----

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**U.S. SECURITIES ANDEXCHANGE COMMISSION****Washington, D.C.  20549****FORM 10-Q**

**(Mark One)**
| ý | **QUARTERLY REPORT UNDER SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934** |
|--------|----------------------------------------------------------------------------------------|

**For the Quarterly Period Ended June 30, 2001**
| o | **TRANSITION REPORT UNDER SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934** |
|---|-----------------------------------------------------------------------------------------|

**For the transition period from          to         .**

**Commission File Number 000-30493**

| **BioNebraska, Inc.**                                              |
|--------------------------------------------------------------------|
| ****                                                               |
| (Exact  name of small business issuer as specified in its charter) |

** **

| **Delaware**                                                    | **47-0727668**                        |
|-----------------------------------------------------------------|---------------------------------------|
|                                                                 |                                       |
| (State or other  jurisdiction of incorporation or organization) | (I.R.S. Employer  Identification No.) |
|                                                            |                                  |
| **4130 N.W. 37th Street, Lincoln, Nebraska**                    | **68524-1637**                        |
|                                                                 |                                       |
| (Address  of principal executive offices)                       | Zip  Code                             |
|                                                            |                                  |
| **(402) 470-2100**                                              |
|                                                                 |
| (Issuer's  Telephone Number)                                    |

Checkwhether the issuer (1) filed all reports required to be filed by Section 13 or15(d) of the Exchange Act during the past 12 months (or for such shorter periodthat the registrant was required to file such report), and (2) has been subjectto such filing requirements for the past 90 days.       YES ý  NO o

Asof August 10, 2001, the Company had 7,361,254 shares of Common Stock, $.01 parvalue per share, outstanding.

----

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**BIONEBRASKA, INC.INDEX**

| **PART I.**    | **FINANCIAL INFORMATION** |
|----------------|---------------------------|
|           |
|           | ITEM 1.                   | FINANCIAL STATEMENTS |
|           |                      |   |
|           |                      | Condensed  Consolidated Balance Sheets as of June 30, 2001 and December 31, 2000 |
|           |                      | Condensed  Consolidated Statements of Operations for the three and six month periods  ended June 30, 2001 and 2000 |
|           |                      | Condensed  Consolidated Statements of Cash Flows for the six month periods ended June  30, 2001 and 2000 |
|           |                      | Notes  to Condensed Consolidated Financial Statements |
|           |                      |   |   |   |
|           | ITEM 2.                   | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |   |
|           |                      | Cautionary  Statement About Forward-Looking Statements |   |
|           |                      | Overview |   |
|           |                      | Results of Operations |   |
|           |                      | Liquidity and Capital  Resources |   |
|           |                      | Market Risk |   |
|           |                      |   |   |
|           | ITEM 3.                   | QUALITATIVE  AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK |   |
|           |                      |   |   |
| **PART II.**   | **OTHER  INFORMATION**    |   |
|           |                      |
|           | ITEM 1.                   | LEGAL  PROCEEDINGS |   |
|           | ITEM 2.                   | CHANGES  IN SECURITIES |   |
|           | ITEM 3.                   | DEFAULTS  UPON SENIOR SECURITIES |   |
|           | ITEM 4.                   | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS |   |
|           | ITEM 5.                   | OTHER  INFORMATION |   |
|           | ITEM 6.                   | EXHIBITS  AND REPORTS ON FORM 8-K |   |
|           |                      |   |   |
| **SIGNATURES** |                      |
|                |                           |  |  |  |  |  |

 

