##### Table of Contents

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



---



FORM 10-Q



---



(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------



For the quarterly period ended June 30, 2005



or



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



For the transition period from  to



Commission File Number: 000-19122



---



APHTON CORPORATION

(Exact name of registrant as specified in its charter)



---



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 95-3640931                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|8 Penn Center, 1628 JFK Boulevard, Suite 2300 Philadelphia PA  |  | 19103                               
|(Address of principal executive offices)                       |  | (Zip Code)                          



(215) 218-4340

(Registrants telephone number, including area code)





(Former name, former address and former
fiscal year, if changed since last report)



---



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes ̈No



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



Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of the latest practicable date:



|                               |  |                              |  |               
|------------------------------ |  | ---------------------------- |  | --------------
|Class                          |  | Number of Shares outstanding |  | As of         
|Common Stock, $0.001 par value |  | 59,719,598                   |  | August 1, 2005



---



---

##### Table of Contents

APHTON CORPORATION



Index



|                               |  |                                                                                                       |  |                                                                                       |  |     
|------------------------------ |  | ----------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------- |  | ----
|                               |  |                                                                                                       |  |                                                                                       |  | Page
|Part I - Financial Information |  | 1                                                                                                    
|                               |  |                                                                                                       | 
|                               |  | Item 1.                                                                                               |  | Financial Statements:                                                                 |  | 1   
|                               |  |                                                                                                      
|                               |  | Consolidated Balance Sheets  June 30, 2005 (unaudited) and December 31, 2004                         |  | 2                                                                                    
|                               |  |                                                                                                      
|                               |  | Consolidated Statements of Operations (unaudited) - Three and six months ended June 30, 2005 and 2004 |  | 3                                                                                    
|                               |  |                                                                                                      
|                               |  | Consolidated Statements of Cash Flows (unaudited) - Six months ended June 30, 2005 and 2004           |  | 4                                                                                    
|                               |  |                                                                                                      
|                               |  | Notes to Consolidated Financial Statements (unaudited)                                                |  | 5                                                                                    
|                               |  |                                                                                                       | 
|                               |  | Item 2.                                                                                               |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 12  
|                               |  |                                                                                                       | 
|                               |  | Item 3.                                                                                               |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 22  
|                               |  |                                                                                                       | 
|                               |  | Item 4.                                                                                               |  | Controls and Procedures                                                               |  | 23  
|                               | 
|Part II - Other Information    |  | 23                                                                                                   
|                               |  |                                                                                                       | 
|                               |  | Item 4.                                                                                               |  | Submission of Matters to a Vote of Security Holders                                   |  | 23  
|                               |  |                                                                                                       | 
|                               |  | Item 5.                                                                                               |  | Other Information                                                                     |  | 23  
|                               |  |                                                                                                       | 
|                               |  | Item 6.                                                                                               |  | Exhibits                                                                              |  | 24  
|                               | 
|Signatures                     |  | 25                                                                                                   



i



---

##### Table of Contents

Part I - Financial Information



Item 1. Interim Financial Statements



The interim consolidated financial statements included herein have been prepared by us, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the consolidated financial
statements include all adjustments (consisting of normal recurring entries) necessary to present fairly our financial position as of June 30, 2005, and December 31, 2004, and the results of our operations for the three and six months ended June 30,
2005 and 2004; and our cash flows for the six months ended June 30, 2005 and 2004. These financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our most recent annual report on
Form 10-K filed with the Securities and Exchange Commission on March 16, 2005.



1



---

##### Table of Contents

APHTON CORPORATION

Consolidated Balance Sheets



|                                                                                                                                                                       |  |               |              |   |                   |   |              |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------------ | - | ----------------- | - | ------------ | -
|                                                                                                                                                                       |  | June 30, 2005 |              |   | December 31, 2004 |  
|                                                                                                                                                                       |  | (Unaudited)   |              |   |                   |  
|Assets                                                                                                                                                                 |  |               |              |   |                   |   |              |  
|Current assets:                                                                                                                                                        |  |               |              |   |                   |   |              |  
|Cash and cash equivalents                                                                                                                                              |  | $             | 8,056,290    |   |                   | $ | 29,999,497   |  
|Short-term investments available for sale                                                                                                                              |  |               | 18,530,975   |   |                   |   | 12,314,992   |  
|Investment securities-trading                                                                                                                                          |  |               | 728,181      |   |                   |   | 1,099,585    |  
|                                                                                                                                                                       |  |               |              |   |                   |   |              |  
|Total cash and short-term equivalents                                                                                                                                  |  |               | 27,315,446   |   |                   |   | 43,414,074   |  
|Other current assets                                                                                                                                                   |  |               | 1,312,746    |   |                   |   | 556,165      |  
|                                                                                                                                                                       |  |               |              |   |                   |   |              |  
|Total current assets                                                                                                                                                   |  |               | 28,628,192   |   |                   |   | 43,970,239   |  
|Equipment and improvements, net                                                                                                                                        |  |               | 1,046,316    |   |                   |   | 780,307      |  
|Deferred financing costs, net                                                                                                                                          |  |               | 487,618      |   |                   |   | 519,915      |  
|Unconditional supply commitment                                                                                                                                        |  |               | 6,704,678    |   |                   |   | 6,704,678    |  
|Other assets                                                                                                                                                           |  |               |             |   |                   |   | 659,488      |  
|                                                                                                                                                                       |  |               |              |   |                   |   |              |  
|Total assets                                                                                                                                                           |  | $             | 36,866,804   |   |                   | $ | 52,634,627   |  
|                                                                                                                                                                       |  |               |              |   |                   |   |              |  
|Liabilities and Stockholders Equity (Deficit)                                                                                                                         |  |               |              |   |                   |   |              |  
|Liabilities:                                                                                                                                                           |  |               |              |   |                   |   |              |  
|Current liabilities:                                                                                                                                                   |  |               |              |   |                   |   |              |  
|Convertible debentures, net                                                                                                                                            |  | $             | 12,511,116   |   |                   | $ |             |  
|Trade accounts payable                                                                                                                                                 |  |               | 3,789,271    |   |                   |   | 3,941,760    |  
|Due to related party                                                                                                                                                   |  |               | 1,860,000    |   |                   |   | 3,255,435    |  
|Accrued liabilities                                                                                                                                                    |  |               | 2,348,295    |   |                   |   | 1,835,006    |  
|Current portion of long-term liabilities                                                                                                                               |  |               | 507,351      |   |                   |   |             |  
|Accrued interest payable                                                                                                                                               |  |               | 765,000      |   |                   |   | 630,000      |  
|Other current liabilities                                                                                                                                              |  |               | 1,167,307    |   |                   |   | 137,247      |  
|                                                                                                                                                                       |  |               |              |   |                   |   |              |  
|Total current liabilities                                                                                                                                              |  |               | 22,948,340   |   |                   |   | 9,799,448    |  
|Convertible debentures, net                                                                                                                                            |  |               |             |   |                   |   | 11,845,022   |  
|Deferred revenue                                                                                                                                                       |  |               | 10,000,000   |   |                   |   | 10,000,000   |  
|Other liabilities                                                                                                                                                      |  |               | 8,244,664    |   |                   |   |             |  
|                                                                                                                                                                       |  |               |              |   |                   |   |              |  
|Total liabilities                                                                                                                                                      |  |               | 41,193,004   |   |                   |   | 31,644,470   |  
|                                                                                                                                                                       |  |              
|Commitments and contingencies                                                                                                                                          |  |               |              |   |                   |   |              |  
|Stockholders equity (Deficit):                                                                                                                                        |  |               |              |   |                   |   |              |  
|Preferred stock, $0.001 par value - Authorized: 4,000,000 shares; Issued and outstanding: none                                                                         |  |               |             |   |                   |   |             |  
|Common stock, $0.001 par value - Authorized: 100,000,000 shares; Issued and outstanding: 59,719,598 shares at June 30, 2005 and 37,798,586
shares at December 31, 2004 |  |               | 59,719       |   |                   |   | 37,799       |  
|Additional paid in capital                                                                                                                                             |  |               | 243,696,749  |   |                   |   | 216,320,552  |  
|Historical exchange rate account                                                                                                                                       |  |               | 670,432      |   |                   |   |             |  
|Purchase warrants                                                                                                                                                      |  |               | 298,900      |   |                   |   | 298,900      |  
|Accumulated deficit                                                                                                                                                    |  |               | (249,052,000 | ) |                   |   | (195,667,094 | )
|                                                                                                                                                                       |  |               |              |   |                   |   |              |  
|Total stockholders equity (deficit)                                                                                                                                   |  |               | (4,326,200   | ) |                   |   | 20,990,157   |  
|                                                                                                                                                                       |  |               |              |   |                   |   |              |  
|Total liabilities and stockholders equity (deficit)                                                                                                                   |  | $             | 36,866,804   |   |                   | $ | 52,634,627   |  
|                                                                                                                                                                       |  |               |              |   |                   |   |              |  



The accompanying
notes are an integral part of the financial statements.



