**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**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 June 30,  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            **

** **

**Commission file number 1-14430**

 

**MAXIM PHARMACEUTICALS, INC.**

(Exact Name of Registrant asSpecified in Its Charter)

 
| **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’s Telephone Number,Including Area Code)

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports) and (2) hasbeen subject to such filing requirements for the past90 days. Yes ý  No o

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes ý No o

 

The number of outstandingshares of the registrant’s Common Stock, $.001 par value, as of July 29,2005 was 28,606,141.

 

 

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**MAXIMPHARMACEUTICALS, INC. AND SUBSIDIARIES**

*(ADevelopment Stage Company)*

 

**INDEX**

 
| **Part I–Financial Information** |                                                                                                                                                                                 |
|--------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Item 1.                                    | Financial Statements (unaudited)                                                                                                                                                     |   |
|                                       | Condensed Consolidated Balance Sheets–June 30, 2005 and September 30,  2004                                                                                           | 1 |
|                                       | Condensed Consolidated Statements of Operations–Three and Nine Months  Ended June 30, 2005 and 2004 and from Inception (October 23, 1989)  through June 30, 2005 | 2 |
|                                       | Condensed Consolidated Statements of Cash Flows–Nine Months Ended June 30,  2005 and 2004 and from Inception (October 23, 1989) through June 30,  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                                                                                                                          | 33 |
| Item 4.                                    | Controls  and Procedures                                                                                                                                                             | 34 |
| **Part II–Other  Information**   | 35                                                                                                                                                                                   |
| Item 1.                                    | Legal  Proceedings                                                                                                                                                                   | 35 |
| Item 5.                                    | Other  Information                                                                                                                                                                   | 36 |
| Item 6.                                    | Exhibits                                                                                                                                                                             | 37 |
| **SIGNATURES**                             | 38                                                                                                                                                                                   |

 

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**CONDENSED CONSOLIDATED BALANCE SHEETS(Unaudited)**

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

 

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

 
| ** **                                                                                                                                                                              | ** ** | **As of June 30** | ** ** | **As of September 30** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                              | ** ** | **2005**               | ** ** | **2004**                    | ** ** |
| **ASSETS**                                                                                                                                                                              |       |                   | ** ** |                        |       |
| **Current  Assets:**                                                                                                                                                                    |       |                   | ** ** |                        |       |
| Cash and  cash equivalents                                                                                                                                                              | ** ** | **$**                  | **4,662**  | ** **                  | $          | 10,658 |   |
| Investments  in marketable securities, available for sale                                                                                                                               | ** ** | **18,796**             | ** ** | 38,746                      |       |
| Accrued  interest and other current assets                                                                                                                                              | ** ** | **652**                | ** ** | 2,354                       |       |
| Total  current assets                                                                                                                                                                   | ** ** | **24,110**             | ** ** | 51,758                      |       |
|                                                                                                                                                                                    |       |                   | ** ** |                        |       |
| Restricted  cash and cash equivalents                                                                                                                                                   | ** ** | **3,500**              | ** ** | 3,500                       |       |
| Property and  equipment, net                                                                                                                                                            | ** ** | **2,497**              | ** ** | 3,579                       |       |
| Patents and  licenses, net                                                                                                                                                              | ** ** | **4,923**              | ** ** | 4,393                       |       |
| Notes  receivable from officer and former officer, net of allowance of $3,348 and  $2,930 at June 30, 2005 and September 30, 2004, respectively                               | ** ** | **264**                | ** ** | 682                         |       |
| Deposits and  other assets                                                                                                                                                              | ** ** | **136**                | ** ** | 273                         |       |
| Total assets                                                                                                                                                                            | ** ** | **$**                  | **35,430** | ** **                  | $          | 64,185 |   |
|                                                                                                                                                                                    |       |                   | ** ** |                        |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                          |       |                   | ** ** |                        |       |
| **Current  Liabilities:**                                                                                                                                                               |       |                   | ** ** |                        |       |
| Accounts  payable                                                                                                                                                                       | ** ** | **$**                  | **1,158**  | ** **                  | $          | 5,311 |   |
| Accrued  expenses                                                                                                                                                                       | ** ** | **2,125**              | ** ** | 4,177                       |       |
| Notes  payable and current portion of long-term debt and obligations under capital  leases                                                                                              | ** ** | **249**                | ** ** | 1,071                       |       |
| Deferred  revenue                                                                                                                                                                       | ** ** | **75**                 | ** ** | 131                         |       |
| Total  current liabilities                                                                                                                                                              | ** ** | **3,607**              | ** ** | 10,690                      |       |
|                                                                                                                                                                                    |       |                   | ** ** |                        |       |
| Long-term  debt and obligations under capital leases, excluding current portion                                                                                                         | ** ** | **—**             | ** ** | 96                          |       |
|                                                                                                                                                                                    |       |                   | ** ** |                        |       |
| Commitments  and contingencies                                                                                                                                                          |       |                   | ** ** |                        |       |
|                                                                                                                                                                                    |       |                   | ** ** |                        |       |
| **Stockholders’  Equity:**                                                                                                                                                         |       |                   | ** ** |                        |       |
| Convertible  preferred stock, $.001 par value, 5,000,000 shares authorized; no shares  issued and outstanding at June 30, 2005 and September 30, 2004                         | ** ** | **—**             | ** ** | —                      |       |
| Common  stock, $.001 par value, 60,000,000 shares authorized; 28,606,141 and  28,561,091 shares issued and outstanding at June 30, 2005 and September 30,  2004, respectively | ** ** | **29**                 | ** ** | 28                          |       |
| Additional  paid-in capital                                                                                                                                                             | ** ** | **405,185**            | ** ** | 405,031                     |       |
| Deficit  accumulated during the development stage                                                                                                                                       | ** ** | **(373,230**           | **)**      | (351,472                    | )          |
| Accumulated  other comprehensive loss                                                                                                                                                   | ** ** | **(161**               | **)**      | (188                        | )          |
| Total  stockholders’ equity                                                                                                                                                        | ** ** | **31,823**             | ** ** | 53,399                      |       |
| Total  liabilities and stockholders’ equity                                                                                                                                        | ** ** | **$**                  | **35,430** | ** **                  | $          | 64,185 |   |

 

*SeeAccompanying Notes to Condensed Consolidated Financial Statements*

 

1

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**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS (Unaudited)**

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

 

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

 
| ** **                                                                        | ** ** | **Three Months Ended June 30** | ** ** | **Nine Months Ended June 30** | ** ** | **From Inception  (October 23, 1989)  Through** | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------------------------|------------|------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                        | ** ** | **2005**                            | ** ** | **2004**                           | ** ** | **2005**                                             | ** ** | **2004** | ** ** | **June 30, 2005** | ** ** |
|                                                                              |       |                                |       |                               |       |                                                 |       |   |   |   |   |
| Collaboration  and research revenue                                               | ** ** | **$**                               | **100**    | ** **                         | $          | 801                                                  | ** ** | **$** | **1,583** | ** ** | $ | 3,493 |   | $ | 20,519 |   |
|                                                                              |       |                                | ** ** |                               |       |                                                 | ** ** |   |   |   |   |
| Operating  expenses:                                                              |       |                                | ** ** |                               |       |                                                 | ** ** |   |   |   |   |
| Research and  development                                                         | ** ** | **3,290**                           | ** ** | 9,883                              | ** ** | **15,358**                                           | ** ** | 27,578 |   | 269,061 |   |
| Business  development and marketing                                               | ** ** | **443**                             | ** ** | 1,086                              | ** ** | **1,907**                                            | ** ** | 2,377 |   | 28,182 |   |
| General and  administrative                                                       | ** ** | **1,959**                           | ** ** | 1,836                              | ** ** | **6,159**                                            | ** ** | 5,191 |   | 53,137 |   |
| 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                | ** ** | **94**                              | ** ** | —                             | ** ** | **418**                                              | ** ** | — |   | 3,348 |   |
| Total  operating expenses                                                         | ** ** | **5,786**                           | ** ** | 12,805                             | ** ** | **23,842**                                           | ** ** | 35,146 |   | 398,983 |   |
|                                                                              |       |                                | ** ** |                               |       |                                                 | ** ** |   |   |   |   |
| Loss from  operations                                                             | ** ** | **(5,686**                          | **)**      | (12,004                            | **)**      | **(22,259**                                          | **)**      | (31,653 | ) | (378,464 | ) |
|                                                                              |       |                                | ** ** |                               |       |                                                 | ** ** |   |   |   |   |
| Other income  (expense):                                                          |       |                                | ** ** |                               |       |                                                 | ** ** |   |   |   |   |
| Investment  income                                                                | ** ** | **161**                             | ** ** | 340                                | ** ** | **532**                                              | ** ** | 1,217 |   | 31,854 |   |
| Gain on sale  of assets                                                           | ** ** | **—**                          | ** ** | —                             | ** ** | **—**                                           | ** ** | — |   | 4,435 |   |
| Interest  expense                                                                 | ** ** | **(8**                              | **)**      | (14                                | **)**      | **(31**                                              | **)**      | (56 | ) | (2,897 | ) |
| Other income  (expense)                                                           | ** ** | **—**                          | ** ** | —                             | ** ** | **—**                                           | ** ** | 3 |   | 21 |   |
| Total other  income                                                               | ** ** | **153**                             | ** ** | 326                                | ** ** | **501**                                              | ** ** | 1,164 |   | 33,413 |   |
|                                                                              |       |                                | ** ** |                               |       |                                                 | ** ** |   |   |   |   |
| Loss before  cumulative effect of accounting change and preferred stock dividends | ** ** | **(5,533**                          | **)**      | (11,678                            | **)**      | **(21,758**                                          | **)**      | (30,489 | ) | (345,051 | ) |
|                                                                              |       |                                | ** ** |                               |       |                                                 | ** ** |   |   |   |   |
| Cumulative  effect of accounting change                                           | ** ** | **—**                          | ** ** | —                             | ** ** | **—**                                           | ** ** | — |   | (28,179 | ) |
|                                                                              |       |                                | ** ** |                               |       |                                                 | ** ** |   |   |   |   |
| Net loss  before preferred stock dividends                                        | ** ** | **(5,533**                          | **)**      | (11,678                            | **)**      | **(21,758**                                          | **)**      | (30,489 | ) | (373,230 | ) |
| Dividends on  preferred stock                                                     | ** ** | **—**                          | ** ** | —                             | ** ** | **—**                                           | ** ** | — |   | 5,496 |   |
|                                                                              |       |                                | ** ** |                               |       |                                                 | ** ** |   |   |   |   |
| Net loss  applicable to common stock                                              | ** ** | **$**                               | **(5,533** | **)**                              | $          | (11,678                                              | **)**      | **$** | **(21,758** | **)** | $ | (30,489 | ) | $ | (378,726 | ) |
|                                                                              |       |                                | ** ** |                               |       |                                                 | ** ** |   |   |   |   |
| Basic and  diluted net loss per share of common stock                             | ** ** | **$**                               | **(0.19**  | **)**                              | $          | (0.41                                                | **)**      | **$** | **(0.76** | **)** | $ | (1.08 | ) |   |   |
|                                                                              |       |                                | ** ** |                               |       |                                                 | ** ** |   |   |   |   |
|   Weighted average shares outstanding                                        | ** ** | **28,606,141**                      | ** ** | 28,282,906                         | ** ** | **28,588,743**                                       | ** ** | 28,100,889 |   |   |   |

