,560      |                              | $          | 10,658 |   |
| Investments  in marketable securities, available for sale                                                                                                                                    |       | 15,206                            |       | 38,746                            |       |
| Accrued  interest and other current assets                                                                                                                                                   |       | 775                               |       | 2,354                             |       |
| Total  current assets                                                                                                                                                                        |       | 23,541                            |       | 51,758                            |       |
|                                                                                                                                                                                         |       |                              |       |                              |       |
| Restricted  cash and cash equivalents                                                                                                                                                        |       | 264                               |       | 3,500                             |       |
| Property  and equipment, net                                                                                                                                                                 |       | 2,063                             |       | 3,579                             |       |
| Patents  and licenses, net                                                                                                                                                                   |       | 4,878                             |       | 4,393                             |       |
| Notes  receivable from officers, net of allowance of $0 and $2,930,000 at September 30,  2005 and September 30, 2004, respectively                                                 |       | —                            |       | 682                               |       |
| Deposits  and other assets                                                                                                                                                                   |       | 136                               |       | 273                               |       |
| Total  assets                                                                                                                                                                                |       | $                                 | 30,882     |                              | $          | 64,185 |   |
|                                                                                                                                                                                         |       |                              |       |                              |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                |       |                              |       |                              |       |
| **Current Liabilities:**                                                                                                                                                                     |       |                              |       |                              |       |
| Accounts  payable                                                                                                                                                                            |       | $                                 | 2,486      |                              | $          | 5,311 |   |
| Accrued  expenses                                                                                                                                                                            |       | 2,490                             |       | 4,177                             |       |
| Notes  payable and current portion of long-term debt and obligations under capital  leases                                                                                                   |       | 253                               |       | 1,071                             |       |
| Deferred  revenue                                                                                                                                                                            |       | 23                                |       | 131                               |       |
| Total  current liabilities                                                                                                                                                                   |       | 5,252                             |       | 10,690                            |       |
|                                                                                                                                                                                         |       |                              |       |                              |       |
| Long-term  debt and obligations under capital leases, excluding current portion                                                                                                              |       | —                            |       | 96                                |       |
|                                                                                                                                                                                         |       |                              |       |                              |       |
| **Stockholders’ Equity:**                                                                                                                                                               |       |                              |       |                              |       |
| Convertible  preferred stock, $.001 par value, 5,000,000 shares authorized; no shares  issued and outstanding at September 30, 2005 and September 30, 2004                         |       | —                            |       | —                            |       |
| Common  stock, $.001 par value, 60,000,000 shares authorized; 28,402,808 and  28,561,091 shares issued and outstanding at September 30, 2005 and September 30,  2004, respectively |       | 28                                |       | 28                                |       |
| Additional  paid-in capital                                                                                                                                                                  |       | 404,888                           |       | 405,031                           |       |
| Deficit  accumulated during the development stage                                                                                                                                            |       | (379,165                          | )          | (351,472                          | )          |
| Accumulated  other comprehensive loss                                                                                                                                                        |       | (121                              | )          | (188                              | )          |
| Total  stockholders’ equity                                                                                                                                                             |       | 25,630                            |       | 53,399                            |       |
| Total  liabilities and stockholders’ equity                                                                                                                                             |       | $                                 | 30,882     |                              | $          | 64,185 |   |

 

*See Accompanying Notes to Consolidated FinancialStatements*

 

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**CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVELOSS**

**(in thousands, except per share and share amounts)**

 

*Maxim Pharmaceuticals, Inc. and Subsidiaries (ADevelopment Stage Company)*

 
| ** **                                                                        | ** ** | **Year Ended September 30** | ** ** | **From Inception  (October 23, 1989) Through** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                        | ** ** | **2005**                         | ** ** | **2004**                                            | ** ** | **2003** | ** ** | **September 30, 2005** | ** ** |
|                                                                              |       |                             |       |                                                |       |   |   |   |   |
| Collaboration  and research revenue                                               |       | $                                | 1,680      |                                                | $          | 4,118 |   | $ | 3,830 |   | $ | 20,616 |   |
|                                                                              |       |                             |       |                                                |       |   |   |   |   |
| Operating  expenses:                                                              |       |                             |       |                                                |       |   |   |   |   |
| Research  and development                                                         |       | 17,789                           |       | 37,923                                              |       | 42,528 |   | 271,492 |   |
| Business  development and marketing                                               |       | 2,318                            |       | 4,604                                               |       | 1,395 |   | 28,593 |   |
| General  and administrative                                                       |       | 9,491                            |       | 6,631                                               |       | 7,757 |   | 56,469 |   |
| Amortization  of goodwill and other acquisition-related intangible assets         |       | —                           |       | —                                              |       | — |   | 2,955 |   |
| Purchased  in-process technology                                                  |       | —                           |       | —                                              |       | — |   | 42,300 |   |
| Provisions  for note receivable and loan guarantee to/for officers                |       | 418                              |       | 1,330                                               |       | — |   | 3,348 |   |
| Total  operating expenses                                                         |       | 30,016                           |       | 50,488                                              |       | 51,680 |   | 405,157 |   |
|                                                                              |       |                             |       |                                                |       |   |   |   |   |
| Loss  from operations                                                             |       | (28,336                          | )          | (46,370                                             | )          | (47,850 | ) | (384,541 | ) |
|                                                                              |       |                             |       |                                                |       |   |   |   |   |
| Other  income (expense):                                                          |       |                             |       |                                                |       |   |   |   |   |
| Investment  income                                                                |       | 681                              |       | 1,467                                               |       | 2,499 |   | 32,003 |   |
| Gain  on sale of assets                                                           |       | —                           |       | —                                              |       | — |   | 4,435 |   |
| Interest  expense                                                                 |       | (38                              | )          | (72                                                 | )          | (123 | ) | (2,904 | ) |
| Other  income                                                                     |       | —                           |       | 7                                                   |       | 18 |   | 21 |   |
| Total  other income                                                               |       | 643                              |       | 1,402                                               |       | 2,394 |   | 33,555 |   |
|                                                                              |       |                             |       |                                                |       |   |   |   |   |
| Loss  before cumulative effect of accounting change and preferred stock dividends |       | (27,693                          | )          | (44,968                                             | )          | (45,456 | ) | (350,986 | ) |
|                                                                              |       |                             |       |                                                |       |   |   |   |   |
| Cumulative  effect of accounting change                                           |       | —                           |       | —                                              |       | — |   | (28,179 | ) |
|                                                                              |       |                             |       |                                                |       |   |   |   |   |
| Net  loss before preferred stock dividends                                        |       | (27,693                          | )          | (44,968                                             | )          | (45,456 | ) | (379,165 | ) |
| Dividends  on preferred stock                                                     |       | —                           |       | —                                              |       | — |   | 5,496 |   |
|                                                                              |       |                             |       |                                                |       |   |   |   |   |
| Net  loss applicable to common stock                                              |       | $                                | (27,693    | )                                                   | $          | (44,968 | ) | $ | (45,456 | ) | $ | (384,661 | ) |
|                                                                              |       |                             |       |                                                |       |   |   |   |   |
| Other  comprehensive income (loss), net of tax:                                   |       |                             |       |                                                |       |   |   |   |   |
| Foreign  currency translation adjustments                                         |       | —                           |       | —                                              |       | — |   | (4 | ) |
| Unrealized  gains (losses) on securities                                          |       | 67                               |       | (650                                                | )          | (629 | ) | (117 | ) |
| Other  comprehensive income (loss), net of tax:                                   |       | 67                               |       | (650                                                | )          | (629 | ) | (121 | ) |
|                                                                              |       |                             |       |                                                |       |   |   |   |   |
| Total  comprehensive loss                                                         |       | $                                | (27,626    | )                                                   | $          | (45,618 | ) | $ | (46,085 | ) | $ | (384,782 | ) |
|                                                                              |       |                             |       |                                                |       |   |   |   |   |
| Basic  and diluted net loss per share of common stock                             |       | $                                | (0.97      | )                                                   | $          | (1.59 | ) | $ | (1.94 | ) |   |   |
|                                                                              |       |                             |       |                                                |       |   |   |   |   |
| Weighted  average shares outstanding                                              |       | 28,563,045                       |       | 28,211,817                                          |       | 23,444,028 |   |   |   |

 

*See Accompanying Notes to Consolidated FinancialStatements*

 

50

----

 

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY**

(in thousands)

*MaximPharmaceuticals, Inc. and Subsidiaries (A Development Stage Company)*

 
| ** **                                                                                         | ** ** | ** **           | ** ** | ** **        | ** ** | ** **  | ** ** | ** **      | ** ** | ** **     | ** ** | ** **  | ** ** | ** **        | ** ** | **Accumulated**   | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|----------------------|------------|-------------------|------------|-------------|------------|-----------------|------------|----------------|------------|-------------|------------|-------------------|------------|-------------------|------------|------------|------------|
| ** **                                                                                         | ** ** | ** **           | ** ** | ** **        | ** ** | ** **  | ** ** | ** **      | ** ** | ** **     | ** ** | ** **  | ** ** | **Subscription**  | ** ** | **Other**         | ** ** | ** ** | ** ** |
| ** **                                                                                         | ** ** | ** **           | ** ** | ** **        | ** ** | ** **  | ** ** | ** **      | ** ** | **Additional** | ** ** | ** **  | ** ** | **Receivable  /** | ** ** | **Comprehensive** | ** ** | ** ** | ** ** |
| ** **                                                                                         | ** ** | **Preferred  Stock** | ** ** | **Common  Stock** | ** ** | **Paid-In** | ** ** | **Accumulated** | ** ** | **Deferred**   | ** ** | **Income**  | ** ** | ** **        | ** ** |
| ** **                                                                                         | ** ** | **Shares**           | ** ** | **Amount**        | ** ** | **Shares**  | ** ** | **Amount**      | ** ** | **Capital**    | ** ** | **Deficit** | ** ** | **Compensation**  | ** ** | **(Loss)**        | ** ** | **Total**  | ** ** |
| Balance at  October 23, 1989 (inception)                                                      |       | —               |       | $                 | —     |        | —     |            | $          | —         |       | $           | —     |              | $          | —            |       | $          | —     |   | $ | — |   | $ | — |   |
| Issuance of  common stock at $.001                                                                 |       | —               |       | —            |       | 1           |       | 8               |       | —         |       | —      |       | —            |       | —            |       | 8          |       |
| Net income                                                                                         |       | —               |       | —            |       | —      |       | —          |       | —         |       | —      |       | —            |       | —            |       | —     |       |
| Balance at  December 31, 1989                                                                 |       | —               |       | —            |       | 1           |       | 8               |       | —         |       | —      |       | —            |       | —            |       | 8          |       |
| Net income                                                                                         |       | —               |       | —            |       | —      |       | —          |       | —         |       | 1           |       | —            |       | —            |       | 1          |       |
| Balance at  December 31, 1990                                                                 |       | —               |       | —            |       | 1           |       | 8               |       | —         |       | 1           |       | —            |       | —            |       | 9          |       |
| Net income                                                                                         |       | —               |       | —            |       | —      |       | —          |       | —         |       | —      |       | —            |       | —            |       | —     |       |
| Balance at  December 31, 1991                                                                 |       | —               |       | —            |       | 1           |       | 8               |       | —         |       | 1           |       | —            |       | —            |       | 9          |       |
| Additional  funding                                                                                |       | —               |       | —            |       | —      |       | —          |       | 1,259          |       | —      |       | —            |       | —            |       | 1,259      |       |
| Net loss                                                                                           |       | —               |       | —            |       | —      |       | —          |       | —         |       | (2,445      | )          | —            |       | —            |       | (2,445     | )          |
| Balance at  December 31, 1992                                                                 |       | —               |       | —            |       | 1           |       | 8               |       | 1,259          |       | (2,444      | )          | —            |       | —            |       | (1,177     | )          |
| Net effect of  reorganization and issuance of common stock to account for reverse  acquisition     |       | —               |       | —            |       | 181         |       | (8              | )          | 53             |       | (1,198      | )          | —            |       | —            |       | (1,153     | )          |
| Net loss                                                                                           |       | —               |       | —            |       | —      |       | —          |       | —         |       | (4,239      | )          | —            |       | —            |       | (4,239     | )          |
| Balance at  September 30, 1993                                                                |       | —               |       | —            |       | 182         |       | —          |       | 1,312          |       | (7,881      | )          | —            |       | —            |       | (6,569     | )          |
| Issuance of  common stock at $60 per share for consulting and professional services                |       | —               |       | —            |       | 1           |       | —          |       | 66             |       | —      |       | —            |       | —            |       | 66         |       |
| Issuance of  Series A preferred stock for cash at $3.00 per share                             |       | 250                  |       | —            |       | —      |       | —          |       | 487            |       | —      |       | —            |       | —            |       | 487        |       |
| Issuance of  common stock to convert bridge debt financing at prices from $52.50 to $75  per share |       | —               |       | —            |       | 113         |       | —          |       | 5,934          |       | —      |       | —            |       | —            |       | 5,934      |       |
| Net loss                                                                                           |       | —               |       | —            |       | —      |       | —          |       | —         |       | (2,433      | )          | —            |       | —            |       | (2,433     | )          |
| Balance at  September 30, 1994                                                                |       | 250                  |       | —            |       | 296         |       | —          |       | 7,799          |       | (10,314     | )          | —            |       | —            |       | (2,515     | )          |
|                                                                                                    |            |                      |            |                   |            |             |            |                 |            |                |            |             |            |                   |            |                   |            |            |            |  |  |  |  |  |  |  |

 

51

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| ** **                                                                                                | ** ** | ** **           | ** ** | ** **        | ** ** | ** **  | ** ** | ** **      | ** ** | ** **     | ** ** | ** **  | ** ** | ** **        | ** ** | **Accumulated**   | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|----------------------|------------|-------------------|------------|-------------|------------|-----------------|------------|----------------|------------|-------------|------------|-------------------|------------|-------------------|------------|------------|------------|
| ** **                                                                                                | ** ** | ** **           | ** ** | ** **        | ** ** | ** **  | ** ** | ** **      | ** ** | ** **     | ** ** | ** **  | ** ** | **Subscription**  | ** ** | **Other**         | ** ** | ** ** | ** ** |
| ** **                                                                                                | ** ** | ** **           | ** ** | ** **        | ** ** | ** **  | ** ** | ** **      | ** ** | **Additional** | ** ** | ** **  | ** ** | **Receivable  /** | ** ** | **Comprehensive** | ** ** | ** ** | ** ** |
| ** **                                                                                                | ** ** | **Preferred  Stock** | ** ** | **Common  Stock** | ** ** | **Paid-In** | ** ** | **Accumulated** | ** ** | **Deferred**   | ** ** | **Income**  | ** ** | ** **        | ** ** |
| ** **                                                                                                | ** ** | **Shares**           | ** ** | **Amount**        | ** ** | **Shares**  | ** ** | **Amount**      | ** ** | **Capital**    | ** ** | **Deficit** | ** ** | **Compensation**  | ** ** | **(Loss)**        | ** ** | **Total**  | ** ** |
| Issuance of  common stock at $3.00 per share upon conversion of debt                                      |       | —               |       | —            |       | 553         |       | 1               |       | 1,659          |       | —      |       | —            |       | —            |       | 1,660      |       |
| Issuance of  common stock pursuant to anti-dilutive provisions in previous bridge debt  financing         |       | —               |       | —            |       | 1,137       |       | 1               |       | (1             | )          | —      |       | —            |       | —            |       | —     |       |
| Issuance of  common stock at $3.00 per share for subscription receivable                                  |       | —               |       | —            |       | 104         |       | —          |       | 311            |       | —      |       | (311              | )          | —            |       | —     |       |
| Net loss                                                                                                  |       | —               |       | —            |       | —      |       | —          |       | —         |       | (2,790      | )          | —            |       | —            |       | (2,790     | )          |
| Balance at  September 30, 1995                                                                       |       | 250                  |       | —            |       | 2,090       |       | 2               |       | 9,768          |       | (13,104     | )          | (311              | )          | —            |       | (3,645     | )          |
| Issuance of  common stock at $3.00 per share in exchange for repayment of note payable to  bank           |       | —               |       | —            |       | 745         |       | 1               |       | 2,249          |       | —      |       | —            |       | —            |       | 2,250      |       |
| Receipt of  subscription receivable                                                                       |       | —               |       | —            |       | —      |       | —          |       | —         |       | —      |       | 311               |       | —            |       | 311        |       |
| Issuance of  common stock and warrants at $3.75 per unit for cash                                         |       | —               |       | —            |       | 466         |       | 1               |       | 1,740          |       | —      |       | —            |       | —            |       | 1,741      |       |
| Issuance of  common stock at $4.50 per share for cash                                                     |       | —               |       | —            |       | 400         |       | —          |       | 1,800          |       | —      |       | —            |       | —            |       | 1,800      |       |
| Exercise of  common stock options                                                                         |       | —               |       | —            |       | —      |       | —          |       | 3              |       | —      |       | —            |       | —            |       | 3          |       |
| Issuance of  common stock at $7.50 per share and warrants at $.10 per warrant in initial  public offering |       | —               |       | —            |       | 2,875       |       | 3               |       | 18,217         |       | —      |       | —            |       | —            |       | 18,220     |       |
| Conversion of  preferred stock to common stock                                                            |       | (250                 | )          | —            |       | 103         |       | —          |       | —         |       | —      |       | —            |       | —            |       | —     |       |
| Options granted  to employees                                                                             |       | —               |       | —            |       | —      |       | —          |       | 395            |       | —      |       | (163              | )          | —            |       | 232        |       |
| Amortization of  deferred compensation                                                                    |       | —               |       | —            |       | —      |       | —          |       | —         |       | —      |       | 44                |       | —            |       | 44         |       |
| Net loss                                                                                                  |       | —               |       | —            |       | —      |       | —          |       | —         |       | (833        | )          | —            |       | —            |       | (833       | )          |
| Balance at  September 30, 1996                                                                       |       | —               |       | —            |       | 6,679       |       | 7               |       | 34,172         |       | (13,937     | )          | (119              | )          | —            |       | 20,123     |       |

 

52

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| ** **                                                                 | ** ** | ** **           | ** ** | ** **        | ** ** | ** **  | ** ** | ** **      | ** ** | ** **     | ** ** | ** **  | ** ** | ** **        | ** ** | **Accumulated**   | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------|------------|----------------------|------------|-------------------|------------|-------------|------------|-----------------|------------|----------------|------------|-------------|------------|-------------------|------------|-------------------|------------|------------|------------|
| ** **                                                                 | ** ** | ** **           | ** ** | ** **        | ** ** | ** **  | ** ** | ** **      | ** ** | ** **     | ** ** | ** **  | ** ** | **Subscription**  | ** ** | **Other**         | ** ** | ** ** | ** ** |
| ** **                                                                 | ** ** | ** **           | ** ** | ** **        | ** ** | ** **  | ** ** | ** **      | ** ** | **Additional** | ** ** | ** **  | ** ** | **Receivable  /** | ** ** | **Comprehensive** | ** ** | ** ** | ** ** |
| ** **                                                                 | ** ** | **Preferred  Stock** | ** ** | **Common  Stock** | ** ** | **Paid-In** | ** ** | **Accumulated** | ** ** | **Deferred**   | ** ** | **Income**  | ** ** | ** **        | ** ** |
| ** **                                                                 | ** ** | **Shares**           | ** ** | **Amount**        | ** ** | **Shares**  | ** ** | **Amount**      | ** ** | **Capital**    | ** ** | **Deficit** | ** ** | **Compensation**  | ** ** | **(Loss)**        | ** ** | **Total**  | ** ** |
| Option granted to  consultant                                              |       | —               |       | —            |       | —      |       | —          |       | 97             |       | —      |       | —            |       | —            |       | 97         |       |
| Amortization of  deferred compensation                                     |       | —               |       | —            |       | —      |       | —          |       | —         |       | —      |       | 68                |       | —            |       | 68         |       |
| Net loss                                                                   |       | —               |       | —            |       | —      |       | —          |       | —         |       | (6,895      | )          | —            |       | —            |       | (6,895     | )          |
| Balance at  September 30, 1997                                        |       | —               |       | —            |       | 6,679       |       | 7               |       | 34,269         |       | (20,832     | )          | (51               | )          | —            |       | 13,393     |       |
| Issuance of  common stock at $15.25 per share in public follow-on offering |       | —               |       | —            |       | 2,500       |       | 3               |       | 34,711         |       | —      |       | —            |       | —            |       | 34,714     |       |
| Exercise of  common stock purchase warrants                                |       | —               |       | —            |       | 392         |       | —          |       | 4,116          |       | —      |       | —            |       | —            |       | 4,116      |       |
| Exercise of stock  options and warrants                                    |       | —               |       | —            |       | 313         |       | —          |       | 634            |       | —      |       | —            |       | —            |       | 634        |       |
| Options granted  to consultants                                            |       | —               |       | —            |       | —      |       | —          |       | 50             |       | —      |       | —            |       | —            |       | 50         |       |
| Contribution to  401(k) plan                                               |       | —               |       | —            |       | 2           |       | —          |       | 27             |       | —      |       | —            |       | —            |       | 27         |       |
| Amortization of  deferred compensation                                     |       | —               |       | —            |       | —      |       | —          |       | —         |       | —      |       | 37                |       | —            |       | 37         |       |
| Net loss                                                                   |       | —               |       | —            |       | —      |       | —          |       | —         |       | (21,855     | )          | —            |       | —            |       | (21,855    | )          |
| Balance at  September 30, 1998                                        |       | —               |       | —            |       | 9,886       |       | 10              |       | 73,807         |       | (42,687     | )          | (14               | )          | —            |       | 31,116     |       |
| Issuance of  Series A preferred stock for cash, net of issuance costs |       | 207                  |       | —            |       | —      |       | —          |       | 18,259         |       | —      |       | —            |       | —            |       | 18,259     |       |
| Exercise of stock  options and warrants                                    |       | —               |       | —            |       | 314         |       | —          |       | 1,083          |       | —      |       | —            |       | —            |       | 1,083      |       |
| Options granted  to consultants                                            |       | —               |       | —            |       | —      |       | —          |       | 80             |       | —      |       | —            |       | —            |       | 80         |       |
| Contribution to  401(k) plan                                               |       | —               |       | —            |       | 6           |       | —          |       | 72             |       | —      |       | —            |       | —            |       | 72         |       |
| Dividends on  Series A preferred stock                                |       | —               |       | —            |       | —      |       | —          |       | (483           | )          | —      |       | —            |       | —            |       | (483       | )          |
| Unrealized loss  on investments available for sale                         |       | —               |       | —            |       | —      |       | —          |       | —         |       | —      |       | —            |       | (69               | )          | (69        | )          |
| Amortization of  deferred compensation                                     |       | —               |       | —            |       | —      |       | —          |       | —         |       | —      |       | 11                |       | —            |       | 11         |       |
| Net loss                                                                   |       | —               |       | —            |       | —      |       | —          |       | —         |       | (39,226     | )          | —            |       | —            |       | (39,226    | )          |
| Balance at  September 30, 1999                                        |       | 207                  |       | —            |       | 10,206      |       | 10              |       | 92,818         |       | (81,913     | )          | (3                | )          | (69               | )          | 10,843     |       |