**BIONEBRASKA, INC.**(a development stage company)Condensed Consolidated BalanceSheets(unaudited)

|                                   | June 30,2001                                                                                                                                                              |        | December 31,2000 |        |
|----------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------|------------------|-------------|
|                                   |                                                                                                                                                                           |        |                  |        |
| ASSETS                                 |                                                                                                                                                                      |        |             |        |
|                                   |                                                                                                                                                                      |        |             |        |
|                                   | Current assets                                                                                                                                                            |        |             |        |   |
|                                   | Cash and cash equivalents                                                                                                                                                 | $           | 7,938,845        |        | $ | 9,492,135 |   |
|                                   | Prepaid expenses                                                                                                                                                          | 196,638     |             | 174,499     |   |
|                                   | Other current assets                                                                                                                                                      | 54,216      |             | 45,734      |   |
|                                   |                                                                                                                                                                           |        |                  |        |
|                                   | Total current assets                                                                                                                                                      | 8,189,699   |             | 9,712,368   |   |
|                                   |                                                                                                                                                                      |
|                                   | Property and equipment, net of  accumulated depreciation $3,327,898 and $2,973,722                                                                                        | 6,147,229   |             | 5,780,172   |   |
|                                   | Patents and patents licensed, net  of accumulated amortization of $195,961 and $170,529                                                                    | 689,683     |             | 663,437     |   |
|                                   | Deferred financing costs, net of  accumulated amortization of $256,344 and $128,172                                                                                       | 256,345     |             | 384,517     |   |
|                                   | Other assets                                                                                                                                                              | 37,599      |             | 32,599      |   |
|                                   |                                                                                                                                                                           |        |                  |        |
|                                   | Total assets                                                                                                                                                              | $           | 15,320,555       |        | $ | 16,573,093 |   |
|                                   |                                                                                                                                                                           |        |                  |        |
|                                   |                                                                                                                                                                      |        |             |        |
| LIABILITIES  AND SHAREHOLDERS' DEFICIT |                                                                                                                                                                      |        |             |        |
|                                   |                                                                                                                                                                      |        |             |        |
|                                   | Current liabilities:                                                                                                                                                      |        |             |        |   |
|                                   | Accounts payable                                                                                                                                                          | $           | 549,648          |        | $ | 628,374 |   |
|                                   | Accrued expenses                                                                                                                                                          | 317,589     |             | 288,354     |   |
|                                   | Capital lease obligations -  current portion                                                                                                                              | 614,208     |             | 617,251     |   |
|                                   | Notes payable - current portion                                                                                                                                           | 650,732     |             | 608,299     |   |
|                                   |                                                                                                                                                                      |             |             |             |   |
|                                   | Total current liabilities                                                                                                                                                 | 2,132,177   |             | 2,142,278   |   |
|                                   |                                                                                                                                                                      |             |             |             |   |
|                                   | Long-term liabilities:                                                                                                                                                    |        |             |        |   |
|                                   | Capital lease obligations - less  current portion                                                                                                                         | 793,682     |             | 1,036,871   |   |
|                                   | Notes payable - less current  portion                                                                                                                                     | 1,219,133   |             | 1,555,465   |   |
|                                   |                                                                                                                                                                      |             |             |             |   |
|                                   | Total long-term liabilities                                                                                                                                               | 2,012,815   |             | 2,592,336   |   |
|                                   |                                                                                                                                                                           |        |                  |        |
|                                   | Total liabilities                                                                                                                                                         | 4,144,992   |             | 4,734,614   |   |
|                                   |                                                                                                                                                                           |        |                  |        |
|                                   |
|                                   | Redeemable preferred stock                                                                                                                                                |
|                                   | Series A,F and A,E,F ($0.01 par  value, 211,750 and  411,750 shares  authorized, 121,018 and 138,088 issued and outstanding, at redemption value)                    | 16,010,233  |             | 16,675,502  |   |
|                                   |                                                                                                                                                                           |        |                  |        |
|                                   | Shareholders' deficit                                                                                                                                                     |
|                                   | Common stock, ($0.01 par value,  20,000,000 shares authorized, 7,360,454 and 7,329,845  shares issued and outstanding)                                               | 73,605      |             | 73,298      |   |
|                                   | Convertible preferred stock,  Series B,C,D,E,G,H and B,C,D,G ($0.01 par value; 496,500 and 216,500 shares  authorized, 245,174 and 148,104 shares issued and outstanding) | 2,452       |             | 1,481       |   |
|                                   | Additional paid-in capital                                                                                                                                                | 67,016,315  |             | 58,603,886  |   |
|                                   | Deficit  accumulated during development stage                                                                                                                             | (71,927,042 | )                | (63,515,688 | ) |
|                                   |                                                                                                                                                                      |             |             |             |   |
|                                   | Total shareholders' deficit                                                                                                                                               | (4,834,670  | )                | (4,837,023  | ) |
|                                   |                                                                                                                                                                           |        |                  |        |
|                                   | Total liabilities and  shareholders' deficit                                                                                                                              | $           | 15,320,555       |        | $ | 16,573,093 |   |
|                                   |                                                                                                                                                                           |        |                  |        |
|                                        |                                                                                                                                                                           |             |                  |             |  |  |  |  |  |  |  |  |  |