 

*See Accompanying Notes to CondensedConsolidated Financial Statements*

 

2

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**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)**

**(In thousands)**

 

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

 
| ** **                                                                             | ** ** | ** **                         | ** **  | ** **  | ** ** | **From Inception**          | ** ** |
|----------------------------------------------------------------------------------------|------------|------------------------------------|-------------|-------------|------------|-----------------------------|------------|
| ** **                                                                             | ** ** | ** **                         | ** **  | ** **  | ** ** | **(October 23, 1989)** | ** ** |
| ** **                                                                             | ** ** | **Nine Months Ended June 30** | ** **  | **Through** | ** ** |
| ** **                                                                             | ** ** | **2005**                           | ** **  | **2004**    | ** ** | **June 30, 2005**      | ** ** |
| **OPERATING  ACTIVITIES:**                                                             |       |                               | ** **  |        |       |                        |       |
| Net loss                                                                               | ** ** | **$**                              | **(21,758** | **)**       | $          | (30,489                     | )          | $ | (373,230 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities:           |       |                               | ** **  |        |       |                        |       |
| Depreciation  and amortization                                                         | ** ** | **1,250**                          | ** **  | 1,258       |       | 15,517                      |       |
| Stock  contributions to 401(k) plan                                                    | ** ** | **—**                         | ** **  | —      |       | 643                         |       |
| Cumulative  effect of accounting change                                                | ** ** | **—**                         | ** **  | —      |       | 28,179                      |       |
| Stock-based  compensation                                                              | ** ** | **60**                             | ** **  | 332         |       | 1,617                       |       |
| Loss on  disposal of property and equipment                                            | ** ** | **125**                            | ** **  | 20          |       | 429                         |       |
| Provisions  for note receivable and loan guarantees to/for officers                    | ** ** | **418**                            | ** **  | —      |       | 3,348                       |       |
| 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                                             | ** ** | **1,834**                          | ** **  | 280         |       | 1,935                       |       |
| Deposits and  other assets                                                             | ** ** | **137**                            | ** **  | (131        | )          | (632                        | )          |
| Accounts  payable                                                                      | ** ** | **(4,153**                         | **)**       | (1,372      | )          | 66                          |       |
| Accrued  expenses                                                                      | ** ** | **(2,052**                         | **)**       | 372         |       | 828                         |       |
| Deferred  revenue                                                                      | ** ** | **(56**                            | **)**       | 191         |       | 75                          |       |
| Net cash  used in operating activities                                                 | ** ** | **(24,195**                        | **)**       | (29,539     | )          | (278,865                    | )          |
|                                                                                   |       |                               | ** **  |        |       |                        |       |
| **INVESTING  ACTIVITIES:**                                                             |       |                               | ** **  |        |       |                        |       |
| Purchases of  marketable securities                                                    | ** ** | **—**                         | ** **  | (57,244     | )          | (503,492                    | )          |
| Sales and  maturities of marketable securities                                         | ** ** | **19,977**                         | ** **  | 66,160      |       | 485,038                     |       |
| Purchases of  property and equipment                                                   | ** ** | **(50**                            | **)**       | (457        | )          | (11,614                     | )          |
| Additions to  patents and licenses                                                     | ** ** | **(820**                           | **)**       | (1,058      | )          | (8,339                      | )          |
| 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                                   | ** ** | **19,154**                         | ** **  | 7,401       |       | (33,787                     | )          |
|                                                                                   |       |                               | ** **  |        |       |                        |       |
| **FINANCING  ACTIVITIES:**                                                             |       |                               | ** **  |        |       |                        |       |
| Net proceeds  from issuance of common stock and exercise of stock options and warrants | ** ** | **94**                             | ** **  | 2,815       |       | 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 and cash equivalents                                                  | ** ** | **—**                         | ** **  | —      |       | (3,500                      | )          |
| Payments on  notes payable, long-term debt, and capital lease obligations              | ** ** | **(1,049**                         | **)**       | (1,036      | )          | (10,960                     | )          |
| Proceeds  from issuance of notes payable to related parties                            | ** ** | **—**                         | ** **  | —      |       | 4,982                       |       |
| Payments on  notes payable to related parties                                          | ** ** | **—**                         | ** **  | —      |       | (1,330                      | )          |
| Loan to  officer                                                                       | ** ** | **—**                         | ** **  | 272         |       | (3,612                      | )          |
| Net cash  provided by (used in) financing activities                                   | ** ** | **(955**                           | **)**       | 2,051       |       | 317,314                     |       |
|                                                                                   |       |                               | ** **  |        |       |                        |       |
| Net increase  (decrease) in cash and cash equivalents                                  | ** ** | **(5,996**                         | **)**       | (20,087     | )          | 4,662                       |       |
|                                                                                   |       |                               | ** **  |        |       |                        |       |
| Cash and  cash equivalents at beginning of period                                      | ** ** | **10,658**                         | ** **  | 32,861      |       | —                      |       |
|                                                                                   |       |                               | ** **  |        |       |                        |       |
| Cash and  cash equivalents at end of period                                            | ** ** | **$**                              | **4,662**   | ** **  | $          | 12,774                      |       | $ | 4,662 |   |
|                                                                                   |       |                               | ** **  |        |       |                        |       |
| Noncash  investing activities:                                                         |       |                               | ** **  |        |       |                        |       |
| Acquisition  of property and equipment under capital lease                             | ** ** | **$**                              | **—**  | ** **  | $          | —                      |       | $ | 270 |   |
| Increase  (decrease) in fair value of securities available for sale                    | ** ** | **$**                              | **27**      | ** **  | $          | (762                        | )          | $ | 493 |   |

 

*See Accompanying Notes to Condensed Consolidated Financial Statements*

 

3

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**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS (Unaudited)**

 

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

 

**1.****                                      PRINCIPLESOF 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 “DevelopmentStage Enterprise” as set forth in Financial Accounting Standards BoardStatement No. 7, “Accounting and Reporting by Development StageEnterprises”.

 

The information at June 30, 2005 and for thethree and nine months ended June 30, 2005 and 2004 and from inception (October 23,1989) through June 30, 2005 is unaudited. In the opinion of the Company,these condensed consolidated financial statements contain all of theadjustments, consisting only of normal recurring adjustments and accruals,necessary to present fairly the condensed consolidated financial position ofthe Company as of June 30, 2005 and September 30, 2004, and thecondensed consolidated results of operations for the three and nine monthsended June 30, 2005 and 2004 and from inception (October 23, 1989)through June 30, 2005. The condensed consolidated results of operationsfor the three and nine months ended June 30, 2005 are not necessarilyindicative of the results to be expected in subsequent periods or for the yearas a whole. For further information, refer to the consolidated financialstatements and footnotes thereto in our Annual Report on Form 10-K for theyear ended September 30, 2004.

 

**2.****                                      SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

 

*Stock Option Plans*-The Company accounts for its stock optionplans under the recognition and measurement principles of APB Opinion No. 25,“Accounting for Stock Issued to Employees”,**andrelated Interpretations.  Compensationexpense associated with stock options to employees was $0 and $29,000 for thethree months ended June 30, 2005 and 2004, respectively, and $52,000 and$81,000 for each of the nine month periods ended June 30, 2005 and 2004,respectively.  Compensation expense tonon-employees was $1,000 and $97,000 for the three months ended June 30,2005 and 2004, respectively, and $8,000 and $251,000 for the nine months ended June 30,2005 and 2004, respectively.  No other stock-basedemployee compensation cost is reflected in net loss, as all options grantedunder our stock option plans had an exercise price equal to the market value ofthe underlying common stock on the date of grant.  The following table illustrates the effect onnet loss and loss per share if the Company had applied the fair valuerecognition provisions of SFAS No. 123, “Accounting for Stock-BasedCompensation”,**to stock-basedemployee compensation, in thousands, except per share data.

 
| ** **                                                                                                      | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                                                      | ** ** | **June 30, 2005** | ** ** | **June 30, 2004** | ** ** | **June 30, 2005** | ** ** | **June 30, 2004** | ** ** |
| Net loss, as  reported                                                                                          |       | $                      | (5,533     | )                      | $          | (11,678 | ) | $ | (21,758 | ) | $ | (30,489 | ) |
| Add: Total  stock-based employee compensation expense determined under fair value based  methods for all awards |       | (463                   | )          | (778                   | )          | (824 | ) | (2,335 | ) |
| Less:  Compensation expense associated with stock options                                                       |       | 0                      |       | 29                     |       | 52 |   | 81 |   |
| Pro forma  net loss                                                                                             |       | $                      | (5,996     | )                      | $          | (12,427 | ) | $ | (22,530 | ) | $ | (32,743 | ) |
|                                                                                                            |       |                   |       |                   |       |   |   |   |   |
| Net loss per  share:                                                                                            |       |                   |       |                   |       |   |   |   |   |
| Basic and  diluted - as reported                                                                                |       | $                      | (0.19      | )                      | $          | (0.41 | ) | $ | (0.76 | ) | $ | (1.08 | ) |
| Basic and  diluted - pro forma                                                                                  |       | $                      | (0.21      | )                      | $          | (0.44 | ) | $ | (0.79 | ) | $ | (1.17 | ) |

 

4

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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 andnine months ended, June 30, 2005 and 2004, respectively:

 
| ** **                    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|-------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                    | ** ** | **June 30, 2005** | ** ** | **June 30, 2004** | ** ** | **June 30, 2005** | ** ** | **June 30, 2004** | ** ** |
| Risk free  interest rate      |       | 3.625                  | %          | 1.94                   | %          | 3.07 | % | 2.20 | % |
| Dividend  Yield               |       | 0                      |       | 0                      |       | 0 |   | 0 |   |
| Volatility  Factor            |       | 73                     | %          | 75                     | %          | 81 | % | 75 | % |
| Expected  Life (in years)     |       | 3.10                   |       | 3.09                   |       | 3.27 |   | 3.59 |   |
| Resulting  average fair value |       | $                      | 0.79       |                   | $          | 4.37 |   | $ | 1.12 |   | $ | 4.35 |   |
|                               |            |                        |            |                        |            |  |  |  |  |  |  |  |  |

 

**3.****                                      TOTALOTHER COMPREHENSIVE LOSS**

 

Total other comprehensive loss for the three monthsended June 30, 2005 and 2004 was $5,440,000 and $12,049,000, respectively. Total other comprehensive loss for thenine months ended June 30, 2005 and 2004 was $21,731,000 and $31,251,000,respectively.  The difference betweentotal other comprehensive loss and net loss attributable to common stock wascomposed of a net unrealized gain on available-for-sale securities.

