**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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##### **FORM 10-Q**

| **x**      |   | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|------------|--------|-----------------------------------------------------------------------------------------------|
| ** ** |   | ** **                                                                                    |
| ** ** |   | **For the quarterly period ended June 30, 2007**                                              |
| ** ** |   | ** **                                                                                    |
| **OR**     |
| ** ** |   | ** **                                                                                    |
| **o**      |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Commissionfile number 0-18006**

**ORCHESTRA THERAPEUTICS, INC.**

(Exact name of registrantas specified in its charter)

| **Delaware**                              |   | **33-0255679**       |
|-------------------------------------------|--------|----------------------|
| (State or other  jurisdiction of          |   | (I.R.S. Employer     |
| incorporation or  organization)           |   | Identification  No.) |
| ** **                                |   | ** **           |
| **5931  Darwin Court**                    |   | ** **           |
| **Carlsbad,  California**                 |   | **92008**            |
| (Address of  principal executive offices) |   | (Zip Code)           |

 

Registrant’s telephone number, including area code:**(760) 431-7080**

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

Yes  x                   Noo

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer. See definition of “accelerated filer” and “largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer                          o            Accelerated filer   o            Non-accelerated filer           x

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o                    Nox

As of  September 26, 2007, there were 10,527,675shares of our common stock outstanding.

 

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**ORCHESTRATHERAPEUTICS, INC.**

**INDEX**
| PART I – FINANCIAL  INFORMATION                                                                    |   |   |
|---------------------------------------------------------------------------------------------------------|--------|--------|
| **Item 1. Financial Statements  (unaudited)**                                                           |   |   |
| **Condensed Balance Sheets**                                                                            |   |   |
| **Condensed Statements of  Operations**                                                                 |   |   |
| **Condensed Statements of Cash Flows**                                                                  |   |   |
| **Notes to Condensed  Financial Statements**                                                            |   |   |
| **Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations** |   |   |
| **Item 3.  Quantitative and Qualitative Disclosures about Market Risk**                                 |   |   |
| **Item 4. Controls and  Procedures**                                                                    |   |   |
| PART II – OTHER  INFORMATION                                                                       |   |   |
| **Item 1. Legal Proceedings**                                                                           |   |   |
| **Item 1A. Risk Factors**                                                                               |   |   |
| **Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds**                                |   |   |
| **Item 3.  Defaults Upon Senior Securities**                                                            |   |   |
| **Item 4.  Submission of Matters to a Vote of Security Holders**                                        |   |   |
| **Item 5. Other Information**                                                                           |   |   |
| **Item 6. Exhibits**                                                                                    |   |   |
| SIGNATURES                                                                                              |   |   |

 

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**PART I – FINANCIAL INFORMATION**

**Item 1. Financial Statements**

**Orchestra Therapeutics, Inc.**

**CondensedBalance Sheets**

*(inthousands, except for share amounts)*
| ** **                                                                                                                                                                  | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                  | ** ** | **2007**          | ** ** | **2006**              | ** ** |
| ** **                                                                                                                                                                  | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
| **Assets**                                                                                                                                                                  | ** ** | ** **        | ** ** | ** **            | ** ** |
| ** **                                                                                                                                                                  | ** ** | ** **        | ** ** | ** **            | ** ** |
| Current Assets:                                                                                                                                                             |       |              |       |                  |       |
| Cash and cash  equivalents                                                                                                                                                  |       | $                 | 269        |                  | $          | 3,421 |   |
| Accounts  receivable                                                                                                                                                        |       | —            |       | 900                   |       |
| Prepaid expenses                                                                                                                                                            |       | 157               |       | 389                   |       |
|                                                                                                                                                                        |       | 426               |       | 4,710                 |       |
| Property and equipment,  net                                                                                                                                                |       | 2,401             |       | 2,785                 |       |
| Deposits and other  assets ($370 and $521 restricted in escrow account as security for long-term  lease at June 30, 2007 and December 31, 2006, respectively)               |       | 460               |       | 611                   |       |
|                                                                                                                                                                        |       | $                 | 3,287      |                  | $          | 8,106 |   |
| ** **                                                                                                                                                                  | ** ** | ** **        | ** ** | ** **            | ** ** |
| **Liabilities and Stockholders’  (Deficit) Equity**                                                                                                                    | ** ** | ** **        | ** ** | ** **            | ** ** |
| ** **                                                                                                                                                                  | ** ** | ** **        | ** ** | ** **            | ** ** |
| Current Liabilities:                                                                                                                                                        |       |              |       |                  |       |
| Accounts payable  and accrued expenses                                                                                                                                      |       | $                 | 3,730      |                  | $          | 3,084 |   |
| Liability for  warrants committed in excess of authorized stock                                                                                                             |       | 1,839             |       | 7,308                 |       |
| Convertible  promissory notes, net of discount of $1,381 plus accrued interest of $535 at  June 30, 2007                                                                    |       | 4,189             |       | —                |       |
| Convertible  promissory notes, related party, net of discount of $149 plus accrued interest  of $60 at June 30, 2007                                                        |       | 461               |       | —                |       |
| Current portion  of deferred liabilities and revenue                                                                                                                        |       | 387               |       | 358                   |       |
|                                                                                                                                                                        |       | 10,606            |       | 10,750                |       |
|                                                                                                                                                                        |       |              |       |                  |       |
| Convertible promissory  notes, related party, net of discount of $224 and $592 plus accrued interest  of $545 and $458 at June 30, 2007 and December 31, 2006, respectively |       | 3,477             |       | 3,571                 |       |
| Convertible promissory  notes, net of discount of $2,845 plus accrued interest of $348 at December  31, 2006                                                                |       | —            |       | 2,733                 |       |
| Long-term deferred  liabilities and revenue, net of current portion                                                                                                         |       | 1,739             |       | 1,936                 |       |
| Total long-term  liabilities                                                                                                                                                |       | 5,216             |       | 8,240                 |       |
|                                                                                                                                                                        |       |              |       |                  |       |
| Stockholders’ (Deficit)  Equity :                                                                                                                                      |       |              |       |                  |       |
| Common stock,  $.0025 par value, 35,000,000 shares authorized; 10,642,400 and 9,088,410  shares issued and outstanding at June 30, 2007 and December 31, 2006, respectively |       | 27                |       | 23                    |       |
| Warrants                                                                                                                                                                    |       | 2,610             |       | 2,610                 |       |
| Additional  paid-in capital                                                                                                                                                 |       | 142,236           |       | 139,908               |       |
| Accumulated  deficit                                                                                                                                                        |       | (157,408          | )          | (153,425              | )          |
| Total  stockholders’ deficit                                                                                                                                           |       | (12,535           | )          | (10,884               | )          |
|                                                                                                                                                                        |       | $                 | 3,287      |                  | $          | 8,106 |   |

 

*Seeaccompanying notes to condensed financial statements.*

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**OrchestraTherapeutics, Inc.**

**CondensedStatements of Operations**

*(in thousands, except for per shareamounts)*

*(unaudited)*
| ** **                                                                                                                                   | ** ** | **Three Months Ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                                                                   | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenues:                                                                                                                                    |       |                                                |       |                                              |       |   |   |   |   |
| Licensed  research revenue                                                                                                                   |       | $                                                   | 4          |                                              | $          | 4 |   | $ | 8 |   | $ | 8 |   |
| Contract  research revenue                                                                                                                   |       | —                                              |       | 7                                                 |       | — |   | 14 |   |
|                                                                                                                                         |       | 4                                                   |       | 11                                                |       | 8 |   | 22 |   |
|                                                                                                                                         |       |                                                |       |                                              |       |   |   |   |   |
| Expenses:                                                                                                                                    |       |                                                |       |                                              |       |   |   |   |   |
| Research and  development                                                                                                                    |       | 1,834                                               |       | 2,475                                             |       | 4,103 |   | 4,938 |   |
| General and  administrative                                                                                                                  |       | 1,077                                               |       | 1,469                                             |       | 2,551 |   | 2,798 |   |
|                                                                                                                                         |       | 2,911                                               |       | 3,944                                             |       | 6,654 |   | 7,736 |   |
|                                                                                                                                         |       |                                                |       |                                              |       |   |   |   |   |
| Other income and  (expense):                                                                                                                 |       |                                                |       |                                              |       |   |   |   |   |
| Interest expense  - including non-cash accretion of $814 and $2,760 for the three months and  $1,684 and $3,488 for six months, respectively |       | (1,030                                              | )          | (3,632                                            | )          | (2,160 | ) | (4,862 | ) |
| Investment income                                                                                                                            |       | 15                                                  |       | 44                                                |       | 50 |   | 64 |   |
| Gain on warrant  liability marked to fair value                                                                                              |       | 1,857                                               |       | 111,521                                           |       | 5,713 |   | 226,180 |   |
| Beneficial  inducement cost                                                                                                                  |       | —                                              |       | —                                            |       | (940 | ) | (14,095 | ) |
|                                                                                                                                         |       | 842                                                 |       | 107,933                                           |       | 2,663 |   | 207,287 |   |
|                                                                                                                                         |       |                                                |       |                                              |       |   |   |   |   |
| Net income (loss)                                                                                                                            |       | $                                                   | (2,065     | )                                                 | $          | 104,000 |   | $ | (3,983 | ) | $ | 199,573 |   |
|                                                                                                                                         |       |                                                |       |                                              |       |   |   |   |   |
| Basic income (loss) per  share                                                                                                               |       | $                                                   | (0.20      | )                                                 | $          | 31.53 |   | $ | (0.40 | ) | $ | 87.60 |   |
|                                                                                                                                         |       |                                                |       |                                              |       |   |   |   |   |
| Diluted (loss) per  share                                                                                                                    |       | $                                                   | (0.20      | )                                                 | $          | 0.39 |   | $ | (0.40 | ) | $ | 1.50 |   |