See accompanying notes to consolidatedfinancial statements

**BIONEBRASKA, INC.******(a development stage company)Condensed ConsolidatedStatement of Operations(unaudited)

|                                                                  | Three Months Ended  June 30,       |             | Six  Months Ended  June 30, |      | Cumulative period  From April 15,  1988 (date of  incorporation) to  June 30, 2001 |      |
|-----------------------------------------------------------------------|------------------------------------|------------------|-----------------------------|-----------|------------------------------------------------------------------------------------|-----------|
|                                                                  | 2001                               |             | 2000                        |      | 2001                                                                               |      | 2000 |   |   |
|                                                                  |                                    |             |                             |      |                                                                                    |      |  |   |  |   |
|                                                                  |                               |             |                        |      |                                                                               |      |   |   |   |   |
| Revenues                                                              | $                                  | 1,175            |                        | $         | 7,495                                                                              |      | $ | 2,493 |   | $ | 7,495 |   | $ | 3,662,870 |   |
|                                                                  |                                    |             |                             |      |                                                                                    |      |  |   |  |   |
|                                                                  |                               |             |                        |      |                                                                               |      |   |   |   |   |
| Operating costs and  expenses:                                        |                               |             |                        |      |                                                                               |      |   |   |   |   |
|                                                                  | General and administrative         | 753,202          |                        | 586,700   |                                                                               | 1,555,397 |   | 1,195,642 |   | 20,557,947 |   |
|                                                                  | Research and development           | 3,651,304        |                        | 3,345,851 |                                                                               | 6,658,462 |   | 6,437,338 |   | 54,945,045 |   |
|                                                                  |                                    |             |                             |      |                                                                                    |      |  |   |  |   |
|                                                                  | Total operating costs and expenses | 4,404,506        |                        | 3,932,551 |                                                                               | 8,213,859 |   | 7,632,980 |   | 75,502,992 |   |
|                                                                  |                                    |             |                             |      |                                                                                    |      |  |   |  |   |
| Operating loss                                                        | (4,403,331                         | )                | (3,925,056                  | )         | (8,211,366                                                                         | )         | (7,625,485 | ) | (71,840,122 | ) |
|                                                                  |                                    |             |                             |      |                                                                                    |      |  |   |  |   |
| Other income (expense)                                                |                               |             |                        |      |                                                                               |      |   |   |   |   |
|                                                                  | Interest income                    | 93,489           |                        | 201,953   |                                                                               | 203,642   |   | 413,725 |   | 1,800,901 |   |
|                                                                  | Interest expense                   | (198,182         | )                           | (73,389   | )                                                                                  | (403,630  | ) | (148,788 | ) | (1,887,821 | ) |
|                                                                  |                                    |             |                             |      |                                                                                    |      |  |   |  |   |
|                                                                  | (104,693                           | )           | 128,564                     |      | (199,988                                                                           | )         | 264,937 |   | (86,920 | ) |
|                                                                  |                                    |             |                             |      |                                                                                    |      |  |   |  |   |
| NET LOSS                                                              | $                                  |  (4,508,024 | )                           | $         |  (3,796,492                                                                   | )         | $ | (8,411,354 | ) | $ | (7,360,548 | ) | $ | (71,927,042 | ) |
|                                                                  |                                    |             |                             |      |                                                                                    |      |  |   |  |   |
|                                                                  |                               |             |                        |      |                                                                               |      |   |   |   |   |
| Preferred stock  dividends accreted and accumulating but not declared | $                                  | (810,984         | )                           | $         | (693,055                                                                           | )         | $ | (1,501,968 | ) | $ | (1,386,111 | ) | $ | (11,367,887 | ) |
|                                                                  |                                    |             |                             |      |                                                                                    |      |  |   |  |   |
|                                                                  |                               |             |                        |      |                                                                               |      |   |   |   |   |
| Net loss applicable to  common stock                                  | $                                  | (5,319,008       | )                           | $         | (4,489,547                                                                         | )         | $ | (9,913,322 | ) | $ | (8,746,659 | ) | $ | (83,294,929 | ) |
|                                                                  |                                    |             |                             |      |                                                                                    |      |  |   |  |   |
|                                                                  |                               |             |                        |      |                                                                               |      |   |   |   |   |
| Basic and diluted loss  per common share                              | $                                  | (0.72            | )                           | $         | (0.64                                                                              | )         | $ | (1.35 | ) | $ | (1.27 | ) | $ | (19.63 | ) |
|                                                                  |                                    |             |                             |      |                                                                                    |      |  |   |  |   |
|                                                                  |                               |             |                        |      |                                                                               |      |   |   |   |   |
| Average number of  common shares outstanding - basic and diluted      |                               |             |                        |      |                                                                               |      |   |   |   |   |
| 7,354,929                                                             |                               | 6,973,626        |                        | 7,355,974 |                                                                               | 6,903,207 |   | 4,243,236 |   |
|                                                                  |                                    |             |                             |      |                                                                                    |      |  |   |  |   |