 

**4.****                                      NETLOSS PER SHARE**

 

Net loss per share is calculated in accordance withSFAS No. 128, “Earnings per Share”. Basic net loss per share of commonstock is computed by dividing the net loss after deduction of dividends onpreferred stock by the weighted average number of shares of common stockoutstanding during the period. Diluted net loss per share is calculated byincluding the additional common shares issuable upon exercise of outstandingoptions and warrants in the basic weighted average share calculation unless theeffect of their inclusion is antidilutive. As of June 30, 2005 and 2004, outstanding options and warrantstotaled 5,652,000 and 5,602,000, respectively. As these securities were antidilutive, diluted loss per share equaledbasic loss per share in each respective period.

 

**5.****                                      DEFERREDRENT**

 

In accordance with SFAS No.13, “Accountingfor Leases”, the Company records operating lease rent expenses on astraight-line basis over the lease term, which causes the amount expensed inour financial statements to vary from the actual amounts paid during theperiod.  This variance is recorded asdeferred rent and included in Accrued Expenses on the accompanying condensedconsolidated balance sheets.  As of June 30,2005 and September 30, 2004, the deferred rent 

 

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balance was $698,000 and $679,000, respectively.

 

**6.****                                      RESTRUCTURING**

 

In February 2005, the Company announcedan involuntary workforce reduction of twelve employees as part of a plan torealign its resources and corporate objectives based upon several factors,including that an additional phase 3 trial of Ceplene therapy for the treatmentof Acute Myeloid Leukemia is necessary before submitting a New Drug Applicationto the United States Food and Drug Administration.  The cost of the severance packages associatedwith the workforce reduction, including pay, benefits continuation andoutplacement services, totaled approximately $405,000 of which $91,000 wasexpensed in the three months ended June 30, 2005.  In October 2004, the Company implementeda restructuring plan which resulted from the negative outcome of the Company’sconfirmatory Phase 3 clinical trial of Ceplene in advanced malignant melanomapatients with liver metastases.  Therestructuring plan included a reduction in the Company’s workforce ofapproximately 50%.  The cost of theseverance packages associated with these two restructurings, including pay,benefits continuation and outplacement services, totaled approximately$1,594,000 which was expensed in the nine months ended June 30, 2005.  Of the total $1,594,000 of restructuringcharges approximately $1,103,000 was included in research and developmentexpense, approximately $155,000 was included in business development andmarketing expense and approximately $336,000 was included in general andadministrative expense for the nine months ended June 30, 2005.  Through June 30, 2005, approximately$1,498,000 of this amount was paid and the remaining $96,000 will be paidthrough September 30, 2005.

 

**7.****                                      RELATEDPARTY TRANSACTIONS**

 

In December 2000, the Company entered into a$2,850,000 full recourse secured revolving promissory note with an officer ofthe Company.  The note bears interest atan annual rate of 4.0% and is secured by the officer’s outstanding options andshares of common stock. During the quarter ended September 30, 2002, theCompany determined that the note to the officer had become impaired because theCompany determined that the officer did not have the ability to repay the loanin full when due and recorded an allowance on the note in the amount of$700,000.  The Company has subsequentlyrecorded $1,751,000 of expense, including $94,000 during the quarter ended June 30,2005, to increase the allowance on the note related to the decrease in thevalue of the Company stock and stock options held by the officercollateralizing the note.  In addition,the Company has not recorded interest income of $367,000 on the note subsequentto June 30, 2002.  The entireoutstanding balance of principal and interest was due in December 2002.  Since the note came due, the officer has nothad sufficient liquid assets to repay the loan in full, however, the officerhas paid the Company $394,000 related to the note.   The Company is continuing to review its optionsand alternatives and is discussing with the officer the resolution of the loan.As of June 30, 2005, the recorded outstanding principal and interestbalance on the note was $264,000, net of the $2,451,000 allowance.

 

At June 30, 2005, the Company was owed$900,000, including $4,000 of unrecorded interest, from a former officerresulting from an unpaid loan, due in July 2004, that the individual hadwith a bank, which the Company guaranteed in July 2001.  The purpose of the bank loan was

 

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to allow the payment of income taxesassociated with the exercise of stock options. The Board determined that it was in the Company’s best interest toprovide the guarantee to avoid the necessity of the officer selling personalholdings of the Company’s securities during a period of depressed marketprices.  During the fourth quarter offiscal year 2002, the Company determined that it was probable the formerofficer would not have the ability to repay his bank loan.  Therefore, the Company 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 theCompany.  The Company holds the stockoptions of the former officer as collateral. The Company has full recourse and is reviewing its options andalternatives and is discussing with the former officer theresolution of the amount due.  As of June 30, 2005, the recordedoutstanding principal and interest balance on the loan was $0, net of the$897,000 allowance.

 

**8.****                                      CONTINGENCIES**

 

In October 2001 and May 2002,certain former shareholders of Cytovia filed complaints in California SuperiorCourt in San Diego, against the Company and two of its officers, alleging fraudand negligent 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 panel rejectedall of the plaintiffs’ claims, determined that the Company has no liability forsuch claims and awarded recovery of the Company’s reasonable attorneys’ feesand 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, theplaintiffs filed an Appeal.  In December 2004,the Court of Appeal reversed the judgment of the Superior Court and remandedthe lawsuit to the trial court for further proceedings.  The Company has filed a petition to theUnited States Supreme Court seeking further appellate review, and is alsovigorously defending the underlying claims back in the Superior Court.

 

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 Southern District ofCalifornia.  These three actions wereconsolidated and in March 2005, plaintiffs filed a consolidated amendedcomplaint.  The Company has filed amotion to dismiss that complaint.  Nodiscovery has been conducted.  The caseshave been tendered to the Company’s insurance carrier, which has deniedcoverage.  The Company disputes theposition taken by the insurance carrier and fully intends to enforce its rightsunder 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’s

 

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entire Board ofDirectors, alleging breach of fiduciary duty, abuse of control, grossmismanagement, waste of corporate assets, unjust enrichment and violations ofthe California Corporations Code, all of which arise from allowing purportedviolations of federal securities laws related to declines in the Company’sstock price in connection with various statements and alleged omissions to thepublic and to the securities markets, and seeking damages therefore.  No discovery has been conducted, and theparties have entered into a stipulation to stay the action pending resolution ofa motion to dismiss the federal actions. The complaint has been tendered to the Company’s insurance carrier,which has denied coverage.  The Companydisputes the position taken by the insurance carrier and fully intends toenforce its rights under the policy.

 

On May 3, 2005, plaintiff Carolina CasualtyInsurance Company filed a complaint in the United States District Court for theSouthern District of California against one officer of the Company, two formerofficers of the Company and the Company’s entire Board of Directors, seeking adeclaratory judgment from the court that the Company’s D&O insurance policydid not cover losses arising from the state and federal shareholder suits thatwere filed in 2004.  The Company answeredthe complaint and filed counterclaims against Carolina Casualty.  No discovery has been conducted.

 

The Company intends to engage in a rigorous defenseagainst such claims.  No assurances canbe made that the Company will be successful in its defense of the pendingclaims. If the Company is not successful in its defense of such claims, theCompany could be forced to, among other things, make significant payments toresolve these claims, and such payments could have a material adverse effect onthe Company’s business, financial condition and results of operations if not coveredby the Company’s insurance carrier. The Company has not accrued any expensesrelated to the above claims as the extent or range of such payments, if any,cannot yet be reasonably estimated. Further, regardless of success of the litigation, the litigation itselfmay result in substantial costs and divert management’s attention andresources, all of which could adversely affect the Company’s business.

 

**9.****                                      SUBSEQUENT EVENTS**

 

             On August 3,2005 Larry Stambaugh, CEO, returned to the Company 203,333 shares he owned inMaxim stock and returned to the Company all 1,563,667 stock option grants hecurrently holds.  These shares of Maximstock and stock options were collateral on the loan the Company made to Mr. Stambaugh.

 

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**ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

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

 

*This Management’s Discussion andAnalysis of Financial Condition 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 the Company’s drugcandidates and future cash requirements. Such statements are only predictionsand the Company’s actual results could differ materially from those anticipatedor projected in such forward-looking statements. Moreover, the Company assumesno responsibility for the accuracy and completeness of the forward-lookingstatements.  The Company is under no dutyto update any of the forward-looking statements after the date hereof toconform such statements to actual results or to changes in its expectations.  Factors that could cause or contribute tosuch differences include, but are not limited to, those discussed in the section entitled“Risk Factors” contained in this Quarterly Report. As a result, you arecautioned not to rely on these forward-looking statements.*

 

*This Management’s Discussion andAnalysis of Financial Condition and Results of Operations should be read inconjunction with the condensed consolidated financial statements, including therelated notes, appearing in Item 1 of this Quarterly Report on Form 10-Qas well as the Company’s Annual Report on Form 10-K for the year ended September 30,2004.*

 

#### **OVERVIEW**

#### ** **

We are a biopharmaceutical company dedicated todeveloping innovative cancer therapeutics. Our lead drug candidate is CepleneTM (histamine dihydrochloride), whichhas shown a statistically significant improvement in leukemia free survival ina Phase 3 clinical trial as a remission maintenance therapy for patients withacute myeloid leukemia, or AML.  Cepleneis designed to prevent or reverse damage associated with oxidative stress,thereby protecting critical cells and tissues. Because Ceplene modulates basicimmune functions, it has the potential to be used in the treatment of a broadrange of diseases in which oxidative stress plays an important role.  More than 2,000 patients have participated inour 17 clinical trials of Ceplene, conducted in 20 countries.  We are currently seeking a strategicpartnership to further develop Ceplene in AML and other indications andcomplete commercialization.

 

We are also discovering and developing small-moleculeapoptosis inducers to treat cancer using our proprietary high-throughputscreening technology and our chemical genetics approach.  This program has identified four leadoncology candidates that are proceeding to clinical trials independently andthrough collaborations.  The mostadvanced candidate from the program is in a Phase 1 trial through collaborationwith Myriad Genetics.