 

*Seeaccompanying notes to condensed financial statements.*

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**OrchestraTherapeutics, Inc.**

**CondensedStatements of Cash Flows**

*(in thousands)*

*(unaudited)*
| ** **                                                                           | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                           | ** ** | **2007**                                          | ** ** | **2006** | ** ** |
|                                                                                 |       |                                              |       |   |   |
| Net cash used in  operating activities                                               |       | $                                                 | (4,111     | ) | $ | (6,246 | ) |
|                                                                                 |       |                                              |       |   |   |
| Cash Flows From  Investing Activities:                                               |       |                                              |       |   |   |
| Purchase of  property and equipment                                                  |       | (2                                                | )          | (29 | ) |
| Net cash used in  investing activities                                               |       | (2                                                | )          | (29 | ) |
|                                                                                 |       |                                              |       |   |   |
| Cash Flows From  Financing Activities:                                               |       |                                              |       |   |   |
| Net proceeds  from common stock sold under the Standby Equity Distribution Agreement |       | —                                            |       | 1,139 |   |
| Proceeds from  secured convertible notes                                             |       | —                                            |       | 7,700 |   |
| Proceeds from  secured convertible note, related party                               |       | —                                            |       | 550 |   |
| Payments on  short-term convertible debenture                                        |       | —                                            |       | (548 | ) |
| Proceeds from  warrant exercise                                                      |       | 1,067                                             |       | 6,123 |   |
| Offering costs  for debt and equity transactions                                     |       | (106                                              | )          | (1,876 | ) |
| Net cash provided  by financing activities                                           |       | 961                                               |       | 13,088 |   |
|                                                                                 |       |                                              |       |   |   |
| Net increase (decrease)  in cash and cash equivalents                                |       | (3,152                                            | )          | 6,813 |   |
| Cash and cash  equivalents - beginning of year                                       |       | 3,421                                             |       | 146 |   |
| Cash and cash equivalents - end of period                                            |       | $                                                 | 269        |   | $ | 6,959 |   |

 

*Seeaccompanying notes to condensed financial statements.*

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**ORCHESTRA THERAPEUTICS, INC.**

**Notes to Condensed FinancialStatements (unaudited)**

**Note 1 – The Company:**

Orchestra Therapeutics,Inc., a Delaware Corporation, is an immuno-pharmaceutical company focused ondeveloping products to treat autoimmune diseases.  Our lead immune-based therapeutic productcandidate is NeuroVaxTM for the treatment of multiple sclerosis(MS).  NeuroVaxTM isdesigned to stimulate pathogen-specific immune responses aimed at slowing orhalting the rate of disease progression.

In addition to MS, wehave proprietary technology and prior clinical experience for evaluation ofpeptide-based immune therapies for rheumatoid arthritis (“RA”) andpsoriasis.  We are conductingpre-clinical work with human samples with various prestigious academic institutionstoward the development of several therapeutic vaccines to treat otherautoimmune diseases including RA and psoriasis.

We have completed ourtransition to an autoimmune diseases development company from our origins as anHIV vaccine development company.  Overthe past five years we have increased our focus on our autoimmune diseaseprogram, and in particular NeuroVaxTM and MS; at the beginning of the period ourfocus was almost exclusively on HIV.

During the quarter theCompany scaled back operations at its King of Prussia, Pennsylvania (KOP)facility which resulted in a reduction in its workforce and a one timeseverance charge of $75,000.  Theremaining employees were given a six month employment agreement and a promiseof a stay bonus.  The stay bonus of$226,000 is being expensed ratably over the six month service period.

On August 24, 2007 theCompany laid off almost all of its employees and discontinued its NeuroVaxTM multiple sclerosis PII trial which was beingenrolled in Eastern Europe. The Company has hired a broker and is attempting tosell its HIV manufacturing assets and intellectual property. The proceeds fromthe sale of these assets will be used to pay its creditors. The Company iscurrently evaluating strategic options related to its autoimmunetechnology.  Additionally, on August 24,2007 Dr. Joseph O’Neill’s employment was terminated, without cause, inconjunction with the reorganization of the Company. Dr. O’Neill’s severance perhis 2005 employment agreement is being accrued by the Company and will be paidwhen the Company’s KOP facility is sold.

The Company believes,based on consultations with its broker, that the net realizable value for thepotential sale of its KOP facility equals or exceeds the net book value of theKOP facility assets of $2,299,000  atJune 30, 2007.

On July 23, 2007,Cheshire Associates (“Cheshire”) invested $250,000 in a bridge transaction withthe Company..  The Company issued a 15%Secured Promissory Note to Cheshire in the principal amount of $250,000 (the “Note”).and issued 500,000 shares of the Company’s common stock to Cheshire.  The Note accrues interest at the rate of 15%per annum and matures on the earlier of December 1, 2007 or immediately beforethe closing of a financing which raises over $10,000,000 for the Company.  In connection with this transaction, on July23, 2007, the Company also entered into a Security Agreement with Cheshire.

On August 28, 2007,Spencer Trask Investment Partners LLC (“STIP”) made a $150,000 investment inthe Company.  In exchange STIP received aSenior Subordinated Secured Promissory Note, due on January 1, 2008 (the “STIPNote”) in the principal amount of $450,000****as well as****600,000 shares of common stock of the Company.  The STIP Note and shares of common stock wereissued pursuant to a Securities Purchase Agreement between the Company andSpencer Trask, dated August 28, 2007, and is secured by the grant of a securityinterest in all of the assets of the Company pursuant to the terms of aSecurity Agreement, dated the same date, by the Company in favor of SpencerTrask.  On August 28, 2007, the Companyalso entered into a Registration Rights Agreement with Spencer Trask.  Pursuant to the Registration RightsAgreement, the Company agreed to register Spencer Trask’s shares of commonstock issued under the Securities Purchase Agreement.

All numbers herein havebeen adjusted to reflect our 1-for-100 reverse stock split of December 2006.

**Note 2 – Interim FinancialStatements:**

The accompanying condensed balance sheet as of June30, 2007 and the condensed statements of operations and of cash flows for thethree and six months ended June 30, 2007 and 2006 have been prepared byOrchestra Therapeutics, Inc. (the “Company”) and have 

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not been audited. These financial statements, in theopinion of management, include all adjustments (consisting only of normalrecurring accruals) necessary for a fair presentation of the financialposition, results of operations and cash flows for all periods presented. Thefinancial statements should be read in conjunction with the financialstatements and notes thereto included in the Company’s Annual Report on Form10-K filed for the year ended December 31, 2006. Interim operating results arenot necessarily indicative of operating results for the full year.

The preparation of financial statements in conformitywith generally accepted accounting principles requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period. Actual results could differ from those estimates.

Certain prior year amounts have been reclassified to conform to the currentyear presentation.

**Note 3 *–*Going Concern:**

The accompanying financial statements have beenprepared on a going concern basis, which contemplates the realization of assetsand the satisfaction of liabilities in the normal course of business. The Companyhas incurred net losses since inception (but for the $238,640,000 cumulativegain on warrant liability marked to fair value) and has an accumulated deficitof $157,408,000 and cash and cash equivalents of $269,000 as of June 30, 2007.The Company will not generate meaningful revenues in the foreseeable future. Thesefactors, among others, raise substantial doubt about the Company’s ability tocontinue as a going concern. The Company’s independent registered publicaccounting firm, LevitZacks, indicated in its audit report on the 2006financial statements that there is substantial doubt about the Company’sability to continue as a going concern.

The financial statementsdo not include any adjustments relating to the recoverability andclassification of recorded asset amounts or the amounts and classification ofliabilities that might be necessary should the Company be unable to continue asa going concern.

