**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

----

 

**FORM 10-Q**

 

**(Mark One)**

 

| ý     | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|------------|------------|-----------------------------------------------------------------------------------------------|
|       |       |                                                                                          |
|       |       | **For the  quarterly period ended March 31, 2005**                                            |
|       |       |                                                                                          |
|       |       | **or**                                                                                        |
| ** ** | ** ** | ** **                                                                                    |
| o          | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transition period from            to            **

 

**Commissionfile number 1-14430**

 

----

 

**MAXIMPHARMACEUTICALS, INC.**

 (Exact Name of Registrant as Specified in ItsCharter)

 

| **Delaware**                                                     | ** ** | **87-0279983**                     |
|------------------------------------------------------------------|------------|------------------------------------|
| (State or Other  Jurisdiction of Incorporation or Organization)  | ** ** | (IRS Employer  Identification No.) |
|                                                             | ** ** |                               |
|  **8899 University Center  Lane, Suite 400, San Diego, CA** | ** ** | **92122**                          |
| (Address of Principal  Executive Offices)                        | ** ** | (Zip Code)                         |

 

**(858) 453-4040**

(Registrant’sTelephone Number, Including Area Code)

 

----

 

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 whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Exchange Act).  Yes ý   No o 

 

Thenumber of outstanding shares of the registrant’s Common Stock, $.001 par value,as of April 28, 2005 was 28,606,141.

 

 

----

 

**MAXIMPHARMACEUTICALS, INC. AND SUBSIDIARIES**

*(ADevelopment Stage Company)*

 

**INDEX**

 
|                                  | ** ** | ** **                                                                                                                                                                  | **Page** |
|---------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------|
|                                  |       |                                                                                                                                                                        |     |
| **Part I–Financial Information** |       |                                                                                                                                                                        |
| Item 1.                               |       | Financial Statements (unaudited)                                                                                                                                            |     |   |
|                                  |       | Condensed Consolidated Balance  Sheets–March 31, 2005 and September 30, 2004                                                                                      |     | 1 |
|                                  |       | Condensed Consolidated  Statements of Operations–Three and Six Months Ended March 31, 2005 and 2004  and from Inception (October 23, 1989) through March 31, 2005 |     | 2 |
|                                  |       | Condensed Consolidated  Statements of Cash Flows–Six Months Ended March 31, 2005 and 2004 and from  Inception (October 23, 1989) through March 31, 2005           |     | 3 |
|                                  |       | Notes to Condensed Consolidated  Financial Statements                                                                                                                       |     | 4 |
| Item 2.                               |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                                 |     | 9 |
| Item  3.                              |       | Quantitative  and Qualitative Disclosures About Market Risk                                                                                                                 |     | 31 |
| Item 4.                               |       | Controls and Procedures                                                                                                                                                     |     | 31 |
| **Part II–Other  Information**   |       | 33                                                                                                                                                                          |
| Item 1.                               |       | Legal Proceedings                                                                                                                                                           |     | 33 |
| Item  4.                              |       | Submission  of Matters to a Vote of Security Holders                                                                                                                        |     | 34 |
| Item 6.                               |       | Exhibits                                                                                                                                                                    |     | 34 |
| **SIGNATURES**                        |       |                                                                                                                                                                        | 36       |

 

----

 

**CONDENSEDCONSOLIDATED BALANCE SHEETS (Unaudited)(in thousands, except share data)**

 

*Maxim Pharmaceuticals, Inc. andSubsidiaries (A Development Stage Company)*

 
| ** **                                                                                                                                                                     | ** ** | **As of March 31  2005** | ** ** | **As of September 30  2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|------------------------------|------------|
| **ASSETS**                                                                                                                                                                     |       |                     |       |                         |       |
| **Current  Assets:**                                                                                                                                                           |       |                     |       |                         |       |
| Cash and cash  equivalents                                                                                                                                                     | ** ** | **$**                    | **1,634**  |                         | $          | 10,658 |   |
| Investments in  marketable securities, available for sale                                                                                                                      | ** ** | **27,491**               |       | 38,746                       |       |
| Accrued interest  and other current assets                                                                                                                                     | ** ** | **2,048**                |       | 2,354                        |       |
| Total current  assets                                                                                                                                                          | ** ** | **31,173**               |       | 51,758                       |       |
|                                                                                                                                                                           | ** ** | ** **               |       |                         |       |
| Restricted cash  and cash equivalents                                                                                                                                          | ** ** | **3,500**                |       | 3,500                        |       |
| Property and  equipment, net                                                                                                                                                   | ** ** | **2,762**                |       | 3,579                        |       |
| Patents and  licenses, net                                                                                                                                                     | ** ** | **4,857**                |       | 4,393                        |       |
| Notes receivable  from officer and former officer, net of allowance of $3,254,000 and  $2,930,000 at March 31, 2005 and September 30, 2004, respectively                       | ** ** | **358**                  |       | 682                          |       |
| Deposits and  other assets                                                                                                                                                     | ** ** | **218**                  |       | 273                          |       |
| Total assets                                                                                                                                                                   | ** ** | **$**                    | **42,868** |                         | $          | 64,185 |   |
|                                                                                                                                                                           |       |                     |       |                         |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                 |       |                     |       |                         |       |
| **Current  Liabilities:**                                                                                                                                                      |       |                     |       |                         |       |
| Accounts payable                                                                                                                                                               | ** ** | **$**                    | **2,070**  |                         | $          | 5,311 |   |
| Accrued expenses                                                                                                                                                               | ** ** | **2,914**                |       | 4,177                        |       |
| Notes payable  and current portion of long-term debt and obligations under capital leases                                                                                      | ** ** | **535**                  |       | 1,071                        |       |
| Deferred revenue                                                                                                                                                               | ** ** | **75**                   |       | 131                          |       |
| Total current  liabilities                                                                                                                                                     | ** ** | **5,594**                |       | 10,690                       |       |
|                                                                                                                                                                           |       |                     |       |                         |       |
| Long-term debt  and obligations under capital leases, excluding current portion                                                                                                | ** ** | **13**                   |       | 96                           |       |
|                                                                                                                                                                           |       |                     |       |                         |       |
| Commitments and  contingencies                                                                                                                                                 |       |                     |       |                         |       |
|                                                                                                                                                                           |       |                     |       |                         |       |
| **Stockholders’  Equity:**                                                                                                                                                |       |                     |       |                         |       |
| Convertible  preferred stock, $.001 par value, 5,000,000 shares authorized; no shares  issued and outstanding at March 31, 2005 and September 30, 2004                         | ** ** | **—**               |       | —                       |       |
| Common stock,  $.001 par value, 60,000,000 shares authorized; 28,606,141 and 28,561,091  shares issued and outstanding at March 31, 2005 and September 30, 2004,  respectively | ** ** | **29**                   |       | 28                           |       |
| Additional  paid-in capital                                                                                                                                                    | ** ** | **405,183**              |       | 405,031                      |       |
| Deficit  accumulated during the development stage                                                                                                                              | ** ** | **(367,697**             | **)**      | (351,472                     | )          |
| Accumulated  other comprehensive loss                                                                                                                                          | ** ** | **(254**                 | **)**      | (188                         | )          |
| Total  stockholders’ equity                                                                                                                                               | ** ** | **37,261**               |       | 53,399                       |       |
| Total  liabilities and stockholders’ equity                                                                                                                               | ** ** | **$**                    | **42,868** |                         | $          | 64,185 |   |

 

*See Accompanying Notes to CondensedConsolidated Financial Statements*

 

1

----

 

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)(in thousands, except per share amounts)**

 

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

 
| ** **                                                                        | ** ** | ** **                      | ** ** | ** **                    | ** ** | ** **     | ** ** | ** ** | ** **  | **From Inception  (October 23, 1989)** | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------------------------|------------|-------------------------------|------------|----------------|------------|------------|-------------|----------------------------------------|------------|
| ** **                                                                        | ** ** | **Three Months Ended March 31** | ** ** | **Six Months Ended March 31** | ** ** | **Through**    | ** ** |
| ** **                                                                        | ** ** | **2005**                        | ** ** | **2004**                      | ** ** | **2005**       | ** ** | **2004**   | ** **  | **March 31, 2005**                     | ** ** |
|                                                                              |       |                            |       |                          |       |           |       |       |        |                                   |       |
| Collaboration  and research revenue                                               | ** ** | **$**                           | **1,120**  |                          | $          | 1,273          | ** ** | **$**      | **1,483**   |                                   | $          | 2,692 |   | $ | 20,419 |   |
|                                                                              |       |                            |       |                          |       |           |       |       |        |                                   |       |
| Operating  expenses:                                                              |       |                            |       |                          |       |           |       |       |        |                                   |       |
| Research and  development                                                         | ** ** | **5,119**                       |       | 8,363                         | ** ** | **12,068**     |       | 17,694     |        | 265,771                                |       |
| Business  development and marketing                                               | ** ** | **482**                         | ** ** | 647                           | ** ** | **1,464**      |       | 1,290      |        | 27,739                                 |       |
| General and  administrative                                                       | ** ** | **1,985**                       | ** ** | 1,589                         | ** ** | **4,200**      |       | 3,355      |        | 51,178                                 |       |
| 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                | ** ** | **324**                         | ** ** | —                        | ** ** | **324**        | ** ** | —     |        | 3,254                                  |       |
| Total operating  expenses                                                         | ** ** | **7,910**                       | ** ** | 10,599                        | ** ** | **18,056**     | ** ** | 22,339     |        | 393,197                                |       |
|                                                                              |       |                            | ** ** |                          |       |           | ** ** |       |        |                                   |       |
| Loss from  operations                                                             | ** ** | **(6,790**                      | **)**      | (9,326                        | )          | **(16,573**    | **)**      | (19,647    | )           | (372,778                               | )          |
|                                                                              |       |                            | ** ** |                          |       |           | ** ** |       |        |                                   |       |
| Other income  (expense):                                                          |       |                            | ** ** |                          |       |           | ** ** |       |        |                                   |       |
| Investment  income                                                                | ** ** | **163**                         | ** ** | 407                           |       | **371**        | ** ** | 877        |        | 31,693                                 |       |
| Gain on sale of  assets                                                           | ** ** | **—**                      | ** ** | —                        |       | **—**     | ** ** | —     |        | 4,435                                  |       |
| Interest expense                                                                  | ** ** | **(10**                         | **)**      | (20                           | )          | **(24**        | **)**      | (43        | )           | (2,889                                 | )          |
| Other income  (expense)                                                           | ** ** | **(1**                          | **)**      | —                        |       | **1**          | ** ** | 3          |        | 21                                     |       |
| Total other  income                                                               | ** ** | **152**                         | ** ** | 387                           |       | **348**        | ** ** | 837        |        | 33,260                                 |       |
|                                                                              |       |                            | ** ** |                          |       |           | ** ** |       |        |                                   |       |
| Loss before  cumulative effect of accounting change and preferred stock dividends | ** ** | **(6,638**                      | **)**      | (8,939                        | )          | **(16,225**    | **)**      | (18,810    | )           | (339,518                               | )          |
|                                                                              |       |                            | ** ** |                          |       |           | ** ** |       |        |                                   |       |
| Cumulative  effect of accounting change                                           | ** ** | **—**                      | ** ** | —                        |       | **—**     | ** ** | —     |        | (28,179                                | )          |
|                                                                              |       |                            | ** ** |                          |       |           | ** ** |       |        |                                   |       |
| Net loss before  preferred stock dividends                                        | ** ** | **(6,638**                      | **)**      | (8,939                        | )          | **(16,225**    | **)**      | (18,810    | )           | (367,697                               | )          |
| Dividends on  preferred stock                                                     | ** ** | **—**                      | ** ** | —                        |       | **—**     | ** ** | —     |        | 5,496                                  |       |
|                                                                              |       |                            | ** ** |                          |       |           | ** ** |       |        |                                   |       |
| Net loss  applicable to common stock                                              | ** ** | **$**                           | **(6,638** | **)**                         | $          | (8,939         | )          | **$**      | **(16,225** | **)**                                  | $          | (18,810 | ) | $ | (373,193 | ) |
|                                                                              |       |                            | ** ** |                          |       |           | ** ** |       |        |                                   |       |
| Basic and  diluted net loss per share of common stock                             | ** ** | **$**                           | **(0.23**  | **)**                         | $          | (0.32          | )          | **$**      | **(0.57**   | **)**                                  | $          | (0.67 | ) |   |   |
|                                                                              |       |                            | ** ** |                          |       |           | ** ** |       |        |                                   |       |
| Weighted average  shares outstanding                                              | ** ** | **28,599,419**                  | ** ** | 28,034,279                    | ** ** | **28,580,045** | ** ** | 28,010,377 |        |                                   |       |