 

During the periods encompassed by this QuarterlyReport, we have devoted substantially all of our resources to our histaminetherapy and apoptosis modulator product development programs. We conduct ourresearch and other product development efforts through a combination ofinternal efforts and collaborative programs with universities, other clinicalresearch sites, contract research organizations and pharmaceutical companies.Oversight of all external and collaborative programs is conducted by ourexecutive officers and other staff located

 

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primarily at ourheadquarters in San Diego, California. We currently have 34 associates, 14 of whom comprise the core researchteam for the apoptosis program, 6 in drug development, primarily clinical andregulatory, and 14 in general and administrative, business development andmanagement positions.

 

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 transactions aimed at effectively leveragingand building 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, will not cause our stockholdersto suffer substantial dilution or will not adversely affect our business or thetrading price of our stock.  In addition,any such transactions may require us to incur non-recurring or other charges,may require us to assume debt or other substantial financial obligations andmay pose significant integration challenges with respect to our businessincluding the development of our product candidates, and/or management andbusiness disruptions, any of which could materially and adversely affect ourbusiness and financial results.  Inaddition as part of a strategic transaction we may be required to comply with variousNasdaq listing requirements in order to continue to be listed on the NasdaqNational Market.

 

In May 2004, we announced the results of ourinternational Phase 3 clinical trial testing the combination of Ceplene plusInterleukin-2, or IL-2, in 320 patients with AML in complete remission.  The primary endpoint of the Phase 3 trial wasachieved using intent-to-treat analysis, as patients treated with theCeplene/IL-2 combination therapy experienced a statistically significant(p=0.0096) increase in leukemia-free survival compared to patients in thecontrol arm of the trial as assessed by the stratified log-rank test.  AML patients are typically treated withchemotherapy to achieve disease remission, but the majority of patients willultimately relapse.  The prognosis forAML patients after relapse is dismal, with few long-term survivors.  The Ceplene therapy treats patients duringremission (after chemotherapy) with the goal to increase their remission periodand prevent relapses.

 

On January 18, 2005, we announced that based oncorrespondence with the United States Food and Drug Administration, or FDA, aswell as consultations with external advisors regarding the AML clinicalresults, that an additional Phase 3 clinical trial will be necessary to furtherevaluate Ceplene/IL-2 combination therapy for the treatment of AML patients incomplete remission before applying for regulatory approval by the FDA in theUnited States.  Given the time and costsrequired to conduct another Phase 3 clinical trial, we believe that any suchtrial would need to be done in collaboration with a corporate partner.  We currently anticipate filing an applicationfor approval in Europe during the first half of 2006 based on the above AML clinicaltrial.  We are seeking a strategicpartner to advance the development and potential commercialization of Ceplenein AML and other indications.  We willcontinue to evaluate strategic options related to our regulatory evaluationsand partnering efforts.

 

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In September 2004, we announced that theconfirmatory Phase 3 trial, or M0104 trial, for the treatment of advancedmalignant melanoma patients with liver metastases failed to demonstrate animprovement in overall patient survival. As a result, we withdrew our United States New Drug Application, or NDA,seeking approval of Ceplene therapy to treat advanced malignant melanomapatients with liver metastases and closed the treatment protocol approved bythe FDA in April 2004.  In addition,in October 2004 we implemented a restructuring plan that included areduction of approximately 50% of our workforce, primarily in the area ofresearch and development, to allow sufficient funds to support ouroperations.  In February 2005, weannounced that we further reduced our workforce by 12 employees, primarily inareas associated with Ceplene development. The cost of the severance packages associated with the workforcereduction done in February 2005, including pay, benefits continuation andoutplacement services, totaled approximately $405,000 of which $91,000 wasexpensed in the three months ended June 30, 2005.  We expensed the total cost of theserestructurings, approximately $1,594,000, in the nine months ended June 30,2005.  We expect these two workforcereductions to lower what would otherwise be our quarterly expense by$1,505,000.

 

In February 2005, we announced the preliminaryresults from our Phase 2 Ceplene trials treating patients with HepatitisC.  Our Phase 2 trial, or M0406, ofCeplene in combination with PEG-Intron® (peginterferon alfa-2b) and Rebetol®(ribavirin, USP) for the treatment of hepatitis C patients who failed torespond to previous therapy, which was conducted in cooperation withSchering-Plough Corporation, did not improve virological response compared totreatment with the PEG-Intron and Rebetol alone.

 

In February 2005, we also announced the resultsfrom two investigator-driven studies with Ceplene plus IL-2 versus IL-2 alonein 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 completed to date suggest that Ceplenecan be safely self-administered by most patients in their own homes.

 

We are discovering and developing a series of novelcancer drug candidates that are potent inducers of apoptosis, or programmedcell death. The apoptosis program is focused on discovering and developingsmall-molecule apoptosis inducers to treat cancer using a proprietaryhigh-throughput screening technology and our chemical genetics approach.  The most advanced candidate from this programis in a Phase 1 trial through a collaboration with Myriad Genetics.  We anticipate that three additional leadcandidates identified through this program will advance towards clinical trialsindependently and through collaborations over the next 12 to 18 months.

 

Although focused on cancer, the apoptosis program haswider applicability since apoptosis is relevant to a broad range of diseasesand conditions.  Our proprietary livecell high throughput screening technology can screen over 30,000 compounds perday to identify small-molecule compounds that modulate – either positively ornegatively – the caspase cascade leading to apoptosis.  This technology has high specificity and isamenable to most cell lines.

 

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The cell-based assayallows for the identification of compounds that induce or inhibit apoptosisregardless of stimuli, mode of action or mechanism.  Approximately one million compounds have beenscreened to date.  We have recentlyacquired additional compounds for our compound library and we have initiated anew screening campaign.

 

Our screening technology is particularly versatile andcan be adapted for almost any cell type that can be cultured, and it canmeasure caspase activation inside multiple cell types (e.g. cancer cells,immune cells, or cell lines from different organ systems or geneticallyengineered cells).  This allows theresearchers to find potential drug candidates that are selective for specificcancer types, which may help identify candidates that provide increasedtherapeutic benefit and reduced toxicity. For example, we are developing an assay to identify compounds that areselective for the myc oncogene, which is over-expressed in many types ofcancers.  The versatility of the platformalso allows for application beyond cancer, such as inflammatory disease wherewe have developed an assay to identify immunosuppressive agents selective for Band T cells.

 

All of our drug candidates are in the developmentstage, and the generation of revenue from product sales is dependent uponapproval by the FDA and international regulatory agencies. We expect tocontinue to incur losses at least over the next several years as we continueresearch and development activities related to our apoptosis modulatortechnology, seek a development and marketing partnership for Ceplene and ouroral histamine and topical histamine technology and pursue a strategictransaction. Losses may fluctuate from quarter to quarter, and suchfluctuations may be substantial as a result of, among other factors, the numberand timing of clinical trials conducted, the funding, if any, provided as a resultof corporate collaborations, the results of clinical testing, and the timing ofFDA or international regulatory filings and approvals. There can be noassurance that we will successfully develop, commercialize, manufacture ormarket our products or ever achieve or sustain product revenues orprofitability.

 

# **CRITICAL ACCOUNTING POLICIES**

# ** **

The preparation of consolidated financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires us to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues and expenses aswell as related disclosure of contingent assets and liabilities. Theseestimates include useful lives for fixed assets, useful lives for intellectual property,estimated lives for license agreements, revenue recognition, allowance fornotes receivable, valuation of intellectual property, and estimates forclinical trial expenses incurred but not yet billed.  On an on-going basis, we evaluate ourestimates. We base our estimates on historical experience and various otherassumptions that are believed to be reasonable under the circumstances. Underdifferent assumptions or conditions these estimates may vary significantly. Inaddition, actual results may differ materially from these estimates.

 

We believe the following critical accountingpolicies affect our more significant judgments and estimates used in thepreparation of our consolidated financial statements.

 

*Revenue Recognition.*  Revenue is generally recognized when all ofthe following criteria

 

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are met: persuasive evidence that an arrangement exists; services havebeen rendered and amounts paid to us are non-refundable; the price is fixed anddeterminable; and collection is reasonably assured.  All multiple deliverable arrangements arereviewed by us for separability in accordance with EITF 00-21.  If the separability criteria are met,non-refundable upfront technology access fees are accounted for separately.  Upfront technology access fees which are notconsidered separable from the related research fees are recognized as revenueover the applicable research period as research activities are performed.Milestone payments are recognized when earned and collectibility is assuredprovided that the milestone events are substantive and the payments approximatethe fair value of the milestone. Amounts received but unearned are recorded asdeferred revenue.  We are provided withdonated materials and services pursuant to the terms of certain of ourcollaborative agreements.  These donatedmaterials and services are recorded as revenue and expense when used at thefair market value of the material received or the service provided.  Grant funding is recognized as revenue whenservices are performed under the grant.

 

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

 

*Valuation ofIntellectual 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 applicationsbeing issued, the scope of our issued patents, the assessment of future cashflows to be generated from the patents and our experience. In the event that itis determined that an impairment exists where we had previously determined thatone did not exist, it may result in a material adjustment to our financialstatements.

 

**RESULTS OF OPERATIONS FOR THE THREEAND NINE MONTHS ENDED JUNE 30, 2005 AND 2004**

** **

*Collaboration and Research Revenue. *For the quarterended June 30, 2005, collaboration and research revenue was $100,000, adecrease of $701,000 or 88% compared to the same period in the prior year.  This decrease was primarily attributable tothe completion of or stage of various collaboration agreements.  The services under the Celera GenomicsCorporation, or Celera, agreement were completed in May 2004, the ScheringCorporation, or Schering, agreement was completed in December 2004, andthe grant from National Institute of Health ended in January 2005.  The research services under the MyriadGenetics Inc., or Myriad, agreement were completed in November 2004.

 

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For the nine months ended June 30, 2005,collaboration and research revenue was $1,583,000, a decrease of $1,910,000 or55% over the same period in the prior year. The decrease was primarily attributable to a decrease in donated drugsand services from our collaboration with Schering which provided $12,900 in thenine months period ended June 30, 2005 compared to $1,824,000 in the sameperiod in the prior year.

 

*Research and Development Expenses. *Research anddevelopment expenses for the quarter ended June 30, 2005 totaled$3,290,000, a decrease of $6,593,000 or 67% over the same period in the prioryear.  Research and development expensesfor the nine months ended June 30, 2005 totaled $15,358,000, a decrease of$12,220,000 or 44% over the same period in the prior year.  These decreases were primarily due to thedecrease in clinical trial activity because our Ceplene clinical trials aresubstantially complete.  For the threeand nine month periods ended June 30, 2005, restructuring expenses of$100,000 and $1,103,000 were recorded in research and development expenses,respectively.