In July and August 2007, the Company received loanproceeds of $400,000 from certain investors (see Note 7).  The Company is currently being funded on amonth-to-month basis by STIP while it attempts to sell its KOP facility;however, no assurance can be given that the Company will be able to obtainadditional financing when and as needed in the future.

**Note 4 – Net Income (Loss) per Share:**

Basic and diluted net loss per share was computedusing the weighted average number of common shares outstanding, 10,519,000 and9,853,000 for the three and six months ended June 30, 2007, respectively.Potentially dilutive securities are excluded from the diluted net loss pershare calculation for the three months and six months ended June 30, 2007 asthe effect would be antidilutive. As of June 30, 2007 potentially dilutiveshares not included are 137,000 shares for outstanding employee stock options,4,940,000 shares issuable under convertible notes payable, 3,499,000 sharesissuable under warrants outstanding, and 94,000 shares issuable under Class BWarrants outstanding.

The following is a reconciliation of net income andshare amounts used in the computations of income (loss) per share for the threeand six months ended June 30, 2006 (in thousands):
|                                                          | ** ** | **Three Months  Ended  June 30, 2006** | ** ** | **Six Months  Ended  June 30, 2006** | ** ** |
|----------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| Net income used  in computing basic net income per share |       | $                                                     | 104,000    |                                                | $          | 199,573 |   |
| Impact of  assumed conversions:                          |       |                                                  |       |                                                |       |
| 8% interest on convertible debentures                    |       | 225                                                   |       | 379                                                 |       |
| Impact of equity  classified as liability                |       |                                                  |       |                                                |       |
| Gain on warrant liability marked to fair value           |       | (111,521                                              | )          | (226,180                                            | )          |
| Net loss used in  computing diluted net loss per share   |       | $                                                     | (7,296     | )                                                   | $          | (26,228 | ) |

 

The weighted average shares outstanding used in thebasic net income per share computations for the three and six months ended June30, 2006 were 3,298,590 and 2,278,320, respectively. In determining the numberof shares used in computing diluted loss per share, the Company addedapproximately 16,000,000 potentially dilutive securities, mostly attributed tothe 2006 Private Placement. As a result, the diluted loss per share was $0.39and $1.50 for the three and six months ended June 30, 2006.

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**Note 5 –** Stockholders’ Equity:

*2006 Private Placement Convertible Notes Activity:*  During the six months ended June 30, 2007,$195,000 of outstanding principal plus accrued interest of $15**,**000 was converted into approximately 105,000 shares of theCompany’s common stock.

*2006 Private Placement InvestorWarrant Activity:*  InMarch 2007, the Company entered into a Warrant Exercise and Price Protectionarrangement with certain warrant holders of the 2006 Private Placement.  This arrangement included a special warrantexercise inducement whereby (i) the warrant holder would receive 2.5 shares ofCompany common stock for each $2.00 of second tranche warrant exercise pricepaid to the Company (this equates to an effective price of $0.80 per share) and(ii) the warrant holder would receive short-term ratchet-style price protection(through September 30, 2007) on March 2007 warrant exercises. Under the specialWarrant Exercise and Price Protection arrangement, 533,625 second tranchewarrants were exercised during the first quarter of 2007. The Company receivedgross proceeds totaling $1,067,000 (net proceeds to the Company were $961,000after $106,000 of cash commissions paid to the placement agent), and issuedapproximately 1,334,000 shares of common stock (of which approximately 206,000shares were subscribed at March 31, 2007 and subsequently issued during April2007). The remaining 5,447,625 unexercised warrants from the second trancheexpired on March 30, 2007.

The Warrant Exercise andPrice Protection arrangement resulted in a non-cash charge to operations of$940,000 during the first quarter of 2007 representing beneficial inducementcost.

*Warrants Issued for Limited Recourse Support:*  In connection with the limited recourseinterest support on the 2006 Private Placement convertible notes, Spencer TraskIntellectual Capital Company LLC (“STIC”) earned approximately 63,000 and127,000 seven-year warrants to purchase the Company’s common stock at $2.00 pershare for the three and six months ended June 30, 2007, respectively.  These warrants were valued utilizing theBlack-Scholes option-pricing model (“BSOPM”) and the Company recognized thevalue of these warrants, $39,000 and $121,000 for the three and six monthsended June 30, 2007, respectively, as interest expense at the time of issuance.

*Commissions Paid and WarrantsIssued to Placement Agent:* Upon exercise of the 2006 Private Placement investor warrants, SpencerTrask Ventures, Inc. (“STVI”) was entitled to a commission equal to 10% of thewarrant exercise proceeds in cash plus seven-year placement agent warrants topurchase a number of shares of the Company’s common stock (at $2.00 per share)equal to 20% of the number of exercised warrants. As a result of the exerciseof 533,625 second tranche warrants during the first quarter of 2007, STVIbecame entitled to approximately $106,000 in cash and 106,000 additionalplacement agent warrants. The exercise price per share of the 106,000 additionalplacement agent warrants is at $0.80 instead of $2.00, as a result of anamendment related to the Warrant Exercise and Price Protectionarrangement.  STVI has chosen to sharesome of this compensation with its employees and/or its selected dealers. STVI willretain approximately 23,000 warrants of the 106,000 warrants earned during thefirst quarter of 2007.

*Antidilution Adjustments:*  The 2006 Private Placement (including theplacement agent warrants) resulted in weighted-average antidilution adjustmentsunder various warrants held by Cheshire Associates LLC (“Cheshire”) resultingin them becoming exercisable for an aggregate of 1,070,731 shares of commonstock, instead of the 338,091 shares of common stock for which they had beenexercisable before the 2006 Private Placement, and at a blended exercise priceof $9.72 instead of at a blended exercise price of $31.00. Following theWarrant Exercise and Price Protection exercises during the six month periodended June 30, 2007 and the expiration of the remaining 5,447,625 unexercisedsecond tranche warrants, the warrants held by Cheshire are now exercisable foran aggregate of 934,120 shares of common stock at a blended exercise price of$11.14 per share.

**Note 6** – **Commitmentsand Contingencies:**

On October 3, 2006 the Company reached agreement withclass counsel to settle the Company’s securities-law class action lawsuit forapproximately $9.6 million. In May 2007, the federal court gave final approvalto the settlement. The Company also reached an agreement to settle the relatedCalifornia state-court derivative lawsuit for approximately $0.25 million,which settlement would also be funded entirely by the Company’s insurers, plusagreement to adopt certain corporate governance requirements. The settlements,which include no admission of wrongdoing by the Company, or any defendants, hadno effect on the Company’s operations, cash flow, or financial position as theyare within insurance limits. The settlements also include company officers whowere named in the lawsuits.

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**7** – **SubsequentEvents:**

On July 23, 2007,Cheshire Associates (“Cheshire”) invested $250,000 in a bridge transaction withthe Company..  The Company issued a 15%Secured Promissory Note to Cheshire in the principal amount of $250,000 (the “Note”).and issued 500,000 shares of the Company’s common stock to Cheshire.  The Note accrues interest at the rate of 15%per annum and matures on the earlier of December 1, 2007 or immediately beforethe closing of a financing which raises over $10,000,000 for the Company.  In connection with this transaction, on July23, 2007, the Company also entered into a Security Agreement with Cheshire.

On August 28, 2007,Spencer Trask Investment Partners LLC (“STIP”) made a $150,000 investment inthe Company.  In exchange STIP received aSenior Subordinated Secured Promissory Note, due on January 1, 2008 (the “STIPNote”) in the principal amount of $450,000****as well as****600,000 shares of common stock of the Company.  The STIP Note and shares of common stock wereissued pursuant to a Securities Purchase Agreement between the Company andSpencer Trask, dated August 28, 2007, and is secured by the grant of a securityinterest in all of the assets of the Company pursuant to the terms of aSecurity Agreement, dated the same date, by the Company in favor of SpencerTrask.  On August 28, 2007, the Companyalso entered into a Registration Rights Agreement with Spencer Trask.  Pursuant to the Registration RightsAgreement, the Company agreed to register Spencer Trask’s shares of common stockissued under the Securities Purchase Agreement.

**Item 2. Management’s Discussion andAnalysis of Financial Condition and Results****of Operations**

The following discussion contains forward-lookingstatements concerning our liquidity, capital resources, financial condition,results of operation and timing of anticipated revenues and expenditures. Suchstatements are subject to risks and uncertainties that could cause actualresults to differ materially from those projected. Factors that could cause orcontribute to such differences include those discussed under “Risk Factors,” aswell as those discussed elsewhere in this Form 10-Q. The following discussionshould be read in conjunction with our financial statements and notes theretoincluded elsewhere in this Form 10-Q. Except for our ongoing obligation todisclose material information as required by federal securities laws, weundertake no obligation to publicly release the result of any revisions tothese forward-looking statements that may be indicated in order to reflectevents or circumstances after the date hereof or to reflect the occurrence ofunanticipated events.