 

53

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| ** **                                                                                                             | ** ** | ** **           | ** ** | ** **        | ** ** | ** **  | ** ** | ** **      | ** ** | ** **     | ** ** | ** **  | ** ** | ** **        | ** ** | **Accumulated**   | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|-------------------|------------|-------------|------------|-----------------|------------|----------------|------------|-------------|------------|-------------------|------------|-------------------|------------|------------|------------|
| ** **                                                                                                             | ** ** | ** **           | ** ** | ** **        | ** ** | ** **  | ** ** | ** **      | ** ** | ** **     | ** ** | ** **  | ** ** | **Subscription**  | ** ** | **Other**         | ** ** | ** ** | ** ** |
| ** **                                                                                                             | ** ** | ** **           | ** ** | ** **        | ** ** | ** **  | ** ** | ** **      | ** ** | **Additional** | ** ** | ** **  | ** ** | **Receivable  /** | ** ** | **Comprehensive** | ** ** | ** ** | ** ** |
| ** **                                                                                                             | ** ** | **Preferred  Stock** | ** ** | **Common  Stock** | ** ** | **Paid-In** | ** ** | **Accumulated** | ** ** | **Deferred**   | ** ** | **Income**  | ** ** | ** **        | ** ** |
| ** **                                                                                                             | ** ** | **Shares**           | ** ** | **Amount**        | ** ** | **Shares**  | ** ** | **Amount**      | ** ** | **Capital**    | ** ** | **Deficit** | ** ** | **Compensation**  | ** ** | **(Loss)**        | ** ** | **Total**  | ** ** |
| Issuance of  common stock at $55.00 per share in public follow-on offering, net of  issuance costs                     |       | —               |       | —            |       | 3,205       |       | 3               |       | 164,826        |       | —      |       | —            |       | —            |       | 164,829    |       |
| Issuance of  common stock at $42.125 per share and assumption of stock options in  acquisition, net of estimated costs |       | —               |       | —            |       | 1,533       |       | 2               |       | 72,898         |       | —      |       | —            |       | —            |       | 72,900     |       |
| Issuance of  Series B preferred stock for cash, net of issuance costs                                             |       | 268                  |       | 1                 |       | —      |       | —          |       | 22,551         |       | —      |       | —            |       | —            |       | 22,552     |       |
| Dividends on  Series A and Series B preferred stock                                                          |       | —               |       | —            |       | —      |       | —          |       | (5,013         | )          | —      |       | —            |       | —            |       | (5,013     | )          |
| Issuance of  Series A and Series B preferred stock in payment of dividends                                   |       | 56                   |       | —            |       | —      |       | —          |       | 5,193          |       | —      |       | —            |       | —            |       | 5,193      |       |
| Conversion of  preferred stock to common stock                                                                         |       | (531                 | )          | (1                | )          | 5,307       |       | 5               |       | (5             | )          | —      |       | —            |       | —            |       | (1         | )          |
| Exercise of stock  options and warrants                                                                                |       | —               |       | —            |       | 2,839       |       | 3               |       | 21,684         |       | —      |       | —            |       | —            |       | 21,687     |       |
| Options granted  to consultants                                                                                        |       | —               |       | —            |       | —      |       | —          |       | 223            |       | —      |       | —            |       | —            |       | 223        |       |
| Common stock  issued as payment for technology rights                                                                  |       | —               |       | —            |       | 23          |       | —          |       | 199            |       | —      |       | —            |       | —            |       | 199        |       |
| Contribution to  401(k) plan                                                                                           |       | —               |       | —            |       | 3           |       | —          |       | 101            |       | —      |       | —            |       | —            |       | 101        |       |
| Unrealized loss  on investments available for sale                                                                     |       | —               |       | —            |       | —      |       | —          |       | —         |       | —      |       | —            |       | (78               | )          | (78        | )          |
| Amortization of  deferred compensation                                                                                 |       | —               |       | —            |       | —      |       | —          |       | —         |       | —      |       | 3                 |       | —            |       | 3          |       |
| Net loss                                                                                                               |       | —               |       | —            |       | —      |       | —          |       | —         |       | (77,489     | )          | —            |       | —            |       | (77,489    | )          |
| Balance at  September 30, 2000                                                                                    |       | —               |       | —            |       | 23,116      |       | 23              |       | 375,475        |       | (159,402    | )          | —            |       | (147              | )          | 215,949    |       |
| Exercise of stock  options and warrants                                                                                |       | —               |       | —            |       | 105         |       | —          |       | 512            |       | —      |       | —            |       | —            |       | 512        |       |
| Options granted  to consultants                                                                                        |       | —               |       | —            |       | —      |       | —          |       | 149            |       | —      |       | —            |       | —            |       | 149        |       |
| Contribution to  401(k) plan                                                                                           |       | —               |       | —            |       | 31          |       | —          |       | 195            |       | —      |       | —            |       | —            |       | 195        |       |
| Unrealized gain  on investments available for sale                                                                     |       | —               |       | —            |       | —      |       | —          |       | —         |       | —      |       | —            |       | 1,085             |       | 1,085      |       |
| Stock based  compensation for modifications in stock option agreements                                                 |       | —               |       | —            |       | —      |       | —          |       | 80             |       | —      |       | —            |       | —            |       | 80         |       |
| Net loss                                                                                                               |       | —               |       | —            |       | —      |       | —          |       | —         |       | (37,323     | )          | —            |       | —            |       | (37,323    | )          |
| Balance at  September 30, 2001                                                                                    |       | —               |       | —            |       | 23,252      |       | 23              |       | 376,411        |       | (196,725    | )          | —            |       | 938               |       | 180,647    |       |
| Exercise of stock  options and warrants                                                                                |       | —               |       | —            |       | 11          |       | —          |       | 53             |       | —      |       | —            |       | —            |       | 53         |       |
| Warrants granted  to consultants                                                                                       |       | —               |       | —            |       | —      |       | —          |       | 1              |       | —      |       | —            |       | —            |       | 1          |       |
| Contribution to  401(k) plan                                                                                           |       | —               |       | —            |       | 48          |       | —          |       | 202            |       | —      |       | —            |       | —            |       | 202        |       |
| Unrealized gain  on investments available for sale                                                                     |       | —               |       | —            |       | —      |       | —          |       | —         |       | —      |       | —            |       | 157               |       | 157        |       |
| Net loss                                                                                                               |       | —               |       | —            |       | —      |       | —          |       | —         |       | (64,323     | )          | —            |       | —            |       | (64,323    | )          |

 

54

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|                                                                                                   |   |                 |   |              |   |        |   |            |   |           |   |        |    |              |   | **Accumulated**   |   |      |   |
|--------------------------------------------------------------------------------------------------------|--------|----------------------|--------|-------------------|--------|-------------|--------|-----------------|--------|----------------|--------|-------------|---------|-------------------|--------|-------------------|--------|-----------|--------|
|                                                                                                   |   |                 |   |              |   |        |   |            |   |           |   |        |    | **Subscription**  |   | **Other**         |   |      |   |
|                                                                                                   |   |                 |   |              |   |        |   |            |   | **Additional** |   |        |    | **Receivable  /** |   | **Comprehensive** |   |      |   |
|                                                                                                   |   | **Preferred  Stock** |   | **Common  Stock** |   | **Paid-In** |   | **Accumulated** |   | **Deferred**   |   | **Income**  |    |              |   |
|                                                                                                   |   | **Shares**           |   | **Amount**        |   | **Shares**  |   | **Amount**      |   | **Capital**    |   | **Deficit** |    | **Compensation**  |   | **(Loss)**        |   | **Total** |   |
| Foreign currency  translation adjustment                                                               |   | —               |   | —            |   | —      |   | —          |   | —         |   | —      |    | —            |   | (4                | )      | (4        | )      |
| Balance at  September 30, 2002                                                                    |   | —               |   | —            |   | 23,311      |   | 23              |   | 376,667        |   | (261,048    | )       | —            |   | 1,091             |   | 116,733   |   |
| Issuance of  common stock and warrants at $5.60 per share in private placement, net of  issuance costs |   | —               |   | —            |   | 4,555       |   | 5               |   | 24,083         |   | —      |    | —            |   | —            |   | 24,088    |   |
| Exercise of stock  options                                                                             |   | —               |   | —            |   | 68          |   | —          |   | 341            |   | —      |    | —            |   | —            |   | 341       |   |
| Warrants and  options granted to consultants                                                           |   | —               |   | —            |   | —      |   | —          |   | 108            |   | —      |    | —            |   | —            |   | 108       |   |
| Options granted  to employees                                                                          |   | —               |   | —            |   | —      |   | —          |   | 6              |   | —      |    | —            |   | —            |   | 6         |   |
| Contribution to  401(k) plan                                                                           |   | —               |   | —            |   | 17          |   | —          |   | 46             |   | —      |    | —            |   | —            |   | 46        |   |
| Unrealized loss  on investments available for sale                                                     |   | —               |   | —            |   | —      |   | —          |   | —         |   | —      |    | —            |   | (629              | )      | (629      | )      |
| Net loss                                                                                               |   | —               |   | —            |   | —      |   | —          |   | —         |   | (45,456     | )       | —            |   | —            |   | (45,456   | )      |
| Balance at  September 30, 2003                                                                    |   | —               |   | —            |   | 27,951      |   | 28              |   | 401,251        |   | (306,504    | )       | —            |   | 462               |   | 95,237    |   |
| Exercise of stock  options and warrants                                                                |   | —               |   | —            |   | 610         |   | —          |   | 3,611          |   | —      |    | —            |   | —            |   | 3,611     |   |
| Warrants and  options granted to consultants                                                           |   | —               |   | —            |   | —      |   | —          |   | 174            |   | —      |    | —            |   | —            |   | 174       |   |
| Options granted  to employees                                                                          |   | —               |   | —            |   | —      |   | —          |   | (5             | )      | —      |    | —            |   | —            |   | (5        | )      |
| Unrealized loss  on investments available for sale                                                     |   | —               |   | —            |   | —      |   | —          |   | —         |   | —      |    | —            |   | (650              | )      | (650      | )      |
| Net loss                                                                                               |   | —               |   | —            |   | —      |   | —          |   | —         |   | (44,968     | )       | —            |   | —            |   | (44,968   | )      |
| Balance at  September 30, 2004                                                                    |   | —               |   | —            |   | 28,561      |   | 28              |   | 405,031        |   | (351,472    | )       | —            |   | (188              | )      | 53,399    |   |
| Exercise of stock  options and warrants                                                                |   | —               |   | —            |   | 45          |   | —          |   | 94             |   | —      |    | —            |   | —            |   | 94        |   |
| Warrants and  options granted to consultants                                                           |   | —               |   | —            |   | —      |   | —          |   | 8              |   | —      |    | —            |   | —            |   | 8         |   |
| Options granted  to employees                                                                          |   | —               |   | —            |   | —      |   | —          |   | 52             |   | —      |    | —            |   | —            |   | 52        |   |
| Retirement of  offiicer’s common stock                                                            |   | —               |   | —            |   | (203        | )      | —          |   | (297           | )      | —      |    | —            |   | —            |   | (297      | )      |
| Unrealized loss  on investments available for sale                                                     |   | —               |   | —            |   | —      |   | —          |   | —         |   | —      |    | —            |   | 67                |   | 67        |   |
| Net loss                                                                                               |   | —               |   | —            |   | —      |   | —          |   | —         |   | (27,693     | )       | —            |   | —            |   | (27,693   | )      |
| Balance at  September 30, 2005                                                                    |   | —               |   | $                 | — |        | 28,403 |            | $      | 28             |   | $           | 404,888 |              | $      | (379,165          | )      | $         | — |   | $ | (121 | ) | $ | 25,630 |   |
|                                                                                                        |        |                      |        |                   |        |             |        |                 |        |                |        |             |         |                   |        |                   |        |           |        |  |  |  |  |  |  |  |

 

*See Accompanying Notes to Consolidated FinancialStatements*

 

55

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**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(in thousands)**

 

*Maxim Pharmaceuticals, Inc. and Subsidiaries (ADevelopment Stage Company)*

 
| ** **                                                                              | ** ** | **Year Ended September 30** | ** ** | **From Inception  (October 23, 1989)  Through** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                              | ** ** | **2005**                         | ** ** | **2004**                                             | ** ** | **2003** | ** ** | **September 30, 2005** | ** ** |
| **OPERATING ACTIVITIES:**                                                               |       |                             |       |                                                 |       |   |   |   |   |
| Net  loss                                                                               |       | $                                | (27,693    | )                                                    | $          | (44,968 | ) | $ | (45,456 | ) | $ | (379,165 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities:            |       |                             |       |                                                 |       |   |   |   |   |
| Depreciation  and amortization                                                          |       | 1,619                            |       | 1,718                                                |       | 2,325 |   | 15,886 |   |
| Stock  contributions to 401(k) plan                                                     |       | —                           |       | —                                               |       | 46 |   | 643 |   |
| Cumulative  effect of accounting change                                                 |       | —                           |       | —                                               |       | — |   | 28,179 |   |
| Stock-based  compensation                                                               |       | 60                               |       | 169                                                  |       | 114 |   | 1,617 |   |
| Loss  on disposal of property and equipment                                             |       | 334                              |       | 15                                                   |       | 8 |   | 638 |   |
| Provisions  for note receivable and loan guarantees to/for officers                     |       | 385                              |       | 1,330                                                |       | — |   | 3,315 |   |
| Purchased  in-process technology                                                        |       | —                           |       | —                                               |       | — |   | 44,946 |   |
| Gain  on sale of assets                                                                 |       | —                           |       | —                                               |       | — |   | (2,146 | ) |
| Loss  on write-off of patents                                                           |       | 143                              |       | 363                                                  |       | — |   | 950 |   |
| Amortization  of premium on investments                                                 |       | —                           |       | —                                               |       | — |   | 535 |   |
| Cumulative  effect of reorganization                                                    |       | —                           |       | —                                               |       | — |   | 1,153 |   |
| Gain  on sale of subsidiary                                                             |       | —                           |       | —                                               |       | — |   | (2,288 | ) |
| Other                                                                                   |       | —                           |       | —                                               |       | — |   | (284 | ) |
| Changes  in operating assets and liabilities:                                           |       |                             |       |                                                 |       |   |   |   |   |
| Accrued  interest and other current assets                                              |       | 2,015                            |       | 291                                                  |       | 1,324 |   | 2,116 |   |
| Deposits  and other assets                                                              |       | 137                              |       | (131                                                 | )          | 22 |   | (632 | ) |
| Accounts  payable                                                                       |       | (2,825                           | )          | 170                                                  |       | 3,284 |   | 1,394 |   |
| Accrued  expenses                                                                       |       | (1,687                           | )          | 372                                                  |       | 1,157 |   | 1,193 |   |
| Deferred  revenue                                                                       |       | (108                             | )          | (59                                                  | )          | (285 | ) | 23 |   |
| Net  cash used in operating activities                                                  |       | (27,620                          | )          | (40,730                                              | )          | (37,461 | ) | (281,927 | ) |
|                                                                                    |       |                             |       |                                                 |       |   |   |   |   |
| **INVESTING ACTIVITIES:**                                                               |       |                             |       |                                                 |       |   |   |   |   |
| Purchases  of marketable securities                                                     |       | (4,525                           | )          | (65,031                                              | )          | (49,926 | ) | (508,017 | ) |
| Sales  and maturities of marketable securities                                          |       | 28,132                           |       | 84,103                                               |       | 74,045 |   | 493,193 |   |
| Purchases  of property and equipment                                                    |       | (111                             | )          | (672                                                 | )          | (842 | ) | (11,675 | ) |
| Additions  to patents and licenses                                                      |       | (1,005                           | )          | (1,517                                               | )          | (849 | ) | (8,887 | ) |
| Net  proceeds from sale of assets                                                       |       | 51                               |       | —                                               |       | — |   | 3,503 |   |
| Cash  acquired in acquisition of business                                               |       | —                           |       | —                                               |       | — |   | 1,121 |   |
| Net  cash provided by (used in) investing activities                                    |       | 22,542                           |       | 16,883                                               |       | 22,428 |   | (30,762 | ) |
|                                                                                    |       |                             |       |                                                 |       |   |   |   |   |
| **FINANCING ACTIVITIES:**                                                               |       |                             |       |                                                 |       |   |   |   |   |
| Net  proceeds from issuance of common stock and exercise of stock options and  warrants |       | 94                               |       | 3,611                                                |       | 24,429 |   | 281,420 |   |
| Net  proceeds from issuance of preferred stock                                          |       | —                           |       | —                                               |       | — |   | 41,298 |   |
| Payment  of preferred stock dividends                                                   |       | —                           |       | —                                               |       | — |   | (302 | ) |
| Proceeds  from issuance of notes payable and long-term debt                             |       | —                           |       | —                                               |       | — |   | 9,318 |   |
| Restricted  cash                                                                        |       | 3,236                            |       | —                                               |       | — |   | (264 | ) |
| Payments  on notes payable, long-term debt, and capital lease obligations               |       | (1,350                           | )          | (1,342                                               | )          | (1,432 | ) | (11,261 | ) |
| Proceeds  from issuance of notes payable to related parties                             |       | —                           |       | —                                               |       | — |   | 4,982 |   |
| Payments  on notes payable to related parties                                           |       |                             |       | —                                               |       | — |   | (1,330 | ) |
| Loan  to officer and payment of guarantee, net                                          |       | —                           |       | (625                                                 | )          | 122 |   | (3,612 | ) |
| Net  cash provided in financing activities                                              |       | 1,980                            |       | 1,644                                                |       | 23,119 |   | 320,249 |   |
|                                                                                    |       |                             |       |                                                 |       |   |   |   |   |
| Net  increase (decrease) in cash and cash equivalents                                   |       | (3,098                           | )          | (22,203                                              | )          | 8,086 |   | 7,560 |   |
|                                                                                    |       |                             |       |                                                 |       |   |   |   |   |
| Cash  and cash equivalents at beginning of period                                       |       | 10,658                           |       | 32,861                                               |       | 24,775 |   | — |   |
|                                                                                    |       |                             |       |                                                 |       |   |   |   |   |
| Cash  and cash equivalents at end of period                                             |       | $                                | 7,560      |                                                 | $          | 10,658 |   | $ | 32,861 |   | $ | 7,560 |   |

 

*SeeAccompanying Notes to Consolidated Financial Statements*

 

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**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**MAXIMPHARMACEUTICALS, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY)**

 

**1.  NATURE OF OPERATIONS AND BASIS FORPRESENTATION**

 

MaximPharmaceuticals, Inc. (the “Company”) was incorporated in Delaware andmerged in 1993 with Syntello Vaccine Development AB (“SVD”), a Swedishbiopharmaceutical company, in an exchange of stock accounted for as a reverseacquisition (the “Reorganization”). The Company’s proprietary technologies,which provide the basis for drug candidates for life-threatening cancers andliver diseases, were acquired during and following the Reorganization. Thestatements of operations inception-to-date information reflect the cumulativeoperations of SVD from the date of its inception (October 23, 1989). Thestatements of stockholders’ equity for the periods from inception to the dateof the Reorganization reflect the equity activity of SVD. The Company sold SVDin July 1996. In June 2000, the Company acquired Cytovia, Inc.,(“Cytovia”) and in September 2000, the Company incorporated Maxim PharmaceuticalsEurope Limited, both of which operate as wholly owned subsidiaries.