 

In the future, we expect to continueincurring additional research and development expenses due to:

 

•                  researchrelated to our apoptosis modulator program;

•                  preclinicaland clinical testing of our product candidates; and

•                  regulatory-relatedexpenses.

 

*Business Development and MarketingExpenses. *Businessdevelopment and marketing expenses for the quarter ended June 30, 2005were $443,000, a decrease of $643,000 or 59% over the same period of the prioryear.  For the nine months ended June 30,2005, business development and marketing expenses were $1,907,000, a decreaseof $470,000 or 20% over the same period in the prior year.   These decreases were primarily due to thework force reductions. For the three and nine month periods ended June 30,2005, restructuring expenses of $0 and $155,000 were recorded in businessdevelopment and marketing expenses, respectively.

 

*General and Administrative Expenses. *For the quarterended June 30, 2005, general and administrative expenses were $1,959,000,an increase of $123,000 or 7% from the same period in the prior year.  For the nine months ended June 30, 2005,general and administrative expenses were $6,159,000, an increase of $968,000 or19% from the same period in the prior year. These increases were primarily due to an increase in accounting, legaland consulting expenses.  For the threeand nine month periods ended June 30, 2005, restructuring expenses of $0and $456,000 were recorded in general and administrative expenses,respectively, including a $120,000 write-down for excess or idle property andequipment in the nine month period.

 

*Provision for note receivable from anofficer. *For the three months and nine months ended June 30,2005, the Company recorded expense of $94,000 and $418,000, respectively, foran additional allowance on a note receivable from an officer of the Company dueto the decrease 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

 

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Liquidity and Capital Resource section ofthis MD&A or Footnote 7 of the financial statements, “Related PartyTransactions”.

 

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*Investment Income. *Investment income was $161,000 forthe quarter ended June 30, 2005, a decrease of $179,000 or 53% from thesame period in the prior year. Investment income was $532,000 for the nine months ended June 30,2005, a decrease of $685,000 or 56% from the same period in the prioryear.  These decreases were a result of adecrease in our cash and short-term investment balances.

 

*Net Loss Applicable to Common Stock. *Net loss applicableto common stock for the quarter ended June 30, 2005 totaled $5,533,000, adecrease of $6,145,000 or 53% from the same period in the prior year. Thisdecrease was primarily a result of the decrease in research and developmentexpenses, partially offset by the decrease in collaboration and researchrevenue, as described above.

 

Net loss applicable to common stock for the ninemonths ended June 30, 2005 totaled $21,758,000, a decrease of $8,731,000or 29% 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 and administrativeexpenses and the provision for the note receivable from the officer and thedecrease in collaboration and research revenue, as described above.

 

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

#### ** **

Since inception, we have financed ouroperations primarily through the sale of our equity securities providing totalnet proceeds of approximately $323 million, including an initial publicoffering in 1996, an international follow-on public offering in 1997, privateofferings of preferred stock in July and November 1999, a follow-onpublic offering in February 2000, and a private placement of common stockin September 2003.

 

Until required for operations, our policyunder established guidelines is to keep our cash reserves in bank deposits,corporate debt securities, United States government instruments and otherreadily marketable debt instruments, all of which are investment-gradequality.  As of June 30, 2005, wehad cash, cash equivalents and investments (including restricted cash of $3.5million) totaling approximately $27.0 million compared with $52.9 million at September 30,2004.  As of June 30, 2005, we hadworking capital of approximately $20.5 million compared with $41.1 million at September 30,2004.  The decrease in our cash, cashequivalents and short-term investments, and working capital was primarily dueto day-to-day operating expenses relating to research and developmentactivities.

 

In December 2000, we entered into a $2,850,000full recourse secured revolving promissory note with an officer of theCompany.  The note bears interest at anannual rate of 4.0% and is secured by the officer’s outstanding options andshares of common stock.  During thequarter ended September 30, 2002, we determined that the note to theofficer had become impaired because we 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.  We havesubsequently recorded $1,751,000 of expense, including $94,000 during thequarter ended June 30, 2005, to increase the allowance on the note relatedto the decrease in the value of the

 

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Company stock and stockoptions held by the officer collateralizing the note.  In addition, we have not recorded interestincome of $367,000 on the note subsequent to June 30, 2002.  The entire outstanding balance of principaland interest was due in December 2002. Since the note came due, the officer has not had sufficient liquidassets to repay the loan in full, however, the officer has paid us $394,000 relatedto the note.   We are continuing toreview our options and alternatives and are discussing with the officer theresolution of the loan. As of June 30, 2005, the recorded outstandingprincipal and interest balance on the note was $264,000, net of the $2,451,000allowance.

 

At June 30, 2005, we were owed $900,000,including $4,000 of unrecorded interest, from a former officer resulting froman unpaid loan, due in July 2004, that the individual had with a bank,which we guaranteed in July 2001. The purpose of the bank loan was to allow the payment of income taxesassociated with the exercise of stock options. The Board determined that it was in our best interest to provide theguarantee to avoid the necessity of the officer selling personal holdings of oursecurities during a period of depressed market prices.  During the fourth quarter of fiscal year2002, we had determined that it was probable the former officer would not havethe ability to repay his bank loan. Therefore, we had recorded a provision for the guarantee and a liabilityin the amount of $900,000, $3,000 of which was subsequently reversed.  The former officer does not currently havethe assets necessary to repay us.  Wehold the stock options of the former officer as collateral.  We have full recourse and are reviewing ouroptions and alternatives and are discussing with the former officer theresolution of the amount due.  As of June 30,2005, the recorded outstanding principal and interest balance on the loan was$0, net of the $897,000 allowance.

 

We have term loans with a bank totaling$190,000 at June 30, 2005, the proceeds of which were used to financecapital expenditures.  The term loanagreements contain customary affirmative and negative covenants, includingfinancial covenants requiring the maintenance of specified liquidity terms andthe maintenance 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 June 30, 2005, we maintained the minimumaggregate balance noted above at the bank and were in compliance with allcovenants.

 

The following table summarizes ourcontractual obligations as of June 30, 2005, net of sublease commitmentson operating leases of $192,000 in year one, $372,000 in years two and three,$295,000 in years four and five and $38,000 thereafter:

 
| ** **                   | ** ** | **Payments due by Period (in thousands)** | ** ** |
|------------------------------|------------|-------------------------------------------|------------|
| ** **                   | ** ** | **Total**                                 | ** ** | **Less than 1  Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More than 5  Years** | ** ** |
|                         |       |                                      |       |   |   |   |   |   |   |   |   |
| CONTRACTUAL  OBLIGATIONS     |       |                                      |       |   |   |   |   |   |   |   |   |
| Debt                         |       | $                                         | 243        |   | $ | 243 |   | $ | — |   | $ | — |   | $ | — |   |
| Capital  Lease Obligations   |       | 6                                         |       | 6 |   | — |   | — |   | — |   |
| Severance  Obligations       |       | 96                                        |       | 96 |   | — |   | — |   | — |   |
| Operating  Lease Commitments |       | 8,160                                     |       | 1,724 |   | 3,531 |   | 2,664 |   | 241 |   |
|                              |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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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.  And in October 2004, a derivativecomplaint was filed against one officer, two former officers and our entire Boardof Directors alleging, among other things, breach of fiduciary duty arisingfrom allowing purported violations of federal securities laws.  No discovery has been conducted.  All of the foregoing complaints were tenderedto our insurance carriers, however, our primary carrier has denied coverage forthese claims.  We dispute the positiontaken by our primary carrier and intend to enforce our rights under thepolicy.  In May 2005, the Company’sprimary D&O insurance carrier filed a complaint in Federal Court againstus, one officer, two former officers and our entire Board of Directors seekingdeclaratory relief as to whether the Company’s D&O insurance policy coveredthe losses arising from the foregoing complaints.  The Company answered the complaint and filedcounterclaims against the primary carrier. No discovery has been conducted. In addition, in December 2004, the California Court of Appealsreversed the judgment of the Superior Court and remanded to the trial court forfurther proceedings complaints filed in October 2001 and May 2002 bycertain former shareholders of Cytovia, a Company we acquired in 2000.  The complaints, filed against us and two ofour officers, allege fraud and negligent misrepresentation in connection withour acquisition of Cytovia.  Thesecomplaints are more fully discussed in the section entitled Risk Factorscontained herein and in footnote 8, “Contingencies” to these condensedconsolidated financial statements.  Noassurances can be made as to whether we will be successful in our defense ofthe pending claims. If we are not successful in our defense of such claims, wecould be forced to, among other things, make significant payments to resolvethese claims.  To the extent such paymentsare not covered by our insurance carrier, they would have a material adverseeffect on our liquidity and capital resources, including the possibility thatsuch payments could fully deplete our cash 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 development and marketing partnershipfor Ceplene and our oral histamine and topical histamine technology and pursuea strategic transaction. In addition, our cash requirements may fluctuate infuture periods as we conduct additional research and development activities,including clinical trials, and undertake efforts associated with the commerciallaunch of any product candidates that are approved for sale by governmentregulatory bodies.  The followingactivities could result in an increase in cash requirements:  the anticipated filing of an application forEuropean regulatory approval for Ceplene in AML, costs associated with pursuinga strategic transaction and other research related to liver disease, theapoptosis modulator and topical histamine technologies. Other factors that mayimpact our cash requirements include: the results of clinical trials, the scopeof other research and development activities, the time required to obtainregulatory approvals, costs associated with defending certain lawsuitscurrently pending against us, the costs of filing, prosecuting, defending andenforcing patent claims and other intellectual property rights, and the abilityto establish marketing alliances and collaborative arrangements. As a result ofthese factors, it is difficult to predict accurately the timing and amount

 

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of future cash requirements. However, based on the corporate restructuringas previously discussed and the completion of Ceplene trials, we expect that infiscal year 2005 our use of cash in operations will be lower than fiscal year2004*.*

 

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 transactions aimed at effectively leveragingand building 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, will not cause our stockholdersto suffer substantial dilution or will not adversely affect our business or thetrading price of our stock.  In addition,any such transactions may require us to incur non-recurring or other charges,may require us to assume debt or other substantial financial obligations andmay pose significant integration challenges with respect to our businessincluding the development of our product candidates, and/or management andbusiness disruptions, any of which could materially and adversely affect ourbusiness and financial results.  Inaddition as part of a strategic transaction we may be required to comply withvarious Nasdaq listing requirements in order to continue to be listed on theNasdaq National Market.

 

We believe that our available cash, cash equivalents andinvestments at June 30, 2005 will be sufficient to satisfy our fundingneeds for at least the next 12 months. To meet our cash requirements, we may pursue the issuance of additionalequity securities and corporate collaborative agreements. The issuance ofadditional equity securities, if any, could result in substantial dilution toour stockholders. There can be no assurance that additional funding will beavailable on terms acceptable to us, if at all. The failure to fund our capitalrequirements would have a material adverse effect on our business, financialcondition and results of operations.