 

*SeeAccompanying Notes to Condensed Consolidated Financial Statements*

 

2

----

 

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)(In thousands)**

 

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

 
| ** **                                                                             | ** ** | ** **                    | ** **  | ** **  | ** ** | **From Inception   (October 23, 1989)** | ** ** |
|----------------------------------------------------------------------------------------|------------|-------------------------------|-------------|-------------|------------|-----------------------------------------|------------|
| ** **                                                                             | ** ** | **Six Months Ended March 31** | ** **  | **Through** | ** ** |
| ** **                                                                             | ** ** | **2005**                      | ** **  | **2004**    | ** ** | **March 31, 2005**                      | ** ** |
| **OPERATING  ACTIVITIES:**                                                             |       |                          |        |        |       |                                    |       |
| Net loss                                                                               | ** ** | **$**                         | **(16,225** | **)**       | $          | (18,810                                 | )          | $ | (367,697 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities:           |       |                          |        |        |       |                                    |       |
| Depreciation and  amortization                                                         | ** ** | **851**                       |        | 844         |       | 15,118                                  |       |
| Stock  contributions to 401(k) plan                                                    | ** ** | **—**                    |        | —      |       | 643                                     |       |
| Cumulative  effect of accounting change                                                | ** ** | **—**                    |        | —      |       | 28,179                                  |       |
| Stock-based  compensation                                                              | ** ** | **59**                        |        | 205         |       | 1,616                                   |       |
| Loss on disposal  of property and equipment                                            | ** ** | **123**                       |        | 20          |       | 427                                     |       |
| Provision for  note receivable for officer and loan guarantee for former officer       | ** ** | **324**                       |        | —      |       | 3,254                                   |       |
| Purchased  in-process technology                                                       | ** ** | **—**                    |        | —      |       | 44,946                                  |       |
| Gain on sale of  assets                                                                | ** ** | **—**                    |        | —      |       | (2,146                                  | )          |
| Amortization of  premium on investments                                                | ** ** | **—**                    |        | —      |       | 535                                     |       |
| Cumulative  effect of reorganization                                                   | ** ** | **—**                    |        | —      |       | 1,153                                   |       |
| Gain on sale of  subsidiary                                                            | ** ** | **—**                    |        | —      |       | (2,288                                  | )          |
| Other                                                                                  | ** ** | **—**                    |        | —      |       | 160                                     |       |
| Changes in  operating assets and liabilities:                                          |       |                          | ** **  |        |       |                                    |       |
| Accrued interest  and other current assets                                             | ** ** | **437**                       | ** **  | (180        | )          | 538                                     |       |
| Deposits and  other assets                                                             | ** ** | **55**                        | ** **  | (127        | )          | (714                                    | )          |
| Accounts payable                                                                       | ** ** | **(3,241**                    | **)**       | (2,296      | )          | 978                                     |       |
| Accrued expenses                                                                       | ** ** | **(1,263**                    | **)**       | 100         |       | 1,617                                   |       |
| Deferred revenue                                                                       | ** ** | **(56**                       | **)**       | 536         |       | 75                                      |       |
| Net cash used in  operating activities                                                 | ** ** | **(18,936**                   | **)**       | (19,708     | )          | (273,606                                | )          |
|                                                                                   |       |                          | ** **  |        |       |                                    |       |
| **INVESTING  ACTIVITIES:**                                                             |       |                          | ** **  |        |       |                                    |       |
| Purchases of  marketable securities                                                    | ** ** | **—**                    | ** **  | (48,628     | )          | (503,492                                | )          |
| Sales and  maturities of marketable securities                                         | ** ** | **11,189**                    | ** **  | 49,260      |       | 476,250                                 |       |
| Purchases of  property and equipment                                                   | ** ** | **(19**                       | **)**       | (261        | )          | (11,583                                 | )          |
| Additions to  patents and licenses                                                     | ** ** | **(649**                      | **)**       | (619        | )          | (8,168                                  | )          |
| Net proceeds  from sale of assets                                                      | ** ** | **47**                        | ** **  | —      |       | 3,499                                   |       |
| Cash acquired in  acquisition of business                                              | ** ** | **—**                    | ** **  | —      |       | 1,121                                   |       |
| Net cash  provided by (used in) investing activities                                   | ** ** | **10,568**                    | ** **  | (248        | )          | (42,373                                 | )          |
|                                                                                   |       |                          | ** **  |        |       |                                    |       |
| **FINANCING  ACTIVITIES:**                                                             |       |                          | ** **  |        |       |                                    |       |
| Net proceeds  from issuance of common stock and exercise of stock options and warrants | ** ** | **94**                        | ** **  | 442         |       | 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                                                                        | ** ** | **—**                    | ** **  | —      |       | (3,500                                  | )          |
| Payments on  notes payable, long-term debt, and capital lease obligations              | ** ** | **(750**                      | **)**       | (777        | )          | (10,661                                 | )          |
| Proceeds from  issuance of notes payable to related parties                            | ** ** | **—**                    | ** **  | —      |       | 4,982                                   |       |
| Payments on  notes payable to related parties                                          | ** ** | **—**                    | ** **  | —      |       | (1,330                                  | )          |
| Loan to officer                                                                        | ** ** | **—**                    | ** **  | 122         |       | (3,612                                  | )          |
| Net cash  provided by (used in) financing activities                                   | ** ** | **(656**                      | **)**       | (213        | )          | 317,613                                 |       |
|                                                                                   |       |                          | ** **  |        |       |                                    |       |
| Net increase  (decrease) in cash and cash equivalents                                  | ** ** | **(9,024**                    | **)**       | (20,169     | )          | 1,634                                   |       |
|                                                                                   |       |                          | ** **  |        |       |                                    |       |
| Cash and cash  equivalents at beginning of period                                      | ** ** | **10,658**                    | ** **  | 32,861      |       | —                                  |       |
|                                                                                   | ** ** | ** **                    | ** **  |        |       |                                    |       |
| Cash and cash  equivalents at end of period                                            | ** ** | **$**                         | **1,634**   | ** **  | $          | 12,692                                  |       | $ | 1,634 |   |
|                                                                                   |       |                          | ** **  |        |       |                                    |       |
| Noncash  investing activities:                                                         |       |                          | ** **  |        |       |                                    |       |
| Acquisition of  property and equipment under capital lease                             | ** ** | **$**                         | **—**  | ** **  | $          | 51                                      |       | $ | 270 |   |
| Increase  (decrease) in fair value of securities  available for sale              | ** ** | **$**                         | **(66**     | **)**       | $          | (391                                    | )          | $ | 400 |   |

 

*SeeAccompanying Notes to Condensed Consolidated Financial Statements*

 

3

----

 

**NOTES TO CONDENSED****CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)***Maxim Pharmaceuticals, Inc.and Subsidiaries (A Development Stage Company)*

 

**1.****                                      PRINCIPLES OF INTERIM PERIOD REPORTING**

 

Maxim Pharmaceuticals, Inc. (the “Company”)has not earned significant revenues from planned principal operations.Accordingly, the Company’s activities have been accounted for as those of a“Development Stage Enterprise” as set forth in Financial Accounting StandardsBoard Statement No. 7.

 

The information at March31, 2005 and for the three and six months ended March 31, 2005 and 2004 andfrom inception (October 23, 1989) through March 31, 2005 is unaudited. In theopinion of the Company, these condensed consolidated financial statementscontain all of the adjustments, consisting only of normal recurring adjustmentsand accruals, necessary to present fairly the condensed consolidated financialposition of the Company as of March 31, 2005 and September 30, 2004, andthe condensed consolidated results of operations for the three and six monthsended March 31, 2005 and 2004 and from inception (October 23, 1989)through March 31, 2005. The condensed consolidated results of operations forthe three and six months ended March 31, 2005 are not necessarily indicative ofthe results to be expected in subsequent periods or for the year as a whole.For further information, refer to the consolidated financial statements andfootnotes thereto in our Annual Report on Form 10-K for the year endedSeptember 30, 2004.