**Overview**

Orchestra Therapeutics,Inc., a Delaware Corporation, is an immuno-pharmaceutical company focused ondeveloping products to treat autoimmune diseases.  Our lead immune-based therapeutic productcandidate is NeuroVaxTM for the treatment of multiple sclerosis(MS).  NeuroVaxTM isdesigned to stimulate pathogen-specific immune responses aimed at slowing orhalting the rate of disease progression.

In addition to MS, wehave proprietary technology and prior clinical experience for evaluation ofpeptide-based immune therapies for rheumatoid arthritis (“RA”) andpsoriasis.  We are conductingpre-clinical work with human samples with various prestigious academicinstitutions toward the development of several therapeutic vaccines to treatother autoimmune diseases including RA and psoriasis.

We have completed ourtransition to an autoimmune diseases development company from our origins as anHIV vaccine development company.  Overthe past five years we have increased our focus on our autoimmune diseaseprogram, and in particular NeuroVaxTM and MS; at the beginning of the period ourfocus was almost exclusively on HIV.

During the quarter theCompany scaled back operations at its King of Prussia, Pennsylvania (KOP)facility which resulted in a reduction in its workforce and a one timeseverance charge of $75,000.  Theremaining employees were given a six month employment agreement and a promiseof a stay bonus.  The stay bonus of$226,000 is being expensed ratably over the six month service period.

On August 24, 2007 theCompany laid off almost all of its employees and discontinued its NeuroVaxTM multiple sclerosis PII trial which was beingenrolled in Eastern Europe. The Company has hired a broker and is attempting tosell its HIV manufacturing assets and intellectual property. The proceeds fromthe sale of these assets will be used to pay its creditors. The Company iscurrently evaluating strategic options related to its autoimmunetechnology.  Additionally, on August 24,2007 Dr. Joseph O’Neill’s employment was terminated, without cause, inconjunction with the reorganization of the Company. Dr. O’Neill’s severance perhis 2005 employment agreement is being accrued by the Company and will be paidwhen the Company’s KOP facility is sold.

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The Company believes,based on consultations with its broker, that the net realizable value for thepotential sale of its KOP facility equals or exceeds the net book value of theKOP facility assets of $2,299,000  atJune 30, 2007.

On July 23, 2007,Cheshire Associates (“Cheshire”) invested $250,000 in a bridge transaction withthe Company..  The Company issued a 15%Secured Promissory Note to Cheshire in the principal amount of $250,000 (the “Note”).and issued 500,000 shares of the Company’s common stock to Cheshire.  The Note accrues interest at the rate of 15%per annum and matures on the earlier of December 1, 2007 or immediately beforethe closing of a financing which raises over $10,000,000 for the Company.  In connection with this transaction, on July23, 2007, the Company also entered into a Security Agreement with Cheshire.

On August 28, 2007,Spencer Trask Investment Partners LLC (“STIP”) made a $150,000 investment inthe Company.  In exchange STIP received aSenior Subordinated Secured Promissory Note, due on January 1, 2008 (the “STIPNote”) in the principal amount of $450,000****as well as****600,000 shares of common stock of the Company.  The STIP Note and shares of common stock wereissued pursuant to a Securities Purchase Agreement between the Company andSpencer Trask, dated August 28, 2007, and is secured by the grant of a securityinterest in all of the assets of the Company pursuant to the terms of a SecurityAgreement, dated the same date, by the Company in favor of Spencer Trask.  On August 28, 2007, the Company also enteredinto a Registration Rights Agreement with Spencer Trask.  Pursuant to the Registration RightsAgreement, the Company agreed to register Spencer Trask’s shares of commonstock issued under the Securities Purchase Agreement.

We caution investors not to be misled by the “gain onwarrant liability marked to fair value” reported for the three and six monthsended June 30, 2007 and June 30, 2006, and the resulting net income we reportedfor the three and six months June 30, 2006. Our operations are notprofitable.  Indeed, our operations usedapproximately $6,246,000 of cash for the six months ended June 30, 2006, and5,011,000 for the six months ended June 30, 2007, excluding the $900,000received from NovaRx, Inc. in January 2007.

In December 2006, we effected a 1-for-100 reversestock split.  All numbers in thisQuarterly Report have been adjusted to reflect the reverse stock split.

**Liquidity and Capital Resources**

As of June 30, 2007, we had an accumulated deficit of$157,408,000. We have not generated revenues from the commercialization of anyproduct.  We expect to continue to incursubstantial net operating losses over the next several years, which wouldimperil our ability to continue operations even if we can resolve our moreimmediate cash needs.  We may not be ableto generate sufficient product revenue to become profitable on a sustainedbasis, or at all, and do not expect to generate significant product revenuebefore 2012, if at all, unless they are earned through corporate collaborationsor new research and development agreements. We have operating and liquidity concerns due to our significant netlosses and negative cash flows from operations. We have $5,335,000 of securedindebtedness which matures on January 1, 2008. As a result of these and otherfactors, our independent registered public accounting firm, LevitZacks,indicates, in its report on the 2006 financial statements, that there issubstantial doubt about our ability to continue as a going concern.

In March 2007, we entered into a Warrant Exercise andPrice Protection arrangement with certain warrant holders of the 2006 PrivatePlacement.  This agreement included aspecial warrant exercise inducement whereby (i) the warrant holder wouldreceive 2.5 shares of our common stock for each $2.00 of warrant exercise pricepaid to us (this equates to an effective price of $0.80 per share) and, (ii)the warrant holder would receive short-term ratchet-style price protection(through September 30, 2007) on March 2007 warrant exercises.  Under the special Warrant Exercise and PriceProtection arrangement, 533,625 second tranche warrants were exercised duringthe first quarter of 2007.  We receivedgross proceeds totaling $1,067,000 (net proceeds to us were $961,000 after$106,000 of cash commissions paid to the placement agent), and issuedapproximately 1,334,000 shares of common stock (of which approximately 206,000shares were subscribed at March 31, 2007 and subsequently issued during April2007). The remaining 5,447,625 unexercised warrants from the second trancheexpired on March 30, 2007.

On July 23, 2007,Cheshire Associates (“Cheshire”) invested $250,000 in a bridge transaction withthe Company..  The Company issued a 15%Secured Promissory Note to Cheshire in the principal amount of $250,000 (the “Note”).and issued 500,000 shares of the Company’s common stock to Cheshire.  The Note accrues interest at the rate of 15%per annum and matures on the earlier of December 1, 2007 or immediately beforethe closing of a financing which raises over $10,000,000 for the Company.  In connection with this transaction, on July23, 2007, the Company also entered into a Security Agreement with Cheshire.

On August 28, 2007,Spencer Trask Investment Partners LLC (“STIP”) made a $150,000 investment inthe Company.  In exchange STIP received aSenior Subordinated Secured Promissory Note, due on January 1, 2008 (the “STIPNote”) in the principal amount of 

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$450,000****as well as****600,000 sharesof common stock of the Company.  The STIPNote and shares of common stock were issued pursuant to a Securities PurchaseAgreement between the Company and Spencer Trask, dated August 28, 2007, and issecured by the grant of a security interest in all of the assets of the Companypursuant to the terms of a Security Agreement, dated the same date, by theCompany in favor of Spencer Trask.  OnAugust 28, 2007, the Company also entered into a Registration Rights Agreementwith Spencer Trask.  Pursuant to theRegistration Rights Agreement, the Company agreed to register Spencer Trask’sshares of common stock issued under the Securities Purchase Agreement.

We need to raise additional capital immediately**. **The Company iscurrently being funded on a month-to-month basis by STIP while it attempts tosell its KOP facility; however, no assurance can be given that the Company willbe able to obtain additional financing when and as needed in the future.

We will need to raise very substantial additionalfunds over several years inorder to continue research and development,preclinical studies and clinical trials necessary to bring potential productsto market and to establish manufacturing and marketing capabilities.

We cannot provide assurance that such financing willbe available on acceptable terms, if at all. If we raise funds through futureequity arrangements, significant further dilution to stockholders might result.

**Results of Operations**

***Three and SixMonths Ended June 30, 2007 Compared to Three and Six Months Ended June 30,2006.***

***Revenues.***Werecorded revenues for the three and six months ended June 30, 2007 of $4,000and $8,000, respectively, the same as the $11,000 and $22,000 for thecorresponding period in 2006. We have not received any revenues from the saleof products and do not expect to derive revenue from the sale of any productsearlier than 2012, if at all.