2



---

##### Table of Contents

APHTON CORPORATION

Consolidated Statements of Operations (Unaudited)

For the three and six months ended June 30, 2005 and 2004



|                                                     |  |                             |             |   |                           |   |            |      |  |   |             |   |  |   |             |  
|---------------------------------------------------- |  | --------------------------- | ----------- | - | ------------------------- | - | ---------- | ---- |  | - | ----------- | - |  | - | ----------- | -
|                                                     |  | Three months ended June 30, |             |   | Six months ended June 30, |  
|                                                     |  | 2005                        |             |   | 2004                      |   |            | 2005 |  |   | 2004        |  
|Revenue:                                             |  | $                           |            |   |                           | $ |           |      |  | $ |            |   |  | $ |            |  
|                                                     |  |                             |             |   |                           |   |            |      |  |   |             |   |  |   |             |  
|Costs and expenses:                                  |  |                             |             |   |                           |   |            |      |  |   |             |   |  |   |             |  
|General and administrative                           |  |                             | 2,972,288   |   |                           |   | 849,679    |      |  |   | 5,354,093   |   |  |   | 1,662,131   |  
|Research and development                             |  |                             | 8,328,960   |   |                           |   | 5,371,404  |      |  |   | 13,147,420  |   |  |   | 10,162,384  |  
|Acquired in-process research and development         |  |                             |            |   |                           |   |           |      |  |   | 32,991,860  |   |  |   |            |  
|Restructuring expense                                |  |                             | 818,122     |   |                           |   |           |      |  |   | 818,122     |   |  |   |            |  
|                                                     |  |                             |             |   |                           |   |            |      |  |   |             |   |  |   |             |  
|Total costs and expenses                             |  |                             | 12,119,370  |   |                           |   | 6,221,083  |      |  |   | 52,311,495  |   |  |   | 11,824,515  |  
|                                                     |  |                             |             |   |                           |   |            |      |  |   |             |   |  |   |             |  
|Loss from operations                                 |  |                             | (12,119,370 | ) |                           |   | (6,221,083 | )    |  |   | (52,311,495 | ) |  |   | (11.824,515 | )
|Other income (expense):                              |  |                             |             |   |                           |   |            |      |  |   |             |   |  |   |             |  
|Dividend and interest income                         |  |                             | 268,187     |   |                           |   | 119,283    |      |  |   | 543,313     |   |  |   | 144,131     |  
|Interest expense including amortized discount        |  |                             | (870,925    | ) |                           |   | (658,073   | )    |  |   | (1,593,602  | ) |  |   | (1,299,401  | )
|Unrealized gain/ losses from investments             |  |                             | 8,033       |   |                           |   | 12,385     |      |  |   | (23,122     | ) |  |   | 10,248      |  
|                                                     |  |                             |             |   |                           |   |            |      |  |   |             |   |  |   |             |  
|Net loss                                             |  | $                           | (12,714,075 | ) |                           | $ | (6,747,488 | )    |  | $ | (53,384,906 | ) |  | $ | (12,969,537 | )
|                                                     |  |                             |             |   |                           |   |            |      |  |   |             |   |  |   |             |  
|Per share data:                                      |  |                             |             |   |                           |   |            |      |  |   |             |   |  |   |             |  
|Basic and fully diluted loss per common share        |  | $                           | (0.21       | ) |                           |   | (0.18      | )    |  | $ | (1.07       | ) |  | $ | (0.37       | )
|                                                     |  |                             |             |  
|Weighted average number of common shares outstanding |  |                             | 59,649,598  |   |                           |   | 37,631,712 |      |  |   | 49,783,841  |   |  |   | 34,760,985  |  



The accompanying
notes are an integral part of the financial statements.



3



---

##### Table of Contents

APHTON CORPORATION

Consolidated Statements of Cash Flows (Unaudited)

For the six months ended June 30, 2005 and 2004



|                                                                            |  |                           |             |   |      |   |             |  
|--------------------------------------------------------------------------- |  | ------------------------- | ----------- | - | ---- | - | ----------- | -
|                                                                            |  | Six Months Ended June 30, |            
|                                                                            |  | 2005                      |             |   | 2004 |  
|Cash flows from operating activities:                                       |  |                           |             |   |      |   |             |  
|Cash paid to suppliers and employees                                        |  | $                         | (16,861,290 | ) |      | $ | (12,306,378 | )
|                                                                            |  |                           |             |   |      |   |             |  
|Net cash used in operating activities                                       |  |                           | (16,861,290 | ) |      |   | (12,306,378 | )
|                                                                            |  |                           |             |   |      |   |             |  
|Cash flows from investing activities:                                       |  |                           |             |   |      |   |             |  
|Investment securities  available for sale                                  |  |                           | (6,215,984  | ) |      |   |            |  
|Cash acquired in acquisition, net of cost                                   |  |                           | 1,459,424   |   |      |   |            |  
|Capital expenditures                                                        |  |                           | (325,676    | ) |      |   | (154,034    | )
|                                                                            |  |                           |             |   |      |   |             |  
|Net cash used in investing activities                                       |  |                           | (5,082,236  | ) |      |   | (154,0349   | )
|                                                                            |  |                           |             |   |      |   |             |  
|Cash flows from financing activities:                                       |  |                           |             |   |      |   |             |  
|Proceeds from sale of common stock and warrants                             |  |                           | 319         |   |      |   | 48,621,628  |  
|Net cash received from financing activities                                 |  |                           |            |   |      |   | 48,621,628  |  
|                                                                            |  |                           |             |   |      |   |             |  
|Net (decrease) increase in cash and short-term cash investments             |  |                           | (21,943,207 | ) |      |   | 36,161,216  |  
|Cash and cash equivalents:                                                  |  |                           |             |   |      |   |             |  
|Beginning of period                                                         |  |                           | 29,999,497  |   |      |   | 18,378,988  |  
|                                                                            |  |                           |             |   |      |   |             |  
|End of period                                                               |  | $                         | 8,056,290   |   |      | $ | 54,540,204  |  
|                                                                            |  |                           |             |   |      |   |             |  
|Reconciliation of net loss to net cash used in operating activities         |  |                           |             |   |      |   |             |  
|Net loss                                                                    |  | $                         | (53,384,906 | ) |      | $ | (12,969,537 | )
|                                                                            |  |                           |             |   |      |   |             |  
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                           |             |   |      |   |             |  
|Charges for acquired in-process research and development and other          |  |                           | 32,991,860  |   |      |   |            |  
|Common stock issued for interest payment                                    |  |                           | 300,000     |   |      |   | 600,000     |  
|Depreciation and amortization                                               |  |                           | 237,523     |   |      |   | 36,443      |  
|Amortization of deferred financing costs                                    |  |                           | 32,297      |   |      |   | 13,948      |  
|Amortization of discount on convertible debentures                          |  |                           | 679,885     |   |      |   | 520,453     |  
|Unrealized gain/loss on investments                                         |  |                           | 23,122      |   |      |   | (10,248     | )
|Non-cash employee compensation expense                                      |  |                           | (23,122     | ) |      |   | 10,248      |  
|Change in Special Equity Component  exchange                               |  |                           | 670,432     |   |      |   |            |  
|Investment securities - trading                                             |  |                           | 6,862,996   |   |      |   | (117,849    | )
|Other current assets                                                        |  |                           | 1,171,342   |   |      |   | (547,577    |  
|Current liabilities                                                         |  |                           | (6,550,943  | ) |      |   | (157,741    | )
|Other non-current liabilities                                               |  |                           | 128,226     |   |      |   |            |  
|                                                                            |  |                           |             |   |      |   |             |  
|Net cash used in operating activities:                                      |  | $                         | (16,861,290 | ) |      | $ | (12,306,378 | )
|                                                                            |  |                           |             |   |      |   |             |  



The accompanying
notes are an integral part of the financial statements.





4



---

##### Table of Contents

Notes to the Consolidated Financial Statements (unaudited)



1. Organization and Summary of Significant Accounting Policies



Aphton Corporation (Aphton or the Company) is a biopharmaceutical company focused on developing innovative cancer therapies. The Companys research and development efforts are based on its
proprietary active immunization and monoclonal antibody technologies, and its technologies are based on key discoveries made by it as well as its understanding of the central role of gastrin, a naturally occurring hormone, and gastrin receptors.



On March 24, 2005, Aphton completed the acquisition of Igeneon
AG, a clinical stage biopharmaceutical company headquartered in Vienna, Austria. Through Igeneon, Aphton is focused on the development of active and passive cancer immunotherapies (cancer vaccines and monoclonal antibodies) designed to prevent or
delay the development of metastases in cancers of epithelial origin. These product candidates are designed to target disseminated tumor cells, thereby having the potential to prevent metastasis and the spread of cancer.



We do not currently have any source of operating revenue and will require
significant amounts of cash to continue to fund our operations, our clinical trials and our research and development efforts until such time, if ever, that one of our products has received regulatory approval for marketing. Furthermore, the results
of our recent Insegia clinical trial and other factors have weakened the market value of our common stock and adversely affected our ability to access the capital markets for funding. Additionally, the market price of our common stock may prohibit
us from obtaining financing terms from potential investors that would benefit us in the long term. Consequently, we are exploring a number of alternatives, including licensing or selling a significant portion or all of our intellectual property
and/or other assets, the sale or exchange of a significant portion or all of our equity, restructuring or refinancing some or all of our debt, or pursuing other financial alternatives. We may implement one or more of these alternatives. No
assurances can be given that any particular transaction will be completed nor can any prediction or assurance be made regarding the possible impact of future transactions on our business, results or capitalization. Our ability to make interest or
principal payments on our indebtedness, comply with the covenants in our indebtedness documents, or effectively implement any of these alternatives to fund our future operations is dependent on many factors, many of which are beyond our control.



Interim Financial Statements



The interim consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the consolidated financial statements include all adjustments (consisting of normal recurring
entries) necessary to present fairly the Companys financial position as of June 30, 2005, and December 31, 2004, and the results of its operations for the three and six months ended June 30, 2005 and 2004; and its cash flows for the six months
ended June 30, 2005 and 2004. It is suggested that these financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Companys latest annual report on Form 10-K filed with the
Securities and Exchange Commission on March 16, 2005.



Use of Estimates
in the Preparation of Financial Statements



The
preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates, however, management believes such differences
are unlikely to be significant.