 

**2.****                                      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

*Stock Option Plans*-The Company accounts forits stock option plans under the recognition and measurement principles of APBOpinion No. 25, “Accounting for Stock Issued to Employees”,**and related Interpretations.  Compensation expense associated with stockoptions to employees was $0 and $6,000 for the three months ended March 31,2005 and 2004, respectively, and $52,000 for each of the six month periodsended March 31, 2005 and 2004, respectively. Compensation expense to non-employees was $2,000 and $56,000 for thethree months ended March 31, 2005 and 2004, respectively, and $7,000 and$153,000 for the six months ended March 31, 2005 and 2004.  No other stock-based employee compensationcost is reflected in net loss, as all options granted under our stock optionplans had an exercise price equal to the market value of the underlying commonstock on the date of grant.  Thefollowing table illustrates the effect on net loss and loss per share if theCompany had applied the fair value recognition provisions of SFAS No. 123, “Accountingfor Stock-Based Compensation”,**tostock-based employee compensation, in thousands, except per share data.

 
| ** **                                                                                                      | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                                                                      | ** ** | **March 31, 2005**     | ** ** | **March 31, 2004**   | ** ** | **March 31, 2005** | ** ** | **March 31, 2004** | ** ** |
| Net loss, as  reported                                                                                          |       | $                      | (6,638     | )                    | $          | (8,939 | ) | $ | (16,225 | ) | $ | (18,810 | ) |
| Add: Total  stock-based employee compensation expense determined under fair value based  methods for all awards |       | (402                   | )          | (949                 | )          | (361 | ) | (1,557 | ) |
| Less:  Compensation expense associated with stock options                                                       |       | 0                      |       | 6                    |       | 52 |   | 52 |   |
| Pro forma net  loss                                                                                             |       | $                      | (7,040     | )                    | $          | (9,882 | ) | $ | (16,534 | ) | $ | (20,315 | ) |
|                                                                                                            |       |                   |       |                 |       |   |   |   |   |
| Net loss per  share:                                                                                            |       |                   |       |                 |       |   |   |   |   |
| Basic and  diluted-as reported                                                                                  |       | $                      | (0.23      | )                    | $          | (0.32 | ) | $ | (0.57 | ) | $ | (0.67 | ) |
| Basic and  diluted- pro forma                                                                                   |       | $                      | (0.25      | )                    | $          | (0.35 | ) | $ | (0.58 | ) | $ | (0.73 | ) |

 

4

----

 

The fair value of the stock options were estimated at the date of grantusing the “Black-Scholes” method for option pricing and the followingweighted-average assumptions were used for grants made during the three and sixmonths ended, March 31, 2005 and 2004, respectively:

 
| ** **                    | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                    | ** ** | **March 31, 2005**     | ** ** | **March 31, 2004**   | ** ** | **March 31, 2005** | ** ** | **March 31, 2004** | ** ** |
| Risk free  interest rate      |       | 2.89                   | %          | 2.00                 | %          | 2.95 | % | 2.33 | % |
| Dividend Yield                |       | 0                      |       | 0                    |       | 0 |   | 0 |   |
| Volatility  Factor            |       | 83                     | %          | 75                   | %          | 83 | % | 75 | % |
| Expected Life  (in years)     |       | 2.90                   |       | 3.02                 |       | 3.31 |   | 3.85 |   |
| Resulting  average fair value |       | $                      | 0.97       |                 | $          | 4.63 |   | $ | 1.19 |   | $ | 4.33 |   |
|                               |            |                        |            |                      |            |  |  |  |  |  |  |  |  |

 

**3.****                                      TOTAL OTHER COMPREHENSIVE LOSS**

 

Total other comprehensiveloss for the three months ended March 31, 2005 and 2004 was $6,629,000 and$9,072,000, respectively.  Total othercomprehensive loss for the six months ended March 31, 2005 and 2004 was$16,291,000 and $19,201,000, respectively. The difference between total other comprehensive loss and net lossattributable to common stock was composed of a net unrealized loss onavailable-for-sale securities.

 

**4.****                                      NET LOSS PER SHARE**

 

Net loss per share iscalculated in accordance with SFAS No. 128 “Earnings per Share”. Basic netloss per share of common stock is computed by dividing the net loss afterdeduction of dividends on preferred stock by the weighted average number ofshares of common stock outstanding during the period. Diluted net loss pershare is calculated by including the additional common shares issuable uponexercise of outstanding options and warrants in the basic weighted averageshare calculation unless the effect of their inclusion is antidilutive.  As of March 31, 2005 and 2004, outstandingoptions and warrants totaled 5,877,000 and 5,769,000, respectively.  As these securities were antidilutive,diluted loss per share equaled basic loss per share in each respective period.

 

**5.****                                      DEFERRED RENT**

 

In accordance with SFAS No.13, “Accounting forLeases”, the Company records operating lease rent expenses on a straight-linebasis over the lease term, which causes the amount expensed in our financialstatements to vary from the actual amounts paid during the period.  This variance is recorded as deferred rentand included in Accrued Expenses on the accompanying condensed consolidatedbalance sheets.  As of March 31, 2005 and2004, the deferred rent balance was $692,000 and $640,000, respectively.

 

5

----

 

**6.****                                      RESTRUCTURING**

 

In February 2005, the Company announced an involuntaryworkforce reduction of twelve employees as part of a plan to realign itsresources and corporate objectives based upon several factors, including thatan additional phase 3 trial of Ceplene therapy for the treatment of AcuteMyeloid Leukemia is necessary before submitting a New Drug Application to theUnited States Food and Drug Administration. The cost of the severance packages associated with the workforcereduction, including pay, benefits continuation and outplacement services,totaled approximately $314,000 which was expensed in the three months endedMarch 31, 2005.  In October 2004, theCompany 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 the restructuring, including pay, benefits continuation and outplacementservices, totaled approximately $1,189,000 which was expensed in the threemonths ended December 31, 2004.  Of thetotal $1,503,000 of restructuring charges approximately $1,002,000 was includedin research and development expense, approximately $155,000 was included inbusiness development and marketing expense and approximately $346,000 wasincluded in general and administrative expense for the six months ended March31, 2005.  Through March 31, 2005,approximately $1,324,000 of this amount was paid and the remaining $179,000will be paid through September 30, 2005.

 

In the quarter ended March 31, 2005, related to therealignment of its resources and corporate objectives, the Company recorded anet write-down of $120,000, which is recorded in General and Administrativeexpense in the accompanying condensed consolidated statements of operations,for abandonment of  property andequipment.

 

**7.****                                      RELATED PARTY TRANSACTIONS**

 

In December 2000, theCompany entered into a $2.85 million full recourse secured revolving promissorynote with an officer of the Company.  Thenote bears interest at an annual rate of 4.0% and is secured by the officer’soutstanding options and shares of common stock. During the quarter endedSeptember 30, 2002, the Company determined that the note to the officer hadbecome impaired because the Company 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 has subsequently recorded $1,657,000 of expense, including $324,000during the quarter ended March 31, 2005, to increase the allowance on the noterelated to the decrease in the value of the Company stock and stock optionsheld by the officer collateralizing the note. In addition, the Company has not recorded interest income of $337,000 onthe note subsequent to June 30, 2002. The entire outstanding balance of principal and interest was due inDecember 2002.  Since the note came due,the officer has not had sufficient liquid assets to repay the loan in full,however, the officer has paid the Company $394,000 related to the note.   The Company is continuing to review itsoptions and alternatives and intends to continue to pursue

 

6

----

 

collection on theloan. As of March 31, 2005, the recorded outstanding principal and interestbalance on the note was $358,000, net of the $2,357,000 allowance.

 

At March 31, 2005,the Company was owed $901,000, including $4,000 of unrecorded interest, from aformer officer resulting from an unpaid loan, due in July 2004, that theindividual had with a bank, which the Company 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 theCompany’s best interest to provide the guarantee to avoid the necessity of theofficer selling personal holdings of the Company’s securities during a periodof depressed market prices.  During thefourth quarter of fiscal year 2002, the Company had determined that it wasprobable the former officer would not have the ability to repay his bankloan.  Therefore, the Company hadrecorded a provision for the guarantee and a liability in the amount of$900,000, $3,000 of which was subsequently reversed.  The former officer does not currently havethe assets necessary to repay the Company. The Company holds the stock options of the former officer ascollateral.  The Company is reviewing itsoptions and alternatives, has full recourse and intends to continue to pursuecollection of the amount from the former officer.  As of March 31, 2005, the recordedoutstanding principal and interest balance on the loan was $0, net of the $897,000allowance.

 

**8.****                                      CONTINGENCIES**

 

In October 2001and May 2002, certain former shareholders of Cytovia filed complaints inCalifornia Superior Court in San Diego, against the Company and two of its officers, alleging fraud andnegligent misrepresentation in connection with the Company’s acquisition ofCytovia. A binding arbitration proceeding with the American ArbitrationAssociation was held in May 2003. The three-member arbitration panelrejected all of the plaintiffs’ claims, determined that the Company has noliability for such claims and awarded recovery of the Company’s reasonableattorneys’ fees and costs of approximately $922,000 as prevailing party in theproceedings.  In December 2003, thedecision was confirmed by the Superior Court, which entered a judgment to thiseffect.  In June 2004, the plaintiffsfiled an Appeal.  In December  2004, the Court of Appeal reversed thejudgment of the Superior Court and remanded the lawsuit to the trial court forfurther proceedings.  The Company intendsto file a petition to the United States Supreme Court seeking further appellatereview and to continue vigorously defending against these claims.

 

On September 21, 2004, plaintiff Dr. Richard Bassin,on behalf of himself and purportedly on behalf of a class of others similarlysituated, filed a complaint in the United States District Court for theSouthern District of California against the Company, one officer of the Companyand one former officer of the Company, alleging violations of federalsecurities laws related to declines in the Company’s stock price in connectionwith various statements and alleged omissions to the public and to thesecurities markets during the class period from November 11, 2002 to September17, 2004, and seeking damages therefore. Thereafter two similar complaints were filed in the SouthernDistrict.  The actions were consolidatedand in March 2005, the plaintiffs filed a consolidated amended complaint.  The Company has until May 2005 to file a motionto dismiss or otherwise respond to the complaint.  The complaint has been tendered to theCompany’s insurance carrier, which has denied coverage.  The Company disputes

 

7

----

 

the position taken by the insurance carrier and fully intends toenforce its rights under the policy.

 

On October 7, 2004, plaintiff Jesus Putnam,purportedly on behalf of the Company, filed a derivative complaint in theSuperior Court for the State of California, County of San Diego, against oneofficer of the Company, two former officers of the Company and the Company’sentire Board of Directors, alleging breach of fiduciary duty, abuse of control,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 inthe Company’s stock price in connection with various statements and allegedomissions to the public and to the securities markets, and seeking damagestherefore.  No discovery has beenconducted, and plaintiff’s counsel has stipulated to stay the action pendingresolution of a motion to dismiss the federal actions.  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.

 

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, financialcondition and results of operations if not covered by the Company’s insurancecarrier. The Company has not accrued any expenses related to the above claimsas the extent or range of such payments, if any, cannot yet be reasonablyestimated.  Further, regardless ofsuccess of the litigation, the litigation itself may result in substantialcosts and divert management’s attention and resources, all of which couldadversely affect the Company’s business.

 

8

----

 

**ITEM 2****.  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION 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 certainforward-looking statements that involve risks and uncertainties. Suchforward-looking statements include but are not limited to statements regardingplans for the development and commercialization of our drug candidates andfuture cash requirements. Such statements are only predictions and our actualresults could differ materially from those anticipated or projected in suchforward-looking statements. Moreover, we assume no responsibility for theaccuracy and completeness of the forward-looking statements.  We are under no duty to update any of theforward-looking statements after the date hereof to conform such statements toactual results or to changes in our expectations.  Factors that could cause or contribute tosuch differences include, but are not limited to, those discussed in thesection entitled “Risk Factors” contained in this Quarterly Report. As aresult, you are cautioned not to rely on these forward-lookingstatements.*

 

*This Management’s Discussion and Analysis of FinancialCondition and Results of Operations should be read in conjunction with thecondensed consolidated financial statements, including the related notes,appearing in Item 1 of this Quarterly Report on Form 10-Q as well as theCompany’s Annual Report on Form 10-K for the year ended September 30, 2004.*

 

#### **OVERVIEW**

 

We are abiopharmaceutical company dedicated to developing innovative cancertherapeutics.  Our lead drug candidate isCepleneTM (histamine dihydrochloride), which has shown a statistically significantimprovement in leukemia free survival in a Phase 3 clinical trial as aremission maintenance therapy for patients with acute myeloid leukemia(AML).  We are currently seeking astrategic partnership to complete commercialization and further development ofCeplene in AML and other indications.  Weare also discovering and developing small-molecule apoptosis inducers to treatcancer using our proprietary high-throughput screening technology and ourchemical genetics approach.  This programhas identified four lead oncology candidates that are proceeding to clinicaltrials independently and through collaborations.  The most advanced candidate from the programis entering a Phase 1 trial through collaboration with Myriad Genetics.