 

Since the Reorganization,the Company has devoted substantially all of its resources to its CepleneTM(histamine dihydrochloride) product development program and to the developmentof an oral formulation of histamine. In addition, a result of the June 2000acquisition of Cytovia, Inc., the Company also has undertaken research anddevelopment efforts relating to apoptosis modulator drug candidates. TheCompany conducts its research and other product development efforts through acombination of internal efforts and collaborative programs with universities,other clinical research sites, contract research organizations andpharmaceutical companies. Oversight of all external and collaborative programsis conducted by the Company’s executive officers and staff primarily located atits headquarters in San Diego, California.

 

Since commencement of operations, the Companyhas been a development stage enterprise, and accordingly, the Company’soperations have been directed primarily toward developing its proprietarytechnologies. The Company has incurred net losses since its inception and as ofSeptember 30, 2005, had an accumulated deficit of $379.2 million. Suchlosses and accumulated deficit resulted from the absence of significant revenueand significant costs incurred in the development of the Company’s proprietarytechnologies. The Company has used combined cash in operating and investingactivities in excess of $312 million since inception and does not currentlyhave an FDA approved drug. The Company last raised capital in 2003 in a privateplacement transaction which generated net proceeds to the Company of $24.1million.

 

In September 2004,the Company announced that the confirmatory Phase 3 trial, or M0104 trial, forthe treatment of advanced malignant melanoma patients with liver metastasesfailed to demonstrate an improvement in overall patient survival.  As a result, the Company withdrew its UnitedStates New Drug Application, or NDA, seeking approval of Ceplene therapy totreat advanced malignant melanoma patients with liver metastases and closed thetreatment protocol approved by the FDA in April 2004.

 

The Company expects toincur substantial losses as it continues its research and developmentactivities, particularly the conduct of clinical trials of its drug candidates.The future success of the Company is dependent on its ability to obtainadditional capital required to develop and commercialize its drug candidatesand upon its ability to attain future profitable operations. The Companyexpects to utilize its cash and cash equivalents to fund its operations,including research and development of its product candidates primarily forpre-clinical activities and for clinical trials.  Based upon projected spending levels, theCompany believes that it has cash and investments on hand at September 30,2005, that are sufficient to fund the Company’s operations for at least thenext twelve months, including the screening of additional compounds,advancement of IND enabling studies, initiation of a Phase 1 clinical trialwith one lead apoptosis product candidate, and preparation and submission of aEuropean regulatory filing for Ceplene (collectively, the “2006 Objectives”).Additionally, the Company believes that without additional equity or debtfinancing it does not currently have adequate funding to complete the clinicaltrials required to bring any drug candidates to market, therefore, it willrequire significant additional funding. If the Company is unsuccessful in itsefforts to raise additional funds through the sale of its equity securities orthrough strategic relationships, it will be required to significantly reduce orcurtail its research and development activities and other operations.

 

The Company will require,over the long-term, substantial new funding to pursue development 

 

57

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and commercialization ofits product candidates and continue its operations.  The Company believes that satisfying thesecapital requirements over the long-term will require successfulcommercialization of its product candidates. However, it is uncertain whether any products will be approved or willbe commercially successful.  The amountof the Company’s future capital requirements will depend on numerous factors,including the progress of its research and development programs, the conduct ofpre-clinical tests and clinical trials, the development of regulatorysubmissions, the costs associated with protecting patents and other proprietaryrights, the development of marketing and sales capabilities and theavailability of third-party funding.

 

On September 6,2005, the Company entered into a merger agreement with EpiCept Corporation, orEpiCept, pursuant to which EpiCept will issue shares of its common stock to theCompany’s stockholders in exchange for all of the outstanding stock of theCompany and will assume most of the Company’s outstanding options and all ofthe outstanding warrants.  Uponcompletion of the merger, the Company will become a wholly-owned subsidiary ofEpiCept, with the Company’s stockholders holding approximately 28% of EpiCept’scommon stock outstanding.  The proposedtransaction is subject to approval by the Company’s stockholders and certainother customary closing conditions.  TheCompany has scheduled a special meeting of stockholders on December 21,2005 for the purpose of voting on a proposal to adopt and approve the mergeragreement and approve the merger.  TheCompany anticipates closing the transaction in January 2006.

 

The Company believes thatif the proposed merger does not close there can be no assurance that theCompany will be successful in obtaining any financing, if required, or that itwill generate positive cash flows from operations.  If the Company obtains funds througharrangements with collaborative partners or others, the Company may be requiredto relinquish rights to certain of its technologies or product candidates.  The Company’s operating plans should the mergernot close consist of moving forward with the 2006 Objectives and raisingadditional funds through issuing equity or debt securities and seekingcollaborative partners, strategic and other similar arrangements.  In addition, if, at any time, the Company’sprospects for financing its research and development programs decline, theCompany may decide to further reduce research and development expenses bydelaying, discontinuing or reducing its funding of development of one or moreproduct candidate.

 

**2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

PRINCIPLES OFCONSOLIDATION—The consolidated financial statements include the financialstatements of Maxim Pharmaceuticals, Inc. and its wholly ownedsubsidiaries, Cytovia, Inc. and Maxim Pharmaceuticals Europe Limited. Allintercompany balances and transactions have been eliminated in consolidation.

 

CASH EQUIVALENTS ANDINVESTMENTS IN MARKETABLE SECURITIES—Investments with original maturities ofless than 90 days at the date of purchase are considered to be cash equivalents.All other investments are classified as short-term investments which are deemedby management to be available-for-sale and are reported at fair value with netunrealized gains or losses reported within other comprehensive loss in theconsolidated statement of stockholders’ equity. Realized gains and losses, anddeclines in value judged to be other than temporary, are included in investmentincome or interest expense. The cost of securities sold is computed using thespecific identification method.

 

CONCENTRATION OF CREDITRISK—The Company invests its excess cash in U.S. government securities andother highly liquid debt instruments of financial institutions and U.S. andforeign corporations with strong credit ratings. These instruments are held atvarious institutions. The Company has established guidelines which theseinstitutions must follow relative to diversification and maturities to maintainan adequate level of liquidity and safety. Cash and cash equivalents held at anindividual institution may exceed the Federal Deposit Insurance Corporation’slimits.

 

PROPERTYAND EQUIPMENT—Property and equipment are recorded at cost, net of 

 

58

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accumulateddepreciation and amortization. Depreciation on property and equipment iscalculated on the straight-line method over the estimated useful lives of theassets, which range from three to seven years. Amortization of leaseholdimprovements is calculated using the straight-line method over the shorter of thelease term or the estimated useful lives of the assets.

 

PATENTS AND LICENSES—TheCompany capitalizes certain legal costs and acquisition costs related topatents and licenses that have demonstrated alternative future use at the timethe costs are capitalized. Accumulated costs are amortized over the lesser ofthe legal lives or the estimated economic lives of the proprietary rights,generally seven to ten years, using the straight-line method and commencing atthe time the patents are issued or the license is acquired.  Costs related to patents the Company is notactively pursuing are evaluated for impairment and written off to expense.  Accumulated amortization related to patentswas $1,741,000 and $1,363,000 at September 30, 2005 and 2004,respectively.  Based on existing patents,estimated amortization expense related to patents for the years ending September 30,2006, 2007, 2008, 2009 and 2010 is $390,000, $529,000, $653,000, $709,000,$669,000, respectively.

 

IMPAIRMENT OF LONG-LIVEDASSETS—The Company reviews long-lived assets and certain identifiableintangibles for impairment whenever events or changes in circumstances indicatethat the carrying amount of an asset may not be recoverable. Recoverability ofassets to be held and used is measured by a comparison of the carrying amountof an asset to future net undiscounted cash flows expected to be generated bythe asset. If such assets are considered to be impaired, the impairment to berecognized is measured by the amount by which the carrying amount of the assetsexceeds the fair value of the assets. Assets to be disposed of are reported atthe lower of the carrying amount or fair value less costs to sell.

 

FAIR VALUE OF FINANCIALINSTRUMENTS—The carrying amount of cash and cash equivalents, short-terminvestments, accrued interest and other current assets, accounts payable, andaccrued expenses are considered to be representative of their respective fairvalues because of the short-term nature of these financial instruments. Thecarrying amount of the note payable and long-term debt are reasonable estimatesof their fair value as these amounts bear interest based on market ratescurrently available for notes with similar terms.

 

REVENUE RECOGNITION—Revenueconsists of up-front technology access fees, research fees, and milestonepayments. Revenue isgenerally recognized when all of the following criteria are met: persuasiveevidence that an arrangement exists; services have been rendered and arenonrefundable; the price is fixed and determinable; and collection isreasonably assured.  All multipledeliverable arrangements are reviewed by the Company for separability inaccordance with EITF 00-21.  If theseparability criteria are met, non-refundable upfront technology access feesare accounted for separately.  Upfronttechnology access fees which are not considered separable from the relatedresearch fees are recognized as revenue over the applicable research period asresearch activities are performed. Milestone payments are recognized whenearned and collectibility is assured provided that the milestone events aresubstantive and the payments approximate the fair value of the milestone.Amounts received but unearned are recorded as deferred revenue.  Certain collaborative agreements provide theCompany donated materials and services, which are recorded as revenue andexpense when used at the fair market value of the material received or theservice provided.  Grant funding isrecognized as revenue when services are performed under the grant.

 

RESEARCHAND DEVELOPMENT—All research and development expenses, including purchasedresearch and development, are expensed as incurred.

 

59

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INCOME TAXES—Income taxes are accounted forunder the asset and liability method. Deferred tax assets and liabilities arerecognized for the future tax consequences attributable to differences betweenthe financial statement carrying amounts of existing assets and liabilities andtheir respective tax bases and operating loss and tax credit carry forwards.Deferred tax assets and liabilities are measured using enacted tax ratesexpected to apply to taxable income in the years in which those temporarydifferences are expected to be recovered or settled. The effect on deferred taxassets and liabilities of a change in tax rates is recognized in income in theperiod that includes the enactment date.

 

NETLOSS PER SHARE—Net loss per share is calculated in accordance with SFAS No. 128*“Earnings per Share.”* Basic net loss pershare of common stock is computed by dividing the net loss after deduction ofdividends on preferred stock by the weighted average number of shares of commonstock outstanding during the period. Diluted loss per share is calculated byincluding the additional common shares issuable upon exercise of options andwarrants in the basic weighted average share calculation, unless the effect oftheir inclusion is antidilutive. At September 30, 2005, 2004 and 2003,outstanding options and warrants totaled 3,382,000, 5,712,000, and 5,379,000,respectively. As these securities were antidilutive for the years then ended,diluted loss per share equaled the basic loss per share in each respectiveyear.

 

STOCK OPTION PLANS— The Company accounts for its stock optionplans under the measurement and recognition principles of APB Opinion No. 25,*“Accounting for Stock Issued to Employees,”*andrelated Interpretations.  Compensationexpense associated with stock options awarded to employees for the years endingSeptember 30, 2005, 2004 and 2003 was $52,000, a $5,000 credit, and$6,000, respectively.  No otherstock-based employee compensation cost is reflected in net loss, as all optionsgranted under those plans had an exercise price equal to the market value ofthe underlying common stock on the date of grant.  The following table illustrates the effect onnet loss and net loss per share if the Company had applied the fair valuerecognition provisions of SFAS Statement No. 123, *“Accounting for Stock-Based Compensation,”*tostock-based employee compensation.

 
| ** **                                                                                                | ** ** | **Year Ended (in thousands, except per share data)** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                                | ** ** | **September 30, 2005**                          | ** ** | **September 30, 2004** | ** ** | **September 30, 2003** | ** ** |
| Net  loss, as reported                                                                                    |       | $                                                    | (27,693    | ) | $ | (44,968 | ) | $ | (45,456 | ) |
| Less:  Compensation expense (credit) associated with stock options                                        |       | 52                                                   |       | (5 | ) | 6 |   |
| Add:  Total stock-based employee compensation expense determined under fair value  methods for all awards |       | (3,430                                               | )          | (3,466 | ) | (3,331 | ) |
| Pro  forma net loss                                                                                       |       | $                                                    | (31,071    | ) | $ | (48,439 | ) | $ | (48,781 | ) |
|                                                                                                      |       |                                                 |       |   |   |   |   |
| Net  loss per share:                                                                                      |       |                                                 |       |   |   |   |   |
| Basic  and diluted-as reported                                                                            |       | $                                                    | (0.97      | ) | $ | (1.59 | ) | $ | (1.94 | ) |
| Basic  and diluted-pro forma                                                                              |       | $                                                    | (1.09      | ) | $ | (1.72 | ) | $ | (2.08 | ) |

 

The fair value of the stock optionswere estimated at the date of grant using the “Black-Scholes” method for optionpricing and the following weighted-average assumptions for the years ended September 30,2005, 2004 and 2003, respectively:

 
| ** **                               | ** ** | **Year Ended**              | ** ** |
|------------------------------------------|------------|-----------------------------|------------|
| ** **                               | ** ** | **September 30, 2005** | ** ** | **September 30, 2004** | ** ** | **September 30, 2003** | ** ** |
| Risk-free interest rate                  |       | 3.05                        | %          | 2.48 | % | 2.31 | % |
| Dividend yield                           |       | 0                           | %          | 0 | % | 0 | % |
| Volatility factor                        |       | 80.8                        | %          | 77.0 | % | 75.0 | % |
| Expected life (in  years)                |       | 3.18                        |       | 3.83 |   | 3.81 |   |
| Resulting average grant  date fair value |       | $                           | 1.08       |   | $ | 4.46 |   | $ | 1.70 |   |
|                                          |            |                             |            |  |  |  |  |  |  |  |

 

60

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TRANSLATION OF FOREIGN CURRENCY FINANCIALSTATEMENTS—Assets and liabilities of foreign operations where the functionalcurrency is other than the U.S. dollar are translated at fiscal year-end ratesof exchange, and the related revenue and expense amounts are translated at theaverage rates of exchange during the fiscal year. Gains or losses resultingfrom translating foreign currency financial statements resulted in animmaterial impact to the financial statements for the years ended September 30,2005, 2004 and 2003.

 

USE OFESTIMATES—The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities, the disclosure of contingent assets and liabilitiesat the date of the consolidated financial statements and the reported amountsof expenses during the reporting period. Actual results could differ from theseestimates.

 

RECLASSIFICATIONS—Certainamounts in the prior years’ consolidated financial statements have beenreclassified to conform with current year classifications.

 

**3.  SHORT-TERM INVESTMENTS IN MARKETABLESECURITIES**

 

The following is asummary of the Company’s investment securities, all of which are classified asavailable-for-sale. Determination of estimated fair value is based upon quotedmarket prices.

 
| ** **                                        | ** ** | **September 30, 2005** | ** ** |
|---------------------------------------------------|------------|-----------------------------|------------|
| ** **                                        | ** ** | **(in thousands)**          | ** ** |
| ** **                                        | ** ** | **Gross  amortized  cost**  | ** ** | **Gross  unrealized  gains** | ** ** | **Gross  unrealized  losses** | ** ** | **Market  Value** | ** ** |
|                                              |       |                        |       |   |   |   |   |   |   |
| Corporate debt securities                         |       | $                           | 5,023      |   | $ | — |   | $ | (38 | ) | $ | 4,985 |   |
| Other securities                                  |       | 3,300                       |       | — |   | — |   | 3,300 |   |
| U.S. securities and  other government obligations |       | 7,000                       |       | — |   | (79 | ) | 6,921 |   |
|                                              |       | $                           | 15,323     |   | $ | — |   | $ | (117 | ) | $ | 15,206 |   |

 
| ** **                                        | ** ** | **September 30, 2004** | ** ** |
|---------------------------------------------------|------------|-----------------------------|------------|
| ** **                                        | ** ** | **(in thousands)**          | ** ** |
| ** **                                        | ** ** | **Gross  amortized  cost**  | ** ** | **Gross  unrealized  gains** | ** ** | **Gross  unrealized  losses** | ** ** | **Market  Value** | ** ** |
|                                              |       |                        |       |   |   |   |   |   |   |
| Corporate debt  securities                        |       | $                           | 19,930     |   | $ | — |   | $ | (113 | ) | $ | 19,817 |   |
| Other securities                                  |       | 8,000                       |       | — |   | — |   | 8,000 |   |
| U.S. securities and  other government obligations |       | 11,000                      |       | $ | — |   | (71 | ) | 10,929 |   |
|                                              |       | $                           | 38,930     |   | $ | — |   | $ | (184 | ) | $ | 38,746 |   |

 

61

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The amortized cost andestimated fair value of securities available-for-sale at September 30,2005, by contractual maturity, are as follows (in thousands):

 
| ** **                              | ** ** | **Amortized  Cost** | ** ** | **Estimated  Fair Value** | ** ** |
|-----------------------------------------|------------|---------------------|------------|---------------------------|------------|
|                                    |       |                |       |                      |       |
| Due in one year or less                 |       | $                   | 11,016     |                      | $          | 10,924 |   |
| Due after one year  through three years |       | 4,307               |       | 4,282                     |       |
|                                    |       | $                   | 15,323     |                      | $          | 15,206 |   |

 

Investments in a netunrealized loss position at September 30, 2005 are as follows (in thousands):

 
| ** **                                        | ** ** | ** **                 | ** ** | **Less than 12 Months of  temporary impairment** | ** ** | **Greater than 12 Months  of temporary  impairment** | ** ** | **Total temporary  impairment** | ** ** |
|---------------------------------------------------|------------|----------------------------|------------|--------------------------------------------------|------------|------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                        | ** ** | **Number of  Investments** | ** ** | **Fair  Value**                                  | ** ** | **Unrealized  Losses**                               | ** ** | **Fair  Value**                 | ** ** | **Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Unrealized  Losses** | ** ** |
| Corporate  debt securities                        |       | 5                          |       | $                                                | —     |                                                 | $          | —                          |       | $ | 4,985 |   | $ | (38 | ) | $ | 4,985 |   | $ | (38 | ) |
| U.S.  securities and other government obligations |       | 4                          |       | 1,981                                            |       | (20                                                  | )          | 4,940                           |       | (59 | ) | 6,921 |   | (79 | ) |
|                                              |       |                       |       |                                             |       |                                                 |       |                            |       |   |   |   |   |   |   |
| Total  temporarily impaired securities            |       | 9                          |       | $                                                | 1,981      |                                                 | $          | (20                             | )          | $ | 9,925 |   | $ | (97 | ) | $ | 11,906 |   | $ | (117 | ) |

 

Investments in a netunrealized loss position at September 30, 2004 are as follows (in thousands):

 
| ** **                                        | ** ** | ** **                 | ** ** | **Less than 12 Months of  temporary impairment** | ** ** | **Greater than 12 Months  of temporary  impairment** | ** ** | **Total temporary  impairment** | ** ** |
|---------------------------------------------------|------------|----------------------------|------------|--------------------------------------------------|------------|------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                        | ** ** | **Number of  Investments** | ** ** | **Fair  Value**                                  | ** ** | **Unrealized  Losses**                               | ** ** | **Fair  Value**                 | ** ** | **Unrealized  Losses** | ** ** | **Fair Value** | ** ** | **Unrealized  Losses** | ** ** |
| Corporate  debt securities                        |       | 18                         |       | $                                                | 16,060     |                                                 | $          | (89                             | )          | $ | 3,757 |   | $ | (24 | ) | $ | 19,817 |   | $ | (113 | ) |
| U.S.  securities and other government obligations |       | 7                          |       | 10,929                                           |       | (71                                                  | )          | —                          |       | — |   | 10,929 |   | (71 | ) |
|                                              |       |                       |       |                                             |       |                                                 |       |                            |       |   |   |   |   |   |   |
| Total  temporarily impaired securities            |       | 25                         |       | $                                                | 26,989     |                                                 | $          | (160                            | )          | $ | 3,757 |   | $ | (24 | ) | $ | 30,746 |   | $ | (184 | ) |

 

The Company believes thatthe decline in value is temporary and primarily related to the change in marketinterest rates since purchase.  TheCompany anticipates full recovery of amortized cost with respect to thesesecurities at maturity or sooner in the event of a change in the market interestrate environment.