See accompanyingnotes to consolidated financial statements

**BIONEBRASKA, INC.**(a development stage company)Condensed ConsolidatedStatement of Cash Flows(unaudited)

|                                                         | Six  Months Ended June 30,                                                     |       | Cumulative  period from April 15, 1988 (date of incorporation) to June 30, 2001 |       |
|--------------------------------------------------------------|--------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
|                                                              |                                                                           |       |
|                                                         | 2001                                                                           |       | 2000                                                                            |       |   |
|                                                         |                                                                                |       |                                                                                 |       |  |   |
|                                                         |                                                                           |       |                                                                            |       |   |   |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                       |                                                                           |       |                                                                            |       |   |   |
|                                                         | Net loss                                                                       | $          | (8,411,354                                                                      | )          | $ | (7,360,548 | ) | $ | (71,927,042 | ) |
|                                                         | Adjustments to reconcile net loss to net cashflows from  operating activities: |       |                                                                            |       |   |   |   |
|                                                         | Depreciation and amortization                                                  | 379,608    |                                                                            | 394,685    |   | 3,762,833 |   |
|                                                         | Amortization of deferred financing costs                                       | 128,172    |                                                                            | -          |   | 256,344 |   |
|                                                         | Acquired in process research and development                                   | -          |                                                                            | -          |   | 1,200,000 |   |
|                                                         | Stock-based compensation expense                                               | 174,174    |                                                                            | -          |   | 7,019,959 |   |
|                                                         | Changes in operating assets and liabilities:                                   |       |                                                                            |       |   |   |   |
|                                                         | Accounts receivable and other current assets                                   | (30,621    | )                                                                               | (6,701     | ) | (250,852 | ) |
|                                                         | Accounts payable and accrued expenses                                          | (49,491    | )                                                                               | 315,755    |   | 867,237 |   |
|                                                         |                                                                           |            |                                                                            |            |   |  |   |
|                                                         |                                                                           |       |                                                                            |       |   |   |
|                                                         | Net cash flows from operating activities                                       | (7,809,512 | )                                                                               | (6,656,809 | ) | (59,071,521 | ) |
|                                                         |                                                                           |            |                                                                            |            |   |  |   |
|                                                         |                                                                           |       |                                                                            |       |   |   |
| CASH FLOWS FROM INVESTING  ACTIVITIES:                       |                                                                           |       |                                                                            |       |   |   |
|                                                         | Purchase of property and equipment                                             | (721,233   | )                                                                               | (1,912,528 | ) | (9,475,127 | ) |
|                                                         | Increase in deposits and other assets                                          | (5,000     | )                                                                               | (18,337    | ) | (269,278 | ) |
|                                                         | Increase in patents                                                            | (51,678    | )                                                                               | -          |   | (892,938 | ) |
|                                                         | Acquisition of R&C, Inc. and GRFCo                                         | -          |                                                                            | -          |   | (1,200,000 | ) |
|                                                         |                                                                           |            |                                                                            |            |   |  |   |
|                                                         |                                                                           |       |                                                                            |       |   |   |
|                                                         | Net cash flows from investing activities                                       | (777,911   | )                                                                               | (1,930,865 | ) | (11,837,343 | ) |