 

During the periodsencompassed by this Quarterly Report, we have devoted substantially all of ourresources to our histamine therapy and apoptosis modulator product developmentprograms. We conduct our research and other product development efforts througha combination 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.

 

Ceplene is designed toprevent or reverse damage associated with oxidative stress,

 

9

----

 

thereby protectingcritical cells and tissues. Because Ceplene modulates basic immune functions,it has the potential to be used in the treatment of a broad range of diseasesin which oxidative stress plays an important role.  More than 2,000 patients have participated inour 17 completed and ongoing clinical trials of Ceplene, conducted in 20countries.

 

In March 2005, weretained Piper Jaffray & Co. to advise and assist in identifying andevaluating our strategic options.  PiperJaffray & Co. is a leading investment bank serving the life scienceindustry.  Working with Piper Jaffray, weare currently seeking and evaluating strategic transactions aimed ateffectively leveraging and building on our assets in order to improvestockholder value.  These potentialtransactions may include a variety of different business arrangements,including spin-offs, acquisitions, strategic partnerships, joint ventures,restructurings, divestitures, business combination and investments.  We cannot assure you that any suchtransactions will be consummated on favorable terms or at all, will in factenhance stockholder value, or will not adversely affect our business or thetrading price of our stock.  Any suchtransactions may require us to incur non-recurring or other charges and maypose significant integration challenges and/or management and businessdisruptions, any of which could materially and adversely affect our businessand financial results.

 

In May 2004, we announcedthe results of our international Phase 3 clinical trial testing the combinationof Ceplene plus Interleukin-2, or IL-2, in 320 patients with acute myeloidleukemia, or AML, in complete remission. The primary endpoint of the Phase 3 trial was achieved usingintent-to-treat analysis, as patients treated with the Ceplene/IL-2 combinationtherapy experienced a statistically significant (p=0.0096) increase inleukemia-free survival compared to patients in the control arm of the trial asassessed 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 therapy treats patients during remission (afterchemotherapy) with the goal to increase their remission period and preventrelapses.

 

On January 18, 2005, weannounced that based on correspondence with the United States Food and DrugAdministration, or FDA, as well as consultations with external advisorsregarding the AML clinical results, that an additional Phase 3 clinical trialwill be necessary to further evaluate Ceplene/IL-2 combination therapy for thetreatment of AML patients in complete remission before applying for regulatoryapproval by the FDA in the United States. Given the time and costs required to conduct another Phase 3 clinicaltrial, we believe that any such trial would need to be done in collaborationwith a corporate partner.  We arecontinuing to evaluate the possibility of filing for approval in Europe basedon the above study without conducting an additional clinical trial.  We are seeking a worldwide strategic partnerto advance the development and potential commercialization of Ceplene in AMLand other indications.  We will continueto evaluate strategic options related to our regulatory evaluations andpartnering efforts.

 

In September 2004, weannounced that the confirmatory Phase 3 trial, or M0104 trial, for thetreatment of advanced malignant melanoma patients with liver metastases failedto 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

 

10

----

 

by the FDA inApril 2004.  In addition, in October 2004we implemented a restructuring plan that included a reduction of approximately50% of our workforce, primarily in the area of research and development, toallow sufficient funds to support our operations.  In February 2005, we announced that wefurther reduced our workforce by 12 employees, primarily in areas associatedwith Ceplene development.  We expensedthe total cost of these restructurings, approximately $314,000, in the threemonths ended March 31, 2005, and approximately $1,189,000, in the three monthsended December 31, 2004.  We expect thesetwo workforce reductions to lower what would otherwise be our quarterly expenseby $1,392,000.

 

In February 2005, weannounced the preliminary results from our Phase 2 Ceplene trials treatingpatients with Hepatitis C.  Our Phase 2trial (M0406) of Ceplene in combination with PEG-Intron® (peginterferonalfa-2b) and Rebetol® (ribavirin, USP) for the treatment of hepatitis C patientswho failed to respond to previous therapy, which was conducted in cooperationwith Schering-Plough Corporation, did not improve virological response comparedto treatment with the PEG-Intron and Rebetol alone.

 

In February 2005, we alsoannounced the results from two investigator-driven studies with Ceplene plusIL-2 versus IL-2 alone in patients with metastatic renal cell carcinoma.  The study performed in Denmark showed a trendtowards improvement in patients treated with Ceplene plus IL-2 versus IL-2alone in overall survival (p=0.08), but not tumor response.  In the second study performed in the UnitedKingdom, there was no difference in overall survival or tumor response inpatients treated with Ceplene plus IL-2 compared to treatment with IL-2 alone.

 

Clinical trials completedto date suggest that Ceplene can be safely self-administered by most patientsin their own homes.

 

We are discovering anddeveloping a series of novel cancer drug candidates that are potent inducers ofapoptosis, 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 has entered a Phase 1 trial through a collaborationwith Myriad Genetics.  We anticipate thatthree additional lead candidates identified through this program will advancetowards clinical trials independently and through collaborations over the next12 to 18 months.

 

Although focused oncancer, the apoptosis program has wider applicability since apoptosis isrelevant to a broad range of diseases and conditions.  Our proprietary live cell high throughputscreening technology can screen over 30,000 compounds per day to identifysmall-molecule compounds that modulate – either positively or negatively – thecaspase cascade leading to apoptosis. This technology has high specificity and is amenable to most celllines.  The cell-based assay allows forthe identification of compounds that induce or inhibit apoptosis regardless ofstimuli, mode of action or mechanism. Approximately one million compounds have been screened to date.  We have recently acquired additionalcompounds for our compound library and we are initiating a new screeningcampaign.

 

Our screening technologyis particularly versatile and can be adapted for almost any cell

 

11

----

 

type that can becultured, and it can measure caspase activation inside multiple cell types(e.g. cancer cells, immune cells, or cell lines from different organ systems orgenetically engineered cells).  Thisallows the researchers to find potential drug candidates that are selective forspecific cancer types, which may help identify candidates that provideincreased 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.

 

All of our drugcandidates are in the development stage, and the generation of revenue fromproduct sales is dependent upon approval by the FDA and internationalregulatory agencies. We expect to continue to incur losses at least over thenext several years as we continue research and development activities related toour apoptosis modulator technology, seek a worldwide development and marketingpartnership for Ceplene and our oral histamine and topical histamine technologyand pursue a strategic transaction. Losses may fluctuate from quarter toquarter, and such fluctuations may be substantial as a result of, among otherfactors, the number and timing of clinical trials conducted, the funding, ifany, provided as a result of corporate collaborations, the results of clinicaltesting, and the timing of FDA or international regulatory filings andapprovals. There can be no assurance that we will successfully develop,commercialize, manufacture or market our products or ever achieve or sustainproduct revenues or profitability.

 

# **CRITICAL ACCOUNTING POLICIES**

 

The preparation ofconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires us to makeestimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses as well as related disclosure of contingentassets and liabilities. These estimates include useful lives for fixed assets,useful lives for intellectual property, estimated lives for license agreements,revenue recognition, 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.

 

We believe the following critical accounting policiesaffect our more significant judgments and estimates used in the preparation ofour consolidated financial statements.

 

*RevenueRecognition.*  Revenueis generally recognized when all of the following criteria are met: persuasiveevidence that an arrangement exists; services have been rendered and arenon-refundable; the price is fixed and determinable; and collection isreasonably assured.  All multipledeliverable arrangements are reviewed by us for separability in accordance withEITF 00-21.  If the separability criteriaare met, non-refundable upfront technology access fees are accounted forseparately.  Upfront technology accessfees which are not considered separable

 

12

----

 

from the related researchfees are recognized 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 theterms of certain of our collaborative agreements.  These donated materials and services arerecorded as revenue and expense when used at the fair market value of thematerial received or the service provided. Grant funding is recognized as revenue when services are performed underthe grant.

 

*Clinicaltrial 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.

 

*Valuationof Intellectual Property.* We evaluate our patents and licenses for impairment on an annual basisand whenever indicators of impairment exist. During this process, we review ourportfolio of pending domestic and international patent applications, domesticand international issued patents, and licenses we have acquired from otherparties. To determine if any impairment is present, we consider challenges orpotential challenges to our existing patents, the likelihood of applications beingissued, the scope of our issued patents, the assessment of future cash flows tobe generated from the patents and our experience. In the event that it isdetermined that an impairment exists where we had previously determined thatone did not exist, it may result in a material adjustment to our financialstatements.

 

**RESULTSOF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2005 AND 2004**

 

*Collaboration and ResearchRevenue. *For the quarter ended March 31, 2005,collaboration and research revenue was $1,120,000, a decrease of $153,000 or12% compared to the same period in the prior year.  This decrease was primarily attributable tothe decrease in donated drugs and services from Schering Corporation which provided$6,600 in the current quarter and $646,000 in the same quarter of the previousyear. The decrease in donated drugs and services from Schering is because thehuman testing for M0406 trial was completed in December 2004.  The decrease is offset by a $500,000 increasein collaboration revenue from Myriad Genetics Inc. (Myriad), a collaborationthat we entered into in November 2003. The Myriad Agreement provided $1 million of revenue in the currentquarter, compared to $500,000 of revenue in the same period in the prioryear.  In March 2005, Myriad achieved adevelopment milestone with the dosing of the first patient in a phase 1 trial.

 

For the six months ended March31, 2005, collaboration and research revenue was $1,483,000, a decrease of$1,209,000 or 45% over the same period in the prior year.  As noted above, this decrease was primarilyattributable to a decrease in donated drugs and services from our collaborationwith Schering which provided $12,900 in the six month period ended March 31,2005 compared to $1,693,000 in the same period of the previous year.  The decrease was offset by an

 

13

----

 

increase of $533,000 of revenue from our collaboration with Myriad.

 

*Research and Development Expenses. *Research anddevelopment expenses for the quarter ended March 31, 2005 totaled $5,119,000, adecrease of $3,244,000 or 39% over the same period in the prior year.  Research and development expenses for the sixmonths ended March 31, 2005 totaled $12,068,000, a decrease of $5,626,000 or32% over the same period in the prior year. These decreases are primarily due to the decrease in clinicaltrial activity because our Ceplene clinical trials are winding down.  For the three and six month periods endedMarch 31, 2005, restructuring expenses of $139,000 and $1,002,000 were recordedin research and development expenses.