 

**4.  PROPERTY AND EQUIPMENT**

 

Property and equipmentconsists of the following (in thousands):

 

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| ** **                                      | ** ** | **September 30** | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **2005**              | ** ** | **2004** | ** ** |
|                                            |       |                  |       |   |   |
| Laboratory equipment                            |       | $                     | 3,031      |   | $ | 3,588 |   |
| Office equipment and  furniture                 |       | 2,737                 |       | 4,816 |   |
| Leasehold improvements                          |       | 2,761                 |       | 2,703 |   |
|                                            |       | 8,529                 |       | 11,107 |   |
| Less accumulated  depreciation and amortization |       | (6,466                | )          | (7,528 | ) |
|                                            |       | $                     | 2,063      |   | $ | 3,579 |   |

 

At September 30, 2005and 2004, property and equipment included equipment under capital leases of$84,000 and $84,000 with related accumulated amortization of $81,000 and$53,000, respectively.

 

**5.  ACCRUED INTEREST AND OTHER CURRENT ASSETS**

 

Accruedinterest and other current assets consist of the following (in thousands):

 
| ** **                    | ** ** | **September 30** | ** ** |
|-------------------------------|------------|-----------------------|------------|
| ** **                    | ** ** | **2005**              | ** ** | **2004** | ** ** |
|                          |       |                  |       |   |   |
| Accrued interest              |       | $                     | 143        |   | $ | 427 |   |
| Prepaid insurance             |       | 303                   |       | 421 |   |
| Prepaid clinical trial  costs |       | —                |       | 586 |   |
| Other                         |       | 329                   |       | 920 |   |
|                          |       | $                     | 775        |   | $ | 2,354 |   |

 

**6.  RELATED PARTY TRANSACTIONS**

 

In December 2000,the Company entered into a $2,850,000 full recourse secured revolvingpromissory note with one of its officers. The note bore interest at an annual rate of 4.0% and was secured by theofficer’s outstanding options and shares of common stock. During the quarter endedSeptember 30, 2002, the Company determined that the note due from theofficer had become impaired because it determined that the officer did not havethe ability to repay the loan in full when due and recorded an allowance on thenote in the amount of $700,000.  TheCompany subsequently recorded $1,751,000 of expense including $418,000,$1,333,000 and $0 during the years ended September 30, 2005, 2004 and2003, respectively, to increase the allowance on the note related to thedecrease in the value of the Maxim stock and stock options held by the officercollateralizing the note.  In addition,the Company had not recorded interest income of $367,000 on the note subsequentto June 30, 2002.  The entireoutstanding balance of principal and interest was due in December 2002.  Since the note came due, the officer has nothad sufficient liquid assets to repay the loan in full; however, the officerhas paid the Company $394,000 related to the note.  On August 3,2005, the officer forfeited all collateral securing the loan, including 203,333shares of Maxim common stock and 1,563,667 options to purchase Maxim commonstock resulting in the Company receiving all such shares of common stock andoptions.  The officer was insolvent andunable to repay the outstanding balance of the loan.  After extensively reviewing all related factsand circumstances, including the Company’s current needs, prospects andcontingency plans, the officer’s current assets and liabilities, the Company’sresulting inability to collect the loan indebtedness, and the best interests ofthe Company’s stockholders and creditors, the Company’s board of directorsagreed to forgive the loan.

 

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On August 19, 2005, the Company entered into an agreementwith the officer regarding the forgiveness of all amounts (including principaland interest) owed under the note.  The agreement relating to suchforgiveness also provides for the release by the officer of any and all claimsthat he may have against the Company, its officers, directors, stockholders andcertain of our other representatives with regard to any claims that he may havearising out of or in connection with the loan.  In connection with theloan forgiveness, on August 19, 2005, the Company entered into anindemnification agreement with the officer.  Pursuant to theindemnification agreement, the Company agreed to indemnify the officer forcertain excise taxes, if any, that may arise as a result of the forgiveness ofthe loan under Section 280G and Section 4999 of the Internal RevenueCode of 1986, as amended.  Should theofficer be subject to such excise taxes, payments under the indemnificationagreement could exceed $2 million.

 

On August 19,2005, we entered into an amendment to our existing employment agreement withthe officer dated December 3, 2004.  Prior to the amendment, theofficer’s employment agreement provided that the officer was entitled toreceive continuation of his annual base salary, which is currently set at$405,000 through September 30, 2005 and $450,000 thereafter, plus healthcare insurance coverage for a period of three (3) years from the date ofhis employment termination if we terminated the officer’s employment other thanfor cause.  Pursuant to the amendment, the officer will only be entitledto receive the continuation of his annual base salary and health care insurancecoverage for a period of two (2) years from the date of termination.

 

On August 19, 2005, the Companyalso entered into an amendment to its retention agreement with the officerdated March 11, 2005.  Prior to the amendment, the officer’sretention agreement provided that he was eligible to receive a “success bonus”of up to $225,000 upon consummation of a change in control event or otherstrategic transaction which the Company’s board of directors determined to havepreserved or increased value to its stockholders based upon factors consideredrelevant by the Company’s board at the time a definitive agreement relating tosuch transaction was approved.  Pursuant to the amendment, the officerwill no longer have any right to receive or be considered for all or anyportion of the $225,000 “success bonus”.  In addition, prior to theamendment, the officer’s retention agreement provided that if he remainedcontinuously employed with the Company for at least three months but not longerthan six months following the consummation of a change in control event, theofficer would receive an additional “transition bonus” of $225,000, payable asof his last day of employment with the Company; provided that, if the officerwas terminated by the Company (or our successor) without cause at any timeduring the first six months following the consummation of a change in controlevent, the “transition bonus” would become immediately payable in full on thedate of such termination.  Pursuant to the amendment, such “transitionbonus” was modified to a retention incentive.  The officer is now entitledto receive the “transition bonus” upon the earlier of March 31, 2006 andthe date, if ever, on which the Company terminates his employment other thanfor cause.  Pursuant to the amendment, if the officer has not beencontinuously employed by the Company through March 31, 2006 or has beenterminated by the Company for cause prior to March 31, 2006, then heis not entitled to receive the “transition bonus”.  Pursuant to the retention agreement andsubject to certain limitations, as a result of remaining continuously employedby us through September 30, 2005, the officer is entitled to receive aretention bonus of $225,000 paid in six equal monthly installments on the lastday of each month starting on September 30, 2005.

 

At June 30, 2005, the Company was owed $900,000, including$4,000 of unrecorded interest, from a former officer resulting from an unpaidloan, due in July 2004, that the individual had with a bank, which theCompany guaranteed in July 2001. The purpose of the bank loan was to allow the payment of income taxesassociated with the exercise of stock options. The Board determined that it was in the Company’s best interest toprovide the guarantee to avoid the necessity of the officer selling personalholdings of Maxim securities during a period of depressed market prices.  During the fourth quarter of fiscal year2002, the Company had determined that it was probable the former officer wouldnot have the 

 

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ability to repay his bankloan.  Therefore, the Company recorded aprovision for the guarantee and a liability in the amount of $900,000.  The former officer does not currently havethe assets necessary to repay the Company. As of June 30, 2005, the recorded outstanding principal andinterest balance on the loan was $0, net of the $897,000 allowance.  On August 1, 2005, the former officerforfeited to the Company all 453,333 options to purchase Maxim commonstock.  After extensively reviewing allrelated facts and circumstances, including the Company’s current needs,prospects and contingency plans, the former officer’s current assets andliabilities and the Company’s inability to collect the loan indebtedness, andthe best interests of the Company’s stockholders and creditors the Company’sboard of directors agreed to forgive the loan. On August 19, 2005, the Company entered into an agreement with theofficer regarding the forgiveness of all amounts (including principal andinterest) owed under the note.

 

**7.  ACCRUED EXPENSES**

 

Accrued expenses consistof the following (in thousands):

 
| ** **           | ** ** | **September 30** | ** ** |
|----------------------|------------|-----------------------|------------|
| ** **           | ** ** | **2005**              | ** ** | **2004** | ** ** |
|                 |       |                  |       |   |   |
| Clinical trial costs |       | $                     | 26         |   | $ | 1,198 |   |
| Compensation         |       | 1,454                 |       | 1,019 |   |
| Deferred rent        |       | 704                   |       | 679 |   |
| Other                |       | 306                   |       | 1,281 |   |
|                 |       | $                     | 2,490      |   | $ | 4,177 |   |

 

**8.  NOTES PAYABLE AND LONG TERM DEBT**

 

In September 2005, the Company paid in full a term loan ithad with a bank releasing the Company from all obligations it had under theterm loan agreement.  The agreement contained customary affirmativeand negative covenants, including financial covenants requiring the maintenanceof specified liquidity terms and minimum tangible net worth. The Company wasalso prohibited from paying dividends under the terms of the loan. The Companywas required to maintain its principal depository and operating accounts withthe bank. In addition, the Company hadthe choice to either maintain a minimum aggregate balance of $3,500,000 at theinstitution or pay to the bank a quarterly fee of $2,500.  Throughout 2005 and at September 30,2004, the Company was in compliance with all covenants.

 

Notes payable andlong-term debt consist of the following (in thousands):

 
| ** **                                                                                                                                                                                       | ** ** | **September 30** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                       | ** ** | **2005**              | ** ** | **2004** | ** ** |
|                                                                                                                                                                                             |       |                  |       |   |   |
| 5.82% promissory note payable, payable in  monthly installments through April 10, 2006                                                                                                      |       | $                     | 238        |   | $ | — |   |
| 4.76% promissory note payable, payable in  monthly installments through October 1, 2005                                                                                                     |       | 13                    |       | — |   |
| Bank  term loan payable in monthly installments commencing January 1, 2002  through April 1, 2006,at an interest rate of prime plus .75% (paid in  full as of September 30, 2005) |       | —                |       | 808 |   |
| 3.75% promissory note payable, payable in  monthly installments through June 30, 2005                                                                                                       |       | —                |       | 339 |   |
| Total  notes payable and long-term debt                                                                                                                                                          |       | 251                   |       | 1,147 |   |
|                                                                                                                                                                                             |       |                  |       |   |   |
| Less  current portion of notes payable and long-term debt                                                                                                                                        |       | (251                  | )          | (1,053 | ) |
| Total  long-term portion of notes payable and long-term debt                                                                                                                                     |       | $                     | —     |   | $ | 94 |   |

 

65

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The aggregate amounts ofdebt outstanding at September 30, 2005, which will become due in 2006 is$251,000.

 

The terms of the Company’s facility lease require it to maintain aletter of credit on behalf of the landlord in the amount of $264,000.  The letter of credit is secured by a $264,000certificate of deposit at the issuing bank.

 

**9.  LEASES**

 

The Company leases officeand laboratory facilities under five and ten-year noncancelable operatingleases with expiration dates through September 2010. Rent expenseapproximated $2,130,000, $2,044,000, and $2,080,000 for the years ended September 30,2005, 2004, and 2003, respectively. The Company entered into agreements tosublease certain of its facilities. Total sublease income for the years ended September 30,2005, 2004 and 2003 was $130,000, $55,000, and $152,000, respectively. Inaddition, the Company is obligated under a capital lease for equipment.

 

Future commitments undernoncancelable operating leases for the next five years, net of subleasecommitments of $322,000 in 2006, $243,000 in 2007, $182,000 in 2008, $144,000in 2009 and $150,000 in 2010 and future minimum lease payments due undercapital lease agreements as of September 30, 2005, are as follows (inthousands):

 
| **Year  Ended September 30** | ** ** | **Operating  Leases** | ** ** | **Capital  Leases** | ** ** |
|-----------------------------------|------------|-----------------------|------------|---------------------|------------|
|                              |       |                  |       |                |       |
| 2006                              |       | $                     | 1,542      |                | $          | 2 |   |
| 2007                              |       | 1,704                 |       | —              |       |
| 2008                              |       | 1,822                 |       | —              |       |
| 2009                              |       | 1,268                 |       | —              |       |
| 2010                              |       | 1,173                 |       | —              |       |
| Total                             |       | $                     | 7,509      |                | $          | 2 |   |

 

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**10.  SUPPLEMENTAL CASH FLOW INFORMATION**

 
| ** **                                                                                | ** ** | **Year Ended September 30** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                | ** ** | **2005**                         | ** ** | **2004** | ** ** | **2003** | ** ** | **From Inception  Through  September 30, 2005** | ** ** |
|                                                                                      |       |                             |       |   |   |   |   |   |   |
| Noncash  investing and financing activities:                                              |       |                             |       |   |   |   |   |   |   |
| Unrealized  gain (loss) on investments available for sale                                 |       | $                                | 67         |   | $ | (650 | ) | $ | (629 | ) | $ | (117 | ) |
| Other  assets acquired under note payable                                                 |       | 436                              |       | 434 |   | 425 |   | 2,465 |   |
| Retirement  of officer’s stock which was collateral for note receivable from officer |       | 264                              |       | — |   | — |   | 264 |   |
| Property  and equipment acquired under capital leases                                     |       | —                           |       | — |   | 50 |   | 270 |   |
| Issuance  of common stock/warrants for services                                           |       | 60                               |       | 169 |   | 114 |   | 410 |   |
| Issuance  of common stock to convert debt                                                 |       | —                           |       | — |   | — |   | 7,594 |   |
| Dividends  on preferred stock                                                             |       | —                           |       | — |   | — |   | 5,496 |   |
| Issuance  of preferred stock in payment of dividend                                       |       | —                           |       | — |   | — |   | (4,891 | ) |
| Acquisition  of subsidiary:                                                               |       |                             |       |   |   |   |   |   |   |
| Assets  acquired                                                                          |       | —                           |       | — |   | — |   | 7,872 |   |
| Liabilities  assumed                                                                      |       | —                           |       | — |   | — |   | (10,336 | ) |
| Net  equity effect of acquisition                                                         |       | —                           |       | — |   | — |   | (72,899 | ) |
| Sale  of subsidiary:                                                                      |       |                             |       |   |   |   |   |   |   |
| Net  patents sold                                                                         |       | —                           |       | — |   | — |   | 154 |   |
| Other  liabilities transferred                                                            |       | —                           |       | — |   | — |   | (121 | ) |
| Note  payable transferred                                                                 |       | —                           |       | — |   | — |   | (2,422 | ) |
| Other  accruals                                                                           |       | —                           |       | — |   | — |   | 100 |   |
| Supplemental  disclosure of cash flow information - cash paid for interest                |       | 38                               |       | 72 |   | 123 |   | 2,221 |   |
|                                                                                           |            |                                  |            |  |  |  |  |  |  |  |  |  |  |

 

**11.  STOCKHOLDERS’ EQUITY**

 

WARRANTS—The Company hasgranted warrants to certain consultants primarily in connection with certainfinancing transactions and investor communication activities.  At September 30, 2005, the Company hasoutstanding warrants to purchase 33,750 shares of common stock issued tonon-employees.  Compensation expenserelated to these warrants during the years ended September 30, 2005, 2004and 2003 totaled $6,000, $78,000 and $39,000, respectively, and was recorded asa general and administrative expense.  InSeptember 2003, in connection with a private placement of common stock,the Company issued to investors 1,366,607 warrants and issued to the placementagent 148,049 warrants.  These warrantsare exercisable at $7.70.  No warrantswere exercised during the years ended September 30, 2005 and 2003.  During the year ended September 30,2004, the investors exercised 271,072 of these 

 

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warrants. As of September 30,2005, warrants to purchase 1,277,334 shares of the Company’s common stock at aweighted average exercise price of $7.68 per share were outstanding. All of thewarrants are exercisable as of September 30, 2005 and have terms expiringin 2006 through 2011.

 

STOCK OPTIONS—In 1993, theCompany established a stock option plan (the “1993 Plan”) under which incentiveand nonqualified stock options have been granted to key employees, directorsand consultants of the Company. Under the 1993 Plan, as amended, options may begranted to purchase up to 1,800,000 shares of common stock; options that aregranted generally vest over four years and have a maximum term of ten years.The 1993 Plan terminated on September 30, 2003.  All granted options remain outstanding undertheir original terms, but no additional options may be granted from theplan.  In August 2000, the Companyadopted a non-statutory stock option plan (the “2000 Plan”) under whichnonqualified stock options may be granted to employees, consultants, officersand directors of the Company. Under the 2000 Plan, options may be granted topurchase up to 750,000 shares of common stock, of which total grants toofficers and directors must be less than half of the authorized shares; optionsthat are granted generally vest over four years and have a maximum term of tenyears. In 2001, the Company established a stock option plan (the “2001Incentive Plan”) under which incentive and nonqualified stock options have beengranted to key employees, directors and consultants of the Company. Under the2001 Plan, as amended, options may be granted to purchase up to 4,250,000shares of common stock; options that are granted generally vest over four yearsand have a maximum term of ten years.

 

The Company also grants options to non-employees inconnection with their execution of consulting agreements with the Company. Thefair value of the options granted to non-employees is estimated using the “Black-Scholes”method for option pricing, and the expense is recorded over the period servicesare performed.  Compensation expense related to option grantsrecorded during the years ended September 30, 2005, 2004 and 2003 totaled$3,000, $96,000 and $69,000, respectively.

 

The following tablesummarizes the Company’s stock option activity (in thousands, except per shareamounts):

 
| ** **                           | ** ** | **Number  of Shares** | ** ** | **Weighted Average  Exercise Price  Per Share** | ** ** |
|--------------------------------------|------------|-----------------------|------------|-------------------------------------------------|------------|
| Outstanding September 30,  2002 |       | 3,724                 |       | $                                               | 11.12      |   |
| Granted                              |       | 539                   |       | $                                               | 3.11       |   |
| Exercised                            |       | (68                   | )          | $                                               | 5.07       |   |
| Canceled                             |       | (390                  | )          | $                                               | 5.46       |   |
| Outstanding September 30,  2003 |       | 3,805                 |       | $                                               | 10.67      |   |
| Granted                              |       | 1,133                 |       | $                                               | 8.09       |   |
| Exercised                            |       | (339                  | )          | $                                               | 4.50       |   |
| Canceled                             |       | (173                  | )          | $                                               | 15.98      |   |
| Outstanding September 30,  2004 |       | 4,426                 |       | $                                               | 10.28      |   |
| Granted                              |       | 1,204                 |       | $                                               | 1.97       |   |
| Exercised                            |       | (45                   | )          | $                                               | 2.10       |   |
| Canceled                             |       | (3,481                | )          | $                                               | 10.64      |   |
| Outstanding September 30,  2005 |       | 2,104                 |       | $                                               | 5.11       |   |

 

AtSeptember 30, 2005, options for 1,615,000 shares of common stock areexercisable, and the remaining 489,000 become exercisable at various datesthrough August 1, 2009. The options expire at various dates through August 1,2015.