Research and Development Expenses



Research and development costs are expensed as
incurred. These costs include external and internal research and development costs, the salaries of dedicated personnel, the allocated salaries of personnel who also perform general and administrative tasks, the costs of the dedicated research and
development facilities and the costs of contracted researchers. There is no allocation of administrative expense or corporate costs to research and development costs.



Foreign Currency Accounting



The Company complies withSFAS No. 52 Foreign Currency Translation,which established standards for reporting on foreign
subsidiaries in consolidated financial statements.



5



---

##### Table of Contents

General and Administrative Expenses



General and administrative expenses represent expenses not clearly related to research and development expenses. A
significant portion of these expenses are related to intellectual property/patent legal costs and salaries, which are typically excluded from research and development expenses according to Statement of Financial Accounting Standards (SFAS) No. 2
Accounting for Research and Development Costs.



Unconditional
Supply Commitment



In connection with its strategic
alliance with sanofi-aventis, the Company has the unconditional right to receive supplies originally aggregating $9 million from sanofi-aventis. The Companys policy is to review the current market prices of alternative available supplies, if
any, to assure that they remain above the stated sanofi-aventis contract price of the materials and that the right to receive the supplies remains unimpaired. sanofi-aventis is one of the largest pharmaceutical vaccine manufacturers in the world.
The Company monitors the financial performance of sanofi-aventis to assess whether it will continue to be able to perform under the contract, wherein the special order supplies are to be provided from supplies manufactured by sanofi-aventis in large
quantities and sold to many customers, including the U.S. Government, as part of sanofi-aventis basic franchise business. The contract allows for inflation-based increases in the per unit costs of the supplies which the Company and
sanofi-aventis believe are sufficient to assure that there will be no future financial hardship incurred by sanofi-aventis in the execution of the agreement. The Company has recently initiated discussions with sanofi-aventis regarding the possible
dissolution of the strategic alliance. While the discussions have progressed, they are in the preliminary stages and there can be no guarantee that the Company will be able to come to an agreement with sanofi-aventis on such dissolution or that the
terms of such dissolution would be as favorable to the Company as it would desire. However, the Company currently expects that the right to continue to receive supplies would be part of any dissolution agreement.



Per Share Data



The Companys basic loss per common share was calculated by dividing net loss by the weighted average number of common
shares outstanding. The Companys potential common shares are anti-dilutive, and accordingly, basic and diluted loss per share are the same. Such potential common shares consist of stock options and purchase warrants.



Investments



Investment securities consist principally of debt securities issued by the U.S. Treasury and other U.S. Government agencies
and corporations and investment in other securities, including mutual funds.



Investment securities are classified into three categories and accounted for as follows: 1) Held-to-maturity securities are debt securities that the Company has the positive intent and ability to hold to maturity.
These securities are reported at amortized cost; 2) Trading securities are bought and held principally for the purpose of selling them in the near term. These securities are reported at fair value, with unrealized gains and losses included in
current earnings; 3) Investment securities available for sale are debt and equity securities not classified as either held-to-maturity or trading securities.



The Company did not hold any held-to-maturity securities at June 30, 2005, and December 31, 2004. Investment securities available for sale are carried at
market value and any unrealized gain or loss, net of income taxes, is reported in accumulated other comprehensive income as a separate component of stockholders equity (deficit). Gains and losses realized on the sales of investment securities
are determined using the specific identification method.



Comprehensive
Income



The Company complies with SFAS No. 130,
Reporting Comprehensive Income, which established standards for reporting comprehensive income (defined to include net income, unrealized gains and losses on available-for-sale investment securities, foreign currency adjustments and
certain other items not included in the income statement). The Company does not have elements of other comprehensive income other than net loss, a historical exchange account for foreign currency transactions and unrealized gains and losses on
available-for-sale investment securities. The amount of unrealized loss for the six months ended at June 30, 2005, was $23,122.



Stock Based Compensation



SFAS No. 148, Accounting for Stock-Based Compensation allows either adoption of a fair value based method of accounting for employee stock
options and similar equity instruments or continuation of the measurement



6



---

##### Table of Contents

of compensation cost relating to such plans using the intrinsic value method of accounting prescribed by Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. The Company has elected to use the intrinsic value method.



Pro forma information is required by SFAS No. 148 and has been determined as if the Company had accounted for its stock-based compensation plans under the
fair value method. The fair value of each option grant was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 2005 and 2004: risk-free interest rates of
3.0%; dividend yield of 0% for all periods; expected volatility factor of 100% for all periods; and expected weighted average life of 19.5 years. The weighted average fair value of options granted during 2005 and 2004 was $1.09 and $6.45,
respectively. Additionally, there were 70,000 shares of restricted stock issued to Company directors on April 21, 2005, which vested the same day. The per share price of these restricted issuances was $1.08 and the total value of these shares was
$75,600.





7



---

##### Table of Contents

The Companys pro forma information follows for the three and six months ended June 30, 2005 and
2004, respectively:



|                                  |  |                             |             |   |                           |   |            |      |  |   |             |   |  |   |             |  
|--------------------------------- |  | --------------------------- | ----------- | - | ------------------------- | - | ---------- | ---- |  | - | ----------- | - |  | - | ----------- | -
|                                  |  | Three months ended June 30, |             |   | Six months ended June 30, |  
|                                  |  | 2005                        |             |   | 2004                      |   |            | 2005 |  |   | 2004        |  
|Net Loss:                         |  |                             |             |   |                           |   |            |      |  |   |             |   |  |   |             |  
|As reported                       |  | $                           | (12,714,079 | ) |                           | $ | (6,747,488 | )    |  | $ | (53,384,910 | ) |  | $ | (12,969,537 | )
|Compensation expense, net of tax  |  |                             | (1,309,567  | ) |                           |   | (264,198   | )    |  |   | (3,567,674  | ) |  |   | (1,096,070  | )
|                                  |  |                             |             |   |                           |   |            |      |  |   |             |   |  |   |             |  
|Pro forma                         |  | $                           | (14,023,646 | ) |                           | $ | (7,011,686 | )    |  | $ | (56,952,584 | ) |  | $ | (14,065,607 | )
|                                  |  |                             |             |   |                           |   |            |      |  |   |             |   |  |   |             |  
|Basic and diluted loss per share: |  |                             |             |   |                           |   |            |      |  |   |             |   |  |   |             |  
|As reported                       |  | $                           | (0.21       | ) |                           | $ | (0.18      | )    |  | $ | (1.07       | ) |  | $ | (0.37       | )
|Compensation expense, net of tax  |  | $                           | (0.02       | ) |                           |   | (0.01      | )    |  | $ | (0.07       | ) |  | $ | (0.03       | )
|                                  |  |                             |             |   |                           |   |            |      |  |   |             |   |  |   |             |  
|Pro forma                         |  | $                           | (0.23       | ) |                           | $ | (0.19      | )    |  | $ | (1.14       | ) |  | $ | (0.40       | )
|                                  |  |                             |             |   |                           |   |            |      |  |   |             |   |  |   |             |  



Recent Accounting Pronouncements



In December 2004, the FASB issued SFAS No. 123(R),
Share-Based Payments, which establishes standards for transactions in which an entity exchanges its equity instruments for goods or services. This standard requires a public entity to measure the costs of employee services received in
exchange for an award of equity instruments based on the grant-date fair value of the award. This eliminates the exception to account for such awards using the intrinsic method previously allowable under APB Opinion No. 25. SFAS No. 123(R) will be
effective for the Company beginning January 1, 2006. The Company currently accounts for such awards using the intrinsic method currently allowable under APB Opinion No. 25. Although the Company has not yet completed its analysis of the impact of
adopting SFAS No. 123(R), it believes the impact likely to be material to its financial statements.



2. March 2005 Acquisition for Common Stock



On March 24, 2005, the Company acquired all of the outstanding equity interests of Igeneon AG, a company based in Vienna, Austria. The results of operations of Igeneon have been included in the consolidated financial
statements since March 24, 2005. The aggregate purchase price for the acquisition was 21,5000,000 shares of Aphton Corporation common stock and $25,000 in cash. The Company obtained an appraisal from an independent third party to estimate the fair
value of the identified intangible assets acquired. Based on the consideration provided, the acquisition of Igeneon resulted in negative goodwill, which has been allocated, on a pro-rata basis, to the acquired technology and acquired property and
equipment and then expensed as acquired in-process research and development.



As part of the preliminary purchase price allocation, the Company allocated $33.0 million of the purchase price to in-process research and development projects. This allocation represented the estimated fair value
based on risk-adjusted cash flows pertaining to the incomplete research and development related primarily to two projects. At the date of acquisition, the development of these projects had not yet reached technological feasibility and the research
and development in progress had no alternative future uses. Accordingly, the acquired research and development was charged to expense as of the date of acquisition.



3. Convertible Notes/Debentures



As of June 30, 2005, and December 31, 2004, the Company had an aggregate principal amount of $23.0 million of convertible debentures and notes
outstanding. The $23.0 million was comprised of $3.0 million principal amount of the Companys Series A Convertible Debenture (the Series A Convertible Debenture) and $20.0 million of the Companys 2003 senior convertible notes
(the 2003 Senior Convertible Notes). There was an initial discount calculated against the value of the 2003 Senior Convertible Notes of $12.9 million, comprised of the beneficial



8



---

##### Table of Contents

conversion feature of $8.3 million and the relative fair value of the detachable warrants of $4.6 million
on the 2003 Senior Convertible Notes. The unamortized discount as of June 30, 2005, is $10.5 million, which is offset against the $23.0 million and is shown as $12.5 million in the 2003 Senior Convertible Notes in the accompanying financial
statements.