|                                                         |                                                                           |            |                                                                            |            |   |  |   |
|                                                         |                                                                           |       |                                                                            |       |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                       |                                                                           |       |                                                                            |       |   |   |
|                                                         | Net proceeds from issuance of common stock                                     | 214,263    |                                                                            | 3,372,420  |   | 39,577,583 |   |
|                                                         | Net proceeds from issuance of preferred stock                                  | 7,360,000  |                                                                            | -          |   | 34,591,371 |   |
|                                                         | Proceeds from long-term obligations                                            | 71,841     |                                                                            | 274,042    |   | 5,511,273 |   |
|                                                         | Payments on notes payable and capital leases                                   | (611,971   | )                                                                               | (353,147   | ) | (2,233,518 | ) |
|                                                         | Proceeds from bridge notes payable                                             | -          |                                                                            | -          |   | 3,765,500 |   |
|                                                         | Payments on bridge notes payable                                               | -          |                                                                            | -          |   | (2,364,500 | ) |
|                                                         |                                                                           |            |                                                                            |            |   |  |   |
|                                                         |                                                                           |       |                                                                            |       |   |   |
|                                                         | Net cash flows from financing activities                                       | 7,034,133  |                                                                            | 3,293,315  |   | 78,847,709 |   |
|                                                         |                                                                           |            |                                                                            |            |   |  |   |
|                                                         |                                                                           |       |                                                                            |       |   |   |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS        | (1,553,290                                                                     | )          | (5,294,359                                                                      | )          | 7,938,845 |   |
|                                                         |                                                                           |       |                                                                            |       |   |   |
| CASH AND CASH  EQUIVALENTS AT BEGINNING OF PERIOD            | 9,492,135                                                                      |       | 18,393,567                                                                      |       | - |   |
|                                                         |                                                                                |       |                                                                                 |       |  |   |
|                                                         |                                                                           |       |                                                                            |       |   |   |
| CASH AND CASH  EQUIVALENTS AT END OF PERIOD                  | $                                                                              | 7,938,845  |                                                                            | $          | 13,099,208 |   | $ | 7,938,845 |   |
|                                                         |                                                                                |       |                                                                                 |       |  |   |
|                                                         |                                                                           |       |                                                                            |       |   |   |
| Supplemental  Disclosures of Investing Financing Activities: |                                                                           |       |                                                                            |       |   |   |
|                                                         |                                                                           |       |                                                                            |       |   |   |
|                                                         | Interest paid                                                                  | $          | 275,458                                                                         |       | $ | 148,788 |   | $ | 1,352,905 |   |
|                                                         |                                                                                |       |                                                                                 |       |  |   |
|                                                              |                                                                                |            |                                                                                 |            |  |  |  |  |  |  |  |  |

See accompanying notes to consolidatedfinancial statements

**BioNebraska,Inc.**Notesto Condensed Consolidated Financial StatementsJune 30, 2001 and 2000(unaudited)

| **(1)** | **Summary of Significant Accounting Policies** |
|---------|------------------------------------------------|