 

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The followingtable summarizes information concerning outstanding and exercisable options asof September 30, 2005 (in thousands, except contractual life and exerciseprice data).

 
| ** **      | ** **  | **Options  Outstanding** | ** ** | **Options  Exercisable**             | ** ** |
|-----------------|-------------|--------------------------|------------|--------------------------------------|------------|
| **Price Range** | ** **  | **Shares**               | ** ** | **Weighted-Average  Exercise Price** | ** ** | **Weighted-Average  Remaining  Contractual Life** | ** ** | **Shares** | ** ** | **Weighted-Average  Exercise Price** | ** ** |
|            |        |                     |       |                                 |       |   |   |   |   |   |   |
| $               | 0.66-$1.41  |                     | 42         |                                 | $          | 1.22 |   | 8.11 years |   | 9 |   | $ | 0.66 |   |
| $               | 1.42-$2.99  |                     | 704        |                                 | $          | 2.08 |   | 8.13 years |   | 336 |   | $ | 2.07 |   |
| $               | 3.00-$5.05  |                     | 296        |                                 | $          | 3.93 |   | 5.98 years |   | 287 |   | $ | 3.94 |   |
| $               | 5.06-$8.00  |                     | 779        |                                 | $          | 6.79 |   | 6.32 years |   | 747 |   | $ | 6.79 |   |
| $               | 8.01-$15.75 |                     | 283        |                                 | $          | 9.89 |   | 7.26 years |   | 236 |   | $ | 10.06 |   |
| $               | 0.66-$15.75 |                     | 2,104      |                                 | $          | 5.11 |   | 7.04 years |   | 1,615 |   | $ | 5.75 |   |
|                 |             |                          |            |                                      |            |  |  |  |  |  |  |  |  |  |  |

 

STOCKHOLDERRIGHTS PLAN—In June 2000, the Board of Directors of the Company declared adividend distribution of one preferred stock purchase right (a “Right”) foreach outstanding share of common stock of Maxim held of record at the close ofbusiness on June 22, 2000. The Rights will initially trade with, and willbe inseparable from Maxim’s common stock. The Rights will be exercisable onlyif a person or group acquires 15% or more of Maxim’s outstanding common stock,or announces a tender offer which, if successful, would result in ownership bya person or group of 15% or more of Maxim’s common stock. Each Right willentitle stockholders, other than the 15% or more acquirer, to buy oneone-hundredth of a share of Maxim’s series A junior participating preferredstock at an exercise price of $325. If a person or group acquires 15% or moreof Maxim’s common stock, each Right will entitle its holder, other than suchperson or member of such group, to purchase a number of Maxim’s common shareshaving a market value of $650. If Maxim were to be acquired in a merger orother business combination transaction after a person has acquired 15% or moreof Maxim’s common stock, each Right will entitle its holder other than theacquiring person, to purchase a number of the acquiring company’s common shareshaving a market value of $650. The Rights Plan also includes an exchangeoption. In general, after the rights become exercisable, the Maxim Board may,at its option, effect an exchange of part or all of the Rights, other thanRights that have become void, for shares of Maxim common stock. Under thisoption, Maxim would issue one share of common stock for each right, subject toadjustment in certain circumstances. The Rights expire on June 22, 2010,unless redeemed by the Company’s Board of Directors. The Rights can be redeemedby the Board at a price of $0.01 per Right at any time before the Rights becomeexercisable.  On September 5, 2005,the Company amended the stockholder rights agreement, dated as of June 15,2000, to ensure that the proposed merger with EpiCept Corporation will nottrigger the rights under the stockholder rights agreement.  The amendment to the stockholder rights agreementprovides that the rights issued under the stockholder rights agreement willexpire immediately prior to the effective date of the proposed merger.

 

**12.  401(K) PLAN**

 

TheCompany has a 401(k) retirement plan (the “401(k) Plan”) under which employeesmeeting eligibility requirements may elect to participate and contribute to the401(k) Plan. The 401(k) Plan provides for matching contributions by the Companyin an amount equal to the lesser of 50% of the employee’s deferral or 3% of theemployee’s qualifying compensation.  TheCompany contribution can be made in the form of either the common stock of theCompany or cash at the discretion of the Company’s Board of Directors.  Company contributions to the 401(k) plan forthe fiscal years ended September 30, 2005, 2004, and 2003 were $146,000,$212,000, and $210,000, respectively, in the form of cash in fiscal year 2005and 2004, and in the form of cash and Company common stock in fiscal year 2003.

 

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**13.  INCOME TAXES**

 

Incometaxes for the years ended September 30, 2005, 2004 and 2003 differed fromthe amounts expected by applying the U.S. federal income tax rate of 34% toloss before taxes as follows (in thousands):

 
| ** **                            | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Computed income benefit               |       | $        | (9,415     | )        | $          | (15,289  | )          | $ | (15,449 | ) |
| State taxes, net of federal benefit   |       | 2        |       | 1        |       | 2        |       |
| Change in federal valuation allowance |       | 9,542    |       | 13,918   |       | 15,182   |       |
| General business credit, net          |       | (307     | )          | (572     | )          | (446     | )          |
| Other, net                            |       | 178      |       | 1,942    |       | 711      |       |
|                                  |       | $        | —     |     | $          | —   |       | $ | — |   |

 

Thecomponents that comprise deferred tax assets and liabilities at September 30,2005 and 2004 are as follows (in thousands):

 
| ** **                             | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax assets:                   |       |     |       |     |       |
| Net operating  loss carryforwards      |       | $        | 134,941    |     | $          | 119,232 |   |
| General business  credit carryforwards |       | 9,197    |       | 8,592    |       |
| Other                                  |       | 2,716    |       | 4,835    |       |
| Total gross  deferred tax assets       |       | 146,854  |       | 132,659  |       |
| Less valuation  allowance              |       | (146,854 | )          | (132,659 | )          |
| Net deferred tax  asset                |       | $        | —     |     | $          | — |   |

 

Thenet change in the valuation allowance for the years ended September 30,2005 and 2004 was an increase of $14,195,000 and $16,017,000, respectively. Thevaluation allowance of $146,854,000 at September 30, 2005 representsdeferred tax assets that more likely than not will not be realized through thereversal of future taxable temporary differences or taxable income. Thevaluation allowance includes $4,068,000, tax effected, related to stock optiondeductions, the benefit of which will be eventually credited to equity.  In assessing the realizability of deferredtax assets, management considers whether it is more likely than not that someportion or all of the deferred tax assets will not be realized. The ultimaterealization of deferred tax assets is dependent upon the generation of futuretaxable income during the periods in which those temporary differences becomedeductible. Management considers the scheduled reversal of deferred taxliabilities, projected future taxable income and tax planning strategies inmaking this assessment. At September 30, 2005 and 2004, we had a valuationallowance equal to our deferred tax assets since we have not established apattern of profitable operations for income tax reporting purposes.

 

AtSeptember 30, 2005, the Company has federal and California tax netoperating loss carryforwards of approximately $322 million and $288 million,respectively. The federal and California tax loss carryforwards are expected toexpire beginning 2006 and 2008, respectively.

 

AtSeptember 30, 2005, the Company has federal and California tax creditcarryforwards of approximately $6.6 million and $2.6 million,respectively.  The federal tax creditcarryforwards are expected to expire beginning 2009.

 

TheCompany has determined that “ownership changes” within the meaning of InternalRevenue Code Section 382 have occurred in prior years.  However, the Company has determined based onan

 

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analysisof rules contained in Section 382, that any limitations on the futureutilization of net operating loss carryforwards as a result of these past“ownership changes” will not have a material impact on such utilization.  As a result of the proposed transaction withEpiCept, it is likely that the future utilization of the Company’s netoperating loss carryforwards and credits will be limited by Sections 382 and383 of the Internal Revenue Code should the merger be consummated.  The transaction is subject to approval by theCompany’s stockholder and certain other customary closing conditions.

 

**14.  LICENSES ANDCOLLABORATIVE AGREEMENTS**

 

TheCompany’s strategy for development of its technologies includes, in some cases,the acquisition and the in-licensing of technologies, and the establishment ofcollaborative relationships with universities, governmental and other entities.In 1993, the Company entered into a technology transfer agreement with aEuropean corporation pursuant to which the Company purchased intellectualproperty and patent rights related to its Ceplene technology. The agreementincluded payments by the Company totaling $700,000 and required that theCompany pay certain royalty obligations to an inventor of the technology basedupon Company product revenues. In October 1999, the Company and theinventor entered a new royalty agreement under which the Company agreed to pay$1,000,000 over three years in exchange for a reduced royalty rate.  During the years ended September 30,2005, 2004, and 2003, the Company paid the inventor $0, $0 and $200,000 incash.  During the years ended September 30,2002, 2001 and 2000, the Company paid the inventor $200,000 each year with anadditional $200,000 paid in common stock in the year ended September 30,2000.

 

InAugust 2001, the Company entered into a Material Transfer Agreement withSchering Corporation (“Schering”) for the Company’s Phase 2 hepatitis Ctrial.  Under the terms of the agreement,Schering contributed the study drug and performed the viral testing for thestudy. During the years ended September 30, 2005, 2004 and 2003, theCompany recognized revenue and the corresponding expense of $0, $1,749,000 and$2,858,000 in contributed product and $13,000, $94,000 and $150,000 incontributed services from Schering, respectively.

 

InNovember 2003, the Company entered into an agreement with Myriad underwhich the Company licensed its MX90745 series of caspase-inducer anti-cancercompounds to Myriad.  Under the terms ofthe agreement the Company granted to Myriad a research license, to performMyriad’s obligations under the research plan, with a non-exclusive, worldwide,royalty-free license, without the right to sublicense the technology.  Myriad is responsible for the worldwidedevelopment and commercialization of any drug candidates from the series ofcompounds.  The Company granted to Myriada development and commercialization license with an exclusive, worldwide,royalty-bearing license, with the right to sublicense the technology.  The agreement requires that Myriad makelicensing, research and milestone payments to the Company totaling up to $27million, assuming the successful commercialization of the compound for thetreatment of cancer, as well as pay a royalty on product sales.  Myriad paid an upfront fee as well asresearch funding for the first year of the agreement.  The Company determined the upfront fee didnot meet the criteria for separability and is recognizing the amount as revenueover the research period.  During theyear ended September 30, 2005, the Company recognized $1,267,000 ofcollaboration revenue, comprised of a $1,000,000 milestone payment resultingfrom Myriad initiating a Phase 1 clinical trial in patients with advanced solidtumors, $134,000 for the upfront payment and $133,000 for researchfunding.  During the year ended September 30,2004, the Company recognized $1,733,000 in collaboration revenue, comprised of$866,000 for the upfront payment and $867,000 for research funding.

 

InMarch 2004 and as amended in January 2005, the Company entered into alicense agreement reacquiring the rights to the MX2105 series of apoptosisinducer anti-cancer compounds from Shire Biochem, Inc (formerly known asBioChem Pharma, Inc.) who had previously announced that oncology

 

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wouldno longer be a therapeutic focus of the company’s research and developmentefforts.  Under the agreement all rightsand obligations of the parties under the July 2000 agreement were terminatedand Shire BioChem agreed to assign and/or license to the Company rights itowned under or shared under the prior research program.  The agreement did not require any up-frontpayments, however, it does require that the Company provide Shire Biochem aportion of any sublicensing payments the Company receives if the Companyrelicenses the series of compounds or make milestone payments to Shire BioChemtotaling up to $26 million, assuming the successful commercialization of thecompound by the Company for the treatment of a cancer indication, as well aspay a royalty on product sales.  In July 2000,the Company had entered into an agreement with BioChem Pharma under which theCompany licensed its MX2105 series of compounds. The Company did not record anyrelated collaboration revenue during the years ended September 30, 2005,2004 and 2003.

 

**15.  RESTRUCTURING**

 

InFebruary 2005, the Company announced an involuntary workforce reduction oftwelve employees as part of a plan to realign its resources and corporateobjectives based upon several factors, including that an additional phase 3trial of Ceplene therapy for the treatment of Acute Myeloid Leukemia isnecessary before submitting a New Drug Application to the United States Foodand Drug Administration.  In October 2004,the Company implemented a restructuring plan which resulted from the negativeoutcome of the Company’s confirmatory Phase 3 clinical trial of Ceplene inadvanced malignant melanoma patients with liver metastases.  The restructuring plan included a reductionin the Company’s workforce of approximately 50%.  The cost of the severance packages associatedwith these two restructurings, including pay, benefits continuation andoutplacement services, totaled approximately $1,601,000 which was expensed inthe year ended September 30, 2005. Of the total $1,601,000 of restructuring charges approximately$1,103,000 was included in research and development expense, approximately$155,000 was included in business development and marketing expense andapproximately $343,000 was included in general and administrative expense forthe year ended September 30, 2005. As of September 30, 2005, all of the severance related expenses hadbeen paid.

 

**16.  COMMITMENTS ANDCONTINGENCIES**

 

InOctober 2001 and May 2002, certain former shareholders of Cytoviafiled complaints in California Superior Court in San Diego, against the Companyand two of its officers, alleging fraud and negligent misrepresentation inconnection with the Company’s acquisition of Cytovia. A binding arbitrationproceeding with the American Arbitration Association was held in May 2003.The three-member arbitration panel rejected all of the plaintiffs’ claims,determined that the Company has no liability for such claims and awardedrecovery of the Company’s reasonable attorneys’ fees and costs of approximately$922,000 as prevailing party in the proceedings.  In December 2003, the decision wasconfirmed by the Superior Court, which entered a judgment to this effect.  In June 2004, the plaintiffs filed anAppeal.  In December 2004, the Courtof Appeal reversed the judgment of the Superior Court and remanded the lawsuitto the trial court for further proceedings. In September 2005, plaintiffsfiled an amended complaint adding state law securities claims against the defendants.  In October 2005, the Company demurred tothis amended complaint on the grounds that the complaint failed to allege anyuntrue statements, thus rendering each asserted cause of action deficient.  The demurrer will be heard in January 2006.  In the meantime, the case continues in thediscovery stages.  The Company intends tovigorously defend itself against these claims.

 

OnSeptember 21, 2004, plaintiff Dr. Richard Bassin, on behalf ofhimself and purportedly on behalf of a class of other shareholders similarlysituated, filed a complaint in the United States District Court for theSouthern District of California against the Company, one officer of the Companyand one

 

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formerofficer of the Company, alleging violations of federal securities laws relatedto declines in the Company’s stock price in connection with various statementsand alleged omissions to the public and to the securities markets during theclass period from November 11, 2002 to September 17, 2004, andseeking damages therefore.  Thereaftertwo similar complaints were filed in the Southern District of California.  These three actions were consolidated and in March 2005,plaintiffs filed a consolidated amended complaint.  No discovery has been conducted.  In October 2005, the Unites StatesDistrict Court of the Southern District of California granted the Company’smotion to dismiss the consolidated amended compliant, but allowed plaintiffsleave to amend.  It is possible that theplaintiffs will exercise their right to file an amended complaint.  The cases have been tendered to the Company’sinsurance carrier, which has denied coverage. The Company disputes the position taken by the insurance carrier andfully intends to enforce its right under the policy.

 

OnOctober 7, 2004, plaintiff Jesus Putnam, purportedly on behalf of theCompany, filed a derivative complaint in the Superior Court for the State ofCalifornia, County of San Diego, against one officer of the Company, two formerofficers of the Company and the Company’s entire Board of Directors, allegingbreach of fiduciary duty, abuse of control, gross mismanagement, waste ofcorporate assets, unjust enrichment and violations of the CaliforniaCorporations Code, all of which arise from allowing purported violations offederal securities laws related to declines in the Company’s stock price inconnection with various statements and alleged omissions to the public and tothe securities markets, and seeking damages therefore.  No discovery has been conducted, and theparties have entered into a stipulation to stay the action pending resolutionof the motion to dismiss the federal actions. In October 2005, plaintiff attempted to file an amended complaintto include class action allegation that defendants breached their fiduciaryduties by approving the merger.  Inaddition, the plaintiff requested that the court enjoin Maxim’s directors fromcompleting the merger as presently proposed. The amended complaint was rejected by the court pending the lifting ofthe stay.  Maxim expects plaintiff tore-file the amended complaint once the stay is lifted, in or about December 2005.  If the court were to grant plaintiff’srequest for an injunction, the merger could be delayed indefinitely.  The complaint has been tendered to theCompany’s insurance carrier, which has denied coverage.  The Company disputes the position taken bythe insurance carrier and fully intends to enforce its rights under the policy.

 

OnMay 3, 2005, plaintiff Carolina Casualty Insurance Company filed acomplaint in the United States District Court for the Southern District ofCalifornia against one officer of the Company, two former officers of theCompany and the Company’s entire Board of Directors, seeking a declaratoryjudgment from the court that the Company’s D&O insurance policy did notcover losses arising from the state and federal shareholder suits that werefiled in 2004.  The Company answered thecomplaint and filed counterclaims against Carolina Casualty.  No discovery has been conducted and the courthas issued a stay of the entire proceedings, pending certain events in thefederal suit.

 

TheCompany intends to engage in a rigorous defense against such claims.  No assurances can be made that the Companywill be successful in its defense of the pending claims. If the Company is notsuccessful in its defense of such claims, the Company could be forced to, amongother things, make significant payments to resolve these claims, and suchpayments could have a material adverse effect on the Company’s business,financial condition and results of operations if not covered by the Company’sinsurance carrier. The Company has not accrued any expenses related to theabove claims as the extent or range of such payments, if any, cannot yet bereasonably estimated.  Further,regardless of success of the litigation, the litigation itself may result insubstantial costs and divert management’s attention and resources, all of whichcould adversely affect the Company’s business.

 

Inconnection with the loan forgiveness discussed in footnote 6, “Related PartyTransactions”, on August 19, 2005, the Company entered into anindemnification agreement with an officer of the Company.  Pursuant to theindemnification agreement, the Company agreed to indemnify the officer for

 

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certainexcise taxes, if any, that may arise as a result of the forgiveness of the loanunder Section 280G and Section 4999 of the Internal Revenue Code of1986, as amended.  Should the officer besubject to such excise taxes, payments under the indemnification agreementcould exceed $2 million.

 

InSeptember 2005, the Company entered into a definitive merger agreementwith EpiCept.  The closing of the transactionis subject to satisfaction of certain customary closing conditions, includingthe approval of the Company’s stockholders. The Company scheduled a special meeting of stockholders on December 21,2005 for the purpose of voting on a proposal to adopt and approve the mergeragreement and approve the merger.  TheCompany anticipates closing the transaction in January 2006.  If and at the time the transaction closes theCompany will owe Piper Jaffray & Co. $600,000 for their investmentbanking services.  In the event that themerger agreement is terminated by EpiCept or the Company due to the failure ofthe Company’s stockholders to adopt the merger agreement, the Company isrequired to pay all reasonable expenses of EpiCept up to $650,000.  Under certain other conditions as describedin the merger agreement if the transaction is not completed, the Company couldbe required to make payments to EpiCept totaling up to $1.4 million.

 

**17.  QUARTERLY RESULTS(UNAUDITED)**

 

Summarizedquarterly results of operations for the years ended September 30, 2005 and2004 are as follows (in thousands, except per share amounts):

 
| ** **                          | ** ** | **Year ended September 30, 2005** | ** ** |
|-------------------------------------|------------|----------------------------------------|------------|
| ** **                          | ** ** | **First**                              | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** |
|                                |       |                                   |       |   |   |   |   |   |   |
| Collaboration and research revenue  |       | $                                      | 363        |   | $ | 1,120 |   | $ | 100 |   | $ | 97 |   |
| Research and development expenses   |       | 6,949                                  |       | 5,119 |   | 3,290 |   | 2,431 |   |
| Net loss applicable to common stock |       | (9,587                                 | )          | (6,638 | ) | (5,533 | ) | (5,935 | ) |
| Net loss per share of common stock  |       | (0.34                                  | )          | (0.23 | ) | (0.19 | ) | (0.21 | ) |
|                                     |            |                                        |            |  |  |  |  |  |  |  |  |  |  |

 
| ** **                          | ** ** | **Year ended September 30, 2004** | ** ** |
|-------------------------------------|------------|----------------------------------------|------------|
| ** **                          | ** ** | **First**                              | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** |
|                                |       |                                   |       |   |   |   |   |   |   |
| Collaboration and research revenue  |       | $                                      | 1,419      |   | $ | 1,273 |   | $ | 801 |   | $ | 625 |   |
| Research and development expenses   |       | 9,331                                  |       | 8,363 |   | 9,883 |   | 10,346 |   |
| Net loss applicable to common stock |       | (9,871                                 | )          | (8,939 | ) | (11,678 | ) | (14,480 | ) |
| Net loss per share of common stock  |       | (0.35                                  | )          | (0.32 | ) | (0.41 | ) | (0.51 | ) |
|                                     |            |                                        |            |  |  |  |  |  |  |  |  |  |  |

 

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**ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ONACCOUNTING AND FINANCIAL DISCLOSURES**

 

None.

 

**ITEM 9A. CONTROLS AND PROCEDURES**

 

*Evaluation of Disclosure Controls and Procedures.*  Wecarried out an evaluation, under the supervision and with the participation ofour management, including our President and Chief Executive Officer, who is ourprincipal executive officer, and Chief Financial Officer, who is our principalfinancial officer, of the effectiveness of the design and operation of ourdisclosure controls and procedures, as defined in Rule 13a-15(e) ofthe Securities and Exchange Act of 1934, as amended or the Exchange Act, as ofthe end of the period covered by this report. Based upon that evaluation, our President and Chief Executive Officerand Chief Financial Officer concluded, as of the evaluation date, that ourdisclosure controls and procedures are effective in enabling us to record,process, summarize and report information required to be included in ourperiodic SEC filings.

 

*Changes in Internal Controls.*  Therehave been no changes in our internal control over financial reporting that hasmaterially affected, or is reasonably likely to materially affect our internalcontrol over financial reporting.