***Research andDevelopment Expenses.***Our research and developmentexpenditures for the three and six months ended June 30, 2007 were $1,834,000and $4,103,000, respectively, as compared to $2,475,000 and $4,938,000 for thecorresponding period in 2006. The $641,000 decrease in research and developmentexpenses for the three month period ended June 30, 2007 compared with thecorresponding period in 2006 is attributable primarily to a decrease of$177,000 in licensed technology amortization due to our licensed technologybeing fully amortized at December 31, 2006 and an overall decrease of $266,000in administration, manufacturing and facility expenditures related to the scaleback of the HIV business.  In addition,clinical trials expenses during the second quarter of 2007 decreased $198,000compared with the corresponding period in 2006 representing a decrease of$170,000 associated with HIV clinical trials and a decrease of $28,000 inexpenses associated with MS clinical trials.

Research and development expenses decreased $835,000for the six month period ended June 30, 2007 compared with the six month periodended June 30, 2006.  This overalldecrease in research and development expenses for the six month period endedJune 30, 2007 compared with the corresponding period in 2006 is attributableprimarily to a decrease of $353,000 in licensed technology amortization due toour licensed technology being fully amortized at December 31, 2006 and anoverall decrease of $354,000 in administration, manufacturing and facilityexpenditures related to the scale back of the HIV business.  In addition, clinical trials expenses for thesix month period ended June 30, 2007 decreased $128,000 compared with thecorresponding period in 2006 representing a decrease of $449,000 associatedwith HIV clinical trials offset by a $321,000 increase in expenses associatedwith our current MS trials.

***General andAdministrative Expenses.***General and administrativeexpenses for the three and six months ended June 30, 2007 were $1,077,000 and$2,551,000 respectively, as compared to $1,469,000 and $2,798,000 for thecorresponding period in 2006. General and administrative expenses decreased$392,000 for the three month period ended June 30, 2007 compared to the threemonth period ended June 30, 2006 primarily due to a $189,000 decrease innon-cash employee stock-based compensation cost and a combined decrease inlegal, public relations and executive severance costs of $203,000.

General and administrative expenses decreased $247,000for the six month period ended June 30, 2007 compared to the six month periodended June 30, 2006 primarily due to a $354,000 decrease in non-cash employeestock-based compensation cost and combined $259,000 decrease in legal,administrative and executive severance costs. This overall decrease in expense for the period was offset by a $366,000increase in expenses associated with investor and public relations activities.

***Interest Expense.***Interestexpense for the three and six months ended June 30, 2007 was $1,030,000 and$2,160,000, respectively,  as compared to$3,632,000 and $4,862,000 for the corresponding period in 2006. The decrease of$2,602,000 and $2,702,000 for the 

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three and six months ended June 30, 2007 is primarilydue to the reduction in 2007 of debt discount accretion and interest expenseassociated with the notes issued in the 2006 Private Placement, issuing the Debenturefor $1,000,000  to Cornell Capital in2005 at a 12% interest rate, and for the accelerated accretion on debt discountfor early partial conversions by Cornell Capital and early payoff of the note.   In addition, the decrease reflects thepartial conversion during the first six months of 2006 of the 8% Mortgage Noteheld by Cheshire Associates LLC, which is an affiliate of our director andmajor stockholder Kevin Kimberlin.

In addition, the interest expense associated with theissuance of warrants to STIC for its limited recourse interest supportdecreased approximately $610,000 and $854,000 for the three and six monthsended June 30, 2007 as compared to the corresponding period in 2006.  The decrease in the value of the warrantsissued to STIC is primarily due to the decrease in our stock price, which isone of the assumptions utilized in the Black-Scholes option-pricing model (“BSOPM”)valuation of the warrants.

During the first quarter of 2007 we recognized anon-cash charge to operations of $940,000 representing beneficial inducementcost associated with the Warrant Exercise and Price Protection arrangement.

During the first quarter of 2006 we recognized anon-cash charge to operations of $14,095,000 representing beneficial inducementcost associated with the Note Exchange and Note Revision transactions withCheshire.

Pursuant to EITF No. 00-19, we are currently requiredto classify certain outstanding derivative instruments (primarily warrants) asa liability.  This warrant liability wasinitially established in March 2006 and the fair value of the warrant liabilityis remeasured utilizing the BSOPM at each reporting date.  We reported a gain on warrant liabilitymarked to fair value of $1,857,000 and $5,713,000 for the three and six monthsended June 30, 2007, respectively, as compared to $111,521,000 and $226,180,000for the corresponding period in 2006, using the assumptions in the tablebelow.  The decrease in the gain recordedeach quarter is attributable to a continued decrease in the company commonstock price since the respective prior period measurement dates, combined withthe expiration of the 2006 Private Placement warrants in March 2007..
| ** **                                                                    | ** ** | **March 31, 2007** | ** ** | **March 31, 2006** | ** ** | **June 30, 2007** | ** ** | **June 30, 2006** | ** ** |
|-------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Dividend yield                                                                |       | 0.0                          | %          | 0.0                          | %          | 0.0                         | %          | 0.0                         | %          |
| Expected  volatility - based on the Company’s three year historical rate |       | 161.95                       | %          | 139.61                       | %          | 164.87                      | %          | 162.62                      | %          |
| Risk-free  interest rate                                                      |       | 4.54                         | %          | 4.83                         | %          | 4.89                        | %          | 5.130                       | %          |
| Company common stock  price                                                   |       | $                            | 1.17       |                         | $          | 11.00                       |       | $                           | 0.61       |   | $ | 2.25 |   |
|                                                                               |            |                              |            |                              |            |                             |            |                             |            |  |  |  |  |

 

**Critical Accounting Policies and Estimates**

Thepreparation of financial statements in conformity with generally acceptedaccounting principles requires management to make estimates and assumptions incertain circumstances that affect amounts reported in the accompanying financialstatements and related footnotes.  Inpreparing these financial statements, management has made its best estimatesand judgments of certain amounts included in the financial statements, givingdue consideration to materiality. However, application of these accounting policies involves the exerciseof judgment and use of assumptions as to future uncertainties and, as a result,actual results could differ from these estimates.  Historically, there have been no significantdifferences between estimates recorded for impairment of intangibles andlong-lived assets or exit and disposal related costs compared to actualexpenses incurred.  In preparingour financial statements the most difficult, subjective and complex estimatesand the assumptions that deal with the greatest amount of uncertainty relate toour accounting for stock-based compensation, asset impairments and warrant liability associated with EITF No. 00-19,as described in Item 7 of our Annual Report on Form 10-K for the yearended December 31, 2006.

**Item 3. Quantitative and QualitativeDisclosures about Market Risk**

We invest our excess cash primarily in U.S. governmentsecurities and money market accounts. These instruments have maturities ofthree months or less when acquired. We do not utilize derivative financialinstruments, derivative commodity instruments or other market risk sensitiveinstruments, positions or transactions. Furthermore, our debt is at fixedrates. Accordingly, we believe that, while the instruments we hold are subjectto changes in the financial standing of the issuer of such securities, we arenot subject to any material risks arising from changes in interest rates,foreign currency exchange rates, commodity prices, equity prices or othermarket changes that affect market risk sensitive instruments.

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**Item 4.Controls and Procedures**

Mr. Michael K. Green, our principal executive officerand principal financial officer, after evaluating the effectiveness of ourdisclosure controls and procedures (as defined in Securities Exchange Act Rule13a-15(e)) have concluded that, as of June 30, 2007, our disclosure controlsand procedures are effective.

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**PART II –OTHER INFORMATION**

**Item 1. Legal Proceedings**

On October 3, 2006 the Company reached agreement withclass counsel to settle the Company’s securities-law class action lawsuit forapproximately $9.6 million. In May 2007, the federal court gave final approvalto the settlement. The Company also reached an agreement to settle the relatedCalifornia state-court derivative lawsuit for approximately $0.25 million,which settlement would also be funded entirely by the Company’s insurers, plusagreement to adopt certain corporate governance requirements. The settlements,which include no admission of wrongdoing by the Company, or any defendants, hadno effect on the Company’s operations, cash flow, or financial position as theyare within insurance limits. The settlements also include company officers whowere named in the lawsuits.

**Item 1A. Risk Factors**

Our future operating results are subject to a numberof factors, including:

***We need more cash immediately, and also on an ongoing basis.***

We have never generated any revenue from productsales. As of June 30, 2007, we had an accumulated deficit of approximately$157,408,000, cash and cash equivalents of only $269,000, a working capitaldeficiency of $10,180,000 and a deficiency in stockholders’ equity of$12,535,000.  Even after our July/August2007 bridge financing, we must raise additional capital immediately. In Julyand August 2007, the Company received loan proceeds of $400,000 from certaininvestors**. **TheCompany is currently being funded on a month-to-month basis by STIP while itattempts to sell its KOP facility; however, no assurance can be given thatthese monthly loans will continue or that the Company will be able to obtainadditional financing when and as needed in the future.