**Basis of Presentation -**Thecondensed consolidated balance sheet as of June 30, 2001, the condensedconsolidated statements of operations for the three and six month periods endedJune 30, 2001 and 2000 and the condensed consolidated statements of cash flowsfor the six month periods ended June 30, 2001 and 2000 have been prepared bythe Company without audit in accordance with accounting principles generallyaccepted in the United States of America. They do not include all of the information and footnotes required byaccounting principles generally accepted in the United States of America.  In the opinion of management, alladjustments (all of which are normal and recurring in nature) considerednecessary to present fairly the financial position at June 30, 2001, andresults of operations and cash flows for the periods presented have beenincluded.  Results of operations for theinterim periods are not necessarily indicative of the results that may beexpected for the full fiscal year, or any other period.  These financial statements and notes shouldbe read in conjunction with the audited financial statements for the year endedDecember 31, 2000, included in the Company’s Form 10-K filed with theSecurities and Exchange Commission.

TheCompany adopted Statement of Financial Accounting Standards (SFAS) No. 133“Accounting for Derivatives and Similar Financial Instruments and for HedgingActivities”, as amended by SFAS No. 137 and SFAS No. 138 on January 1,2001.  There was no impact to thecondensed consolidated financial statements as a result of adopting thisstandard.

In July 2001, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards No.141 (“SFAS 141”), “Business Combinations.” SFAS 141 requires the purchase method of accounting for businesscombinations initiated after June 30, 2001 and eliminates thepooling-of-interests method.  TheCompany does not believe that the adoption of SFAS 141 will have an impact onits financial statements.

InJuly 2001, the FASB issued Statement of Financial Accounting Standards No. 142(“SFAS 142”), “Goodwill and Other Intangible Assets”, which is effectiveJanuary 1, 2002.  SFAS 142 requires,among other things, the discontinuance of goodwill amortization.  In addition, the standard includesprovisions for the reclassification of certain existing recognized intangiblesas goodwill, reassessment of the useful lives of existing recognizedintangibles, reclassification of certain intangibles out of previously reportedgoodwill and the identification of reporting units for purposes of assessingpotential future impairments of goodwill. The Company does not believe that the adoption of SFAS 142 will have animpact on its financial statements.

**Shareholders Equity -**Duringthe six month period ended June 30, 2001, warrants to purchase a total of30,609 shares of common stock were exercised with gross proceeds of$214,263.  In addition, holderredemption rights on Series E Preferred Stock expired on March 31, 2001.  In connection with the expiration of theserights, the Series E Preferred Stock has been reclassified to shareholders’equity as of March 31, 2001.

InApril of 2001, the Company sold 80,000 shares of Series H Convertible PreferredStock at $100 per share.  The Series HPreferred Stock resulted in net proceeds to the Company of approximately $7.4million.

Eachshare of Series H Convertible Preferred Stock is convertible at the option ofthe holder at any time into approximately 6.666 shares of the Company’s commonstock, which is based on an initial conversion price of $15.00 per share and issubject to adjustment.  In the event theCompany closes an initial public offering of common stock which raises at least$7 million, the Series H Convertible Preferred Stock will automatically convertto common stock and any accrued dividends will be extinguished.

**Going Concern Considerations -**The Company, from inception, has experienced losses from its activities inresearch and development, without fully offsetting revenues.  This and the fact that the Company is adevelopment stage business create a substantial doubt as to its ability tocontinue as a going concern.

TheCompany has obtained financing through private placement offerings.  As in the past, the Company is pursuingadditional equity placement offerings to fund several of its programs as wellas its corporate overhead.

TheCompany’s ability to obtain profitability on substantial portions of itsoperations will also depend in large part on: obtaining regulatory approvals of its products; entering intosatisfactory agreements for product commercialization; making the transitionfrom a developmental stage business to a manufacturing and marketing company;and obtaining additional financing through equity or debt issues or developmentcollaborations, as necessary.

Thefinancial statements do not include any adjustments relating to the recoverabilityand classification of recorded asset amounts or the amounts and classificationof liabilities that might be necessary should the Company be unable to continueas a going concern.