The Series A Convertible Debenture is a
convertible, redeemable, five-year debenture that matures on December 19, 2007. At any time prior to maturity, the Company has the right to redeem the Series A Convertible Debenture. In addition, at any time prior to maturity, the Company has the
obligation to redeem the Series A Convertible Debenture under certain conditions, including if the Company transfers its rights to certain projects or other products, or any other rights related thereto, to any entity, other than the holder of the
Series A Convertible Debenture or its affiliates. The Series A Convertible Debenture bears interest at a rate of 11.0% per annum, payable annually. The Series A Convertible Debenture is convertible, at the holders option, at a conversion price
equal to the average closing price of the Companys common stock, as defined in the Series A Convertible Debenture, at the time of conversion. The Series A Convertible Debenture contains provisions that place a cap on the number of shares of
the Companys common stock issuable upon its conversion, such that the holder thereof shall not have the right to convert any portion of the Series A Convertible Debenture to the extent that after giving effect to such conversion the holders
would beneficially own more than 19.99% of the number of shares of the Companys common stock outstanding immediately prior to such conversion. On April 29, 2005, we received communication that sanofi-aventis believes that it has the right to
redeem the Series A Convertible Debenture as a result of our entering into certain collaborative agreements. We are currently evaluating this claim. However, based upon the discussions that we have initiated with sanofi-aventis regarding possible
dissolution of our strategic alliance with sanofi-aventis, we currently believe we will redeem the Series A Convertible Debenture prior to its maturity date in accordance with the Series A Convertible Debentures original terms.



The $20.0 million in 2003 Senior Convertible Notes were issued in two
tranches to accredited investors during the six months ended June 30, 2003. The 2003 Senior Convertible Notes mature on March 31, 2008. We have the right and obligation to redeem the 2003 Senior Convertible Notes under certain conditions at any time
after the third year from the issuance date. The 2003 Senior Convertible Notes bear interest at a rate of 6.0% per annum, payable quarterly in cash or shares of the Companys common stock, at the Companys option.



The 2003 Senior Convertible Notes are convertible at a fixed price of $2.50
per share, unless otherwise adjusted prior to conversion pursuant to the price adjustment provisions set forth therein. The conversion price of the 2003 Senior Convertible Notes will be lowered in the event of a sale by the Company of its common
stock or securities convertible into the Companys common stock at a per share offering price less than the conversion price of the 2003 Senior Convertible Notes in effect immediately prior to such sale. The warrants are exercisable into shares
of the Companys common stock at $2.70 per share, unless otherwise adjusted prior to exercise pursuant to the price adjustment provisions that are substantially similar to those set forth in the 2003 Senior Convertible Notes. The 2003 Senior
Convertible Notes and the warrants contain provisions that place a cap on the number of shares of our common stock issuable upon their conversion or exercise, such that the holders thereof shall not have the right to convert any portion of the notes
to the extent that after giving effect to such conversion the holders would beneficially own more than 19.99% or 4.99%, as the case may be for the respective holder, of the number of shares of the Companys common stock outstanding immediately
prior to such conversion or exercise.



4. Other Financial Liabilities



As of June 30, 2005, reflected on the balance sheet were
other current liabilities of $1,167,000, current portion of long-term liabilities of $507,000 and non-current other liabilities of $8,245,000. The total of these balance sheet line items is $9,919,000. Of this balance, the Companys
wholly-owned subsidiary, Igeneon, had outstanding an aggregate of $8,344,000 in interest-bearing liabilities and finance lease obligations, details of which are noted in the tables below. The remaining balance of $1,585,000, represents operating
accruals for government mandated employee benefits (vacation and pension), non-interest-bearing obligations and other Igeneon employee obligations. The table below reflects the details of Igeneon interest-bearing and finance lease obligations (in
thousands of USD Equivalents).



|                             |  |                  |       |                  |   |       |  |   |      
|---------------------------- |  | ---------------- | ----- | ---------------- | - | ----- |  | - | -----
|                             |  | Less than 1 year |       | More than 1 year |   | Total
|Interest-bearing liabilities |  | $                | 1,659 |                  | $ | 5,803 |  | $ | 7,462
|Finance leasing obligations  |  |                  | 373   |                  |   | 509   |  |   | 882  
|                             |  |                  |       |                  |   |       |  |   |      
|Total                        |  | $                | 2,032 |                  | $ | 6,312 |  | $ | 8,344
|                             |  |                  |       |                  |   |       |  |   |      



9



---

##### Table of Contents

The interest-bearing liabilities are comprised of financial liabilities relating to funds received by
Igeneon prior to the acquisition from various financial institutions and guaranteed by governmental agencies for Igeneons research and development activities. Further, the interest rates on the loans are subsidized by government research
incentive programs. The table below provides the amounts outstanding (in thousands in USD Equivalents), the maturity of each liability and the interest rate.



|                                                          |  |             |       |          |             |               |                  |  
|--------------------------------------------------------- |  | ----------- | ----- | -------- | ----------- | ------------- | ---------------- | -
|Institution                                               |  | Outstanding |       | Maturity |             | Interest rate |                 
|Österreichische Forschungsförderungs-gesellschaft (EUR)   |  | $           | 411   |          | 30 Sep 2005 |               | 2.0              | %
|Österreichische Forschungsförderungs-gesellschaft (EUR)   |  | $           | 563   |          | 30 Jun 2006 |               | 3.0              | %
|Bank Austria Creditanstalt (ERP-Investitionskredit) (EUR) |  | $           | 2,722 |          | 1 Jul 2006  |               | 0.5              | %
|Bank Austria Creditanstalt (FFG-Investitionskredit) (EUR) |  | $           | 887   |          | 30 Jun 2007 |               | 3-m.EURIBOR +0.6 | %
|Erste Bank (FFG-Kredit) (EUR)                             |  | $           | 726   |          | 31 Mar 2008 |               | 3-m.EURIBOR +0.6 | %
|Bank Austria Creditanstalt (FFG-Kredit) (EUR)             |  | $           | 943   |          | 30 Jun 2009 |               | 3-m.EURIBOR +0.5 | %
|Erste Bank (AWS-Kredit) (EUR)                             |  | $           | 1,210 |          | 1 Jul 2010  |               | 3-m.EURIBOR +0.5 | %
|                                                          |  |             |       |          |             |               |                  |  
|Total                                                     |  | $           | 7,462 |          |             |               |                  |  
|                                                          |  |             |       |          |             |               |                  |  



5. Restructuring



On May 11, 2005, the Company announced that it was implementing a cost-
reduction program intended to align expenses with product development priorities. As of June 30, 2005, 22 employees have been terminated. The restructuring charge taken at June 30, 2005, was $818,000. Included in this amount is $767,000 for
severance and other professional services of $51,000. All restructuring charges will result in cash outflows and as of June 30, 2005 approximately $190,000 has been disbursed.



6. Subsequent Events



On July 25, 2005, our wholly-owned subsidiary, Igeneon, signed a licensing and commercialization agreement and a product development and manufacturing
agreement related to the manufacturing, marketing and distribution of our clinical product candidate IGN311. IGN311 is a humanized monoclonal antibody targeting the Lewis-Y antigen that is being developed as a potential new therapy for the treatment
of certain epithelial tumors.



Under the agreements, Igeneon
granted Celltrion a license to commercialize IGN311 in certain Asian countries, including Japan. In return, Igeneon could receive from Celltrion milestone payments totaling $6 million. In addition, Celltrion will provide development and
manufacturing services related to the optimization and upscaling of IGN311 and will produce material for further clinical development, which we believe will result in a cost savings to us of approximately $10 million. As part of the market
authorization process, Celltrion will manage clinical development activities in Asia. Upon market approval of IGN311, Igeneon will also be entitled to receive royalties from sales of IGN311 in Asia, and Celltrion will have the option to manufacture
the therapy for global market supply. The transaction is expected to close on October 1, 2005.



On June 1, 2005, we were informed by The Nasdaq Stock Market that we were not in compliance with Nasdaq National Marketplace Rule 4450(b)(1)(A) regarding the minimum market value of listed shares required for
continued listing on The Nasdaq National Market. Pursuant to the Marketplace Rules, we had until June 30, 2005, to either regain compliance or apply to have our common stock transferred to The Nasdaq SmallCap Market or we would be subject to
delisting. Our senior management and Board of Directors decided to submit an application requesting transfer to The Nasdaq SmallCap Market and that application was approved on July 22, 2005. Accordingly, at the opening of business on July 25, 2005,
our common stock was transferred from The Nasdaq National Market to The Nasdaq SmallCap Market. We believe the decision to transfer the listing of our common stock to The Nasdaq SmallCap Market is in the best interests of our stockholders. Further,
we believe that the liquidity provided by The Nasdaq SmallCap Market is similar to that of The Nasdaq National Market, the transfer will have no effect on the way our shares are traded and the transfer will have no effect on investors ability
to buy and sell our common stock.



10



---

##### Table of Contents

On June 23, 2005, we were informed by The Nasdaq Stock Market that we were not in compliance with Nasdaq
National Marketplace Rule 4450(b) (4) regarding minimum bid price. Pursuant to the Marketplace Rules, we have until December 20, 2005, to regain compliance with this requirement.



11



---

##### Table of Contents

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations



Overview



General



We are a
biopharmaceutical company focused on developing innovative cancer therapies. Our research and development efforts are based on our proprietary active immunization and monoclonal antibody technologies. Our technologies are based on key discoveries
made by us as well as our understanding of the central role of gastrin, a naturally occurring hormone, and gastrin receptors. Through our wholly-owned subsidiary Igeneon, we are focused on the development of active and passive cancer immunotherapies
(cancer vaccines and monoclonal antibodies) designed to prevent or delay the development of metastases in cancers of epithelial origin. These product candidates are designed to target disseminated tumor cells, thereby having the potential to prevent
metastasis and the spread of cancer.