 

In the future weexpect to continue incurring additional research and development expenses dueto:

 

•                  research relatedto our apoptosis modulator program;

•                  preclinical andclinical testing of our product candidates;

•                  the wind down ofour Ceplene clinical trials; and

•                  regulatory-relatedexpenses.

 

*Business Development and Marketing Expenses. *Business development and marketing expenses for the quarter ended March31, 2005 were $482,000, a decrease of $165,000 or 26% over the same period ofthe prior year.  The decrease isprimarily due to the work force reductions. For the six months ended March 31,2005, business development and marketing expenses were $1,464,000, an increaseof $174,000 or 13% over the same period in the prior year.  The increase is due to an increase inpremarketing activities associated with the potential market launch of Ceplene,primarily related to attendance at industry conferences.  For the three and six month periods endedMarch 31, 2005, restructuring expenses of $40,000 and $155,000 were recorded inbusiness development and marketing expenses.

 

*General and Administrative Expenses. *For the quarterended March 31, 2005, general and administrative expenses were $1,985,000, anincrease of $396,000 or 25% from the same period in the prior year.  For the six months ended March 31, 2005,general and administrative expenses were $4,200,000, an increase of $845,000 or25% from the same period in the prior year. These increases were primarily due to an increase in accounting, legaland consulting expenses.  For thethree and six month periods ended March 31, 2005, restructuring expenses of$255,000 and $466,000 were recorded in general and administrative expenses,including a $120,000 write-down for excess or idle property and equipment.

 

*Provision for note receivablefrom an officer. *For the quarter endedMarch 31, 2005, the Company recorded expense of $324,000 for an additionalallowance on a note receivable from an officer of the Company due to thedecrease in the value of the Company stock and stock options held by theofficer collateralizing the note.  TheCompany performs quarterly impairment analyses for the note receivable.  There was no similar expense in the similarperiod of the prior year.  For furtherinformation refer to the Liquidity and Capital Resource section of thisMD&A or Footnote 7 of the financial statements, “Related PartyTransactions”.

 

14

----

 

*Investment Income. *Investmentincome was $163,000 for the quarter ended March 31, 2005, a decrease of$244,000 or 60% from the same period in the prior year.  Investment income was $371,000 for the sixmonths ended March 31, 2005, a decrease of $506,000 or 58% from the same periodin the prior year.  This decrease was aresult of a decrease in our cash and short-term investment balances.

 

*Net Loss Applicable to CommonStock. *Net loss applicable to common stock for thequarter ended March 31, 2005 totaled $6,638,000, a decrease of $2,301,000 or26% from the same period in the prior year. This decrease was primarily aresult of the decrease in research and development expenses, partially offsetby the increase in general and administrative expenses and the provision forthe note receivable from the officer, as described above.

 

Net loss applicable to common stock for the sixmonths ended March 31, 2005 totaled $16,225,000, a decrease of $2,585,000 or14% from the same period in the prior year. This decrease was primarily a result of the decrease in research anddevelopment expenses, partially offset by the increase in general andadministrative expenses and the provision for the note receivable from theofficer and the decrease in collaboration and research revenue, as describedabove.

 

#### **LIQUIDITY AND CAPITAL RESOURCES**

 

We have financed our operations primarily through thesale of our equity securities providing total net proceeds of approximately$323 million, including an initial public offering in 1996, an internationalfollow-on public offering in 1997, private offerings of preferred stock in Julyand November 1999, a follow-on public offering in February 2000, and a privateplacement of common stock in September 2003.

 

Until required for operations, our policy under establishedguidelines is to keep our cash reserves in bank deposits, corporate debtsecurities, United States government instruments and other readily marketabledebt instruments, all of which are investment-grade quality.  As of March31, 2005, we had cash, cash equivalents and investments (including restrictedcash of $3.5 million) totaling approximately $32.6 million compared with $52.9million at September 30, 2004.  As ofMarch 31, 2005, we had working capital of approximately $25.6 million comparedwith $41.1 million at September 30, 2004. The decrease in our cash, cash equivalents and short-term investments,and working capital was primarily due to day-to-day operating expenses relatingto research and development activities.

 

In December 2000, we enteredinto a $2.85 million full recourse secured revolving promissory note with anofficer of the Company.  The note bearsinterest at an annual rate of 4.0% and is secured by the officer’s outstandingoptions and shares of common stock. During the quarter ended September 30, 2002, we determined that the noteto the officer had become impaired because we determined that the officer didnot have the ability to repay the loan in full when due and recorded anallowance on the note in the amount of $700,000.  We have subsequently recorded $1,657,000 ofexpense, including $324,000 during the quarter ended March 31, 2005, toincrease the allowance on the note related to the decrease in the value of theCompany stock and stock options held by the officer collateralizing thenote.  In addition, we

 

15

----

 

have not recorded interest income of $337,000 on thenote subsequent to June 30, 2002.  Theentire outstanding 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 us $394,000 related to the note.  We are continuing to review our options and alternatives and intend tocontinue to pursue collection on the loan. As of March 31, 2005, the recordedoutstanding principal and interest balance on the note was $358,000, net of the$2,357,000 allowance.

 

At March 31, 2005, we were owed $901,000, 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 weguaranteed in July 2001.  The purpose ofthe bank loan was to allow the payment of income taxes associated with theexercise of stock options.  The Boarddetermined that it was in our best interest to provide the guarantee to avoidthe necessity of the officer selling personal holdings of our securities duringa period of depressed market prices. During the fourth quarter of fiscal year 2002, we had determined that itwas probable the former officer would not have the ability to repay his bankloan.  Therefore, we had recorded aprovision for the guarantee and a liability in the amount of $900,000, $3,000of which was subsequently reversed.  Theformer officer does not currently have the assets necessary to repay us.  We hold the stock options of the formerofficer as collateral.  We are reviewingour options and alternatives, have full recourse and intend to continue topursue collection of the amount from the former officer.  As of March 31, 2005, the recordedoutstanding principal and interest balance on the loan was $0, net of the$897,000 allowance.

 

We have term loans with a bank totaling $396,000 atMarch 31, 2005, the proceeds of which were used to finance capitalexpenditures.  The term loan agreementscontain customary affirmative and negative covenants, including financialcovenants requiring the maintenance of specified liquidity terms and themaintenance of our principal depository and operating accounts with thebank.  In addition, we have the choice toeither maintain a minimum aggregate balance of $3,500,000 at the institution orto pay the bank a quarterly fee of $2,500. During the quarter ended March 31, 2005, we maintained the minimumaggregate balance noted above at the bank and were in compliance with allcovenants.

 

The following table summarizes our contractualobligations as of March 31, 2005:

 
| ** **                   | ** ** | **Payments  due by Period (in thousands)** | ** ** |
|------------------------------|------------|--------------------------------------------|------------|
| ** **                   | ** ** | ** **                                 | ** ** | **Less  than  1** | ** ** | ** ** | ** ** | ** ** | ** ** | **More  than 5** | ** ** |
| ** **                   | ** ** | **Total**                                  | ** ** | **Year** | ** ** | **1-3 Years** | ** ** | **3-5  Years** | ** ** | **Years** | ** ** |
|                         |       |                                       |       |   |   |   |   |   |   |   |   |
| CONTRACTUAL  OBLIGATIONS     |       |                                       |       |   |   |   |   |   |   |   |   |
|                         |       |                                       |       |   |   |   |   |   |   |   |   |
| Debt                         |       | $                                          | 537        |   | $ | 524 |   | $ | 13 |   | $ | — |   | $ | — |   |
| Capital Lease  Obligations   |       | 11                                         |       | 11 |   | — |   | — |   | — |   |
| Severance  Obligations       |       | 179                                        |       | 179 |   | — |   | — |   | — |   |
| Operating Lease  Commitments |       | 9,573                                      |       | 1,985 |   | 3,851 |   | 3,112 |   | 625 |   |
|                              |            |                                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

16

----

 

In September 2004, a complaint was filed inFederal Court against us, one officer and one former officer allegingviolations of federal securities laws. Thereafter two similar complaints were filed.  The actions were consolidated and in March 2005,the plaintiffs filed a consolidated amended complaint.  In October 2004, a derivative complaintwas filed against one officer, two former officers and our entire Board ofDirectors alleging, among other things, breach of fiduciary duty arising fromallowing purported violations of federal securities laws.  No discovery has been conducted. Thecomplaints have been tendered to our insurance carrier, however, our carrierhas denied coverage for these claims.  Wedispute the position taken by our insurance carrier and intend to enforce ourrights under the policy.  In addition, inDecember 2004, the Court of Appeal reversed the judgment of the SuperiorCourt and remanded to the trial court for further proceedings complaints filedin October 2001 and May 2002 by certain former shareholders ofCytovia, a Company we acquired in 2000. The complaints, against us and two of our officers, allege fraud andnegligent misrepresentation in connection with our acquisition of Cytovia.  These complaints are more fully discussed inthe section entitled Risk Factors contained herein and in footnote 8, “Contingencies”to these condensed consolidated financial statements.  No assurances can be made as to whether wewill be successful in our defense of the pending claims. If we are not successfulin our defense of such claims, we could be forced to, among other things, makesignificant payments to resolve these claims. To the extent such payments are not covered by our insurance carrier,they would have a material adverse effect on our liquidity and capitalresources, including the possibility that such payments could fully deplete ourcash resources.  

 

As a development stage enterprise, we anticipateincurring additional losses, at least in the near future as we continue toexpend amounts on our research and development activities related to ourapoptosis modulator technology, seek a worldwide development and marketingpartnership for Ceplene and our oral histamine and topical histamine technologyand pursue a strategic transaction. 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:  if after discussions with European regulatorsand consultants, we decide to pursue European regulatory approval for Ceplenein AML, costs associated with pursuing a strategic transaction and otherresearch related to liver disease, the apoptosis modulator and topicalhistamine technologies. Other factors that may impact our cash requirementsinclude: the results of clinical trials, the scope of other research anddevelopment activities, the time required to obtain regulatory approvals, costsassociated with defending certain lawsuits currently pending against us, thecosts of filing, prosecuting, defending and enforcing patent claims and otherintellectual property rights, and the ability to establish marketing alliancesand collaborative arrangements. As a result of these factors, it is difficultto predict accurately the timing and amount of future cash requirements.However based on the corporate restructuring as previously discussed and thecompletion of Ceplene trials, we expect that in fiscal year 2005 our use ofcash in operations will be lower than fiscal year 2004*.*

* *

In March 2005, we retained Piper Jaffray &Co. to advise and assist in identifying and evaluating our strategicoptions.  Piper Jaffray & Co. isa leading investment bank serving the life science industry.  Working with Piper Jaffray, we are currentlyseeking and evaluating strategic

 

17

----

 

transactions aimed at effectively leveraging andbuilding on our assets in order to improve stockholder value.  These potential transactions may include avariety of different business arrangements, including spin-offs, acquisitions,strategic partnerships, joint ventures, restructurings, divestitures, businesscombination and investments.  We cannotassure you that any such transactions will be consummated on favorable terms orat all, will in fact enhance stockholder value, or will not adversely affectour business or the trading price of our stock. Any such transactions may require us to incur non-recurring or othercharges and may pose significant integration challenges and/or management andbusiness disruptions, any of which could materially and adversely affect ourbusiness and financial results.