 

We are currently seeking a strategic partnership to completethe development and commercialization of Ceplene in AML and other indications.  We are also seeking collaborations for thefurther development of our other histamine technologies and our apoptosismodulator drug candidates for cancer and other diseases.  We intend to independently advance oneapoptosis lead drug candidate for the treatment of cancer to an IND withinapproximately the next 12 months.

 

In November 2003, we entered into an agreement withMyriad under which we licensed our MX90745 series of caspase-induceranti-cancer compounds to Myriad.  Theagreement requires that Myriad make licensing, research and milestone paymentsto us totaling up to $27 million, assuming the successful commercialization ofthe compound for the treatment of cancer, as well as pay a royalty on productsales.  In March 2005, Myriad beganhuman clinical trials with this compound, initiating a Phase 1 clinical trialin patients with advanced solid tumors, which triggered a $1 million milestonepayment that we received in April 2005. We are currently seeking collaborations to advance two additional apoptosislead compounds to an IND.  There can beno assurance that we will be able to enter into any additional agreements onacceptable

 

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terms, if at all.

 

We have never paid a cash dividend on ourcommon stock and such payments are prohibited by the terms of our bank loan. Wedo not contemplate the payment of cash dividends on our common stock in theforeseeable future.

 

**IMPACT OF INFLATION**

 

The impact of inflation on our operations for thethree and nine months ended June 30, 2005 and 2004 was not material.

 

#### **RECENT ACCOUNTING PRONOUNCEMENTS**

#### ** **

On December 16, 2004, the FinancialAccounting Standards Board, or FASB, issued SFAS 123(R)*,*“Share-Based Payment”, which is arevision of SFAS 123. Generally, the approach in SFAS 123(R) issimilar to the approach described in SFAS 123. However, SFAS 123(R)requires all share-based payments to employees, including grants of employeestock options, to be recognized in the income statement based on their fairvalues. Pro forma disclosure will no longer be an alternative. This statementalso eliminates the ability to account for share-based compensationtransactions using APB Opinion No. 25. The statement, which was delayed,is effective at the beginning of the fiscal year beginning after June 15,2005. Early adoption will be permitted in periods in which financial statementshave not yet been issued. We expect to adopt SFAS 123(R) on October 1,2005.

 

SFAS 123(R) permits public companies toadopt its requirements using one of two methods: 1) A “modifiedprospective” method in which compensation cost is recognized beginning with theeffective date (a) based on the requirements of SFAS 123(R) for allshare-based payments granted after the effective date and (b) based on therequirements of SFAS 123 for all awards granted to employees prior to theeffective date of SFAS 123(R) that remain unvested on the effective date,2) A “modified retrospective” method which includes the requirements ofthe modified prospective method described above, but also permits entities torestate based on the amounts previously recognized under SFAS 123 forpurposes of pro forma disclosures either (a) all prior periods presentedor (b) prior interim periods of the year of adoption. We plan to adoptSFAS 123 no later than October 1, 2005, but have not yet determinedwhat method we will use.

 

As permitted by SFAS 123, we currentlyaccount for share-based payments to employees using Opinion 25’s intrinsicvalue method and, as such, generally recognize no compensation cost foremployee stock options. Accordingly, the adoption of SFAS 123(R)’s fairvalue method may have 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 EmergingIssues Task Force issued EITF 03-1, “The Meaning of Other-Than-TemporaryImpairment and Its Application to Certain Investments”*.*  EITF 03-1, which was originallyeffective for interim and annual reporting periods beginning after June 15,2004 requires a three-step model to determine other-than-temporary impairments

 

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for all current and future investments in marketable securities. In September 2004, the FASB delayed the requirement to record impairmentlosses under EITF 03-1 until new guidance is issued.  We do not expectthat the adoption of EITF 03-1 will have a material impact on our operatingresults and financial position.

 

In May 2005, the FASB, issuedSFAS 154,**“Accounting Changesand Error Corrections”, SFAS 154 changes therequirements for the accounting for, and reporting of, a change in accountingprinciple and applies to all voluntary changes in accounting principle, as wellas changes pursuant to accounting pronouncements that do not include transitionrules. APB 20 previously required that most voluntary changes in accountingprinciple be recognized by including in net income of the period of the changethe cumulative effect of changing to the new accounting principle. Under SFAS154, changes in accounting principle must be applied retrospectively to priorperiods’ financial statements, unless it is impracticable to determine eitherthe period-specific effects or the cumulative effect of the change. Thestatement also provides guidance for determining whether retrospectiveapplication is impracticable (for example, if assumptions about management’searlier intent are necessary, but cannot be independently substantiated).  The statement will be effective foraccounting changes and corrections of errors made in fiscal years beginningafter December 15, 2005 with early adoption permitted.  We expect to adoptSFAS 154 on October 1, 2005. We do not expect that the adoption of SFAS 154 will have a materialimpact on our operating results and financial position.

 

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** **

**RISK FACTORS**

 

You should carefully consider the followingrisk factors and the other information included herein as well as theinformation included in our Annual Report on Form 10-K for the fiscal yearended September 30, 2004, and other reports and filings made with theSecurities and Exchange Commission before investing in our common stock. If anyof the following risks actually occur, our business, financial condition orresults of operations could be harmed. The trading price of our common stockcould decline due to any of these risks, and you may lose part or all of yourinvestment.

 

**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.**

 

Potential products based on our Ceplene, oralhistamine, apoptosis modulator and topical histamine gel technologies willrequire, dependent upon the specific drug candidate, extensive research and development,preclinical testing, clinical testing, collaborative partners to conductcertain clinical trials, regulatory approval and substantial additionalinvestment before we can market them. We cannot assure you that any of our drugcandidates 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.

 

For example, in September 2004, weannounced that our confirmatory M0104 trial of Ceplene in combination with IL-2for the treatment of advanced malignant melanoma patients with liver metastasesfailed to demonstrate an improvement in overall patient survival, the primaryendpoint.  As a result, we withdrew ourpending NDA seeking approval of Ceplene therapy to treat advanced malignant melanomapatients with liver metastases.

 

We have not completed final testing forefficacy or safety in humans for the diseases we propose to treat with Cepleneand our other drug candidates. Failure to ultimately obtain approval forCeplene and our other drug candidates, any delay in our expected testing anddevelopment schedules, the failure to engage a collaborative partner, or anyelimination of a product development program in its entirety, will negativelyimpact our ability to generate revenues in the

 

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future from the sale of our product candidates.

 

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

 

Our drug candidates are subject to extensivegovernment regulations related to development, clinical trials, manufacturingand commercialization. The process of obtaining FDA, European Agency for theEvaluation of Medicinal Products, or EMEA, and other governmental and similarinternational regulatory approvals is costly, time consuming, uncertain andsubject to unanticipated delays. Even if we believe that preclinical andclinical data are sufficient to support regulatory approval for a drugcandidate, the FDA, EMEA and similar international regulatory authorities maynot ultimately approve the candidate for commercial sale in any jurisdiction.The FDA, EMEA or similar international regulators may refuse to approve anapplication for approval of a drug candidate if they believe that applicableregulatory criteria are not satisfied. The FDA, EMEA or similar internationalregulators may also require additional testing for safety and efficacy.  For example, in May 2004, we announcedthe results of an international Phase 3 clinical trial testing the combination ofCeplene plus IL-2 in patients with AML in complete remission.  The primary endpoint of the Phase 3 trialswas achieved using intent-to-treat analysis, as patients treated with theCeplene plus IL-2 combination therapy experienced a statistically significantincrease in leukemia-free survival compared to patients in the control arm ofthe trial.  In January 2005, weannounced that based on ongoing correspondence with the FDA, as well asconsultations with external advisors, we determined that an additional Phase 3clinical trial will be necessary to further evaluate Ceplene plus IL-2combination therapy for the treatment of AML patients in complete remissionbefore applying for regulatory approval in the United States.   We currently anticipate filing an applicationfor approval in Europe during the first half of 2006 based on the results ofthe AML clinical trial.  However, we haveno assurance that (i) the EMEA or similar regulatory agencies will notrequire an additional Phase 3 trial, (ii) the EMEA or similar regulatoryagencies would approve regulatory filings for drug approval, or (iii) ifan additional Phase 3 trial is required, that the results from such additionalPhase 3 trial would confirm the results from the first Phase 3 trial.

 

In addition, manufacturing facilitiesoperated by the third party manufacturers with whom we contract to manufactureour drug candidates may not pass a FDA, EMEA or similar internationalregulatory pre-approval inspection. Moreover, if the FDA, EMEA or similarinternational regulatory agency grants regulatory approval of a productcandidate, the approval may be limited to specific indications or limited withrespect to its distribution. Similar international regulatory authorities mayapply similar limitations or may refuse to grant any approval.

 

Any failure or delay in obtaining theseapprovals could prohibit or delay us from marketing our drug candidates. If ourdrug candidates do not meet applicable regulatory requirements for approval, wemay not have the financial resources to continue research and development ofthese candidates, and we may not generate revenues from the commercial sale ofany of our products.

 

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

 

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We may encounter problems with any of ourcompleted, ongoing or planned clinical studies, including having inadequateresources to conduct clinical trials necessary to obtain regulatory approval.For example, we may encounter delays in commencing studies or enrollingvolunteers, lower than anticipated retention rate of volunteers in a trial orserious side effects experienced by study participants relating to the drugcandidate. Factors that could affect patient enrollment include the size of thepatient enrollment population for the targeted disease, eligibility criteria,proximity of eligible patients to clinical sites, clinical trial protocols andthe existence of competing protocols, including competitive financialincentives for patients and clinicians, and existing approved drugs. If weencounter any delay in the commencement, conduct or completion of our clinicalstudies for our drug candidates, we may experience the following consequences:

 

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

 

•                                          thesubmission of our applications for regulatory approval of our drug candidates withregulatory authorities in North America, Europe and elsewhere in the world maybe 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;

 

•                                          we may nothave the financial resources to continue and complete research and developmentof any of our product candidates; and

 

•                                          we may not beable to enter into collaborative arrangements relating to any potential productas a result of the delay in clinical development or regulatory filings.

 

**Because we are dependent on clinical researchcenters and other contractors for clinical testing and for certain research anddevelopment activities, the results of our clinical trials and such researchactivities are, to a certain extent, beyond our control.**

 

The nature of clinical trials and ourbusiness strategy requires us to rely on clinical research centers and ourother contractors to assist us with clinical testing and certain research anddevelopment activities. As a result, our success is dependent upon the successof these outside parties in performing their responsibilities. Although webelieve our contractors are economically motivated to perform on theircontractual obligations, we cannot directly control the adequacy and timelinessof the resources and expertise applied to these activities by our contractors.If our contractors do not perform their activities in an adequate or timelymanner, the development and commercialization of our drug candidates could bedelayed.