 

*Management’s Report on Internal Control over FinancialReporting. *Our management is responsible forestablishing and maintaining adequate internal control over financialreporting, as defined in Exchange Act Rules 13a-15(f) and 15d-15(f).  Our internal controls over financialreporting is a process designed under the supervision of our Chief ExecutiveOfficer and Chief Financial Officer to provide reasonable assurance to theCompany regarding the reliability and fair presentation of financial reportingand the preparation of our financial statements for external purposes inaccordance with United States generally accepted accounting principles.

 

Asof September 30, 2005, our management, with the participation of the ChiefExecutive Officer and Chief Financial Officer, assessed the effectiveness ofour internal controls over financial reporting based on the criteria foreffective internal control over financial reporting described in “InternalControl –Integrated Framework,” issued by the Committee of SponsoringOrganizations of the Treadway Commission. Our assessment included an evaluation of the design of our internalcontrol over financial reporting and testing of the operating effectiveness ofour internal control over financial reporting. Based on the assessment under such framework, our management determinedthat we maintained effective internal control over financial reporting as of September 30,2005.

 

Ourmanagement’s assessment of the effectiveness of our internal control overfinancial reporting as of September 30, 2005 has been audited by KPMG LLP,an independent registered public accounting firm as stated in their attestationreport, which is included below.

 

**Report of Independent Registered Public Accounting Firm**

 

The Board of Directors and Stockholders

Maxim Pharmaceuticals, Inc.

 

Wehave audited management’s assessment, included in the accompanying Management’sReport on Internal Control over Financial Reporting as of September 30,2005, that Maxim Pharmaceuticals, Inc. and subsidiaries (MaximPharmaceuticals – a development stage company) maintained effective internalcontrol over financial reporting as of September 30, 2005, based oncriteria established in Internal Control-Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway 

 

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Commission.Maxim Pharmaceuticals’ management is responsible for maintaining effectiveinternal control over financial reporting and for its assessment of theeffectiveness of internal control over financial reporting. Our responsibilityis to express an opinion on management’s assessment and an opinion on theeffectiveness of the Company’s internal control over financial reporting basedon our audit.

 

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internalcontrol over financial reporting, evaluating management’s assessment, testing andevaluating the design and operating effectiveness of internal control, andperforming such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis for ouropinion.

 

Acompany’s internal control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (1) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 

Inour opinion, management’s assessment that Maxim Pharmaceuticals maintainedeffective internal control over financial reporting as of September 30,2005, is fairly stated, in all material respects, based on criteria establishedin Internal Control–Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission. Also, in our opinion, MaximPharmaceuticals maintained, in all material respects, effective internalcontrol over financial reporting as of September 30, 2005, based oncriteria established in Internal Control–Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission.

 

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated balance sheets ofMaxim Pharmaceuticals, Inc. and subsidiaries as of September 30, 2005and 2004, and the related consolidated statements of operations, stockholders’equity, and cash flows for each of the years in the three-year period ended September 30,2005 and for the period from inception (October 23, 1989) through September 30,2005, and our report dated December 12, 2005 expressed an unqualifiedopinion on those consolidated financial statements.

 
| /s/ KPMG  LLP      |   |
|-------------------------|--------|
|                    |
| San  Diego, California  |
| December 12,  2005 |

 

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**ITEM 9B. OTHER INFORMATION**

 

None.

 

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**PART III**

 

**ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT**

 

Ourdirectors and executive officers, the positions held by them and theirexperience are set forth below.

 
| **NAME**                 | ** ** | **Position(s)**                                                               | ** ** | **Age** | ** ** | **Year in Which  He/She Became an  Executive Officer or  Director** | ** ** |
|--------------------------|------------|-------------------------------------------------------------------------------|------------|---------|------------|---------------------------------------------------------------------|------------|
| Larry G. Stambaugh       |       | President and Chief Executive Officer                                         |       | 58      |       | 1993                                                                |       |
| John D. Prunty           |       | Vice President, Finance and Chief Financial Officer,  and Corporate Secretary |       | 43      |       | 2004                                                                |       |
| John F. Bedard           |       | Director                                                                      |       | 56      |       | 2004                                                                |       |
| Per-Olof Mårtensson |       | Director                                                                      |       | 68      |       | 1996                                                                |       |
| F. Duwaine Townsen       |       | Director                                                                      |       | 72      |       | 1993                                                                |       |
| Wayne P. Yetter          |       | Director                                                                      |       | 60      |       | 2003                                                                |       |
| Robert L. Zerbe          |       | Director                                                                      |       | 55      |       | 2002                                                                |       |

 

Theofficers of the Company hold office at the discretion of the Board.  During fiscal year 2005, the officers of theCompany devoted substantially all of their business time to the affairs of theCompany for the period in which they were employed, and they intend to do sountil such time as the proposed merger with EpiCept Corporation is completed.

 

**Larry G. Stambaugh** has served as the Company’s Chairman of the Board of Directors,President and Chief Executive Officer since 1993.  From 1989 to 1992, Mr. Stambaugh servedin a number of positions at ABC Laboratories, Inc., an internationalcontract science research laboratory, including Chairman of the Board ofDirectors, President and Chief Executive Officer.  From 1983 to 1989, Mr. Stambaugh servedas Executive Vice President and Chief Financial Officer of CNB FinancialCorporation, a multi-bank holding company. Mr. Stambaugh received a B.A. in business administration fromWashburn University and is a certified public accountant.

 

**John D. Prunty** has served as the Company’s Vice President, Finance and ChiefFinancial Officer since October 2004. Mr. Prunty joined the company as Senior Director, Finance andController in 2000 and served as Treasurer and Assistant Corporate Secretarybeginning in 2002.  From 1997 to 2000, Mr. Pruntywas Senior Director, Finance and Controller at Gen-Probe Incorporated.  From 1991 to 1997, Mr. Prunty served asVice President, Finance for I-Bus, a division of Maxwell Technologies.  From 1984 to 1991, Mr. Prunty workedwith Ernst & Whinney and its successor firm Ernst & Young,LLP.  Mr. Prunty is a certifiedpublic accountant and received a B.B.A. from the University of San Diego and aM.S. in Management from San Diego State University.

 

**John F. Bedard**, has served as a director of the Company since 2004.  Mr. Bedard has been engaged as aprincipal in a pharmaceutical consulting practice since 2002.  Prior to that, he served in senior managementpositions during a 15-year career at Bristol-Myers Squibb, a pharmaceutical

 

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company,most recently as Vice President, FDA Liaison and Global Strategy.  In that position, Mr. Bedard was theliaison with the FDA for new drug development, and he was also responsible forglobal development plans and registration activities for new drugs.  Before his tenure at Bristol-Myers Squibb, Mr. Bedardheld senior regulatory affair positions at Smith Kline & FrenchLaboratories and Ayerst Laboratories.

 

**Per-Olof Mårtensson**, has served as a director of the Company from 1993 to 1995 and againbeginning in 1996.  Mr. Mårtenssonis a director of Karo Bio AB, a pharmaceutical company, and has served as itsChairman since 2000, and from 1997 to 1998. From 1998 to 2000, and from 1991 to 1997, Mr. Mårtensson served asPresident and Chief Executive Officer of Karo Bio AB.  Since 1990, Mr. Mårtensson has owned andoperated POM Advisory Services AB, an independent consulting firm.  From 1992 to 1995, Mr. Mårtensson servedas Chairman of Skandigen AB, a diversified investment company. From 1987 to1990, Mr. Mårtensson served as President of Pharmacia LEO Therapeutics AB,and as Executive Vice President of Pharmacia AB, both biopharmaceuticalcompanies.  From 1985 to 1990, Mr. Mårtenssonserved as President and Chief Executive Officer of AB LEO, also a biopharmaceuticalcompany.  From 1979 to 1981 Mr. Mårtenssonserved as President, Pharmaceutical Operations for AB Astra, and from 1981 to1984 as President and Chief Executive Officer of AB Ferrosan.  Mr. Mårtensson currently serves on anumber of boards including as the Chairman of the Board of BioInventInternational AB and as the Vice Chairman of the Board of Photocure a/s.

 

**F. Duwaine Townsen**, has served as a director of the Company since 1993.  Mr. Townsen is a General Partner and afounder of EndPoint Late-Stage Fund, a late-stage life science fund whoseformation began in early 1999.  He isalso currently a Senior Managing Director of HamiltonTech Capital Partners,L.P.  Additionally, Mr. Townsen hasserved as a Managing Partner of Ventana Growth Funds, a group of five venturecapital funds, since 1983.  From 1961 to1964, Mr. Townsen served as an auditor at Arthur Young, a predecessorpublic accounting firm to Ernst & Young LLP.  Mr. Townsen is also a director at theCorporate Directors Forum, a corporate governance organization, a director ofSequal Technologies, Inc., a privately held company, and a directoremeritus of Cymer, Inc., a supplier of excimer light sources to thesemiconductor industry.

 

**Wayne P. Yetter**,****has served as a directorof the Company since 2003.  In September 2005,Mr. Yetter became the President and Chief Executive Officer of VerispanLLC., a healthcare information company.  Mr. Yetterserved as the President and Chief Executive Officer of Odyssey Pharmaceuticals, Inc.,a specialty pharmaceuticals subsidiary of PLIVA, d.d., from November 2004to August 2005.  Mr. Yetter wasthe founder of BioPharm Advisory, LLC in 2003 and served as Chairman of theBoard of Directors and Chief Executive Officer of Synavant Inc., apharmaceutical customer relationship management solutions company, from 2000 to2003.  From 1999 to 2000, Mr. Yetterserved as Chief Operating Officer at IMS Health, Inc., which providesinformation services for the healthcare industry.  From 1997 to 1999, he served as President andChief Executive Officer of Novartis Pharmaceuticals Corporation.  From 1994 to 1997, he served as President andChief Executive Officer of Astra Merck, Inc.  From 1991 to 1994, Mr. Yetter served asGeneral Manager and then President of Astra Merck when it was a division ofMerck & Co.  Mr. Yettercurrently serves on the Board of Directors of Noven Pharmaceuticals, Inc.and Matria Healthcare, Inc.

 

**Robert L. Zerbe, M.D.**, has served as a director of the Companysince 2002.  Dr. Zerbe is the ChiefExecutive Officer and Founder of QuatRx Pharmaceuticals Company, a privatebiopharmaceutical company.  Until 2000, Dr. Zerbewas employed by Pfizer as the Senior Vice President of Global Research andDevelopment and Director of Development Operations.  From 1993 to 2000, Dr. Zerbe served atthe Parke-Davis Pharmaceutical Research Division of Warner-Lambert as SeniorVice President Worldwide, Clinical Research and Development.  From 1982 to 1993, Dr. Zerbe served invarious senior research positions at Eli Lilly and Company.  Dr. Zerbe also serves as a director ofA.P. Pharma, a specialty

 

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pharmaceuticalcompany.

 

**Information Regarding the Boardof Directors and its Committees**

 

Asrequired under Nasdaq listing standards, the Company’s independent directorsmeet in regularly scheduled executive sessions at which only independentdirectors are present.  Personsinterested in communicating to the Board their concerns or issues may addresscorrespondence to the full Board, a particular director or to a particularcommittee of the Board, in care of Maxim Pharmaceuticals, Inc.****at 8899 University Center Lane, Suite 400,San Diego, California 92122. ** **If no particular director is named,letters will be forwarded, depending on the subject matter, to the Chair of theAudit, Compensation, or Governance and Nominating Committee.

 

TheBoard has three committees:  an AuditCommittee, a Compensation Committee, and a Governance and NominatingCommittee.  The following table providesmembership and meeting information for fiscal 2005 for each of the Boardcommittees:

 
| **Name**                           | ** ** | **Audit** | ** ** | **Compensation** | ** ** | **Governance  and  Nominating** | ** ** |
|------------------------------------|------------|-----------|------------|------------------|------------|---------------------------------|------------|
| John F. Bedard                     |       |      |       | X                |       | X                               |       |
| Per-Olof Mårtensson           |       | X         |       | X                |       | X                               |       |
| F. Duwaine Townsen                 |       | X         | *          |             |       |                            |       |
| Wayne P. Yetter                    |       | X         |       | X                | *          |                            |       |
| Robert L. Zerbe, M.D.              |       |      |       |             |       | X                               | *          |
| Total meetings in fiscal year 2005 |       | 4         |       | 3                |       | 2                               |       |

 

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*Committee Chairperson

 

TheBoard of Directors has determined that each member of each committee meets theapplicable rules and regulations regarding “independence” and that eachmember is free of any relationship that would interfere with his or herindividual exercise of independent judgment with regard to the Company.

 

**Audit Committee and RelatedMatters**

 

TheAudit Committee of the Board of Directors oversees the Company’s corporateaccounting and financial reporting process. For this purpose, the Audit Committee performs several functions.  The Audit Committee evaluates the performanceof and assesses the qualifications of the independent registered publicaccounting firm; determines and approves the engagement of the independentregistered public accounting firm; determines whether to retain or terminatethe existing independent registered public accounting firm or to appoint andengage new independent registered public accounting firm; reviews and approvesthe retention of the independent registered public accounting firm to performany proposed permissible non-audit services; monitors the rotation of partnersof the independent registered public accounting firm on the Company’s auditengagement team as required by law; confers with management and the independentregistered public accounting firm regarding the effectiveness of internalcontrols over financial reporting; establishes procedures, as required underapplicable law, for the receipt, retention and treatment of complaints receivedby the Company regarding accounting, internal accounting controls or auditingmatters and the confidential and anonymous submission by employees of concernsregarding questionable accounting or auditing matters; reviews the financialstatements to be included in the Company’s Annual Report on Form 10-K; anddiscusses with management and the independent registered public accounting firmthe results of the annual audit and the results of the Company’s

 

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quarterlyfinancial statements.  Three directorscomprised the Audit Committee during fiscal 2005:  Messrs. Mårtensson, Townsen andYetter.  The Audit Committee met four timesduring the fiscal year.  The AuditCommittee has adopted a written Audit Committee Charter which is available onthe Company’s website at www.maxim.com.

 

TheBoard of Directors annually reviews the Nasdaq listing standards definition ofindependence for Audit Committee members and has determined that all members ofthe Company’s Audit Committee are independent (as independence is currentlydefined in Rule 4350(d)(2)(A)(i) and (ii) of the Nasdaq listingstandards).  The Board of Directors hasdetermined that Mr. Townsen qualifies as an “audit committee financialexpert,” as defined in applicable Securities and Exchange Commission, or SEC,rules.  The Board made a qualitativeassessment of Mr. Townsen’s level of knowledge and experience based on anumber of factors, including his formal education and experience as an auditorfor a public accounting firm.

 

**Section 16(a) BeneficialOwnership Reporting Compliance**

 

Section 16(a) ofthe Securities Exchange Act of 1934 requires the Company’s directors andexecutive officers, and persons who own more than ten percent of a registeredclass of the Company’s equity securities, to file with the SEC initial reportsof ownership and reports of changes in ownership of common stock and otherequity securities of the Company. Officers, directors and greater than ten percent stockholders arerequired by SEC regulation to furnish the Company with copies of all Section 16(a) formsthey file.

 

Tothe Company’s knowledge, based solely on a review of the copies of such reportsfurnished to the Company and written representations that no other reports wererequired, during the fiscal year ended September 30, 2005, all Section 16(a) filingrequirements applicable to its officers, directors and greater than ten percentbeneficial owners were complied with.

 

**Code of Business Conduct and Ethics**

 

TheCompany has adopted a****Code ofBusiness Conduct and Ethics that applies to all officers (including the Company’sprincipal executive officer and principal financial officer), directors andemployees.  The Code of Business Conductand Ethics is available on our website at www.maxim.com.** **Ifthe Company makes any substantive amendments to the Code of Business Conductand Ethics or grants any waiver from a provision of the Code to any executiveofficer or director, the Company will promptly disclose the nature of theamendment or waiver on its website.

 

**ITEM 11. EXECUTIVE COMPENSATION**

 

Duringthe fiscal year ended September 30, 2005, each non-employee director ofthe Company received an annual fee of $15,000, a per-meeting fee of $1,500 forregularly scheduled board meetings and a per-meeting fee of $1,000 fortelephonic board meetings.  Eachnon-employee director also received a fee of $1,000 per committee meetingattended ($1,500 per committee meeting attended in the capacity as thatcommittee’s chairperson).  In addition tothe annual fee of $15,000, the lead director received an annual lead directorfee of $20,000.  In the fiscal year endedSeptember 30, 2005, the total compensation paid to non-employee directorswas $222,000.  Non-employee directors arealso eligible for reimbursement for their expenses incurred in attending Boardmeetings in accordance with Company policy.

 

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Inaddition, each non-employee director received an automatic stock option grantof 25,000 shares of common stock under either the 1993 Long-Term IncentivePlan, or the 1993 Plan, the 2000 Nonstatutory Stock Option Plan, or the 2000Plan, or the 2001 Incentive Stock Option Plan (referred to as the 2001 Plan)upon his initial election to the Board, and 25,000 shares if he attended atleast 75% of the meetings held during his first fiscal year as a director.  Each non-employee director also received anautomatic stock option grant of 20,000 shares of common stock under either the1993 Plan, the 2000 Plan or the 2001 Plan upon his reelection to the Board, and20,000 shares annually thereafter if he attended at least 75% of the meetingsheld during a fiscal year.  The exerciseprice of the grants to directors is equal to the fair market value of thecommon stock subject to the option on the date of the option grant.  Consistent with the foregoing, the Company’sgoal is to provide non-employee directors with stock options coveringapproximately 170,000 shares by the end of two three-year terms.  Options granted to non-employee directors areintended by the Company not to qualify as incentive stock options under theInternal Review Cod of 1986, as amended.

 

Duringthe last fiscal year, the Company granted options covering an aggregate of132,500 shares to the non-employee directors of the Company, 129,375 atexercise prices of $1.64 per share and 3,125 at an exercise price of $2.72 pershare.  There were no options exercisedby non-employee directors during the last fiscal year.

 

**Compensation of ExecutiveOfficers**

**Summary of Compensation**

 

Thefollowing table shows for the fiscal years ended September 30, 2005, 2004and 2003, compensation awarded or paid to, or earned by, the Company’s ChiefExecutive Officer, its other most highly compensated executive officer at September 30,2005, and two former executive officers who departed from the Company in fiscalyear 2005 (collectively, the “***Named Executive Officers***”):

 
| ** **                             | ** ** | ** **              | ** ** | ** **     | ** ** | ** **        | ** ** | **Long-Term  Compensation  Awards** | ** ** | ** **    | ** ** |
|----------------------------------------|------------|-------------------------|------------|----------------|------------|-------------------|------------|-------------------------------------|------------|---------------|------------|
| ** **                             | ** ** |                    |       |           |       |              |       | **Number of**                       |       |          | ** ** |
| ** **                             | ** ** |                    |       |           |       |              |       | **Securities**                      |       | **All Other** | ** ** |
| **Name  and Principal**                | ** ** | **Annual Compensation** |       | **Underlying** |       | **Compensation**  | ** ** |
| **Position  (1)**                      | ** ** | **Year**                |       | **Salary ($)** |       | **Bonus ($) (2)** |       | **Options**                         |       | **($) (3)**   | ** ** |
| Larry G. Stambaugh (4)                 |       | 2005                    |       | 406,875        |       | 366,750           |       | 150,000                             |       | 8,500         |       |
| President and  Chief                   |       | 2004                    |       | 450,000        |       | 300,000           |       | 225,000                             |       | 7,563         |       |
| Executive  Officer                     |       | 2003                    |       | 425,000        |       | 75,000            |       | —                              |       | 6,757         |       |
|                                   |       |                    |       |           |       |              |       |                                |       |          |       |
| Richard A. Mafrica (5)                 |       | 2005                    |       | 245,000        |       | —            |       | 75,000                              |       | 1,755         |       |
| Vice President,                        |       | 2004                    |       | 54,090         |       | 75,000            |       | 150,000                             |       | 219,873       |       |
| Commercial Affairs                     |       | 2003                    |       | —         |       | —            |       | —                              |       | —        |       |
|                                   |       |                    |       |           |       |              |       |                                |       |          |       |
| John D. Prunty (6)                     |       | 2005                    |       | 209,250        |       | 157,500           |       | 150,000                             |       | 6,260         |       |
| Vice President,  Finance,              |       | 2004                    |       | 189,667        |       | 22,760            |       | 5,000                               |       | 5,820         |       |
| Chief Financial  Officer and Secretary |       | 2003                    |       | 175,866        |       | 10,552            |       | 5,000                               |       | 5,256         |       |
|                                   |       |                    |       |           |       |              |       |                                |       |          |       |
| Sharon A. Tonetta, Ph.D. (7)           |       | 2005                    |       | 216,667        |       | —            |       | 100,000                             |       | 7,408         |       |
| Vice President,                        |       | 2004                    |       | 208,333        |       | 51,875            |       | 80,000                              |       | 207,138       |       |
| Drug Development                       |       | 2003                    |       | —         |       | —            |       | —                              |       | —        |       |

 

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(1)           The principal position for each of the NamedExecutive Officers reflects the offices and titles held by each of them for thefiscal year ended September 30, 2005.