One of our lead product
candidates, which we acquired through our acquisition of Igeneon in March 2005, is IGN101, a cancer vaccine which is currently in a Phase III randomized double blind clinical trial in non-small cell lung cancer patients. We recently reached target
accrual of 760 patients in this study, three months ahead of schedule. We expect to have final data available from this study in 2007. In addition, on May 16, 2005, we announced that results from our double-blind, placebo-controlled Phase II
clinical trial of IGN101 in patients with solid tumors were presented at the 2005 Annual Meeting of the American Society for Clinical Oncology (ASCO). In the study, a statistically significant difference in overall survival was seen in a subgroup of
patients with rectal cancer and a positive trend toward survival improvement was observed in patients with colon cancer. This trial was conducted in 240 patients with epithelial cancers, which consists of colorectal cancer, gastrointestinal tract
cancer, non-small cell lung cancer and liver cancer.



Another product-candidate we acquired through our acquisition of Igeneon is IGN311, a monoclonal antibody targeting Lewis Y-positive cancer cells. We recently completed an open-label dose escalating Phase I trial with IGN311 and on July 12,
2005, we announced the positive results from this study. In the Phase I trial, IGN311 demonstrated favorable safety and tolerability, and advantageous pharmacokinetics with a serum half-life of more than 20 days. Data from the trial also indicate
efficacy of IGN311 against Lewis Y-positive tumor cells circulating in peripheral blood. As a result of this positive data, we have moved forward with a Phase I/II clinical trial with IGN311 and on July 21, 2005, we announced that initiation of the
open-label Phase I/II began with the enrollment of our first patient. As part of the further development of IGN311, on July 25, 2005, we announced that we entered into a licensing and commercialization agreement and a product development and
manufacturing agreement with Celltrion, Inc. We believe that these agreements validate the interest in IGN311 and will allow us to expedite the development of IGN311 in a cost efficient manner.



Our most advanced product-candidate is Insegia  (G17DT immunogen). We have completed two Phase III clinical trials for the
treatment of pancreatic cancer with Insegia. We also completed testing of Insegia in one Phase II clinical trial for the treatment of gastric cancer and one Phase II clinical trial for the treatment of colorectal cancer. On May 11, 2005, we
announced that as a result of a cost-reduction program we no longer had the internal resources to allocate toward the clinical development of Insegia. However, we have been encouraged by the results achieved in patients who achieved an antibody
response in clinical trials with Insegia as both a monotherapy, and in combination with chemotherapy. Accordingly, we are currently devoting significant effort to seeking partners that have the financial resources to support additional clinical
studies and/or other research and development activities that may be necessary to support regulatory approval of Insegia for patients with gastrin-sensitive cancers. We believe that the activity demonstrated by Insegia in patients with
gastrin-sensitive cancers should enhance our ability to find an appropriate partner to assist in developing Insegia.



In addition, we have recently initiated discussions with sanofi-aventis regarding the possible dissolution of our strategic alliance with them. We have
begun these discussions to facilitate the opportunity to seek a corporate partner for the further development of Insegia in gastric cancer. While the discussions have progressed, they are in the preliminary stages and there can be no guarantee that
we will be able to come to an agreement with sanofi-aventis on such dissolution or that the terms of such dissolution would be as favorable to us as we would desire.



Financial Operations



We do not have any products approved for sale in the United States or abroad. Therefore, we do not generate any revenue from the sale of our products. We
have experienced significant operating losses since our inception in



12



---

##### Table of Contents

1981 and expect to continue incurring significant operating losses for at least the next several years.
We expect losses to continue over the next several years as we continue our clinical trials, apply for regulatory approvals and continue our research and development efforts. We also expect to experience negative operating cash flows for the
foreseeable future. Our losses have adversely impacted, and will continue to adversely impact, our working capital, total assets and stockholders equity (deficit).



Our net loss for the six months ended June 30, 2005, was $53.4 million including non-cash charges of $34.2 million. As of
June 30, 2005, we had an accumulated deficit of approximately $249.0 million. Our operating losses are primarily due to the costs of development of our product-candidates. These costs can vary significantly from year to year depending on the number
of product-candidates in development, the stage of development of each product-candidate, the number of patients enrolled in and complexity of clinical trials and other factors. Our ability to achieve profitability depends upon our ability, alone or
through relationships with third parties, to develop successfully our technology and product-candidates, to obtain required regulatory approvals and to manufacture, market and sell such product-candidates. It is possible that we may never be
profitable.



Because we have not yet generated any revenue from
the sale of any products, we have primarily relied on the capital markets as our source of funding. Based on the current market price of our common stock, we believe it could be difficult for us to obtain additional funding through the issuance of
equity on reasonable terms, if at all. In addition, we have sought and will continue to seek funding through arrangements with collaborative partners or others that would require us to license rights to certain of our technologies, potential
products or products that we would otherwise seek to develop or commercialize ourselves. These collaborations may take the form of strategic alliances with other drug companies. If funding from these various sources is not available at reasonable
terms, we may be required to further reduce our operating expenses in order to conserve cash and capital by delaying, reducing the scope of or eliminating one or more of our product development programs.



Cost-Reduction Program



In connection with the Igeneon acquisition and after further analysis of the results our Phase III clinic trial of Insegia,
we began a review of all of our consolidated resources, budgeted expenditures and the clinical trials and research and development efforts being conducted by the two companies. As a result of such review, on May 11, 2005, we announced that we had
begun implementing a cost-reduction program intended to align our expenses with product development priorities with the goal of improving our operating efficiencies. Based on the current value of our stock price, we believe that our ability to raise
substantial amounts of capital to fund our combined operations is limited and therefore we need to identify and fund those programs which we believe provide the most potential return to stockholders. Accordingly, we have begun the process of closing
our Woodland, California facility, and decommissioning our research and development and QA/QC programs located there.



We currently anticipate that the entire decommissioning process of the Woodland facility and operations should be complete by November 30, 2005. The
responsibilities for most of the positions eliminated at Woodland will be transferred to our corporate office in Philadelphia and our other research and development facilities located in Austria and the United Kingdom. Furthermore, as a result of
our reprioritization of resources, we do not believe that the elimination of the positions and the closing of the Woodland facility will adversely affect our ability to pursue the humanization and development of a gastrin monoclonal antibody or the
development of IGN101 or IGN311, or hinder our ability to find a strategic partner to assist us in the further development of Insegia.



During the quarter ended June 30, 2005, we recognized $818,000 in restructuring charges associated with this cost-reduction program relating primarily to
the costs of employee separation for approximately 22 employees and exit costs associated with the closing and consolidation of the Woodland facility. Included in this amount is $767,000 for severance and other professional services of $51,000. All
restructuring charges will result in cash outflows and as of June 30, 2005 approximately $190,000 has been disbursed.



We continue to monitor our current cash position and believe that in the event we are unable to obtain financing either through the capital markets or by
entry into a strategic alliance, we will need to reduce our current cash burn further through the elimination of employee positions and the termination of certain projects.



Critical Accounting Policies



The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates, however, we believe such differences are unlikely to be significant.



13



---

##### Table of Contents

Our significant accounting policies are described in Note 1 to the financial statements included in this
Quarterly Report. We believe that our most critical accounting policies include the use of estimates. The impact of these estimates on results of operations for the three and six months ended June 30, 2005 and 2004, respectively, were not
significant. We periodically review these policies and estimates, the effect of which is reflected as a component of net loss in the period in which the change is known.



Convertible Debt Issued with Stock Purchase Warrants



We account for convertible debt issued with stock purchase warrants in accordance with Accounting Principles Board Opinion
No. 14, Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants, Emerging Issues Task Force (EITF) No. 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios, and EITF No. 00-27, Application of Issue No. 98-5 to Certain Convertible Instruments.



Income taxes



We account for income taxes pursuant to Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes, which
requires an asset and liability approach in accounting for income taxes. Under this method, the amount of deferred tax asset or liability is calculated by applying the provisions of enacted tax laws to the differences in the bases of assets and
liabilities for financial and income tax purposes. For all periods presented the deferred tax assets are fully reserved.



Research and Development Expenses



Research and development costs are expensed as incurred. These costs include external and internal research and development costs, the salaries of
dedicated personnel, the allocated salaries of personnel who also perform general and administrative tasks, the costs of the dedicated research and development facilities and the costs of contracted researchers. There is no allocation of
administrative expense or corporate costs to research and development costs.



Foreign Currency Accounting



The
Company complies withSFAS No. 52 Foreign Currency Translation,which established standards for reporting on foreign subsidiaries in consolidated financial statements.