 

We believe that our available cash,cash equivalents and investments at March 31, 2005 will be sufficient tosatisfy our funding needs for at least the next 12 months.  To meet our cash requirements, we may pursuethe issuance of additional equity securities and corporate collaborativeagreements. In December 2003, we filed a shelf registration statement,which  allows us to raise up to $75million through the sale of various securities in one or more offerings in thefuture.  Specific prices and terms willbe determined at the time of any offering. The issuance of additional equity securities, if any, could result insubstantial dilution to our stockholders. There can be no assurance that additionalfunding will be available on terms acceptable to us, if at all. The failure tofund our capital requirements would have a material adverse effect on ourbusiness, financial condition and results of operations.

 

We are currently seeking a worldwidestrategic partnership to complete the development and commercialization ofCeplene in AML and other indications.  Weare also seeking collaborations for the further development of our otherhistamine technologies and our apoptosis modulator drug candidates for cancerand other diseases.  We intend toindependently advance one apoptosis lead drug candidate for the treatment ofcancer to an IND within approximately the next 12 months.  

 

In November 2003, we enteredinto an agreement with Myriad under which we licensed our MX90745 series of caspase-inducer anti-cancer compounds to Myriad.  The agreement requires that Myriad makelicensing, research and milestone payments to us totaling up to $27 million,assuming the successful commercialization of the compound for the treatment ofcancer, as well as pay a royalty on product sales.  In March 2005, Myriad began humanclinical trials with this compound, initiating a Phase 1 clinical trial inpatients with advanced solid tumors, which triggered a $1 million milestonepayment that we received in April 2005. We are currently seeking collaborations to advance two additionalapoptosis lead compounds to an IND. There can be no assurance that we will be able to enter into any additionalagreements on acceptable terms, if at all.

 

We havenever paid a cash dividend on our common stock and such payments are prohibitedby the terms of our bank loan. We do not contemplate the payment of cashdividends on our common stock in the foreseeable future.

 

**IMPACT OFINFLATION**

 

The impact of inflation onour operations for the three and six months ended March 31,

 

18

----

 

2005 and 2004 was not material.

 

#### **RECENT ACCOUNTING PRONOUNCEMENTS**

#### ** **

On December 16, 2004, the Financial AccountingStandards Board, or FASB, issued 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 at the beginning of the fiscalyear beginning after June 15, 2005. Early adoption will be permitted inperiods in which financial statements have not yet been issued. We expect toadopt SFAS 123(R) on October 1, 2005. 

 

SFAS 123(R) permits public companies to adopt itsrequirements using one of two methods: 1) A “modified prospective” methodin which compensation cost is recognized beginning with the effective date (a) basedon the requirements of SFAS 123(R) for all share-based payments grantedafter the effective date and (b) based on the requirements ofSFAS 123 for all awards granted to employees prior to the effective dateof SFAS 123(R) that remain unvested on the effective date, 2) A “modifiedretrospective” method which includes the requirements of the modifiedprospective method described above, but also permits entities to restate basedon the amounts previously recognized under SFAS 123 for purposes of proforma disclosures either (a) all prior periods presented or (b) priorinterim periods of the year of adoption. We plan to adopt SFAS 123 nolater than October 1, 2005, but have not yet determined what method wewill use. 

 

As permitted by SFAS 123, we currently accountfor share-based payments to employees using Opinion 25’s intrinsic value methodand, as such, generally recognize no compensation cost for employee stockoptions. Accordingly, the adoption of SFAS 123(R)’s fair value method mayhave a significant impact on our results of operations.  We have not yet determined the impact of theadoption of SFAS 123(R).

 

In March 2004, the FASB’s Emerging Issues TaskForce issued EITF 03-1, “The Meaning of Other-Than-Temporary Impairment and ItsApplication to Certain Investments”*.* EITF 03-1, which was originally effective for interim and annual reportingperiods beginning after June 15, 2004 requires a three-step model todetermine other-than-temporary impairments for all current and futureinvestments in marketable securities.  In September 2004, the FASBdelayed the requirement to record impairment losses under EITF 03-1 until newguidance is issued.  We do not expect that the adoption of EITF 03-1 willhave a material impact on our operating results and financial position.

 

19

----

 

**RISKFACTORS**

** **

You shouldcarefully consider the following risk factors and the other informationincluded herein as well as the information included in our Annual Report on Form 10-Kfor the fiscal year ended September 30, 2004, and other reports andfilings made with the Securities and Exchange Commission before investing inour common stock. If any of the following risks actually occur, our business,financial condition or results of operations could be harmed. The trading priceof our common stock could decline due to any of these risks, and you may losepart or all of your investment. 

 

**The development of our drug candidates issubject to uncertainties, many of which are beyond our control. If we fail tosuccessfully develop our drug candidates, our ability to generate revenues willbe substantially impaired.**

** **

Potentialproducts based on our Ceplene, oral histamine, apoptosis modulator and topicalhistamine gel technologies will require, dependent upon the specific drugcandidate, extensive research and development, preclinical testing, clinicaltesting, collaborative partners to conduct certain clinical trials, regulatoryapproval and substantial additional investment before we can market them. We cannotassure you that any of our drug candidates will:

 

•              besuccessfully developed;

 

•              proveto be safe and effective in clinical trials;

 

•              meetapplicable United States or international regulatory standards;

 

•              becapable of being produced in commercial quantities at acceptable costs;

 

•              becommercially viable;

 

•              beeligible for third party reimbursement from governmental or private insurers;or

 

•              achievemarket 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 livermetastases.  

 

We have notcompleted final testing for efficacy or safety in humans for the diseases wepropose to treat with Ceplene and our other drug candidates. Failure toultimately obtain approval for Ceplene and our other drug candidates, any delayin our expected testing and development schedules, the failure to engage acollaborative partner, or any elimination of a product

 

20

----

 

development program in its entirety, will negatively impactour ability to generate revenues in the future from the sale of our productcandidates.

 

**We may not obtain regulatory clearance tomarket our drug candidates on a timely basis, or at all.**

** **

Our drugcandidates are subject to extensive government regulations related todevelopment, clinical trials, manufacturing and commercialization. The processof obtaining FDA, European Agency for the Evaluation ofMedicinal Products, or EMEA, and othergovernmental and similar international regulatory approvals is costly, timeconsuming, uncertain and subject to unanticipated delays. Even if we believethat preclinical and clinical data are sufficient to support regulatoryapproval for a drug candidate, the FDA, EMEA and similar internationalregulatory authorities may not ultimately approve the candidate for commercialsale in any jurisdiction. The FDA, EMEA or similar international regulators mayrefuse to approve an application for approval of a drug candidate if theybelieve that applicable regulatory criteria are not satisfied. The FDA, EMEA orsimilar international regulators may also require additional testing for safetyand efficacy.  For example, in May 2004,we announced the results of an international Phase 3 clinical trial testing thecombination of Ceplene plus IL-2 in patients with AML in completeremission.  The primary endpoint of thePhase 3 trials was achieved using intent-to-treat analysis, as patients treatedwith the Ceplene/IL-2 combination therapy experienced a statisticallysignificant increase in leukemia-free survival compared to patients in thecontrol arm of the trial.  In January 2005, we announced that based on ongoingcorrespondence with the FDA, as well as consultations with external advisors,we determined that an additional Phase 3 clinical trial will be necessary tofurther evaluate Ceplene plus IL-2 combination therapy for the treatment of AMLpatients in complete remission before applying for regulatory approval in the UnitedStates.   We are continuing to evaluateour regulatory strategy for Europe including the need for an additional Phase 3clinical trial.  We have not yet completed our discussions with the EuropeanRegulators and 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) the results from an additional Phase 3 trial wouldconfirm the results from the first 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.

 

Any failureor delay in obtaining these approvals could prohibit or delay us from marketingour drug candidates. 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.

 

21

----

 

**Delays in the commencement, conduct orcompletion of our clinical trials would negatively impact our business.**

** **

We mayencounter 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:

 

•              theanalysis of data from our clinical studies and the reporting of results may bedelayed;

 

•              thesubmission of our applications for regulatory approval of our drug candidateswith regulatory authorities in North America, Europe and elsewhere in the worldmay be delayed;

 

•              regulatoryapproval of our drug candidates may be delayed and may not occur on a timelybasis, delaying the generation of revenues from the commercial sale of any ofour marketed product candidates;

 

•              wemay not have the financial resources to continue and complete research anddevelopment of any of our product candidates; and

 

•              wemay not be able to enter into collaborative arrangements relating to anypotential product as a result of the delay in clinical development orregulatory filings.

 

**Because we are dependent on clinicalresearch centers and other contractors for clinical testing and for certainresearch and development activities, the results of our clinical trials andsuch research activities are, to a certain extent, beyond our control.**

** **

The natureof clinical trials and our business strategy requires us to rely on clinicalresearch centers and our other contractors to assist us with clinical testingand certain research and development activities. As a result, our success isdependent upon the success of these outside parties in performing theirresponsibilities. 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.

 

22

----

 

**We expect to rely on collaborative partnersfor research and development and commercialization of certain potentialproducts.**

** **

We expectto 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 additional clinicaltrials of Ceplene for the treatment of patients with AML, as well as otherapplications of our histamine technology, theCompany also believes that further clinical development would need to beconducted in collaboration with a corporate partner, and we intend to pursuesuch partnering opportunities.  We cannot be certain that we will be able to maintain thesecollaborations or enter into any future collaborative arrangements, that any ofour collaborations will be successful or that we will receive revenues from anyof these collaborations. The success of these and any future collaborationswill depend, in significant part, on our partners’ development and strategicconsiderations, including the relative advantages of alternative products beingdeveloped or marketed by competitors. If our partners fail to conduct theiractivities in a timely manner, or at all, preclinical or clinical developmentof drug candidates under those collaborations could be delayed or terminated.The suspension or termination of our collaborations, the failure of ourcollaborations to be successful or the delay in the development orcommercialization of drug candidates pursuant to our collaborations could harmour business.

 

**Our planned business may expose us toproduct, clinical trial and other liability claims.**

** **

Our design,testing and development of potential products involves an inherent risk ofexposure 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, purchasedor used by doctors, patients or payors.**

** **

Our drugcandidates may not achieve market acceptance even if they are approved by theFDA, EMEA and similar international regulatory agencies. We cannot guaranteethat physicians, patients, payors or the medical community in general willaccept and utilize any products that we develop. The degree of marketacceptance of our potential products will depend on a number of factors,including:

 

•              thescope of regulatory approvals;

 

•              theestablishment and demonstration of the clinical efficacy, safety and advantagesof our product candidates by clinical trial results, and the acceptance of suchresults by the medical community;

 

23

----

 

•              thepotential advantages of our products over existing treatment methods; and

 

•              reimbursementpolicies of government and other third-party payors.