 

(2)           Bonuses are reflected in the fiscal yearearned.  The fiscal 2005 bonus for Mr. Stambaughand Mr. Prunty include retention bonuses of $225,000 and $105,000,respectively.

 

(3)           All Other Compensation is comprised of theCompany’s nondiscretionary matching contribution to its 401(k) plan with theexception of a $203,700 relocation benefit paid to Dr. Tonetta in 2004 and$1,755 and $219,873 of relocation benefits paid to Mr. Mafrica in 2005 and2004.

 

(4)           On August 3, 2005, Mr. Stambaughforfeited all 1,563,667 stock options he held to purchase Maxim commonstock.  These options were collateralsecuring a loan Mr. Stambaugh owed the Company.

 

(5)           Mr. Mafrica’s employment as an executiveofficer, the Company’s Vice President of Commercial Affairs, commenced on July 22,2004 and terminated on August 15, 2005.

 

(6)           Mr. Prunty became an executive officeron October 19, 2004 with his promotion to Chief Financial Officer, VicePresident Finance and Secretary.  Mr. Pruntypreviously served as our Treasurer and Controller prior to his promotion.

 

(7)           Dr. Tonetta’s employment as an executiveofficer, the Company’s Vice President, Drug Development, commenced on December 1,2003 and terminated on July 14, 2005.

 

**STOCK OPTION GRANTS AND EXERCISES**

 

TheCompany grants options to its executive officers under the 2000 Plan and 2001Plan.  As of October 4, 2005,options to purchase a total of 75,920 and 1,592,850 shares were outstandingunder the 2000 Plan and 2001 Plan, respectively, and options to purchase594,140 and 2,353,547****sharesremained available for grant under the 2000 Plan and 2001 Plan, respectively.

 

**OPTION GRANTS IN LAST FISCAL YEAR**

 

Thefollowing tables show for the fiscal year ended September 30, 2005,certain information regarding options granted to, exercised by, and held atyear end by, the Named Executive Officers:

 
| ** **               | ** ** | **Individual Grants** | ** ** | ** **     | ** ** | ** **   | ** ** |
|--------------------------|------------|-----------------------|------------|----------------|------------|--------------|------------|
| ** **               | ** ** | ** **            | ** ** | **% Total**    | ** ** | ** **   | ** ** | ** ** | ** ** | **Potential Realizable** | ** ** |
| ** **               | ** ** | ** **            | ** ** | **Options**    | ** ** | ** **   | ** ** | ** ** | ** ** | **Value at Assumed** | ** ** |
| ** **               | ** ** | **Number of**         | ** ** | **Granted to** | ** ** | ** **   | ** ** | ** ** | ** ** | **Annual Rates** | ** ** |
| ** **               | ** ** | **Securities**        | ** ** | **Employees**  | ** ** | ** **   | ** ** | ** ** | ** ** | **Of Stock Price** | ** ** |
| ** **               | ** ** | **Underlying**        | ** ** | **In Fiscal**  | ** ** | **Exercise** | ** ** | ** ** | ** ** | **Appreciation for** | ** ** |
| ** **               | ** ** | **Options**           | ** ** | **Year 2005**  | ** ** | **Price**    | ** ** | **Expiration** | ** ** | **Option Term (7)** | ** ** |
| **Name**                 | ** ** | **Granted (1)**       | ** ** | **(6)**        | ** ** | **($/Sh)**   | ** ** | **Date** | ** ** | **5% ($)** | ** ** | **10% ($)** | ** ** |
|                     |       |                  |       |           |       |         |       |   |   |   |   |   |   |
| Larry G. Stambaugh (5)   |       | 150,000 (4            | )          | 14.00          | %          | 1.63         |       | 4/11/15 |   | 154,035 |   | 388,755 |   |
|                     |       |                  |       |           |       |         |       |   |   |   |   |   |   |
| Richard A. Mafrica       |       | 25,000 (3             | )          | 2.33           | %          | 2.30         |       | 10/19/14 |   | 36,225 |   | 91,425 |   |
|                     |       | 50,000 (4             | )          | 4.67           | %          | 1.77         |       | 3/8/15 |   | 55,755 |   | 140,715 |   |
|                     |       |                  |       |           |       |         |       |   |   |   |   |   |   |
| John D. Prunty           |       | 100,000 (3            | )          | 9.33           | %          | 2.30         |       | 10/19/14 |   | 144,900 |   | 365,700 |   |
|                     |       | 50,000 (4             | )          | 4.67           | %          | 1.77         |       | 3/8/15 |   | 55,755 |   | 140,715 |   |
|                     |       |                  |       |           |       |         |       |   |   |   |   |   |   |
| Sharon A. Tonetta, Ph.D. |       | 25,000 (3             | )          | 2.33           | %          | 2.30         |       | 10/19/14 |   | 36,225 |   | 91,425 |   |
|                     |       | 25,000 (2             | )          | 2.33           | %          | 2.43         |       | 11/17/14 |   | 38,273 |   | 96,593 |   |
|                     |       | 50,000 (4             | )          | 4.67           | %          | 1.77         |       | 3/8/15 |   | 55,755 |   | 140,715 |   |

 

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(1)           The options will fully vest upon a change ofcontrol, as defined in the Company’s option plans, unless the acquiring companyassumes the options or substitutes similar options.****The term of the options is ten years.  The options granted to Mr. Stambaughwere forfeited back to the Company on August 3, 2005.  See Item 8, “Financial Statements andSupplementary Information”, Footnote 7, “Related Party Transactions” forfurther information.  Mr. Mafricaand Ms. Tonetta’s employment with the Company was terminated on August 15,2005 and July 14, 2005, respectively.

 

(2)           25% of the options vest annually commencingon the anniversary date of the grant.

 

(3)**          **25% of the options vest annually commencingon the date of the grant.

 

(4)           The options vest in six equal monthlyinstallments on the last day of each month starting on the earlier of theconsummation of a Change in Control or September 30, 2005.

 

(5)           On August 3, 2005, Mr. Stambaughforfeited all 1,563,667 stock options he held to purchase Maxim commonstock.  These options were collateralsecuring a loan Mr. Stambaugh owed the Company.

 

(6)           Based on options to purchase 1,071,350 sharesgranted to employees in the fiscal year ended September 30, 2005,including the Named Executive Officers.

 

(7)           The potential realizable value is calculatedbased on the term of the option at its time of grant (ten years). It iscalculated assuming that the stock price on the date of grant appreciates atthe indicated annual rate, compounded annually for the entire term of theoption and that the option is exercised and sold on the last day of its termfor the appreciated stock price. These amounts represent certain assumed ratesof appreciation only, in accordance with the rules of the SEC, and do notreflect the Company’s estimate or projection of future stock price performance.Actual gains, if any, are dependent on the actual future performance of theCompany’s common stock and no gain to the optionee is possible unless the stockprice increases over the option term, which will benefit all shareholders.

 

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**AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR, ANDFISCAL YEAR-END OPTION VALUES**

 
| ** **               | ** ** | **Shares  Acquired** | ** ** | **Value  Realized  on** | ** ** | **Number of Securities  Underlying Unexercised  Options at Fiscal** | ** ** | **Value of Unexercised In-the  Money Options at Fiscal Year** | ** ** |
|--------------------------|------------|----------------------|------------|-------------------------|------------|---------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **               | ** ** | **on**               | ** ** | **Exercise**            | ** ** | **Year-End**                                                        | ** ** | **End (2)**                                                   | ** ** |
| **Name**                 | ** ** | **Exercise**         | ** ** | **(1) ($)**        | ** ** | **Exercisable**                                                     | ** ** | **Unexercisable**                                             | ** ** | **Exercisable** | ** ** | **Unexercisable** | ** ** |
| ** **               | ** ** | ** **           | ** ** | ** **              | ** ** | ** **                                                          | ** ** | ** **                                                    | ** ** | **($)** | ** ** | **($)** | ** ** |
| Larry G. Stambaugh       |       | —               |       | —                  |       | —                                                              |       | —                                                        |       | — |   | — |   |
| Richard A. Mafrica       |       | —               |       | —                  |       | 175,000                                                             |       | —                                                        |       | — |   | — |   |
| John D. Prunty           |       | —               |       | —                  |       | 55,833                                                              |       | 124,167                                                       |       | — |   | — |   |
| Sharon A. Tonetta, Ph.D. |       | —               |       | —                  |       | 26,250                                                              |       | —                                                        |       | — |   | — |   |

 

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(1)           Amounts reflected are based on the fairmarket value on the date of exercise minus the exercise price and do notindicate that the optionees sold such shares.

 

(2)           Based on the fair market value of the commonstock as of September 30, 2005 ($1.34), the last business day in fiscal2005 minus the exercise price of the options.

 

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**Employment, Termination ofEmployment and Change of Control Agreements**

 

TheCompany and Mr. Stambaugh are parties to an executive employmentagreement, effective as of October 1, 2004, and as amended on August 19,2005, pursuant to which Mr. Stambaugh will receive an annual salary of notless than $405,000 through September 30, 2005 and an annual salary of notless than $450,000 thereafter.  In addition, Mr. Stambaugh iseligible to receive an annual bonus in an amount up to 35% of his annualizedbase salary and equity compensation as determined by our Board ofDirectors.  The employment agreement also provides that if Mr. Stambaugh’semployment is terminated other than for cause he will receive a severancepayment equal to the continuation of his annual base salary plus health careinsurance coverage for a two year period.

 

TheCompany and Mr. Stambaugh are also parties to a retention agreement dated March 11,2005, as amended on August 19, 2005. Pursuant to the retention agreement, Mr. Stambaugh is entitled toreceive a “transition bonus” of $225,000 upon the earlier of March 31,2006 and the date, if ever, on which we terminate his employment other than forcause.  Pursuant to the agreement, if Mr. Stambaugh has not beencontinuously employed by us through March 31, 2006 or has been terminatedby us for cause prior to March 31, 2006, then he is not entitled toreceive the “transition bonus”.  Pursuantto the retention agreement and subject to certain limitations, as a result ofremaining continuously employed by us through September 30, 2005, Mr. Stambaughis entitled to receive a retention bonus of $225,000 paid in six equal monthlyinstallments on the last day of each month starting on September 30, 2005.

 

TheCompany and Mr. Prunty are parties to an executive employment agreement,effective as of October 18, 2004, pursuant to which Mr. Prunty willreceive an annual salary of not less than $210,000, and will be eligible toreceive an annual bonus in an amount up to 25% of his annualized base salaryand equity compensation as determined by our Board of Directors.  Theemployment agreement provides that if Mr. Prunty’s employment isterminated without cause he will be entitled to continuation of his then basesalary and health benefits for six months.  On March 8, 2005, weentered into a retention agreement with Mr. Prunty.  Pursuant to the retention agreement andsubject to certain limitations, as a result of remaining continuously employedby us through September 30, 2005, Mr. Prunty is entitled to receive aretention bonus of $105,000 paid in six equal monthly installments on the lastday of each month starting on September 30, 2005.

 

Inaddition, as part of their retention agreements and subject to certainlimitations, Mr. Stambaugh and Mr. Prunty as a result of remainingcontinuously employed by us through the date of grant (which was within the 60days of the date of the applicable retention agreement), Mr. Stambaugh andMr. Prunty were granted a retention stock option to purchase 150,000 and50,000 shares of our common stock, respectively, at an exercise price equal tothe fair market value of our common stock on the date of grant. Thereafter, provided that they remain continuously employed by us, suchretention options will vest in six equal monthly installments on the last dayof each month starting on September 30, 2005, subject to vesting ceasingupon termination of employment with us for any reason.  Vested retentionoptions are exercisable for five years from the date of grant without regard tocontinuous employment with us.  Notwithstanding the foregoing, if, at anytime following a change in control event, employment with us is involuntarilyterminated by us without cause or the employee voluntarily terminates theiremployment with us for good reason, then the applicable retention bonus shallbe paid in a lump sum (to the extent not already paid prior to such time) andthe applicable retention option shall become fully vested and exercisable (tothe extent not already fully vested and exercisable prior to such time).

 

Asfurther described in the following section, “Certain Relationships and RelatedTransactions”, on August 3, 2005, Mr. Stambaugh forfeited allcollateral, including 203,333 shares of our common stock and 1,563,667 ofoptions to purchase our common stock, securing a loan he owed to the Company.

 

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Mr.Prunty holds stock options to purchase 180,000 shares of Maxim common stocksubject to various vesting provisions. If, at any time following a change in control event, Mr. Prunty’semployment is involuntarily terminated without cause or Mr. Pruntyvoluntarily terminates his employment for good reason then stock options topurchase 132,500 shares of Maxim common stock held by Mr. Prunty shallbecome fully vested and exercisable (to the extent not already fully vested andexercisable prior to such time).  Inaddition, in the event Mr. Prunty’s employment is terminated without causeduring the period beginning on September 6, 2005 and ending 12 months followingthe effective time of the merger, then Mr. Prunty shall be entitled toexercise his vested stock options within such period of time ending on theearlier of the date that is three years following the termination of Mr. Prunty’semployment or the expiration of the option.

 

Mr. Mafrica’semployment as an executive officer was terminated on August 15, 2005.  The Company and Mr. Mafrica were partiesto an executive employment agreement, effective as of July 22, 2004,pursuant to which Mr. Mafrica would receive an annual salary of not lessthan $280,000, and was eligible to receive an annual bonus in an amount up to25% of his annualized base salary and equity compensation as determined by ourBoard of Directors.  The employment agreement also provided that if Mr. Mafrica’semployment was terminated without cause he will be entitled to continuation ofhis then base salary and health benefits for six months.  On August 18, 2005, the Company agreedto provide Mr. Mafrica an additional three months salary continuation andhealth benefits in addition to the six months provided in his employmentagreement.

 

**Pension Plans and Long-TermIncentive Plans**

 

TheCompany has no pension plans or long-term incentive plans.

 

**ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMENT AND RELATED STOCKHOLDER MATTERS**

 

Thefollowing table provides certain information with respect to all of the Company’sequity compensation plans in effect as of the September 30, 2005.

 

**EQUITY COMPENSATION PLAN INFORMATION**

 
| **Plan Category**                                           | ** ** | **Number of securities to be issued upon exercise of outstanding  options,  warrants and rights  (a)** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights  (b)** | ** ** | **Number of securities  remaining available for  issuance under equity  compensation plans  (excluding securities  reflected in column (a))  (c)** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity  compensation plans approved by security holders     |       | 1,898,349                                                                                              |       | $                                                                                       | 4.89       |                                                                                                                                               | 2,353,547  |   |
| Equity  compensation plans not approved by security holders |       | 205,920                                                                                                |       | $                                                                                       | 7.21       |                                                                                                                                               | 594,140    |   |
| Total                                                       |       | 2,104,269                                                                                              |       | $                                                                                       | 5.11       |                                                                                                                                               | 2,947,687  |   |

 

TheCompany’s 2000 Nonstatutory Stock Option Plan, or the 2000 Plan, is the onlyequity compensation plan of the Company that was effective as of September 30,2005 that was adopted without the approval of the Company’s stockholders.  The 2000 Plan was adopted by the Company in August 2000and was subsequently amended by the Company in November 2000 to allowlimited grants to

 

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officersand directors.  The purpose of the 2000Plan is to assist the Company in attracting the services of new employees,directors and consultants and retaining the services of current employees,directors and consultants.  The 2000 Planprovides a means by which selected employees, directors and consultants of theCompany and its affiliates are given an opportunity to purchase stock in theCompany thereby enhancing their efforts in the service of the Company and itsstockholders.  The 2000 Plan providesonly for the grant of nonqualified stock options.  Such options are intended not to qualify asincentive stock options under the Internal Revenue Code of 1986, asamended.  The maximum number of shares ofthe Company’s common stock that may be issued under the 2000 Plan is750,000.  In addition, the aggregatenumber of options granted to officers and directors must be less than 50% ofthe total number of shares granted under the 2000 Plan.  All of the Company’s employees are eligibleto participate in the 2000 Plan.

 

Underthe 2000 Plan, the Board or Compensation Committee may provide for the grant ofstock options to eligible employees.  TheBoard or Compensation Committee determines certain provisions of each optiongranted, including the number of shares to be granted to each person and thetime such option may be exercised.  Theexercise price of nonqualified stock options may not be less than 85% of thefair market value of the Company’s common stock on the date of grant and suchoptions generally include vesting provisions of up to four years.  As of September 30, 2005, 79,940 shareshad been issued under the 2000 Plan, options to purchase an aggregate of 75,920shares at exercise prices ranging from $5.05 to $7.35 per share wereoutstanding and 594,140 shares remained available for future grant.

 

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**Security Ownership Of**

**Certain Beneficial Owners And Management**

 

Thefollowing table sets forth certain information regarding the ownership of Maxim’scommon stock as of November 15, 2005 by: (i) each director; (ii) Maxim’s Chief Executive Officer andits other Named Executive Officers; (iii) all executive officers, formerexecutive officers and directors of Maxim as a group; and (iv) all thoseknown by Maxim to be beneficial owners of more than five percent of its commonstock.

 
| ** **                                                         | ** ** | **Beneficial Ownership (1)** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------|------------|
| **Beneficial  Owner**                                              | ** ** | **Number of Shares**         | ** ** | **Percent of Total** | ** ** |
| Larry G. Stambaugh (2)                                             |       | 13,657                       |       |   | * |
| F. Duwaine Townsen (3)                                             |       | 267,018                      |       |   | * |
| Per-Olof Mårtensson (4)                                       |       | 280,333                      |       |   | * |
| John D. Prunty (5)                                                 |       | 113,625                      |       |   | * |
| Robert L. Zerbe (6)                                                |       | 85,000                       |       |   | * |
| Wayne P. Yetter (7)                                                |       | 75,000                       |       |   | * |
| John F. Bedard, Ph.D. (8)                                          |       | 52,500                       |       |   | * |
| Richard A. Mafrica (9)                                             |       | 0                            |       |   | * |
| Sharon A. Tonetta, Ph.D. (10)                                      |       | 0                            |       |   | * |
| All executive officers and directors as a group (10  persons) (11) |       | 887,133                      |       | 3.04 | % |

 

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* Less than one percent.

 
| (1)  |   | This  table is based upon information supplied by officers, directors and principal  stockholders and Schedules 13D and 13G filed with the SEC. Unless otherwise  indicated in the footnotes to this table and subject to community property  laws where applicable, Maxim believes that each of the stockholders named in  this table has sole voting and investment power with respect to the shares  indicated as beneficially owned. Applicable percentages are based on  28,402,808 shares outstanding on November 15, 2005, adjusted as required  by rules promulgated by the SEC. |
|------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)  |   | Includes  10,000 shares held by Mr. Stambaugh’s spouse.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| (3)  |   | Includes  (i) 70,793 shares held jointly by Mr. Townsen and his spouse and  (ii) 790 shares held individually by Mr. Townsen’s spouse. Also  includes 195,000 shares subject to stock options exercisable within 60 days  of November 15, 2005.                                                                                                                                                                                                                                                                                                                      |
| (4)  |   | Includes  280,000 shares subject to stock options exercisable within 60 days of  November 15, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (5)  |   | Includes  109,583 shares subject to stock options exercisable within 60 days of  November 15, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (6)  |   | Includes  85,000 shares subject to stock options exercisable within 60 days of  November 15, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| (7)  |   | Includes  75,000 shares subject to stock options exercisable within 60 days of  November 15, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| (8)  |   | Includes  52,500 shares subject to stock options exercisable within 60 days of  November 15, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| (9)  |   | Mr. Mafrica’s  employment with Maxim was terminated on August 15, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| (10) |   | Ms. Tonetta’s  employment with Maxim was terminated on July 14, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| (11) |   | Includes  797,083 shares subject to stock options exercisable within 60 days of  November 15, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |

 

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**ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

 

OnAugust 19, 2005, we entered into an agreement with Mr. Stambaughregarding the forgiveness of all amounts owed (including principal and accruedinterest) under a $2,850,000 full recourse, interest bearing, secured revolvingpromissory note made by Maxim to Mr. Stambaugh on December 8, 2000,as amended on December 8, 2001.  The loan was originally made toreplace a loan Mr. Stambaugh had with a third-party that was secured byshares of our stock that he owned.  The purpose of the loan was to avoidthe necessity of Mr. Stambaugh selling our stock during periods of marketvolatility and was viewed at the time to be in the best interests of Maxim andits stockholders.  As reported in our Quarterly Report on Form 10-Qfor the Quarter ended June 30, 2005, as of June 30, 2005 the loan hadbeen written down to $264,000.  This write-down resulted from of ourevaluation of Mr. Stambaugh’s inability to repay the loan, which has beenin default since December 2002.  On August 3, 2005, Mr. Stambaughforfeited all collateral securing the loan, including 203,333 shares of ourcommon stock and 1,563,667 of options to purchase our common stock.  Mr. Stambaughwas insolvent and unable to repay the outstanding balance of the loan. After extensively reviewing all related facts and circumstances,including our current needs, prospects and contingency plans, Mr. Stambaugh’scurrent assets and liabilities, our resulting inability to collect the loanindebtedness, and the best interests of our stockholders and creditors, ourboard of directors agreed to forgive the loan.  The agreement relating tosuch forgiveness also provides for the release by Mr. Stambaugh of any andall claims that he may have against Maxim, its officers, directors,stockholders and certain of our other representatives with regard to any claimsthat he may have arising out of or in connection with the loan.