Because we do notanticipate generating any revenue from our products until at least 2012, if atall, we will continue to have negative cash flow.

We need to raisesubstantial additional capital to fund our operations and repay our loanobligations. We will need to raise substantial funds to continue our operationsand to conduct research and development, preclinical studies and clinicaltrials necessary to bring our potential products to market and to establishmanufacturing and marketing capabilities. We will continue to have limited cashresources. There can be no assurance that we will be successful in consummatingany financing transaction or, if consummated, that the terms and conditionswill not be unfavorable to us.

The timing and amount ofour future capital requirements will depend on many factors, including (but notlimited to):

·                  thetiming of approval to begin new clinical trials;

·                  ourability to raise additional funding and the amounts raised, if any;

·                  thetime and cost involved in obtaining regulatory approvals;

·                  continuedscientific progress in our research and development programs;

·                  thescope and results of preclinical studies and clinical trials;

·                  thecost of manufacturing scale-up and/or withdrawal;

·                  thecosts involved in filing, prosecuting and enforcing patent claims;

·                  competingtechnological and market developments;

·                  effectivecommercialization activities and arrangements;

·                  thecosts of defending against and settling lawsuits; and/or

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·                  otherfactors not within our control or known to us.

Our perceived momentum,and therefore also our access to capital, could be limited if we do notprogress in:

·                  obtainingregulatory approvals;

·                  our research anddevelopment programs;

·                  our preclinicaland clinical trials.

Our access to capitalalso could be limited by:

·                  overallfinancial market conditions;

·                  the securityinterest in substantially all of our assets in respect of indebtedness in anaggregate principal amount of $8,740,000;

·                  Potentialdilution which would occur upon the exercise or conversion of outstandingderivative securities which overlie approximately 8,700,000 shares of ourcommon stock.

***Our independent registered public accountants have expressedsubstantial doubt as to our ability to continue as a going concern.***

As of June 30, 2007, wehad an accumulated deficit of $157,408,000. We have not generated revenues fromthe commercialization of any product. We expect to continue to incur substantialnet operating losses over the next several years, which would imperil ourability to continue operations. Our cash currently on hand does not provide uswith adequate liquidity beyond the third quarter of 2007.  We have $5,335,000 of secured indebtednesswhich matures on January 1, 2008. We may not be able to generate sufficientproduct revenue to become profitable on a sustained basis, or at all, and donot expect to generate significant product revenue before 2012, if at all. Wehave operating and liquidity concerns due to our significant net losses andnegative cash flows from operations. As a result of these and other factors,our independent registered public accounting firm, LevitZacks, indicated, inits report on our 2006 financial statements, that there is substantial doubtabout our ability to continue as a going concern.

We have exited from ourhistoric HIV vaccine development business. Over the past five years we have increased our focus on our autoimmunedisease program, and in particular NeuroVaxTM and MS; at the beginning of theperiod our focus was almost exclusively on HIV

On August 24, 2007 theCompany laid off almost all of its employees and discontinued its Neurovaxmultiple sclerosis PII trial which was being enrolled in Eastern Europe. TheCompany has hired a broker and is attempting to sell its HIV manufacturingassets and intellectual property. The proceeds from the sale of these assetswill be used to pay its creditors. The Company is currently evaluatingstrategic options related to its autoimmune technology.  Additionally, on August 24, 2007 Dr. Joseph O’Neill’semployment was terminated, without cause, in conjunction with thereorganization of the Company. Dr. O’Neill’s severance per his 2005 employmentagreement is being accrued by the Company and will be paid when the Company’sKOP facility is sold.

The Company believes,based on consultations with its broker, that the net realizable value for thepotential sale of its KOP facility equals or exceeds the net book value of theKOP facility assets of $2,299,000  atJune 30, 2007.

Except for any proceedsfrom selling the KOP facility, it is unlikely that stockholders will receiveany return on the hundreds of millions of dollars we have invested in our HIVprogram since we were founded in 1987.

***Due to our low stock price, our recent financings have beenextraordinarily dilutive, and our stockholders can be expected to suffersignificant additional dilution in connection with any future financings.***

As part of our 2006 Private Placement, we offered andsold 80 units in a private securities offering, each unit comprising a $100,000principal amount 8% Senior Secured Convertible Promissory Note, due January 1,2008, and a warrant to purchase up to 150,000 shares of common stock at a priceof $2.00 per share. The principal plus accrued interest on the notes may beconverted into common

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stock at a conversion price equal to $2.00 per share.We have issued approximately 7,561,000 shares of common stock in respect ofnote conversions and warrant exercises through June 30, 2007. If the remainingnotes are converted in full, we would be required to issue approximately2,667,500 more shares of common stock. Additionally, our placement agent forthis offering, which is an affiliate of Kevin Kimberlin, a director and ourlargest stockholder, received warrants to purchase approximately 1,769,000 sharesof common stock at a price of $2.00 per share and warrants to purchaseapproximately 106,000 shares of common stock at $0.80 per share.

In March 2007, we entered into a Warrant Exercise andPrice Protection arrangement with certain warrant holders of the 2006 PrivatePlacement.  This agreement included aspecial warrant exercise inducement whereby (i) the warrant holder wouldreceive 2.5 shares of our common stock for each $2.00 of warrant exercise pricepaid to us (this equates to an effective price of $0.80 per share) and (ii) thewarrant holder would receive short-term ratchet-style price protection (throughSeptember 30, 2007) on March 2007 warrant exercises.  We issued approximately 1,334,000 shares ofcommon stock for the exercise of warrants under the Warrant Exercise and PriceProtection arrangement. The 1,334,000 shares are included in the previousparagraph’s figures.

On July 23, 2007,Cheshire Associates (“Cheshire”) invested $250,000 in a bridge transaction withthe Company..  The Company issued a 15%Secured Promissory Note to Cheshire in the principal amount of $250,000 (the “Note”).and issued 500,000 shares of the Company’s common stock to Cheshire.  The Note accrues interest at the rate of 15%per annum and matures on the earlier of December 1, 2007 or immediately beforethe closing of a financing which raises over $10,000,000 for the Company.  In connection with this transaction, on July23, 2007, the Company also entered into a Security Agreement with Cheshire.

On August 28, 2007,Spencer Trask Investment Partners LLC (“STIP”) made a $150,000 investment inthe Company.  In exchange STIP received aSenior Subordinated Secured Promissory Note, due on January 1, 2008 (the “STIPNote”) in the principal amount of $450,000****as well as****600,000 shares of common stock of the Company.  The STIP Note and shares of common stock wereissued pursuant to a Securities Purchase Agreement between the Company andSpencer Trask, dated August 28, 2007, and is secured by the grant of a securityinterest in all of the assets of the Company pursuant to the terms of aSecurity Agreement, dated the same date, by the Company in favor of SpencerTrask.  On August 28, 2007, the Companyalso entered into a Registration Rights Agreement with Spencer Trask.  Pursuant to the Registration RightsAgreement, the Company agreed to register Spencer Trask’s shares of commonstock issued under the Securities Purchase Agreement.

As a result of the 2006 Private Placement and the 2007Bridge Financing, our existing stockholders as of early 2006, after theconversion and exercise of the notes and warrants, hold only a fraction of theequity interest they previously held in the Company.

Although we urgently need to secure additionalfinancing, there can be no assurance that we will be successful in consummatingany financing transaction or, if consummated, that the terms and conditions ofthe financing will not be unfavorable to us. Any other future near-termfinancings will almost certainly involve substantial further dilution of outstandingequity. Any subsequent offerings may also require the creation or issuance of aclass or series of stock that by its terms ranks senior to the common stockwith respect to rights relating to dividends, voting and/or liquidation.

***Our stock has been delisted from Nasdaq and is subject topenny stock rules, which may make it more difficult for us to raise capital andfor you to sell your securities.***

In November 2005, ourstock and Class B warrants were delisted from the Nasdaq Stock Market (Nasdaq) dueto our failure to satisfy the Nasdaq continued listing criteria.  As a result, our stock is currently quoted onthe Over-the-Counter Bulletin Board quotation service (OTCBB). Securities traded on the OTCBB generally suffer from lower liquidity andgreater price volatility.  Additionally,because our stock price is currently considered a “penny stock” underregulations of the Securities and Exchange Commission, broker-dealers who buyand sell our securities are subject to rules that impose additional sales practicerequirements. These additional burdens imposed upon broker-dealers coulddiscourage broker-dealers from effecting transactions in our common stock,which could severely limit the market liquidity of the common stock andwarrants and your ability to sell our securities in the secondary market.  Being delisted also hurts our ability toraise additional financing, in part because many investors are unwilling totake large positions in stocks which do not trade on Nasdaq or a major stockexchange.