 

**We have yet to market or sell any of ourproduct 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 into any collaborativearrangement with respect to marketing or selling Ceplene with the exception ofagreements relating to Australia, New Zealand and Israel. We cannot guaranteethat we will be able to enter into any additional such arrangements on termsfavorable to us, or at all for Ceplene or any other drug candidate. If we areable to enter into marketing and selling arrangements with collaborativepartners, we cannot assure you that such marketing collaborators will applyadequate resources and skills to their responsibilities, or that theirmarketing 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 partymanufacturers of our product candidates. Our ability to sell our product candidates may be harmed if adequatequantities of our product candidates are not manufactured on a timely basis.**

** **

We do notintend to acquire or establish our own dedicated manufacturing facilities forour drug candidates in the foreseeable future. We have contracted and expect tocontinue to contract with established pharmaceutical manufacturers for theproduction of our drug candidates. If we are unable to continue to contractwith third-party manufacturers on acceptable terms or our manufacturers do notcomply with applicable regulatory requirements, our ability to conduct clinicaltesting and to produce commercial quantities of our product candidates will beadversely affected. If we cannot adequately manufacture our product candidates,it could result in delays in submissions for regulatory approval and incommercial product launches, which in turn could materially impair our competitiveposition and the possibility of achieving profitability. We cannot guaranteethat we will be able to maintain our existing contract manufacturingrelationships, or acquire or establish new, satisfactory third-partyrelationships to provide adequate manufacturing capabilities in the future.

 

**We are not profitable and expect to continueto incur losses. If we do not become profitable, we may ultimately be forced todiscontinue our operations.**

** **

We are adevelopment-stage enterprise. We have experienced net losses every year sinceour inception. Our net losses applicable to common stock were $16.2  million and $18.8 million for the six monthsended March 31, 2005 and 2004.  Asof March 31, 2005, we had an accumulated deficit of approximately $367.7million. We anticipate incurring substantial additional losses over at leastthe next several years related to developing and testing our drug candidatesand preparing for commercialization and planned market launches of ourproducts. If we do not become profitable, our stock price will be negativelyaffected, and we may ultimately be forced to discontinue our operations. We maynever generate product revenues or become

 

24

----

 

profitable. We expect to have quarter-to-quarter fluctuationsin revenues, expenses and losses, some of which could be significant.

 

**We will need to raise additional funds inthe future. If we are unable to obtain the funds necessary to continue ouroperations, we will be required to delay, scale back or eliminate one or moreof our drug development programs.**

** **

We havealready spent substantial funds developing our potential products and business.We expect to continue to have negative cash flow from our operations for atleast the next several years.  We willhave 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:

 

•              theresults of our clinical trials;

 

•              thetiming and scope of any additional clinical trials undertaken;

 

•              thescope and results of our research and development programs;

 

•              thetime required to obtain regulatory approvals;

 

•              ourability to establish marketing alliances and collaborative agreements;

 

•              thecost of our internal marketing activities; and

 

•              thecost of filing, prosecuting and, if necessary, 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 andresearch institutions that are developing products to treat the same diseasesas our drug candidates. To the extent these competitors are successful indeveloping and marketing such products, our future potential market share andrevenues could be reduced.**

** **

There aremany 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

 

25

----

 

testing and clinical trials of new pharmaceutical productcandidates and obtaining FDA, EMEA and other regulatory approvals. If any ofour drug candidates are approved for commercial sale, we will also be competingwith companies that have greater resources and experience in manufacturing,marketing and selling pharmaceutical products. To the extent that any of ourcompetitors succeed in developing products that are more effective, less costlyor have better side effect profiles than our products, then our futurepotential market share could decrease, which may have a negative impact on ourbusiness.

 

**If we fail to secure adequate protection ofour intellectual property or the right to use certain intellectual property ofothers, we may not be able to protect our product candidates and technologiesfrom competitors.**

** **

Our successdepends in large part on our ability to obtain, maintain and protect patents,trademarks and trade secrets and to operate without infringing upon theproprietary rights of others. If we are unable to do so, our product candidatesand technologies may not provide us with any competitive advantage.

 

The patentpositions of biotechnology and pharmaceutical companies are highly uncertainand involve complex legal and factual questions, and the breadth of claimsallowed in biotechnology and pharmaceutical patents cannot be predicted. As aresult, 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 licensed technology rights, may be challenged, invalidated orcircumvented so that our intellectual property rights may not protect ourtechnologies or provide commercial advantage to us. In addition, we also relyon unpatented trade secrets and proprietary know-how, and we cannot be surethat others will not obtain access to or independently develop such tradesecrets and know-how. Enforcement of our intellectual property rights againstany infringers of our patents relating to our product candidates andtechnologies will be costly and time-consuming. Because of the nature of thosepatents, we could be required to bring lawsuits against many different entitiessuch as hospitals or clinics. This would have the effect of increasing thecosts 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.

 

26

----

 

**The technology in our sector is developingrapidly, and our future success depends on our ability to keep abreast oftechnological change.**

** **

We areengaged 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 toattract and retain key personnel.**

** **

Our successwill depend, to a great extent, upon the experience, abilities and continuedservices of our executive officers, and key personnel for research, developmentand commercialization. If we lose the services of any of these officers or keyresearch and development personnel, our business could be harmed. Our successalso will depend upon our ability to attract and retain other highly qualifiedresearch and development, managerial, manufacturing and sales personnel and ourability to develop and maintain relationships with qualified clinicalresearchers. Competition for these personnel and relationships is intense and wecompete with numerous pharmaceutical and biotechnology companies as well aswith universities and non-profit research organizations. We may not be able tocontinue to attract and retain qualified personnel or develop and maintainrelationships with clinical researchers.

 

**The marketability of our product candidatesmay depend on reimbursement and reform measures in the health care industry.**

** **

Our successmay depend, in part, on the extent to which reimbursement for the costs oftherapeutic product candidates and related treatments will be available fromthird-party payors such as United States and similar international governmenthealth administration authorities, private health insurers, managed careprograms and other organizations. Over the past decade, the cost of health carehas risen significantly, and there have been numerous proposals by legislators,regulators and third-party health care payors to curb these costs. Some ofthese proposals have involved limitations on the amount of reimbursement for certainproducts and product candidates.  Wecannot guarantee that similar United States federal or state or similarinternational health care legislation and policies will not be adopted in thefuture or that any product candidates sought to be commercialized by us will beconsidered cost-effective or that adequate third-party insurance coverage willbe available for us to establish and maintain price levels sufficient forrealization of an appropriate return on our investment in product development.Moreover, the existence or threat of cost control measures could have anadverse effect on the willingness of potential collaborators to pursue researchand development programs related to our product candidates.

 

**We may engage in strategic transactions,which could adversely affect our business.**

** **

From timeto time we consider strategic transactions and alternatives with the goal ofmaximizing stockholder value. In March 2005, we announced that we haveretained an

 

27

----

 

investment banker, Piper Jaffray & Co., to adviseand assist in our seeking and evaluating strategic transactions.  Thesepotential transactions may include a variety of different businessarrangements, including spin-offs, acquisitions, strategic partnerships, jointventures, restructurings, divestitures, business combinations and investments.We cannot assure you that any such transactions will be consummated onfavorable terms or at all, will in fact enhance stockholder value, or will notadversely affect our business or the trading price of our stock. Any suchtransactions may require us to incur non-recurring or other charges and maypose significant integration challenges and/or management and businessdisruptions, any of which could materially and adversely affect our businessand financial results.

 

**We have been named as a defendant inlitigation that could result in substantial costs and divert management’sattention and resources.**

** **

In October 2001 and May 2002,certain former shareholders of Cytovia filed complaints in California SuperiorCourt in San Diego, against us and two of our officers, alleging fraud and negligentmisrepresentation in connection with our acquisition of Cytovia. A bindingarbitration proceeding with the American Arbitration Association was held in May 2003.The three-member arbitration panel rejected all of the plaintiffs’ claims,determined that we have no liability for such claims and awarded recovery ofour reasonable attorneys’ fees and costs of approximately $922,000 asprevailing 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 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. We intend to file a petition to the UnitedStates Supreme Court seeking further appellate review and to continuevigorously defending against these claims.

 

On September 21, 2004, plaintiff Dr. RichardBassin, on behalf of himself and purportedly on behalf of a class of otherssimilarly situated, filed a complaint in the United States District Court forthe Southern District of California against us, Larry G. Stambaugh, ourPresident and Chief Executive Officer, and Anthony E. Altig, our former VicePresident Finance and Chief Financial Officer, for alleged violations offederal securities laws related to declines in our stock price in connectionwith various statements and alleged omissions to the public and to thesecurities markets during the class period from November 11, 2002 to September 17,2004, and seeking damages therefore. Thereafter two similar complaints were filed in the SouthernDistrict.  The actions were consolidatedand in March 2005, the plaintiffs filed a consolidated amendedcomplaint.  We have until May 2005to file a motion to dismiss or otherwise respond to the complaint.  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.

 

On October 7, 2004, plaintiff Jesus Putnam,purportedly on behalf of the Company, filed a derivative complaint in theSuperior Court for the State of California, County of San Diego, against LarryG. Stambaugh, Anthony E. Altig, Kurt R. Gehlsen, former Senior Vice Presidentand Chief Scientific Officer, and our entire Board of Directors for allegedbreach of fiduciary duty, abuse of control, gross mismanagement, waste ofcorporate assets, unjust enrichment and

 

28

----

 

violations of theCalifornia Corporations Code, all of which arise from allowing purportedviolations of federal securities laws related to declines in our 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, andplaintiff’s counsel has stipulated to stay the action pending resolution of amotion to dismiss the federal actions. The complaint has been tendered to our insurance carrier, which hasdenied coverage.  We dispute the positiontaken by our insurance carrier and fully intend to enforce our rights under thepolicy. 

 

We intend to engage in arigorous defense against such claims.  Noassurances can be made that we will be successful in our defense of the pendingclaims. If we are not successful in our defense of such claims, we could beforced to, among other things, make significant payments to resolve theseclaims, and such payments could have a material adverse effect on our business,financial condition and results of operations if not covered by our insurancecarrier. Further, regardless of success of the litigation, the litigationitself may result in substantial costs and divert management’s attention andresources, all of which could adversely affect our business.

 

**Our stock price may be highly volatile dueto external factors.**

** **

Our common stockcurrently trades on the Nasdaq National Market and on the OM StockholmExchange. Historically, our common stock has generally experienced relativelylow daily trading volumes in relation to the aggregate number of sharesoutstanding. We currently have a $75 million shelf registration statement onfile with the Securities and Exchange Commission.  Sales of substantial amounts of our commonstock in the public market could adversely affect the prevailing market pricesof our common stock and our ability to raise equity capital in the future.