14



---

##### Table of Contents

Results of Operations



Three months ended June 30, 2005 and 2004



|                                              |  |                             |         |   |                            |   |        |   |  |     |   
|--------------------------------------------- |  | --------------------------- | ------- | - | -------------------------- | - | ------ | - |  | --- | --
|                                              |  | Three months Ended June 30, |         |   | % Change from 2004 to 2005 |  
|                                              |  | 2005                        |         |   | 2004                       |   |       
|                                              |  | (in thousands)              |        
|Revenue:                                      |  | $                           |        |   |                            | $ |       |   |  |    |   
|Costs and expenses:                           |  |                             |         |   |                            |   |        |   |  |     |   
|General and administrative                    |  |                             | 2,972   |   |                            |   | 850    |   |  | 250 | % 
|Research and development                      |  |                             | 8,329   |   |                            |   | 5,371  |   |  | 55  | % 
|Restructuring expense                         |  |                             | 818     |   |                            |   |       |   |  |    |   
|                                              |  |                             |         |   |                            |   |        |   |  |     |   
|Total costs and expenses                      |  |                             | 12,119  |   |                            |   | 6,221  |   |  | 95  | % 
|                                              |  |                             |         |   |                            |   |        |   |  |     |   
|Loss from operations                          |  |                             | (12,119 | ) |                            |   | (6,221 | ) |  | 95  | % 
|                                              |  |                             |         |   |                            |   |        |   |  |     |   
|Other income (expense):                       |  |                             |         |   |                            |   |        |   |  |     |   
|Interest expense including amortized discount |  |                             | (871    | ) |                            |   | (658   | ) |  | 32  | % 
|Dividend and interest income                  |  |                             | 268     |   |                            |   | 119    |   |  | 125 | % 
|Unrealized gain from investments              |  |                             | 8       |   |                            |   | 12     |   |  | (33 | )%
|                                              |  |                             |         |   |                            |   |        |   |  |     |   
|Net loss                                      |  | $                           | (12,714 | ) |                            | $ | (6,747 | ) |  | 88  | % 
|                                              |  |                             |         |   |                            |   |        |   |  |     |   



General and
administrative expenses. General and administrative expenses are primarily comprised of expenses related to intellectual property, general corporate and patent legal costs and the salaries of our administrative personnel. The increase in our
general and administrative expenses for the three months ended June 30, 2005, compared to the three months ended June 30, 2004, was primarily due to the inclusion of the general and administrative costs associated with our wholly-owned subsidiary,
Igeneon, for the full three months ended June 30, 2005, and an increase in salary and benefits of our administrative personnel.



Research and development expenses. Research and development expenses are primarily comprised of the external costs of contracted clinical research
organizations, or CROs, and, to a lesser extent, our external and internal research and development costs which include the salaries of dedicated and allocated personnel and the costs of the dedicated and allocated research and development
facilities. The increase in our research and development expenses for the three months ended June 30, 2005, compared to the three months ended June 30, 2004, was primarily due to an increase in expenses associated with the research and development
of our newly acquired product-candidates, IGN101 and IGN311, and certain other programs of Igeneon. This increase was offset partially by the implementation of our cost-reduction program and the completion of certain of our clinical trials.



Restructuring expenses.On May 11, 2005, the Company
announced that it was implementing a cost- reduction program intended to align expenses with product development priorities. As of June 30, 2005, 22 employees have been terminated. The restructuring charge taken at June 30, 2005, was $818,000.
Included in this amount is $767,000 for severance and other professional services of $51,000. All restructuring charges will result in cash outflows and as of June 30, 2005 approximately $190,000 has been disbursed.





15



---

##### Table of Contents

Net loss. The increase in net loss for the three months ended June 30, 2005, compared to the three
months ended June 30, 2004, was primarily due to the inclusion of the general and administrative costs and research and development costs associated with our wholly-owned subsidiary, Igeneon, for the full three months ended June 30, 2005.



Interest expense including amortized discount. Interest
expense including amortized discount of $358,214 was $871,000 for the three months ended June 30, 2005, compared with interest expense including amortized discount of $275,574 of $658,000 for the three months ended June 30, 2004. This increase is
due primarily to the increase of the amortized discount of our convertible debt instruments and the assumption of interest payment obligations associated with Igeneons outstanding debt.



Six months ended June 30, 2005 and 2004



|                                              |  |                           |         |   |                           |   |         |   |  |     |  
|--------------------------------------------- |  | ------------------------- | ------- | - | ------------------------- | - | ------- | - |  | --- | -
|                                              |  | Six months Ended June 30, |         |   | %Change from 2004 to 2005 |  
|                                              |  | 2005                      |         |   | 2004                      |   |        
|                                              |  | (in thousands)            |        
|Revenue:                                      |  | $                         |        |   |                           | $ |        |   |  |    |  
|Costs and expenses:                           |  |                           |         |   |                           |   |         |   |  |     |  
|General and administrative                    |  |                           | 5,354   |   |                           |   | 1,662   |   |  | 222 | %
|Research and development                      |  |                           | 13,147  |   |                           |   | 10,163  |   |  | 29  | %
|Acquired in-process research and development  |  |                           | 32,992  |   |                           |   |        |   |  |     |  
|Restructuring expense                         |  |                           | 818     |   |                           |   |        |   |  |    |  
|                                              |  |                           |         |   |                           |   |         |   |  |     |  
|Total costs and expenses                      |  |                           | 52,311  |   |                           |   | 11,825  |   |  | 342 | %
|                                              |  |                           |        
|Loss from operations                          |  |                           | (52,311 | ) |                           |   | (11,825 | ) |  | 342 | %
|                                              |  |                           |         |   |                           |   |         |   |  |     |  
|Other income (expense):                       |  |                           |         |   |                           |   |         |   |  |     |  
|Dividend and interest income                  |  |                           | 543     |   |                           |   | 144     |   |  | 277 | %
|Interest expense including amortized discount |  |                           | (1,594  | ) |                           |   | (1,299  | ) |  | 23  | %
|Unrealized gains (losses) from investments    |  |                           | (23     | ) |                           |   | 10      |   |  | 330 | %
|                                              |  |                           |         |   |                           |   |         |   |  |     |  
|Net loss                                      |  | $                         | (53,385 | ) |                           | $ | (12,970 | ) |  | 312 | %
|                                              |  |                           |         |   |                           |   |         |   |  |     |  



General and
administrative expenses. General and administrative expenses are primarily comprised of expenses related to intellectual property, general corporate and patent legal costs and the salaries of our administrative personnel. The increase in our
general and administrative expenses for the six months ended June 30, 2005, compared to the six months ended June 30, 2004, was primarily due to the inclusion of the general and administrative costs associated with our wholly-owned subsidiary,
Igeneon, for the full three months ended June 30, 2005, an increase in salary and benefits of our administrative personnel, and costs associated with our acquisition of Igeneon.



Research and development expenses. Research and development expenses are primarily comprised of the external costs of
contracted clinical research organizations, or CROs, and, to a lesser extent, our external and internal research and development costs which include the salaries of dedicated and allocated personnel and the costs of the dedicated and allocated
research and development facilities. The increase in our research and development expenses for the six months ended June 30, 2005, compared to the six months ended June 30, 2004, was primarily due to an increase in expenses associated with the
research and development of our newly acquired product-candidates, IGN101 and IGN311, and certain other programs of Igeneon. This increase was offset partially by the implementation of our cost-reduction program and the completion of certain of our
clinical trials.



Acquired in-process research and
development expenses.The acquired in-process research and development costs were expensed in conjunction with the acquisition of Igeneon as it was determined that the development of these projects had not yet reached technological feasibility.



Restructuring expenses. On May 11, 2005, the Company
announced that it was implementing a cost-reduction program intended to align expenses with product development priorities. As of June 30, 2005, 22 employees have been terminated. The restructuring charge taken at June 30, 2005 was $818,000.
Included in this amount is $767,000 for severance and other professional services of $51,000. All restructuring charges will result in cash outflows and as of June 30, 2005 approximately $190,000 has been disbursed.



Interest expense including amortized discount. Interest expense
including amortized discount of $698,392 was $1.6 million for the six months ended June 30, 2005, compared with interest expense including amortized discount of $536,000 was $1.3 million for the six months ended June 30, 2004. This increase is due
primarily to the increase of the amortized discount of our convertible debt instruments and the assumption of interest payment obligations associated with Igeneons outstanding debt.



16



---

##### Table of Contents

Net loss. The increase in net loss for the six months ended June 30, 2005, compared to the six
months ended June 30, 2004, was primarily due to the inclusion of the general and administrative costs and research and development costs associated with our wholly-owned subsidiary, Igeneon, for the full three months ended June 30, 2005, and costs
associated with our acquisition of Igeneon.



Liquidity and Capital Resources



We finance our operations through the sale of our equity
and convertible securities and the exercise of outstanding warrants. We also seek to finance our operations by entering into arrangements with strategic partners, whereby we would license certain of our product-candidates in exchange for licensing
fees.



We do not currently have any source of operating revenue
and will require significant amounts of cash to continue to fund our operations, our clinical trials and our research and development efforts until such time, if ever, that one of our products has received regulatory approval for marketing.
Furthermore, the results of our recent Insegia clinical trial and other factors have weakened the market value of our common stock and adversely affected our ability to access the capital markets for funding. Additionally, the market price of our
common stock may prohibit us from obtaining financing terms from potential investors that would benefit us in the long term. Consequently, we are exploring a number of alternatives, including licensing or selling a significant portion or all of our
intellectual property and/or other assets, the sale or exchange of a significant portion or all of our equity, restructuring or refinancing some or all of our debt, or pursuing other financial alternatives. We may implement one or more of these
alternatives. No assurances can be given that any particular transaction will be completed nor can any prediction or assurance be made regarding the possible impact of future transactions on our business, results or capitalization. Our ability to
make interest or principal payments on our indebtedness, comply with the covenants in our indebtedness documents, or effectively implement any of these alternatives to fund our future operations is dependent on many factors, many of which are beyond
our control.



As of June 30, 2005, we had cash and short-term
cash equivalents totaling $27.3 million and working capital of $4.4 million compared to cash and short-term cash equivalents totaling $43.4 million and a working capital of $34.3 million at December 31, 2004. The decrease in working capital was
primarily due to a reclassification from a non-current liability to a current liability for $12.5 million of the Companys convertible debt and the use of cash to support operations.



Indebtedness



As of June 30, 2005, we had an aggregate principal amount of $23.0 million of convertible debt instruments outstanding. The $23.0 million was comprised of
$3.0 million principal amount of our Series A Convertible Debenture and $20.0 million of our 2003 Senior Convertible Notes. There was an initial discount calculated against the value of the 2003 Senior Convertible Notes of $12.9 million, comprised
of the beneficial conversion feature of $8.3 million and other discounts attributable to the value of the detachable warrants issued in conjunction with the 2003 Senior Convertible Notes of $4.6 million.