 

Inconnection with the loan forgiveness, on August 19, 2005, we entered intoan indemnification agreement with Mr. Stambaugh.  Pursuant to theindemnification agreement, we agreed to indemnify Mr. Stambaugh forcertain excise taxes, if any, that may arise as a result of the forgiveness ofthe loan under Section 280G and Section 4999 of the Internal RevenueCode of 1986, as amended.  Should Mr. Stambaughbe subject to such excise taxes, payments under the indemnification agreementcould exceed $2 million.

 

Wehave entered into indemnity agreements with certain officers and directorswhich provide, among other things, that we will indemnify such officer or director,under the circumstances and to the extent provided for therein, for expenses,damages, judgments, fines and settlements he or she may be required to pay inactions or proceedings which he or she is or may be made a party by reason ofhis or her position as a director, officer or other agent of us, and otherwiseto the fullest extent permitted under Delaware law and our Bylaws.  We have also entered into and may in thefuture enter into employment agreements with certain of our executiveofficers.  See “Employment, Severance andChange of Control Agreements.”

 

**ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**

 

Thefollowing table represents aggregate fees for audit and tax services renderedby KPMG LLP, the Company’s independent registered public accountant, for thefiscal years ended September 30, 2005 and 2004, including $236,000 of feesduring fiscal 2005 for services related to the audit of internal controls overfinancial reporting.

 

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| ** **  | ** ** | **Fiscal Year Ended  September 30  (in thousands)** | ** ** |
|-------------|------------|----------------------------------------------------------|------------|
| ** **  | ** ** | **2005**                                                 | ** ** | **2004** | ** ** |
| Audit fees  |       | $                                                        | 390        |   | $ | 171 |   |
| Tax fees(1) |       | 36                                                       |       | 27 |   |
| Total       |       | $                                                        | 426        |   | $ | 198 |   |

 

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(1) Tax fees consisted ofprofessional services rendered for tax compliance, tax advice and taxplanning.  These fees were for servicesrelated to the preparation of our tax returns and consultations regarding theapplication of various provisions of the Internal Revenue Code for each year.

 

Allfees described above were pre-approved by the Audit Committee in accordancewith the policies and procedures set forth below.

 

**PRE-APPROVALPOLICIES AND PROCEDURES**

 

TheAudit Committee pre-approves all audit and permissible non-audit services priorto commencement of services.  Mr. Townsen,the Audit Committee Chairman, has the delegated authority to pre-approve suchservices and these pre-approval decisions are presented to the full AuditCommittee at its next scheduled meeting. During fiscal year 2005 and 2004, the Audit Committee pre-approved 100% ofthe total fees to KPMG LLP.

 

TheAudit Committee has determined that the rendering of the services other thanaudit services by KPMG LLP is compatible with maintaining the independentregistered public accounting firms independence.

 

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**PART IV**

 

**ITEM 15. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES**

 

(a)           The following documents are filed as part ofthis Form 10-K:

 

1.             *Consolidated FinancialStatements*

 

Indexto Consolidated Financial Statements

 
| Report of Independent Registered Public Accounting  Firm                                                                                                                                                | 48 |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----|
| Consolidated Balance Sheets as of  September 30, 2005 and 2004                                                                                                                                     | 49 |
| Consolidated Statements of Operations and  Comprehensive Loss for the years ended September 30, 2005, 2004, and  2003, and from inception (October 23, 1989) through September 30,  2005 | 50 |
| Consolidated Statements of Stockholders’ Equity  from inception (October 23, 1989) through September 30, 2005                                                                            | 51 |
| Consolidated Statements of Cash Flows for the  years ended September 30, 2005, 2004, and 2003, and from inception  (October 23, 1989) through September 30, 2005                         | 56 |

 

2.             *Financial StatementSchedules*

 

Allschedules have been omitted since the required information is not present inamounts sufficient to require submission of the schedule, or because theinformation required is included in the consolidated financial statements ornotes thereto included in Item 8.

 

3.             *Exhibits*

 

Seelist of Exhibits set forth in paragraph (b) below.

 

(b)           Exhibits

 

**INDEX**

 
| **Exhibit Number** | ** ** | **Description**                                                                                                                                                                                                                 |
|-------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1                     |       | Agreement and Plan of Merger, dated as of  September 6, 2005, by and among Maxim Pharmaceuticals, Inc.,  EpiCept Corporation, and Magazine Acquisition Corp., a wholly-owned  subsidiary of EpiCept Corporation. (24) |
| 3.1                     |       | Amended and Restated Certificate of Incorporation  of Registrant. (1)                                                                                                                                                           |
| 3.2                     |       | Certificate of Amendment to Amended and Restated  Certificate of Incorporation. (14)                                                                                                                                            |
| 3.3                     |       | Bylaws of Registrant. (1)                                                                                                                                                                                                       |
| 4.1                     |       | Reference is made to Exhibits 3.1, 3.2 and 3.3.                                                                                                                                                                                 |
| 4.2                     |       | Form of Certificate of Designation of  Series A Junior Participating Preferred Stock. (4)                                                                                                                             |
| 4.3                     |       | Rights Agreement, dated as of June 15, 2000,  between the Registrant and American Stock Transfer & Trust Company,  as Rights Agents. (4)                                                                          |
| 4.4                     |       | Form of Rights Certificate. (4)                                                                                                                                                                                            |
| 4.5                     |       | Specimen Common Stock certificate. (1)                                                                                                                                                                                          |
| 4.6                     |       | Securities Purchase Agreement dated September 22,  2003, between Maxim and the investors whose names appear on the signature  pages thereto. (11)                                                                     |
| 4.7                     |       | Registration Rights Agreement dated  September 22, 2003, between Maxim and the investors whose names appear  on the signature pages thereto. (11)                                                                     |

 

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| 4.8   |   | Form of Common Stock Purchase Warrant issued  to the investors on September 23, 2003. (11)                                                                                                |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.9   |   | Common Stock Purchase Warrant, No. #03-024,  to purchase 148,049 shares of the Registrant’s common stock, issued to  Merriman Curhan Ford & Co. on September 23, 2003. (12) |
| 4.10  |   | Amendment to Rights Agreement, dated as of  September 5, 2005, between Maxim Pharmaceuticals, Inc. and American  Stock Transfer and Trust Company. (24)                                   |
| 10.1  |   | Form of Indemnification Agreement for  directors and officers of the Registrant. (18)                                                                                                          |
| 10.2  |   | Amended and Restated 1993 Long-Term Incentive Plan  and forms of stock option agreements. (2)                                                                                                       |
| 10.3  |   | Employment Agreement dated October 1, 2003  between the Registrant and Kurt R. Gehlsen. (13)*                                                                                                  |
| 10.4  |   | Lease dated May 28, 1998 between Del Mar  Capital Group/Ridgeview, LLC, as Landlord, and the  Registrant. (8)                                                                                  |
| 10.5  |   | License Agreement dated November 6, 1998  among the Registrant, Professional Pharmaceutical, Inc., Bruce A. Jack,  D.D.S. and B. Thomas White, R.PH. (3)                        |
| 10.6  |   | Research and License Agreement effective  July 10, 2000 with BIOCHEM Pharma Inc. (5)‡                                                                                                     |
| 10.7  |   | Registrant’s 2000 Nonstatutory Stock Option Plan.  (5)                                                                                                                                         |
| 10.8  |   | Secured Revolving Promissory Note dated  December 8, 2000 between Larry G. Stambaugh and the  Registrant. (5)                                                                                  |
| 10.9  |   | Loan and Security Agreement dated October 9,  2000 between the Registrant and Silicon Valley Bank. (6)                                                                                         |
| 10.10 |   | Assignment of Deposit Account dated April 11,  2001 between the Registrant, Silicon Valley Bank and Kurt R. Gehlsen.  (7)                                                            |
| 10.11 |   | Assignment of Deposit Account dated April 11,  2001 between the Registrant, Silicon Valley Bank and Dale A. Sander  and Denise M. Sander. (7)                                        |
| 10.12 |   | Loan Modification Agreement dated March 21,  2001 between the Registrant and Silicon Valley Bank. (7)                                                                                          |
| 10.13 |   | Loan Modification Agreement dated April 25,  2001 between the Registrant and Silicon Valley Bank. (7)                                                                                          |
| 10.14 |   | Amendment dated December 8, 2001 to the  Secured Revolving Promissory Note between the Registrant and Larry G.  Stambaugh. (9)*                                                                |
| 10.15 |   | Loan Modification Agreement dated July 29,  2002 between the Registrant and Silicon Valley Bank. (10)                                                                                          |
| 10.16 |   | Amendment to Assignment of Deposit Account dated  July 23, 2002 between the Registrant, Silicon Valley Bank and Kurt R.  Gehlsen. (10)                                                         |
| 10.17 |   | Amendment to Assignment of Deposit Account dated  July 23, 2002 between the Registrant, Silicon Valley Bank and Dale A.  Sander and Denise M. Sander. (10)                                     |
| 10.18 |   | Employment Agreement dated October 1, 2003  between the Registrant and Anthony E. Altig. (13)*                                                                                                 |
| 10.19 |   | Lease dated July 31, 2003 between Alecta  Pensionsförsäkring, Ömsesidigt, a Swedish company, as Landlord, and the  Registrant. (12)                                             |
| 10.20 |   | License and Collaboration Agreement dated  November 19, 2003 between the Registrant and Myriad Genetics, Inc.  (13)‡                                                                 |
| 10.21 |   | Registrant’s 2001 Incentive Stock Option Plan, as  amended. (15)                                                                                                                               |
| 10.22 |   | License Agreement dated March 1, 2004 between  the Registrant and Shire BioChem, Inc. (16)‡                                                                                          |
| 10.23 |   | First Amendment of Standard Office Lease dated  April 30, 2004 between Alecta Pensionsförsäkring, Ömsesidigt, a Swedish  Company, as Landlord, and the Registrant. (17)         |
| 10.24 |   | Employment Agreement dated July 22, 2004  between the Registrant and Richard A. Mafrica. (18)*                                                                                                 |
| 10.25 |   | Employment Agreement between the Registrant and  John D. Prunty, dated October 18, 2004. (19)*                                                                                                 |
| 10.26 |   | Employment Agreement between Maxim  Pharmaceuticals, Inc. and Larry G. Stambaugh, dated December 3, 2004.  (20)*                                                                     |
| 10.27 |   | Employment Agreement between Maxim  Pharmaceuticals, Inc. and Pam G. Gleason, dated December 3, 2004. (20)*                                                                     |
| 10.28 |   | Employment Agreement between Maxim  Pharmaceuticals, Inc. and Sharon A. Tonetta, Ph.D., dated  December 3, 2004. (20)*                                                                    |
|       |        |                                                                                                                                                                                                     |  |

 

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| 10.29 |   | Retention Agreement between Maxim  Pharmaceuticals, Inc. and Larry G. Stambaugh, dated  March 11, 2005. (21)*                                                             |
|-------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.30 |   | Retention Agreement between Maxim  Pharmaceuticals, Inc. and Richard A. Mafrica, dated  March 8, 2005. (21)*                                                              |
| 10.31 |   | Retention Agreement between Maxim  Pharmaceuticals, Inc. and Sharon A. Tonetta, Ph.D., dated  March 8, 2005. (21)*                                                        |
| 10.32 |   | Retention Agreement between Maxim  Pharmaceuticals, Inc. and John D. Prunty, dated March 8, 2005.  (21)*                                                                  |
| 10.33 |   | Retention Agreement between Maxim  Pharmaceuticals, Inc. and Ben Tseng, Ph.D., dated March 8, 2005. (21)*                                                                 |
| 10.34 |   | Retention Agreement between Maxim  Pharmaceuticals, Inc. and Pam G. Gleason, dated March 8, 2005.  (21)*                                                                  |
| 10.35 |   | First Amendment to the License Agreement dated  January 26, 2005, between Maxim and Shire  BioChem Inc. (22) †                                                            |
| 10.36 |   | Agreement between Maxim Pharmaceuticals, Inc.  and Larry G. Stambaugh, dated August 19, 2005. (23)                                                                        |
| 10.37 |   | Indemnification Agreement between Maxim  Pharmaceuticals, Inc. and Larry G. Stambaugh, dated August 19,  2005. (23)                                                       |
| 10.38 |   | Amendment to Employment Agreement between Maxim  Pharmaceuticals, Inc. and Larry G. Stambaugh, dated August 19,  2005. (23)*                                              |
| 10.39 |   | Amendment to Retention Agreement between Maxim  Pharmaceuticals, Inc. and Larry G. Stambaugh, dated August 19,  2005. (23)*                                               |
| 23.1  |   | Consent of KPMG LLP, Independent Registered Public  Accounting Firm.                                                                                                                |
| 24.1  |   | Power of Attorney. Reference is made to the  signature page hereto.                                                                                                            |
| 31.1  |   | Certification by Larry G. Stambaugh, Chief  Executive Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted  Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.2  |   | Certification by John D. Prunty, Chief Financial  Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.     |
| 32    |   | Certification Pursuant to 18 U.S.C.  Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002.                                                 |

 

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*              Management contract or compensatory plan orarrangement required to be filed as an exhibit to this form pursuant to Item601 of Regulation S-K.

 

†              Certain confidential portions deleted pursuantto order granting application for confidential treatment.

 

(1)           Previously filed together with Registrant’sRegistration Statement on Form SB-2 (File No. 333-4854-LA) oramendments thereto and incorporated herein by reference.

 

(2)           Previously filed together with Registrant’sQuarterly Report on Form 10-Q dated December 31, 1996 andincorporated herein by reference.

 

(3)           Previously filed together with Registrant’sQuarterly Report on Form 10-Q dated December 31, 1998 andincorporated herein by reference.

 

(4)           Previously filed together with the Registrant’sCurrent Report on Form 8-A dated June 20, 2000 and incorporatedherein by reference.

 

(5)           Previously filed together with the Registrant’sAnnual Report on Form 10-K dated September 30, 2000 and incorporatedherein by reference.

 

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(6)           Previously filed together with Registrant’sQuarterly Report on Form 10-Q dated December 31, 2000 andincorporated herein by reference.

 

(7)           Previously filed together with Registrant’sQuarterly Report on Form 10-Q dated March 31, 2001 and incorporatedherein by reference.

 

(8)           Previously filed together with the Registrant’sAnnual Report on Form 10-K dated September 30, 2001 and incorporatedherein by reference.

 

(9)           Previously filed together with Registrant’sQuarterly Report on Form 10-Q dated December 31, 2001 andincorporated herein by reference.

 

(10)         Previously filed together with Registrant’sQuarterly Report on Form 10-Q dated June 30, 2002 and incorporatedherein by reference.

 

(11)         Previously filed together with Registrant’sCurrent Report on Form 8-K dated September 22, 2003 and incorporatedherein by reference.

 

(12)         Previously filed together with the Registrant’sAnnual Report on Form 10-K dated September 30, 2003 and incorporatedherein by reference.

 

(13)         Previously filed together with Registrant’sQuarterly Report on Form 10-Q dated December 31, 2003 andincorporated herein by reference.

 

(14)         Previously filed as Exhibit C withRegistrant’s Definitive Proxy Statement filed with the SEC on January 16,2004, and incorporated herein by reference.

 

(15)         Previously filed with Registrant’sRegistration Statement on Form S-8 (File No. 333-113326) on March 5,2004, and incorporated herein by reference.

 

(16)         Previously filed together with Registrant’sQuarterly Report on Form 10-Q dated March 31, 2004 and incorporatedherein by reference.

 

(17)         Previously filed together with Registrant’sQuarterly Report on Form 10-Q dated June 30, 2004 and incorporatedherein by reference.

 

(18)         Previously filed together with the Registrant’sAnnual Report on Form 10-K dated September 30, 2004 and incorporatedherein by reference.

 

(19)         Previously filed together with Registrant’sCurrent Report on Form 8-K dated October 18, 2004 and incorporatedherein by reference.

 

(20)         Previously filed together with Registrant’sCurrent Report on Form 8-K dated December 3, 2004 and incorporatedherein by reference.

 

(21)         Previously filed together with Registrant’sCurrent Report on Form 8-K dated March 8, 2005 and incorporatedherein by reference.

 

(22)         Previously filed together with Registrant’sQuarterly Report on Form 10-Q dated March 31, 2005 and incorporatedherein by reference.

 

95

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(23)         Previously filed together with Registrant’sCurrent Report on Form 8-K dated August 19, 2005 and incorporatedherein by reference.

 

(24)         Previously filed together with Registrant’sCurrent Report on Form 8-K dated September 5, 2005 and incorporatedherein by reference.

 

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**SIGNATURES**

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 
|   | MAXIM  PHARMACEUTICALS, INC. |
|--------|------------------------------|
|   |                         |   |
|   | By:                          | /s/ John D. Prunty |
|   |                         | John D. Prunty, |
|   |                         | *Vice President, Finance and Chief Financial Officer  (Principal  Accounting Officer and Principal Financial Officer)* |
|   |                         | Date: December 14, 2005 |

 

KNOWALL PERSONS BY THESE PRESENTS, that each person whose signature appears belowconstitutes and appoints Larry G. Stambaugh and John D. Prunty, and each ofthem, as his true and lawful attorneys-in-fact and agents, with full power ofsubstitution and resubstitution, for him and in his name, place and stead, inany and all capacities, to sign any and all amendments to this report, and tofile the same, with all exhibits thereto, and other documents in connectiontherewith, with the Securities and Exchange Commission, granting unto saidattorneys-in-fact and agents, and each of them, full power and authority to doand perform each and every act and thing requisite and necessary to be done inconnection therewith, as fully to all intents and purposes as he might or coulddo in person, hereby ratifying and confirming that all said attorneys-in-factand agents, or any of them or their or his substitute or substituted, maylawfully do or cause to be done by virtue hereof.

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below, by the following persons on behalf of the registrant and inthe capacities and on the dates indicated.

 
| **Signature**               | ** ** | **Title**                                                                | ** ** | **Date**               | ** ** |
|-----------------------------|------------|--------------------------------------------------------------------------|------------|------------------------|------------|
|                        |       |                                                                     |       |                   |       |
| /s/LARRY G.  STAMBAUGH      |       | Chairman of the Board, President and Chief                               |       |                   |       |
| Larry G. Stambaugh          |       | Executive Officer

(Principal Executive  Officer)                        |       | December 14, 2005 |       |
|                        |       |                                                                     |       |                   |       |
| /s/JOHN D. PRUNTY           |       | Vice President, Finance and Chief Financial                              |       |                   |       |
| John D. Prunty              |       | Officer (Principal  Accounting Officer and  Principal Financial Officer) |       | December 14, 2005 |       |
|                        |       |                                                                     |       |                   |       |
| /s/JOHN F. BEDARD           |       | Director                                                                 |       | December 14, 2005 |       |
| John F. Bedard              |       |                                                                     |       |
|                        |       |                                                                     |       |                   |       |
| /s/PER-OLOF MÅRTENSSON |       | Director                                                                 |       | December 14, 2005 |       |
| Per-Olof Mårtensson    |       |                                                                     |       |
|                        |       |                                                                     |       |                   |       |
|                        |       |                                                                     |       |                   |       |
| /s/F. DUWAINE TOWNSEN       |       | Director                                                                 |       | December 14, 2005 |       |
| F. Duwaine Townsen          |       |                                                                     |       |
|                        |       |                                                                     |       |                   |       |
|                        |       |                                                                     |       |                   |       |
| /s/WAYNE P. YETTER          |       | Director                                                                 |       | December 14, 2005 |       |
| Wayne P. Yetter             |       |                                                                     |       |
|                        |       |                                                                     |       |                   |       |
| /s/ROBERT L. ZERBE,  M.D.   |       | Director                                                                 |       | December 14, 2005 |       |
| Robert L. Zerbe, M.D.       |       |                                                                     |       |

 

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