 

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

 

•              actualor potential clinical trial results relating to drug candidates underdevelopment by us or our competitors;

 

•              delaysin our clinical testing and development schedules;

 

•              eventsor announcements relating to our collaborative relationships;

 

•              failureto enter into a collaborative partnership to conduct additional clinicalstudies necessary to support regulatory approval of Ceplene therapy in AMLpatients;

 

•              eventsor announcements relating to strategic transactions or our ability tosuccessfully complete such transactions;

 

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

 

29

----

 

•              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.

 

Externalfactors may also adversely affect the market price for our common stock. Theprice and liquidity of our common stock may be significantly affected by theoverall trading activity and market factors on the Nasdaq National Market andthe OM Stockholm Exchange, and these factors may differ between the twomarkets. In addition, the securities markets have from time to time experiencedsignificant price and volume fluctuations that may be unrelated to theoperating performance of particular companies. The market prices of the commonstock of many publicly traded pharmaceutical or biotechnology companies have inthe past been, and can in the future be expected to be, especially volatile.

 

**Certain anti-takeover provisions in ourcharter, by-laws, shareholder rights plan and under Delaware law may deter athird party from acquiring us, even though such acquisition may be beneficialto our stockholders.**

** **

Certainprovisions of our charter and by-laws may make it more difficult for a thirdparty to acquire control of us, even though such acquisition may be beneficialto our stockholders. 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 shareholder rights plan or“poison pill”. Our shareholder rights plan is designed to protect ourshareholders in the event of an unsolicited bid to acquire the Company. Ingeneral terms, the rights plan imposes a significant penalty upon any person orgroup that acquires 15% or more of our outstanding common stock without theapproval of our board of directors. Our shareholder rights plan coulddiscourage a third party from attempting to acquire us through an acquisitionof our outstanding voting stock, even though such acquisition may be beneficialto our stockholders.

 

30

----

 

Our boardof directors also has the authority to issue, at any time, without furtherstockholder approval, up to 5,000,000 shares of preferred stock, and todetermine the price, rights, privileges and preferences of those shares. Thesepreferred shares are available to be used in connection with our shareholderrights plan. Any issuance of preferred stock could discourage a third partyfrom acquiring a majority of our outstanding voting stock.

 

Furthermore,we are subject 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.

 

**Issuing preferred stock with rights seniorto those of our common stock could adversely affect holders of common stock.**

** **

Our charterdocuments give our board of directors the authority to issue a series ofpreferred stock without a vote or action by our stockholders. The board alsohas the authority to determine the terms of preferred stock, including price,preferences and voting rights. The rights granted to holders of preferred stockmay adversely affect the rights of holders of our common stock. For example, aseries of preferred stock may be granted the right to receive a liquidationpreference—a pre-set distribution in the event of a liquidation—that wouldreduce the amount available for distribution to holders of common stock. Inaddition, the issuance of preferred stock could make it more difficult for athird party to acquire a majority of our outstanding voting stock. As a result,common stockholders could be prevented from participating in transactions thatwould offer an optimal price for their shares.

 

#### **ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK**

#### ** **

Our exposure to market risk is principally confinedto our cash equivalents and investments that have maturities of less than threeyears. We maintain a non-trading investment portfolio of investment grade, liquiddebt securities that limits the amount of credit exposure to any one issue,issuer or type of instrument. The securities in our investment portfolio arenot leveraged, are classified as available-for-sale and are subject to interestrate risk. We currently do not hedge interest rate exposure. A hypotheticalten percent change in interest rates during the quarter ended March 31,2005 would have resulted in approximately a $19,000 change in net loss.  We have not used derivative financialinstruments in our investment portfolio. There have been no significant changesin the types or maturities of investments held from September 30, 2004.

 

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

 

We carried out an evaluation, under the supervisionand with the participation of our management, including our President and ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of thedesign and operation of our disclosure controls and procedures, as defined inExchange Act Rule 13a-15(e), as of the end of the period covered by thisreport.  Based upon that evaluation, theCompany’s President and Chief Executive Officer and Chief Financial Officerconcluded that the Company’s disclosure controls and procedures are effectivein enabling us to record, process, summarize and report information required tobe included in

 

31

----

 

our periodic filings with the Securities Exchange Commission within therequired time period.  There have been nosignificant changes in our internal controls over financial reporting thatoccurred during the period covered by this report that have materiallyaffected, or is reasonably likely to materially affect our internal controlover financial reporting.

 

32

----

 

**PART II–OTHER INFORMATION**

** **

***ITEM 1.  LEGAL PROCEEDINGS***

* *

In October 2001 and May 2002, certain formershareholders of Cytovia filed complaints in California Superior Court in San Diego, against the Company and two of its officers, alleging fraud and negligentmisrepresentation in connection with the Company’s acquisition of Cytovia. Abinding arbitration proceeding with the American Arbitration Association washeld in May 2003. The three-member arbitration panel rejected all of theplaintiffs’ claims, determined that the Company has no liability for suchclaims and awarded recovery of the Company’s reasonable attorneys’ fees andcosts 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, theCourt of Appeal reversed the judgment of the Superior Court and remanded thelawsuit to the trial court for further proceedings. The Company intends to filea petition to the United States Supreme Court seeking further appellate reviewand to continue vigorously defending against these claims.

 

On September 21, 2004, plaintiff Dr. RichardBassin, on behalf of himself and purportedly on behalf of a class of otherssimilarly situated, filed a complaint in the United States District Court forthe Southern District of California against the Company, one officer of theCompany and one former officer of the Company, alleging violations of federalsecurities laws related to declines in the Company’s stock price in connectionwith various statements and alleged omissions to the public and to thesecurities markets during the class period from November 11, 2002 to September 17,2004, and seeking damages therefore. Thereafter two similar complaints were filed in the SouthernDistrict.  The actions were consolidatedand in March 2005, the plaintiffs filed a consolidated amendedcomplaint.  The Company has until May 2005to file a motion to dismiss or otherwise respond to the complaint.  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 right under the policy.

 

On October 7, 2004, plaintiffJesus Putnam, purportedly on behalf of the Company, filed a derivativecomplaint in the Superior Court for the State of California, Count of SanDiego, against one officer of the Company, two former officers of the Companyand the Company’s entire Board of Directors, alleging breach of fiduciary duty,abuse of control, gross mismanagement, waste of corporate assets, unjustenrichment and violations of the California Corporations Code, all of whicharise from allowing purported violations of federal securities laws related todeclines in the Company’s stock price in connection with various statements andalleged omissions to the public and to the securities markets, and seekingdamages therefore.  No discovery has beenconducted, and plaintiff’s counsel has stipulated to stay the action pendingresolution of a motion to dismiss the federal actions.  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.

 

The Company intends to engage in a rigorous defenseagainst such claims.  No assurances

 

33

----

 

can be made that the Company will be successful in its defense of thepending claims. If the Company is not successful in its defense of such claims,the Company could be forced to, among other things, make significant paymentsto resolve these claims, and such payments could have a material adverse effecton the Company’s business, financial condition and results of operations if notcovered by the Company’s insurance carrier. Further, regardless of success ofthe litigation, the litigation itself may result in substantial costs anddivert management’s attention and resources, all of which could adverselyaffect the Company’s business.

 

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

*** ***

a)      TheCompany’s Annual Meeting of Stockholders (the “Annual Meeting”) was held on February 18,2005.

 

b)      Atthe Annual Meeting, the stockholders considered and approved the followingproposals:

 

(i)    Electionof a Director to serve until the 2008 Annual Meeting of Stockholders.  The stockholders voted to elect John F.Bedard as a director with 24,508,424 votes cast for the nominee.  A total of 133,626 of the shares abstained.There were no votes against, votes withheld or broker non-votes with respect tothe election of the nominee.  Thefollowing members of the Company’s board of directors continued in office afterthe Annual Meeting:  F. Duwaine Townsen,Robert L. Zerbe, Per-Olof Mårtensson, Larry G. Stambaugh and Wayne P. Yetter.

 

(ii)   Ratification ofAppointment of KPMG LLP as independent auditors of the Company for its fiscalyear ending September 30, 2005.  Thestockholders ratified the selection of KPMG LLP as the independent publicauditors of the Company for the fiscal year ended September 30, 2005 with24,561,270 votes cast for ratification, 64,719 votes against ratification and 16,061abstentions.  There were no voteswithheld or broker non-votes with respect to the proposal.

 

***ITEM6.  EXHIBITS***

 
| 3.1 |   | Amended and Restated  Certificate of Incorporation of Registrant. (1)                                                                                      |
|-----|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.2 |   | Certificate of Amendment  to Amended and Restated Certificate of Incorporation. (2)                                                                        |
| 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. (3)                                                        |
| 4.3 |   | Rights Agreement, dated as  of June 15, 2000, between the Registrant and American Stock  Transfer & Trust Company, as Rights Agents. (3)     |
| 4.4 |   | Form of Rights  Certificate. (3)                                                                                                                      |
| 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. (4) |
| 4.7 |   | Registration Rights  Agreement dated September 22, 2003, between Maxim and the investors  whose names appear on the signature pages thereto. (4) |
| 4.8 |   | Form of Common Stock  Purchase Warrant issued to the investors on September 23, 2003. (4)                                                        |

 

34

----

 
| 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. (5) |
|------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1 |   | First Amendment to the  License Agreement dated January 26, 2005, between Maxim and Shire  BioChem Inc. ‡                                                                                 |
| 10.2 |   | Retention Agreement between Maxim and Larry G.  Stambaugh, dated March 11, 2005. (6)*                                                                                                          |
| 10.3 |   | Retention Agreement between Maxim and Richard A.  Mafrica, dated March 8, 2005. (6)*                                                                                                           |
| 10.4 |   | Retention Agreement between Maxim and Sharon A.  Tonetta, Ph.D., dated March 8, 2005. (6)*                                                                                                     |
| 10.5 |   | Retention Agreement between Maxim and John D.  Prunty, dated March 8, 2005. (6)*                                                                                                               |
| 10.6 |   | Retention Agreement between Maxim and Ben Tseng,  Ph.D., dated March 8, 2005. (6)*                                                                                                             |
| 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.                                                                 |

 

----

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

 

‡              Confidential treatment has been requestedwith respect to deleted portions of this agreement.

 

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

 

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

 

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

 

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

 

(6)           Previously filed together with Registrant’sCurrent Report on Form 8-K dated March 14, 2005 and incorporatedherein by reference.

 

35

----

 

**SIGNATURE**

** **

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

 
|                   | MAXIM PHARMACEUTICALS,  INC. |
|------------------------|------------------------------|
|                   | By:                          | /s/  John D. Prunty |   |
|                   |                         | John  D. Prunty,*Vice President, Finance and Chief Financial  Officer  (Principal Financial and Accounting Officer duly authorized to  sign on behalf of the registrant)* |   |
| Date: May 5, 2005 |                         |   |

 

36

----