 

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

 

We expect to rely on collaborativearrangements for research and development and commercialization of certain drugcandidates discovered and developed by us, such as our agreement with Myriadrelated to the MX90745 series of apoptosis-inducer anti-cancer compounds. Withrespect to any additional clinical trials of Ceplene for the treatment of patientswith AML, as well as other applications 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 cannotbe certain that we will be able to maintain these collaborations or enter intoany future collaborative arrangements, that any of our collaborations will besuccessful or that we will receive revenues from any of these collaborations.The success of these and any future collaborations will depend, in significantpart, on our partners’ development and strategic considerations, including therelative advantages of alternative products being developed or marketed bycompetitors. If our partners fail to conduct their activities in a timelymanner, or at all, preclinical or clinical development of drug candidates underthose collaborations could be delayed or terminated. The suspension ortermination of our collaborations, the failure of our collaborations to besuccessful or the delay in the development or commercialization of drugcandidates pursuant to our collaborations could harm our business.

 

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

 

Our design, testing and development ofpotential products involves an inherent risk of exposure to clinical trial andproduct liability claims and related adverse publicity. Insurance coverage isexpensive and difficult to obtain, and we may be unable to obtain coverage inthe future on acceptable terms, if at all. Although we currently maintainclinical trial insurance for our drug candidates in the amounts we believe tobe commercially reasonable, we cannot be certain that the coverage limits ofour insurance policies or those of our strategic partners will be adequate. Ifwe are unable to obtain sufficient insurance at an acceptable cost or if aclaim is brought against us, whether fully covered by insurance or not, ourbusiness, results of operations and financial condition could be materiallyadversely affected.

 

**Our products may not be accepted, purchasedor used by doctors, patients or payors.**

 

Our drug candidates may not achieve marketacceptance even if they are approved by the FDA, EMEA and similar internationalregulatory agencies. We cannot guarantee that physicians, patients, payors orthe medical community in general will accept and utilize any products that wedevelop. The degree of market acceptance of our potential products will dependon 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;

 

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•                                          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.**

 

We currently intend to rely on collaborativepartners to market and sell our drug candidates in the United States and ininternational markets, if approved for sale in such markets. We have not yetentered into any collaborative arrangement with respect to marketing or sellingCeplene with the exception of agreements relating to Australia, New Zealand andIsrael. We cannot guarantee that we will be able to enter into any additionalsuch arrangements on terms favorable to us, or at all for Ceplene or any otherdrug candidate. If we are able to enter into marketing and selling arrangementswith collaborative partners, we cannot assure you that such marketingcollaborators will apply adequate resources and skills to theirresponsibilities, or that their marketing efforts will be successful. If we areunable to enter into collaborative arrangements, or our marketing collaboratorsefforts are not successful, our ability to generate revenue from product saleswill 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 not intend to acquire or establish ourown dedicated manufacturing facilities for our drug candidates in theforeseeable future. We have contracted and expect to continue to contract withestablished pharmaceutical manufacturers for the production of our drugcandidates. If we are unable to continue to contract with third-partymanufacturers on acceptable terms or our manufacturers do not comply withapplicable regulatory requirements, our ability to conduct clinical testing andto produce commercial quantities of our product candidates will be adverselyaffected. If we cannot adequately manufacture our product candidates, it couldresult in delays in submissions for regulatory approval and in commercialproduct 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 a development-stage enterprise. Wehave experienced net losses every year since our inception. Our net lossesapplicable to common stock were $21.8 million and $30.5 million for the ninemonths ended June 30, 2005 and 2004, respectively.  As of June 30, 2005, we had anaccumulated deficit of approximately $373.2 million. We anticipate incurringsubstantial additional losses over at least the next several years related todeveloping and testing our drug

 

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candidates and preparing for commercialization and planned marketlaunches of our products. If we do not become profitable, our stock price willbe negatively affected, and we may ultimately be forced to discontinue ouroperations. We may never generate product revenues or become profitable. Weexpect to have quarter-to-quarter fluctuations in revenues, expenses andlosses, some of which could be significant.

 

**We will need to raise additional funds in thefuture. 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 have already spent substantial fundsdeveloping our potential products and business. We expect to continue to havenegative cash flow from our operations for at least the next severalyears.  We will have to raise additionalfunds to complete the development of our drug candidates and to bring them tomarket. Our future capital requirements will depend 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.

 

Additional financing may not be available onacceptable terms, if at all. If adequate funds are not available, we will berequired to delay, scale back or eliminate one or more of our drug developmentprograms or obtain funds through arrangements with collaborative partners orothers that may require us to relinquish rights to certain of our technologiesor product candidates that we would 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 are many companies, both publicly andprivately held, including well-known pharmaceutical companies and academic andother research institutions, engaged in developing pharmaceutical products forthe treatment of life-threatening cancers and liver diseases. Productsdeveloped by any of these companies or institutions may demonstrate greatersafety or efficacy than our drug candidates or be more widely accepted bydoctors, patients or third-party payors.

 

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Many of our competitors and potential competitors have substantiallygreater capital resources, research and development capabilities and humanresources than we do. Many of these competitors also have significantly greaterexperience than we do in undertaking preclinical testing and clinical trials ofnew pharmaceutical product candidates and obtaining FDA, EMEA and otherregulatory approvals. If any of our drug candidates are approved for commercialsale, we will also be competing with companies that have greater resources andexperience in manufacturing, marketing and selling pharmaceutical products. Tothe extent that any of our competitors succeed in developing products that aremore effective, less costly or have better side effect profiles than ourproducts, then our future potential market share could decrease, which may havea negative impact on our business.

 

**If we fail to secure adequate protection 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 success depends in large part on ourability to obtain, maintain and protect patents, trademarks and trade secretsand to operate without infringing upon the proprietary rights of others. If weare unable to do so, our product candidates and technologies may not provide uswith any competitive advantage.

 

The patent positions of biotechnology andpharmaceutical companies are highly uncertain and involve complex legal andfactual questions, and the breadth of claims allowed in biotechnology andpharmaceutical patents cannot be predicted. As a result, patents may not issuefrom any of our patent applications. Patents currently held by us or issued tous in the future, or to licensors from whom we have licensed technology rights,may be challenged, invalidated or circumvented so that our intellectualproperty rights may not protect our technologies or provide commercialadvantage to us. In addition, we also rely on unpatented trade secrets andproprietary know-how, and we cannot be sure that others will not obtain accessto or independently develop such trade secrets and know-how. Enforcement of ourintellectual property rights against any infringers of our patents relating toour product candidates and technologies will be costly and time-consuming.Because of the nature of those patents, we could be required to bring lawsuitsagainst many different entities such as hospitals or clinics. This would havethe effect of increasing the costs of enforcing our rights.

 

The pharmaceutical industry has experiencedextensive litigation regarding patent and other intellectual property rights.Although to date we are not aware of any intellectual property claims againstus, in the future we could be forced to incur substantial costs in defendingourselves in lawsuits that are brought against us claiming that we haveinfringed on the patent rights of others or in asserting our patent rights inlawsuits against other parties. We may also be required to participate ininterference proceedings declared by the United States Patent and TrademarkOffice or international patent authorities for the purpose of determining thepriority of inventions in connection with our patent applications or otherparties’ patent applications. Adverse determinations in litigation orinterference proceedings could require us to seek licenses that may not beavailable on commercially reasonable terms or subject us to significantliabilities to third parties.

 

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

 

We are engaged in the pharmaceutical field,which is characterized by extensive research efforts and rapid technologicalprogress. New developments in oncology, cancer therapy, medicinal pharmacology,biochemistry and other fields are expected to continue at a rapid pace.Research and discoveries by others may render some or all of our proposedprograms or product candidates noncompetitive or obsolete. Our businessstrategy is subject to the risks inherent in the development of new productcandidates using new technologies and approaches. Unforeseen problems maydevelop with these technologies or applications, and we may not be able tosuccessfully address technological challenges we encounter in our research anddevelopment programs. This may result in our inability to develop commerciallyfeasible products.

 

**Our future success depends on our ability toattract and retain key personnel.**

 

Our success will depend, to a great extent,upon the experience, abilities and continued services of our executiveofficers, and key personnel for research, development and commercialization. Ifwe lose the services of any of these officers or key research and developmentpersonnel, our business could be harmed. Our success also will depend upon ourability to attract and retain other highly qualified research and development,managerial, manufacturing and sales personnel and our ability to develop andmaintain relationships with qualified clinical researchers. Competition forthese personnel and relationships is intense and we compete with numerouspharmaceutical and biotechnology companies as well as with universities andnon-profit research organizations. We may not be able to continue to attractand retain qualified personnel or develop and maintain relationships withclinical researchers.

 

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

 

Our success may depend, in part, on theextent to which reimbursement for the costs of therapeutic product candidatesand related treatments will be available from third-party payors such as UnitedStates and similar international government health administration authorities,private health insurers, managed care programs and other organizations. Overthe past decade, the cost of health care has risen significantly, and therehave been numerous proposals by legislators, regulators and third-party healthcare payors to curb these costs. Some of these proposals have involvedlimitations on the amount of reimbursement for certain products and product candidates.  We cannot guarantee that similar UnitedStates federal or state or similar international health care legislation andpolicies will not be adopted in the future or that any product candidatessought to be commercialized by us will be considered cost-effective or thatadequate third-party insurance coverage will be available for us to establishand maintain price levels sufficient for realization of an appropriate returnon our investment in product development. Moreover, the existence or threat ofcost control measures could have an adverse effect on the willingness ofpotential collaborators to pursue research and development programs related toour product candidates.

 

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

 

From time to time we consider strategic transactionsand alternatives with the goal of maximizing stockholder value. In March 2005,we announced that we retained an investment banker, Piper Jaffray &Co., to advise and assist in our seeking and evaluating strategictransactions.  These potentialtransactions may include a variety of different business arrangements,including spin-offs, acquisitions, strategic partnerships, joint ventures,restructurings, divestitures, business combinations and investments. We cannotassure you that any such transactions will be consummated on favorable terms orat all, will in fact enhance stockholder value, will not cause our stockholdersto suffer substantial dilution or will not adversely affect our business or thetrading price of our stock. In addition, any such transactions may require usto incur non-recurring or other charges, may require us to assume debt or othersubstantial financial obligations and may pose significant integrationchallenges with respect to our business including the development of ourproduct candidates, and/or management and business disruptions, any of whichcould materially and adversely affect our business and financial results.  In addition as part of a strategictransaction we may be required to comply with various Nasdaq listingrequirements in order to continue to be listed on the Nasdaq National Market.