Our Series A Convertible Debenture has a principal amount of $3.0 million and
is a convertible, redeemable, five-year debenture that matures on December 19, 2007. At any time prior to maturity, the Company has the right to redeem the Series A Convertible Debenture. In addition, at any time prior to maturity, the Company has
the obligation to redeem the Series A Convertible Debenture under certain conditions, including if the Company transfers its rights to certain projects or other products, or any other rights related thereto, to any entity, other than the holder of
the Series A Convertible Debenture or its affiliates. The Series A Convertible Debenture bears interest at a rate of 11.0% per annum, payable annually. The Series A Convertible Debenture is convertible at the holders option at a conversion
price equal to the average closing price of our common stock, as defined in the Series A Convertible Debenture, at the time of conversion. The Series A Convertible Debenture contains provisions that place a cap on the number of shares of our common
stock issuable upon its conversion, such that the holder thereof shall not have the right to convert any portion of the Series A Convertible Debenture to the extent that after giving effect to such conversion the holder would beneficially own more
than 19.99% of the number of shares of our common stock outstanding immediately prior to such conversion. We previously received communication that sanofi-aventis believes that it has the right to redeem the Series A Convertible Debenture as a
result of our entering into certain collaborative agreements. We are currently evaluating this claim. However, based upon the discussions that we have initiated with sanofi-aventis regarding possible dissolution of our strategic alliance with
sanofi-aventis, we currently believe we will redeem the Series A Convertible Debenture prior to its maturity date in accordance with the Series A Convertible Debentures original terms.



17



---

##### Table of Contents

The remaining $20.0 million is our redeemable, five-year interest bearing 2003 Senior Convertible Notes
which were issued in two tranches to accredited investors in 2003. On April 4, 2003, we issued $15.0 million of 2003 Senior Convertible Notes and 5-year warrants to purchase an aggregate total of 1,080,000 shares of our common stock to various
accredited investors. On June 12, 2003, we issued an additional $5.0 million of our 2003 Senior Convertible Notes and a 5-year warrant to purchase an aggregate total of 360,000 shares of our common stock to an accredited investor. The 2003 Senior
Convertible Notes mature on March 31, 2008. We have the right and obligation to redeem the 2003 Senior Convertible Notes under certain conditions at any time after the third year from the issuance date. The 2003 Senior Convertible Notes bear
interest at a rate of 6.0% per annum, payable quarterly in cash or shares of our common stock, at our option.



The 2003 Senior Convertible Notes are convertible at a fixed price of $2.50 per share, unless otherwise adjusted prior to conversion or repayment pursuant
to the price adjustment provisions set forth therein. The conversion price of the 2003 Senior Convertible Notes will be lowered in the event of a sale by us of our common stock or securities convertible or exercisable into our common stock at a per
share offering price less than the conversion price of the 2003 Senior Convertible Notes in effect immediately prior to such sale. The warrants are exercisable into shares of our common stock at $2.70 per share, unless otherwise adjusted prior to
exercise pursuant to the price adjustment provisions that are substantially similar to those set forth in the 2003 Senior Convertible Notes. The 2003 Senior Convertible Notes and the warrants contain provisions that place a cap on the numbers of
shares of our common stock issuable upon their conversion or exercise, such that the holders thereof shall not have the right to convert any portion of the notes to the extent that after giving effect to such conversion the holders would
beneficially own more than 19.99% or 4.99%, as the case may be for the respective holder, of the number of shares of our common stock outstanding immediately prior to such conversion or exercise.



As of June 30, 2005, our wholly-owned subsidiary Igeneon had $7.5 million in
USD equivalents in interest-bearing liabilities that are comprised of financial liabilities relating to funds received by Igeneon prior to the acquisition from various financial institutions and guaranteed by governmental agencies for Igeneons
research and development activities. The table below provides the amounts outstanding (in thousands in USD Equivalents), the maturity of each liability and the interest rate.



|                                                          |  |             |       |          |             |                                        |                         |  
|--------------------------------------------------------- |  | ----------- | ----- | -------- | ----------- | -------------------------------------- | ----------------------- | -
|Institution                                               |  | Outstanding |       | Maturity |             | Interest rate / Rate at March 31, 2005 |                        
|Österreichische Forschungsförderungs-gesellschaft (EUR)   |  | $           | 411   |          | 30 Sep 2005 |                                        | 2.0                     | %
|Österreichische Forschungsförderungs-gesellschaft (EUR)   |  | $           | 563   |          | 30 Jun 2006 |                                        | 3.0                     | %
|Bank Austria Creditanstalt (ERP-Investitionskredit) (EUR) |  | $           | 2,722 |          | 1 Jul 2006  |                                        | 0.5                     | %
|Bank Austria Creditanstalt (FFG-Investitionskredit) (EUR) |  | $           | 887   |          | 30 Jun 2007 |                                        | 3-m.EURIBOR +0.6%/ 2.76 | %
|Erste Bank (FFG-Kredit) (EUR)                             |  | $           | 726   |          | 31 Mar 2008 |                                        | 3-m.EURIBOR +0.6%/ 2.75 | %
|Bank Austria Creditanstalt (FFG-Kredit) (EUR)             |  | $           | 943   |          | 30 Jun 2009 |                                        | 3-m.EURIBOR +0.5%/ 2.66 | %
|Erste Bank (AWS-Kredit) (EUR)                             |  | $           | 1,210 |          | 1 Jul 2010  |                                        | 3-m.EURIBOR +0.5%/ 2.65 | %
|                                                          |  |             |       |          |             |                                        |                         |  
|Total                                                     |  | $           | 7,462 |          |             |                                        |                         |  
|                                                          |  |             |       |          |             |                                        |                         |  





18



---

##### Table of Contents

Uses of Funds



The primary uses of our cash are to fund our operations and working capital requirements, specifically, to fund our research and development activities
and our pre-clinical and clinical studies for our product candidates. Our uses of cash for operating activities and capital expenditures during the six months ended June 30, 2005 and 2004, were as follows:



|                                      |  |                           |        |      |   |       
|------------------------------------- |  | ------------------------- | ------ | ---- | - | ------
|                                      |  | Six months ended June 31,
|                                      |  | 2005                      |        | 2004
|                                      |  | (in thousands)           
|Net cash used in operating activities |  | $                         | 16,861 |      | $ | 12,306
|Capital expenditures                  |  |                           | 325    |      |   | 154   
|                                      |  |                           |        |      |   |       
|Total                                 |  | $                         | 17,186 |      | $ | 12,460
|                                      |  |                           |        |      |   |       



The net cash used in
operating activities is comprised of our net losses and working capital requirements.



Liquidity



Based on our current operating
plans, including the successful implementation of our cost reduction plan discussed above, and our current estimates of contractual obligations, we believe that our existing capital resources, which consist primarily of cash and short-term cash
investments will enable us to maintain operations and satisfy our periodic interest obligations on our 2003 Senior Convertible Notes (which we may, at our option, satisfy in cash or shares of our common stock) into 2006. However, there can be no
assurance that changes in our research and development plans or other future events affecting our operating expenses will not result in the depletion of our funds at an earlier time.



Our working capital and capital requirements will depend upon numerous factors, including the following: the progress of our
research and development program; pre-clinical testing and clinical trials; the timing and cost of obtaining regulatory approvals; the levels of resources that we devote to product development, manufacturing and marketing capabilities; technological
advances; competition; and collaborative arrangements or strategic alliances with other drug companies, including the further development, manufacturing and marketing of certain of our products and our ability to obtain funds from such strategic
alliances or from other sources and any repayments that we may be make on our outstanding indebtedness. Many of these factors are beyond our control. As discussed above, we are exploring a number of alternatives, including licensing or selling a
significant portion or all of our intellectual property and/or other assets, the sale or exchange of a significant portion or all of our equity, restructuring or refinancing some or all of our debt, or pursuing other financial alternatives. We may
implement one or more of these alternatives. If we are unable to complete such transactions, we may be required to delay, reduce the scope of, or eliminate one or more of our research or development programs and/or implement further reductions in
our workforce. We cannot assure you that any of these alternatives can be consummated, or if consummated, would effectively address the risks associated with our negative cash flow.



19



---

##### Table of Contents

Special Note Regarding Forward-Looking Statements



This quarterly report contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.



These statements concern expectations, beliefs, intentions, projections, future plans and strategies, anticipated events or trends and similar expressions
concerning matters that are not historical facts. Specifically, this quarterly report contains forward-looking statements regarding:



| |  |  | our expectations regarding losses and negative operating cash flows for the next several years and the impact on working capital, total assets and stockholders equity;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our expectations as to the adequacy of existing capital resources to support our operations and periodic interest obligations into 2006;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our belief that the impact of our use of estimates is not significant on our results of operations;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | our belief that the transfer of the listing of our common stock is in the best interest of our stockholders, the liquidity provided by The Nasdaq SmallCap Market is similar to that
of The Nasdaq National Market and the transfer will have no effect on investors ability to buy and sell our common stock or the way our shares are traded;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our current expectation that the operations of Igeneon will generate sufficient funds someday in the future to repay its liabilities;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to implement our cost-reduction plan, including decommissioning Woodland, to align our expenses with our product development priorities and improve our operating
efficiencies and to allocate adequate resources to projects that we believe offer us the best opportunity to create value for shareholders;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our belief that reprioritization of research resources will not adversely affect our ability to pursue the humanization and development of a gastrin monoclonal antibody and the
development of IGN101 and IGN311 product-candidates, or hinder our ability to find a strategic partner to assist us in the further development of Insegia;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our belief that our strategic alliance with Celltrion validates the interest in IGN311, will result in a cost savings to us of $10 million and will allow us to expedite the
development of IGN311 in a cost-efficient manner;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to dissolve the strategic alliance with sanofi-aventis on terms favorable to us or at all and our expectation that the right to continue to receive supplies would be a
part of any dissolution agreement;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our belief that we will redeem the Series A Convertible Debenture prior to its maturity date;
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | our current intent to explore a number of alternatives, including licensing or selling a significant portion or all of our intellectual property and/or other assets, the sale or
exchange of a significant portion or all of our equity, restructuring or refinancing some or all of our debt, or pursuing other financial alternatives and our belief that one or more of these alternatives may address the risks associated with our
negative cash flow;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our belief that if we are unable to obtain financing, either through the capital markets or by entry into a strategic alliance, we will need to reduce our current cash burn further
through the elimination of employee positions and termination of certain projects;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our intent to continue to seek partners that have the financial resources to support additional clinical studies and/or other research and development to support regulatory approval
of Insegia for use in patients with gastrin-sensitive cancers and our belief that the activity demonstrated by Insegia in patients with gastrin-sensitive cancers should enhance our ability to find an appropriate partner; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our expectations that the final data from the current Phase III study of IGN101 will be available in 2007.
| | - |  | ----------------------------------------------------------------------------------------------------------