** **

| **Item 2.** | **MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION  AND RESULTS OF OPERATIONS** |
|-------------|--------------------------------------------------------------------------------------------|

             Following is a discussion andanalysis of the Company’s consolidated condensed financial condition andresults of operations for the three and six months ended June 30, 2001 and2000.  The section should be read in conjunctionwith the Company’s audited financial statements for the year ended December 31,2000, and Management’s Discussion and Analysis of Financial Condition andResults of Operations contained in the Company’s Form 10-K for the year endedDecember 31, 2000, as filed with the Securities and Exchange Commission.

**Cautionary Statement About Forward-Looking Statements**

             This Form 10-Q contains, inaddition to historical information, forward-looking statements that are basedon the Company’s current expectations, beliefs, intentions or futurestrategies.  We use words such as“anticipate,” “believe,” “plan,” “expect,” “intend,” and similar expressions toidentify forward-looking statements.

             These statements are subject torisks and uncertainties that could cause actual results to differ materiallyfrom the statements, including the uncertainties involved in the additionaldevelopment of the Company’s new pharmaceutical products, the outcomes ofclinical trials, obtaining regulatory approvals or clearances, the ability of theCompany’s products to be manufactured in commercial quantities, construction ofadditional facilities for commercial production, the development of internal orcontractual distribution and marketing capabilities, the extent to whichreimbursement for the costs of the products and treatments will be availablefrom government health administration authorities, private health insurers andother organizations, protection of the Company’s patent and proprietary rightsand avoiding infringement of other parties’ patents and proprietary rights,potential competition and the dependence of the Company on obtaining futurefinancing.  These risks are furtherdescribed in the Company’s Form 10-K for the year ended December 31, 2000 underthe heading, “Management’s Discussion and Analysis of Financial Condition andResults of Operations – Additional Factors That May Affect FuturePerformance”.  The Company does notundertake responsibility to update such forward-looking statements to reflectevents that arise after the date of this report.

**Overview**

             We are a development stagetherapeutics company engaged in the recombinant production and clinicaldevelopment of middle range peptide hormones (referred to generally as “MRPeptides”) to treat diseases of aging, such as type 2 diabetes, obesity,advanced cases of osteoporosis and other various acute conditions.  We have developed the capability tobiologically produce, purify and amidate MR Peptides in a natural form.  Our MR Peptide hormones serve to naturallyactivate certain endocrine hormone systems governing bodily functions inpersons whose hormones are deficient or lacking as a result of advancing age orbody malfunctions.  We are conductingclinical trials for several of these applications.  No regulatory approvals have been obtained, and consequently, wehave derived no revenues from the sale of these products.  We have financed operations to dateprimarily through the sale of equity securities.

             Since inception in 1989, we haveexperienced operating losses and anticipate that our operating losses willcontinue for the foreseeable future until such time as one or more therapeuticproducts receive regulatory approval and are successfully marketed.  Expenditures will be primarily related toresearch and development activities, clinical trials, and scale-up ofcommercial manufacturing.

**Resultsof Operations**

             Research and development expensesinclude those costs associated with the research, development, production andtesting of our pharmaceutical products, including all direct costs incurred inconducting our clinical trials and all costs related to the protection ofproprietary rights.  These costs haveaggregated $54.9 million since our inception. Research and development costs were $3.7 million and $6.7 million forthe three and six month periods ended June 30, 2001, as compared to $3.3million and $6.4 million for the same periods in the prior fiscal year.  Clinical trial expenditures are projected toincrease significantly during the remainder of 2001.

             General and administrative expensesincreased to $0.8 million and $1.6 million for the three and six month periodsended June 30, 2001, as compared to $0.6 million and $1.2 million for the sameperiods in 2000.  The increase primarilyreflects the strengthening of our administrative support structure, togetherwith a non-cash compensation charge associated with the modification of stockoption terms.

          Interestincome decreased to $0.1 million and $0.2 million for the three and six monthperiods ended June 30, 2001 as compared to $0.2 million and $0.4 million forthe same periods in 2000.  Higherinterest income in the prior year is due to higher average cash and cashequivalent balances, following the sale of equity securities in the fourthquarter of 1999.  We incurred interestexpense of $0.2 million and $0.4 million for the three and six month periodsended June 30, 2001 compared to $0.07 million and $0.15 million for the sameperiods in 2000.  The increase reflectsnon-cash interest charges associated with the extension of certain redeemablepreferred stock terms and an increase in equipment financing costs.