***Our failure to successfully develop our product candidatesmay cause us to cease operations.***

We have not completed thedevelopment of any products.  We aredependent upon our ability to successfully develop our product candidates andour failure to do so may cause us to cease operations.

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For 20 years we wereengaged in an effort to develop a vaccine against HIV.  We exited this program in August 2007  We have chosen to focus our developmentefforts on NeuroVaxTM and other autoimmune disease.  We cannot assure you that any of our drugcandidates will succeed in clinical trials or that we, or our corporatecollaborators, if any, will ever obtain any regulatory approvals for these drugcandidates.

The results of ourpreclinical studies and clinical trials may not be indicative of futureclinical trial results. A commitment of substantial financial and otherresources to conduct time-consuming research, preclinical studies and clinicaltrials will be required if we are to develop any products. None of ourpotential products may prove to be safe or effective in clinical trials.Approval by the U.S. FDA, or other regulatory approvals, including exportlicense permissions, may not be obtained and even if successfully developed andapproved, our products may not achieve market acceptance. Any productsresulting from our programs may not be successfully developed or commerciallyavailable until 2012 or later, if at all. Moreover, unacceptable toxicity orside effects could occur at any time in the course of human clinical trials or,if any products are successfully developed and approved for marketing, duringcommercial use of our products. Although preliminary research and clinicalevidence have shown our product candidates to be safe, the appearance of anyunacceptable toxicity or side effects could interrupt, limit, delay or abortthe development of any of our products or, if previously approved, necessitatetheir withdrawal from the market.

***The lengthy product approval process and uncertainty ofgovernment regulatory requirements may delay or prevent us from commercializingproducts.***

Clinical testing,manufacture, promotion, export and sale of our products are subject toextensive regulation by numerous governmental authorities in the United States,principally the FDA, and corresponding state and numerous foreign regulatoryagencies worldwide. This regulation may delay or prevent us fromcommercializing products. Noncompliance with applicable requirements can resultin, among other things, fines, injunctions, seizure or recall of products,total or partial suspension of product manufacturing and marketing, failure ofthe government to grant pre-market approval, withdrawal of marketing approvalsand criminal prosecution.

The regulatory processfor new therapeutic drug products, including the required preclinical studiesand clinical testing, is lengthy and expensive. We may not receive necessaryinternational regulatory or FDA clearances for our drug candidates in a timelymanner, or at all. The length of the clinical trial process and the number ofpatients regulatory agencies will require to be enrolled in the clinical trialsin order to establish the safety and efficacy of our products is uncertain.

Even if late-stageclinical trials for our drug candidates are initiated and successfullycompleted, the FDA and numerous foreign regulatory agencies may not approvethese candidates for commercial sale. We may encounter significant delays orexcessive costs in our efforts to secure necessary approvals. Regulatoryrequirements are evolving and uncertain. Future United States or foreignlegislative or administrative acts could also prevent or delay regulatoryapproval of our products. We may not be able to obtain the necessary approvalsfor clinical trials, manufacturing or marketing of any of our products underdevelopment. Even if commercial regulatory approvals are obtained, they mayinclude significant limitations on the indicated uses for which a product maybe marketed.

In addition, a marketedproduct is subject to continual regulatory review. Later discovery ofpreviously unknown problems or failure to comply with the applicable regulatoryrequirements may result in restrictions on the marketing of a product orwithdrawal of the product from the market, as well as possible civil orcriminal sanctions.

Among the otherrequirements for regulatory approval is the requirement that prospectivemanufacturers conform to the FDA’s Good Manufacturing Practices, or GMP,requirements. In complying with the FDA’s GMP requirements, manufacturers mustcontinue to expend time, money and effort in production, record keeping andquality control to assure that products meet applicable specifications andother requirements. Failure to comply and maintain compliance with the FDA’sGMP requirements subjects manufacturers to possible FDA regulatory action andas a result may have a material adverse effect on us. We, or our contractmanufacturers, if any, may not be able to maintain compliance with the FDA’sGMP requirements on a continuing basis. Failure to maintain compliance couldhave a material adverse effect on us.

The FDA has notdesignated expanded access protocols for our drug candidates as “treatment”protocols. The FDA may not determine that any of our drug candidates meet allof the FDA’s criteria for use of an investigational drug for treatment use.Even if one of our candidates is allowed for treatment use, third party payersmay not provide reimbursement for the costs of treatment. The FDA also may notconsider our product candidates under development to be appropriate candidatesfor accelerated approval, expedited review or “fast track” designation.

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Marketing any drugproducts outside of the United States will subject us to numerous and varyingforeign regulatory requirements governing the design and conduct of humanclinical trials and marketing approval. Additionally, our ability to exportdrug candidates outside the United States on a commercial basis is subject tothe receipt from the FDA of export permission, which may not be available on atimely basis, if at all. Approval procedures vary among countries and caninvolve additional testing, and the time required to obtain approval may beeven longer than that required to obtain FDA approval. Foreign regulatoryapproval processes include all of the risks associated with obtaining FDAapproval set forth above, and approval by the FDA does not ensure approval bythe health authorities of any other country.

Before we will bepermitted to any either of our drug candidates to foreign countries forclinical use in those countries, we need to meet a number of regulatoryrequirements. One of those requirements is that we must ensure that we canmanufacture the candidate at a United States manufacturing facility in a mannerthat is in “substantial compliance” with current United States GMPrequirements. We must provide the FDA with “credible scientific evidence” thatthe candidate would be safe and effective under the conditions of proposed usein foreign countries. There can be no assurance, however, that we willsuccessfully meet any or all of these requirements for the export of our drugcandidates, and if we are unable to successfully meet all regulatoryrequirements, we will not be permitted by the FDA to export our candidates toforeign countries for clinical use, even if the foreign governments were toapprove such use.

***Our patents andproprietary technology may not be enforceable and the patents******and proprietarytechnology of others may prevent us from commercializing******products. Some of our patents expirefairly soon.***

Although we believe our patents to be protected andenforceable, the failure to obtain meaningful patent protection for ourpotential products and processes would greatly diminish the value of ourpotential products and processes.

In addition, whether or not our patents are issued, orissued with limited coverage, others may receive patents, which contain claimsapplicable to our products. Patents we are not aware of may adversely affectour ability to develop and commercialize products. Also, our patents related toautoimmune diseases have expiration dates that range from 2010 to 2019. Thelimited duration of our patents could diminish the value of our potentialproducts and processes, particularly since we do not expect to generate anyrevenue from our products sooner than 2012, if at all.

The patent positions of biotechnology andpharmaceutical companies are often highly uncertain and involve complex legaland factual questions. Therefore, the breadth of claims allowed in biotechnologyand pharmaceutical patents cannot be predicted. We also rely upon non-patentedtrade secrets and know how, and others may independently develop substantiallyequivalent trade secrets or know how. We also rely on protecting ourproprietary technology in part through confidentiality agreements with ourcurrent and former corporate collaborators, employees, consultants and somecontractors. These agreements may be breached, and we may not have adequateremedies for any breaches. In addition, our trade secrets may otherwise becomeknown or independently discovered by our competitors. Litigation may benecessary to defend against claims of infringement, to enforce our patentsand/or to protect trade secrets. Litigation could result in substantial costsand diversion of management efforts regardless of the results of thelitigation. An adverse result in litigation could subject us to significantliabilities to third parties, require disputed rights to be licensed or requireus to cease using proprietary technologies.

Our products and processes may infringe, or be foundto infringe, on patents not owned or controlled by us. If relevant claims ofthird-party patents are upheld as valid and enforceable, we could be preventedfrom practicing the subject matter claimed in the patents, or be required toobtain licenses or redesign our products or processes to avoid infringement.

***Technologicalchange and competition may render our potential products******obsolete.***

The pharmaceutical and biotechnology industriescontinue to undergo rapid change, and competition is intense and we expect itto increase. Competitors may succeed in developing technologies and productsthat are more effective or affordable than any that we are developing or thatwould render our technology and products obsolete or noncompetitive. Many ofour competitors have substantially greater experience, financial and technicalresources and production and development capabilities than we. Accordingly,some of our competitors may succeed in obtaining regulatory approval forproducts more rapidly or effectively than we, or develop or acquiretechnologies and products that are more effective and/or affordable than anythat we are developing.

***Our lack ofcommercial manufacturing and marketing experience and our******dependence on thirdparties for manufacturing may prevent us from successfully******commercializing products.***

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We have arrangements with third party contractmanufacturing companies to manufacture our product candidates. We may encountercosts, delays and /or other difficulties in producing, packaging anddistributing our clinical trials and finished product. Further, contractmanufacturers must also operate in compliance with the GMP requirements;failure to do so could result in, among other things, the disruption of ourproduct supplies. Our potential dependence upon third parties for themanufacture of our products may adversely affect our profit margins and ourability to develop and deliver products on a timely and competitive basis.