 

**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 formershareholders of Cytovia filed complaints in California Superior Court in SanDiego, against us and two of our officers, alleging fraud and negligent misrepresentationin connection with our acquisition of Cytovia. A binding arbitration proceeding with the American ArbitrationAssociation 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 awardedrecovery of our reasonable attorneys’ fees and costs of approximately $922,000as prevailing party in the proceedings. In December 2003, the decision wasconfirmed by the Superior Court, which entered a judgment to this effect.  In June 2004, the plaintiffs filed anAppeal.  In December 2004, the Courtof Appeal reversed the judgment of the Superior Court and remanded the lawsuitto the trial court for further proceedings. We have filed a petition to theUnited States Supreme Court seeking further appellate review, and are alsovigorously defending the underlying claims back in the Superior Court.

 

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 Southern District ofCalifornia.  These three actions wereconsolidated and in March 2005, plaintiffs filed

 

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a consolidated amended complaint. We have filed a motion to dismiss that complaint.  No discovery has been conducted.  The cases have been tendered to our insurancecarrier, which has denied coverage.  Wedispute the position taken by our insurance carrier and fully intend to enforceour rights under the policy.

 

On October 7, 2004, plaintiff JesusPutnam, purportedly on behalf of the Company, filed a derivative complaint inthe Superior Court for the State of California, County of San Diego, againstLarry G. Stambaugh, Anthony E. Altig, Kurt R. Gehlsen, former Senior VicePresident and Chief Scientific Officer, and our entire Board of Directors foralleged breach of fiduciary duty, abuse of control, gross mismanagement, wasteof corporate assets, unjust enrichment and violations of the CaliforniaCorporations Code, all of which arise from allowing purported 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, and seeking damages therefore.  No discovery has been conducted, and theparties have entered into a stipulation to stay the action pending resolutionof a motion to dismiss the federal actions. 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.

 

On May 3, 2005, plaintiff CarolinaCasualty Insurance Company filed a complaint in the United States DistrictCourt for the Southern District of California against Larry G. Stambaugh,Anthony E. Altig, Kurt R. Gehlsen, and our entire Board of Directors, seeking adeclaratory judgment from the court that our D&O insurance policy did notcover losses arising from the state and federal shareholder suits that werefiled in 2004.  We answered the complaintand filed counterclaims against Carolina Casualty.  No discovery has been conducted.

 

We intend to engage in a rigorous defenseagainst such claims.  No assurances canbe made that we will be successful in our defense of the pending claims. If weare not successful in our defense of such claims, we could be forced to, amongother things, make significant payments to resolve these claims, and suchpayments could have a material adverse effect on our business, financialcondition and results of operations if not covered by our insurance carrier.Further, regardless of success of the litigation, the litigation itself mayresult in substantial costs and divert management’s attention and resources,all of which could adversely affect our business.

 

**Our stock price may be highly volatile due toexternal factors.**

 

Our common stock currently trades on theNasdaq National Market and on the OM Stockholm Exchange. Historically, ourcommon stock has generally experienced relatively low daily trading volumes inrelation to the aggregate number of shares outstanding.  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.

 

Factors that may have a significant impact onthe market price or the liquidity of our common stock also include:

 

•                                          actualor potential clinical trial results relating to drug candidates under 

 

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development by us or our competitors;

 

•                                          delaysin our clinical testing and development schedules;

 

•                                          eventsor announcements relating to our collaborative relationships;

 

•                                          failure toenter into a collaborative partnership to conduct additional clinical studiesnecessary to support regulatory approval of Ceplene therapy in AML patients;

 

•                                          events orannouncements relating to strategic transactions or our ability to successfullycomplete such transactions;

 

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

 

•                                          developmentsor disputes concerning patents or proprietary rights;

 

•                                          regulatorydevelopments in both the United States and other countries;

 

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

 

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

 

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

 

External factors may also adversely affectthe market price for our common stock. The price and liquidity of our commonstock may be significantly affected by the overall trading activity and marketfactors on the Nasdaq National Market and the OM Stockholm Exchange, and thesefactors may differ between the two markets. In addition, the securities marketshave from time to time experienced significant price and volume fluctuationsthat may be unrelated to the operating performance of particular companies. Themarket prices of the common stock of many publicly traded pharmaceutical orbiotechnology companies have in the past been, and can in the future beexpected 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.**

 

Certain provisions of our charter and by-lawsmay make it more difficult for a third party to acquire control of us, eventhough such acquisition may be beneficial to our stockholders. These provisionsinclude, but are not limited to:

 

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•                                          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 rightsplan 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.

 

Our board of directors also has the authorityto issue, at any time, without further stockholder approval, up to 5,000,000shares of preferred stock, and to determine the price, rights, privileges andpreferences of those shares. These preferred shares are available to be used inconnection with our shareholder rights plan. Any issuance of preferred stockcould discourage a third party from acquiring a majority of our outstandingvoting stock.

 

Furthermore, we are subject to the provisionsof Section 203 of the Delaware General Corporations Law, an anti-takeoverlaw, which may also dissuade a potential acquiror, even though such acquisitionmay be beneficial to our stockholders.

 

**Issuing preferred stock with rights senior tothose of our common stock could adversely affect holders of common stock.**

 

Our charter documents give our board ofdirectors the authority to issue a series of preferred stock without a vote oraction by our stockholders. The board also has the authority to determine theterms of preferred stock, including price, preferences and voting rights. Therights granted to holders of preferred stock may adversely affect the rights ofholders of our common stock. For example, a series of preferred stock may begranted the right to receive a liquidation preference—a pre-set distribution inthe event of a liquidation—that would reduce the amount available fordistribution to holders of common stock. In addition, the issuance of preferredstock could make it more difficult for a third party to acquire a majority ofour outstanding voting stock. As a result, common stockholders could beprevented from participating in transactions that would offer an optimal pricefor their shares.

 

#### **ITEM3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

#### ** **

Our exposure to market risk is principallyconfined to our cash equivalents and investments that have maturities of lessthan three years. We maintain a non-trading investment portfolio of investmentgrade, liquid debt securities that limits the amount of credit exposure to anyone issue, issuer or type of instrument. The securities in our investmentportfolio are not leveraged, are classified as available-for-sale and aresubject to interest rate risk. We currently do

 

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not hedge interest rate exposure. A hypothetical ten percentchange in interest rates during the quarter ended June 30, 2005 would haveresulted in approximately a $17,000 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 our periodic filings with the Securities Exchange Commissionwithin the required time period.  Therehave been no significant changes in our internal controls over financialreporting that occurred during the period covered by this report that havematerially affected, or is reasonably likely to materially affect our internalcontrol over financial reporting.

 

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**PART II–OTHERINFORMATION**

 

***ITEM 1.  LEGAL PROCEEDINGS***

 

In October 2001 and May 2002,certain former shareholders of Cytovia filed complaints in California SuperiorCourt in San Diego, against the Company and two of its officers, alleging fraudand negligent 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, theplaintiffs filed an Appeal.  In December 2004,the Court of Appeal reversed the judgment of the Superior Court and remandedthe lawsuit to the trial court for further proceedings. The Company has filed apetition to the United States Supreme Court seeking further appellate review,and is also vigorously defending the underlying claims back in the Superior Court.

 

On September 21, 2004, plaintiff Dr. RichardBassin, on behalf of himself and purportedly on behalf of a class of othershareholders similarly situated, filed a complaint in the United StatesDistrict Court for the Southern District of California against the Company, oneofficer of the Company and one former officer of the Company, allegingviolations of federal securities laws related to declines in the Company’sstock price in connection with various statements and alleged omissions to thepublic and to the securities markets during the class period from November 11,2002 to September 17, 2004, and seeking damages therefore.  Thereafter two similar complaints were filedin the Southern District of California. These three actions were consolidated and in March 2005, plaintiffsfiled a consolidated amended complaint. The Company has filed a motion to dismiss that complaint.  No discovery has been conducted.  The cases have been tendered to the Company’sinsurance carrier, which has denied coverage. The Company disputes the position taken by the insurance carrier andfully intends to enforce its right under the policy.

 

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 the parties have entered into a stipulation to stay the actionpending resolution of the 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.

 

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On May 3, 2005, plaintiff Carolina CasualtyInsurance Company filed a complaint in the United States District Court for theSouthern District of California against one officer of the Company, two formerofficers of the Company and the Company’s entire Board of Directors, seeking adeclaratory judgment from the court that the Company’s D&O insurance policydid not cover losses arising from the state and federal shareholder suits thatwere filed in 2004.  The Company answeredthe complaint and filed counterclaims against Carolina Casualty.  No discovery has been conducted.

 

The Company intends to engage in a rigorous defenseagainst such claims.  No assurances canbe made that the Company will be successful in its defense of the pendingclaims. If the Company is not successful in its defense of such claims, theCompany could be forced to, among other things, make significant payments toresolve these claims, and such payments could have a material adverse effect onthe 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 5.  OTHER INFORMATION**

 

On August 3, 2005 Larry Stambaugh, CEO,returned to the Company 203,333 shares he owned in Maxim stock and returned tothe Company all 1,563,667 stock option grants he currently holds.  These shares of Maxim stock and stock optionswere collateral on the loan the Company made to Mr. Stambaugh.

 

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# **ITEM 6.  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)                                                                                                |
| 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) |
| 31.1 |   | Certification by Larry G. Stambaugh, Chief Executive Officer,  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302  of the Sarbanes-Oxley Act of 2002.                |
| 31.2 |   | Certification by John D. Prunty, Chief Financial Officer, Pursuant to  18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                    |
| 32   |   | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                 |

 

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| (1)    |   | Previously filed together with Registrant’s Registration Statement on  Form SB-2 (File No. 333-4854-LA) or amendments thereto and  incorporated herein by reference. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                |
| (2)    |   | Previously filed as Exhibit C with Registrant’s Definitive Proxy  Statement filed with the SEC on January 16, 2004, and incorporated  herein by reference.           |
|   |   |                                                                                                                                                                                |
| (3)    |   | Previously filed together with the Registrant’s Current Report on Form 8-A  dated June 20, 2000 and incorporated herein by reference.                                |
|   |   |                                                                                                                                                                                |
| (4)    |   | Previously filed together with Registrant’s Current Report on Form 8-K  dated September 22, 2003 and incorporated herein by reference.                               |
|   |   |                                                                                                                                                                                |
| (5)    |   | Previously filed together with the Registrant’s Annual Report on Form 10-K  dated September 30, 2003 and incorporated herein by reference.                           |

 

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**SIGNATURE**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 

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

 

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