**Liquidityand Capital Resources**

             During the six months ended June30, 2001 we used $7.8 million for research and development and administrativeactivities and $0.7 million for equipment acquisitions.  In April 2001 we received net proceeds ofapproximately $7.4 million from the sale of 80,000 shares of Series HConvertible Preferred Stock.  As of June30, 2001 we had total cash and cash equivalents of $7.9 million.  Based on our current operating plan, webelieve that existing cash and cash equivalents will be sufficient to fund ouroperations at the current levels until the fourth quarter of 2001.  Although there can be no assurance that wewill be able to raise additional funds, our plan of operations assumes thatadditional funding will be received prior to that date from the sale ofadditional equity securities.  If we areunable to obtain financing prior to that date, we will be required to modifyour business plan and possibly discontinue some or all of our operations,including the potential delay or discontinuation of some of our clinical trialprograms.

             At June 30, 2001, we had ashareholders’ deficit accumulated during the development stage of $71.9million.  Historically, the auditors’reports on our financial statements have contained an explanatory paragraphconcerning our ability to continue as a going concern.  We expect to continue to incur additionallosses, and will require additional working capital, as we incur substantialexpenses related to clinical trials, research and development activities, andscale-up of commercial manufacturing.

**Market Risk**

             We are exposed to market riskrelated to changes in interest rates. The Company does not use derivativefinancial instruments for speculative or trading purposes.  Due to the nature of cash and cashequivalents, we believe that there is no material market risk exposure.

| **Item 3.** | **QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK.** |
|-------------|----------------------------------------------------------------|

             See Item 2, “Management’sDiscussion and Analysis of Financial Condition and Results of Operations -Market Risk”.

 

**PART II**

**OTHER INFORMATION**

| **Item 1.** | **LEGAL PROCEEDINGS.** |
|-------------|------------------------|

None**Item  2.****CHANGES IN SECURITIES.**
             In April 2001, the Company sold80,000 shares of Series H Convertible Preferred Stock at $100 per share to anaccredited investor outside the United States in an offshore offering inaccordance with Regulation S under the Act. The Company paid an 8% finders fee in connection with the sale.  Each share of Series H Convertible PreferredStock is convertible at the option of the holder at any time into approximately6.666 shares of the Company’s common stock, which is based on an initialconversion price of $15.00 per share and is subject to adjustment.  In the event the Company closes an initialpublic offering of common stock which raises at least $7 million, the Series HConvertible Preferred Stock will automatically convert to common stock and anyaccrued dividends will be extinguished. Because the shares were sold in an offshore offering to a Non-U.S.Person under Regulation S, the Company believes that this transaction wasexempt under Section 4(2) of the Securities Act of 1933 and from theregistration and prospectus delivery requirements of the Act.
**Item 3.****DEFAULTS UPON SENIOR SECURITIES.**
None
**Item 4.****SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.**
None
**Item 5.****OTHER INFORMATION.**
OnJuly 26, 2001, the Company’s stockholders approved an amendment to theCompany’s Certificate of Incorporation to change the corporate name to“Restoragen, Inc.”  The Company intendsto file an amendment with the Delaware Secretary of State in the near future toeffect the name change and the other actions approved by the stockholders.
**Item 6.****EXHIBITS AND REPORTS ON FORM 8-K.**   (a)Exhibits  None (b)Reports on Form 8-K  The Company filed a Form 8-K on June  22, 2001, attaching a letter to shareholders, which summarized progress in  the Company’s medical programs, and a press release relating to the Company’s  name change.  No financial statements  were required to be filed with the Form.
 

**SIGNATURES**

 

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

 
  BIONEBRASKA,  INC.   Dated:   August 10, 2001       /s/   Thomas R. Coolidge  Thomas R. Coolidge  Chief Executive Officer and Chairman  (Duly Authorized Officer)        /s/   David S. Walker  David S. Walker  Senior Vice President and Chief  Financial Officer  (Principal Financial Officer)