The manufacturing process of our products involves anumber of steps and requires compliance with stringent quality controlspecifications imposed by us and by the FDA. Moreover, our products can bemanufactured only in a facility that has undergone a satisfactory inspectionand certification by the FDA. For these reasons, we would not be able toquickly replace our manufacturing capacity if we were unable to use ourmanufacturing facilities as a result of a fire, natural disaster (including anearthquake), equipment failure or other difficulty, or if our manufacturingfacilities are deemed not in compliance with the GMP requirements, and thenon-compliance could not be rapidly rectified. Our inability or reducedcapacity to manufacture our products would prevent us from successfully commercializingour products.

We have no experience in the sales, marketing anddistribution of pharmaceutical or biotechnology products. Thus, our productsmay not be successfully commercialized even if they are developed and approvedfor commercialization and even if we can manufacture them. In addition, ourcompetitors will have significantly greater marketing resources and power thanwe will.

***We may be unable toenter into collaborations.***

Our current development strategy is to seekcollaborative arrangements with larger pharmaceutical companies for theclinical development and commercialization of our product candidates. If we areable to enter into such arrangements, we expect that a large portion of theongoing development costs for our drug candidates would be funded by ourcollaborative partners. However, we may be unable to negotiate collaborativearrangements on favorable terms, or at all, and any future collaborativearrangements may not be successful or continue. If we are unable to enter intofavorable collaborative arrangements, we expect that our future capitalrequirements would increase and we may be required to delay or curtaildevelopment efforts for one or both of our drug candidates.

***Adversedeterminations and pressures concerning product pricing, reimbursement******and related matterscould prevent us from successfully commercializing any of******our product candidates.***

Our ability to earn revenue on any of our productswill depend in part on the extent to which patient reimbursement for the costsof the products and related treatments will be available from government healthadministration authorities, private health coverage insurers, managed careorganizations and other organizations. Failure of patients to obtainappropriate cost reimbursement may prevent us from successfully commercializingany of our other products. Third-party payers are increasingly challenging theprices of medical products and services. If purchasers or users of any of ourother products are not able to obtain adequate reimbursement for the cost ofusing the products, they may forego or reduce their use. Significantuncertainty exists as to the reimbursement status of newly approved health careproducts and whether adequate third party coverage will be available.

***Kevin Kimberlin, amember of our Board of Directors, beneficially owns approximately 24% of ouroutstanding common stock and has the rights to acquire approximately 3,522,000additional shares of our common stock, which could******theoretically result in ownership ofup to approximately 41% of our outstanding******shares and could allow him tocontrol or influence stockholder votes.***

Kevin B. Kimberlin, a member of our Board ofDirectors, together with his affiliates and/or related parties, currently ownsof record approximately 24 % of our outstanding shares of common stock. He andthey also have the right to acquire, through the conversion of indebtedness andthe exercise of options and warrants beneficially owned by them, approximately3,522,000 additional shares. If his/their indebtedness, options and warrants(but not those of anyone else) were to be converted and exercised in full, Mr.Kimberlin and his affiliates and/or related persons would own approximately 41%of our outstanding shares of common stock on a post-conversion/exercise basis.

As a result of ownership of our common stock and theability to acquire additional shares, Mr. Kimberlin and his affiliates and/orrelated persons have the ability to influence, and possibly control,substantially all matters requiring approval by our stockholders, including theelection of directors and the approval of mergers or other business combinationtransactions. If your interests as a stockholder are different from hisinterests, you may not agree with his decisions and you might be adverselyaffected thereby.

***Mr. Kimberlin isalso a secured creditor.***

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As collateral for the Mortgage Note held by Cheshireand the Qubit Note, which have principal amounts of $3,155,000 and $250,000 andmature on January 1, 2009 and January 1, 2008, respectively, parties affiliatedwith and/or associated with Kevin Kimberlin have a perfected security interest(shared with the 2006 Private Placement note holders) in our intellectualproperty and other assets. Pursuant to the security agreement, we must complywith covenants with respect to these assets. The security interests andcovenants could impair our ability to enter into collaborative and licensingarrangements.

***We have significantindebtedness that will mature soon, before our operations can******repay it.***

We have $5,335,000 of secured debt due on January 1,2008 and $3,155,000 of secured debt due on January 1, 2009. We will not haveany product revenues before those dates. There can be no assurance that we canpay, refinance or extend this debt.

***Our reporting ofprofits may confuse investors and result in lawsuits against******us.***

Due to EITF No. 00-19, we reported a large net incomefor the year ended December 31, 2006, and a reduced net loss for the three andsix months ended June 30, 2007.  Ifinvestors fail to understand that this net income is an artifice which does notreflect our unprofitable operations, our stock price might rise temporarily andthen fall again. This scenario might then lead disappointed investors to sue uson a variety of possible legal theories.

***Our certificate of incorporation and bylaws includeprovisions that could make attempts by stockholders to change management moredifficult.***

The approval of 66 2/3%of our voting stock is required to approve specified transactions and to takespecified stockholder actions, including the calling of special meetings ofstockholders and the amendment of any of the anti-takeover provisions,including those providing for a classified board of directors, contained in ourcertificate of incorporation. Further, we have a “poison pill” stockholderrights plan, which would cause substantial dilution to the ownership of aperson or group that attempts to acquire us on terms not approved by our Boardof Directors and may have the effect of deterring hostile takeover attempts.The substantial aggregate equity positions of Mr. Kimberlin and hisaffiliates would make a hostile takeover attempt very unlikely. The practicaleffect of these provisions is to require a party seeking control of us tonegotiate with our Board of Directors, which could delay or prevent a change incontrol. These provisions could limit the price that investors might be willingto pay in the future for our securities and make attempts by stockholders tochange management more difficult.

We are subject to theanti-takeover provisions of Section 203 of the Delaware GeneralCorporation Law, which prohibits us from engaging in a “business combination”with an “interested stockholder” for a period of three years after the date ofthe transaction in which the person first becomes an “interested stockholder,”unless the business combination is approved in a prescribed manner. Theapplication of Section 203 also could have the effect of delaying orpreventing a change of control.

**Item 2. Unregistered Sales of EquitySecurities and Use of Proceeds**

No further disclosure required.

**Item 3. Defaults Upon SeniorSecurities**

None

**Item 4. Submission of Matters to aVote of Security Holders**

**None.**

**Item 5. Other Information**

None

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**Item 6. Exhibits**
| Exhibit  Number | ** ** | **Description of Document**                                                                                                                                  |
|-----------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |       |                                                                                                                                                         |
| 10.208.1 (1)    |       | Supplement to Prospectus Dated June 15, 2007, Press  release announcing discontinuation of our HIV vaccine development program                               |
|            |       |                                                                                                                                                         |
| 31.1            |       | Certification of the Principal Executive Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002/SEC Rule 13a-14(a).                              |
|            |       |                                                                                                                                                         |
| 31.2            |       | Certification of the Principal Financial Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002/SEC Rule 13a-14(a).                              |
|            |       |                                                                                                                                                         |
| 32.1            |       | Certification pursuant to Section 1350 of Chapter 63  of 18 U.S.C. as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of  2002/SEC Rule 13a-14(b). |
|            |       |                                                                                                                                                         |
| 32.2            |       | Certification pursuant to Section 1350 of Chapter 63  of 18 U.S.C. as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of  2002/SEC Rule 13a-14(b). |

 

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(1)           Incorporatedby reference to the Exhibit of the same number filed with our December 31, 2006Form 10-K.

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**SIGNATURES**

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned thereunto duly authorized.
|                        | ORCHESTRA THERAPEUTICS, INC. |
|------------------------|------------------------------|
|                   |                         |
| Date: October 2,  2007 | By:                          | /s/ Michael K. Green |   |
|                   |                         | Michael K. Green, |
|                   |                         | Chief Operating Officer & Chief Financial  Officer |

 

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**ExhibitIndex**
| Exhibit  Number | ** ** | **Description of Document**                                                                                                                                  |
|-----------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |       |                                                                                                                                                         |
| 31.1            |       | Certification of the Principal Executive Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002/SEC Rule 13a-14(a).                              |
|            |       |                                                                                                                                                         |
| 31.2            |       | Certification of the Principal Financial Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002/SEC Rule 13a-14(a).                              |
|            |       |                                                                                                                                                         |
| 32.1            |       | Certification pursuant to Section 1350 of Chapter 63  of 18 U.S.C. as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of  2002/SEC Rule 13a-14(b). |
|            |       |                                                                                                                                                         |
| 32.2            |       | Certification pursuant to Section 1350 of Chapter 63  of 18 U.S.C. as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of  2002/SEC Rule 13a-14(b). |

 

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