20



---

##### Table of Contents

These forward-looking statements reflect our current views about future events and are subject to risks,
uncertainties and assumptions. We caution investors that certain important factors may have affected and could in the future affect our actual results and could cause actual results to differ significantly from those expressed in any forward-looking
statement. The most important factors that could prevent us from achieving our goals, and cause the assumptions underlying forward-looking statements and the actual results to differ materially from those expressed in or implied by those
forward-looking statements include, but are not limited to, the following:



| |  |  | our ability to obtain additional financing or reduce our costs and expenses;
| | - |  | ----------------------------------------------------------------------------



| |  |  | our ability to identify and realize anticipated cost efficiencies;
| | - |  | ------------------------------------------------------------------



| |  |  | our ability to develop, obtain regulatory approval for, produce in commercial quantities and gain commercial acceptance for our product candidates;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to maintain and enter into new arrangements and collaborations with third parties for the supply of key materials and/or assistance in the manufacture, market, sale and
distribution of our products;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our level of debt obligations and the impact of restrictions imposed on us by the terms of this debt;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | our ability to attract and retain highly qualified scientists and other technical personnel;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | our ability to fund the further development of our research and development programs and effectively prioritize our research and development programs to allocate adequate resources
to projects;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to consummate a strategic or financial transaction on terms as favorable to us as we would desire, or at all;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | unexpected expenses or repayments of indebtedness that may negatively impact our ability to fund our research and development or clinical programs;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to identify a partner willing to fund the continued development of Insegia;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | scientific developments regarding immunotherapies;
| | - |  | --------------------------------------------------



| |  |  | our ability to protect our patent and other intellectual property rights from infringement by third parties and to ensure that those rights do not become the subject of infringement
claims by third parties;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to successfully integrate Igeneons operations and product portfolio with our operations and product portfolio; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------



| |  |  | the actual design, results and timing of preclinical and clinical studies for our and Igeneons products and product candidates.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------





21



---

##### Table of Contents

Item 3. Quantitative and Qualitative Disclosure about Market Risk



We do not engage in trading market risk sensitive instruments or purchasing hedging instruments or other than trading instruments that are
likely to expose us to significant market risk, whether interest rate, foreign currency exchange, commodity price or equity price risk.



Foreign Currency Exchange Risk.We have a significant subsidiary with financial liabilities and on-going operations in Austria. In addition, we
have laboratory and staff in England. Consequently, we are exposed to significant currency exchange risk in Euros and Great Britain Pounds. We have, and will continue to have, significant expenses that are denominated in these two currencies. If the
U.S. dollar weakens relative to either of these foreign currencies, any losses generated in the foreign currency will, in effect, increase when converted into U.S. dollars and vice versa. In addition, the financial liabilities of Igeneon are
denominated in Euros; therefore if the U.S. dollar weakens relative to the Euro our amount of financial liabilities will increase when converted into U.S. dollars. We currently expect the operations of Igeneon, which are denominated in Euros, to
generate sufficient funds someday in the future to repay these liabilities.



We do not speculate in the foreign exchange market and currently do not manage exposures that arise in the normal course of business related to fluctuations in foreign currency exchange rates by entering into
offsetting positions through the use of foreign exchange forward contracts. We also do not engage in derivative activities.



Interest Rate Risk. At June 30, 2005, we had cash and current investments in the amount of $27.3 million. We also had principal amount of
convertible debentures and notes payable of $30.5 million. Cash equivalents consist of money market funds and short term investments with maturities of three months or less placed with major financial institutions.



We are exposed to certain market risks that are inherent in our financial
instruments. Specifically, our wholly-owned subsidiary, Igeneon, is subject to interest rate risk on its variable rate financial liabilities. The following table presents the future principal payment obligations and interest rates associated with
Igeneons financial liabilities as of June 30, 2005:



|                                                                         |  |                                   |  |       |  |      |  |      |  |      |  |            |  |       |  |           
|------------------------------------------------------------------------ |  | --------------------------------- |  | ----- |  | ---- |  | ---- |  | ---- |  | ---------- |  | ----- |  | ----------
|                                                                         |  | 2005                              |  | 2006  |  | 2007 |  | 2008 |  | 2009 |  | Thereafter |  | Total |  | Fair Value
|                                                                         |  | (in thousands in USD equivalents)
|Financial Liabilities                                                    |  |                                   |  |       |  |      |  |      |  |      |  |            |  |       |  |           
|Fixed Rate Liabilities                                                   |  |                                   |  |       |  |      |  |      |  |      |  |            |  |       |  |           
|Austria Wirtschaftsservice (8.5%) (EUR)                                  |  | 411                               |  |      |  |     |  |     |  |     |  |           |  | 411   |  | 368       
|Österreichische Forschungsförderungs-gesellschaft (Avg. Rate 2.5%) (EUR) |  |                                  |  | 563   |  |     |  |     |  |     |  |           |  | 563   |  | 429       
|Bank Austria Creditanstalt (0.5%) (EUR)                                  |  |                                  |  | 2,722 |  |     |  |     |  |     |  |           |  | 2,722 |  | 2,007     
|Variable Rate Liabilities                                                |  |                                   |  |       |  |      |  |      |  |      |  |            |  |       |  |           
|Bank Austria Creditanstalt (Euribor +0.6%) (EUR)                         |  | 222                               |  | 444   |  | 221  |  |     |  |     |  |           |  | 887   |  | 659       
|Bank Austria Creditanstalt (FFG-Kredit) (Euribor +0.5%) (EUR)            |  |                                  |  | 157   |  | 315  |  | 315  |  | 156  |  |           |  | 943   |  | 576       
|Erste Bank (FFG-Kredit) (Euribor +0.6%) (EUR)                            |  | 121                               |  | 242   |  | 242  |  | 121  |  |     |  |           |  | 726   |  | 576       
|Erste Bank (AWS-Kredit) (Euribor +0.5%) (EUR)                            |  |                                  |  |      |  |     |  | 403  |  | 403  |  | 404        |  | 1,210 |  | 592       



The following table
presents the future principal payment obligations at maturity and interest rates associated with our direct financial liabilities as of June 30, 2005:



|                                           |  |      |  |      |  |      |       |      |   |        |  |            |  |       |  |            |        |  |   |      
|------------------------------------------ |  | ---- |  | ---- |  | ---- | ----- | ---- | - | ------ |  | ---------- |  | ----- |  | ---------- | ------ |  | - | -----
|                                           |  | 2005 |  | 2006 |  | 2007 |       | 2008 |   | 2009   |  | Thereafter |  | Total |  | Fair Value
|Convertible Debentures:                    |  |      |  |      |  |      |       |      |   |        |  |            |  |       |  |            |        |  |   |      
|Series A Convertible Debenture (11.0%)USD) |  |     |  |     |  | $    | 3,000 |      |   |       |  |           |  |      |  | $          | 3,000  |  | $ | 2,164
|2003 Senior Convertible Notes (6.0%) (USD) |  |     |  |     |  |      |      |      | $ | 20,000 |  |           |  |      |  | $          | 20,000 |  | $ | 9,682



22



---

##### Table of Contents

The convertible debt instruments included in the above table have been classified on our balance sheet as
of June 30, 2005 as current liabilities. We currently believe we will redeem prior to the stated maturity date the Series A Convertible Debenture in accordance with the Series A Convertible Debentures original terms. Furthermore, in accordance
with the terms of the 2003 Senior Convertible Notes, we may be obligated to redeem all or part of the 2003 Senior Convertible Notes at any time after March 31, 2006.



We maintain an investment portfolio of money market funds and auction rate securities. The securities in our investment
portfolio are not leveraged, and are, due to their very short-term nature, subject to minimal interest rate risk. We currently do not hedge interest rate exposure. Because of the short-term maturities of our investments, we do not believe that a
change in interest rates would have a significant negative impact on the value of our investment portfolio.



The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing
risk. To achieve this objective, we invest our excess cash in investments supported by debt instruments of the U.S. Government and its agencies, bank obligations and high-quality corporate issuers, and, by policy, restrict our exposure to any single
corporate issuer by imposing concentration limits. To minimize the exposure due to adverse shifts in interest rates, we maintain investments at an average maturity of generally less than three months.



Item 4. Controls and Procedures



The term disclosure controls and procedures is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, or the Exchange Act. This term refers to the controls and procedures of a company that are
designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange
Commission. An evaluation was performed under the supervision and with the participation of the Companys management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of
the Companys disclosure controls and procedures as of June 30, 2005. Based on that evaluation, the Companys management, including the CEO and CFO, concluded that the Companys disclosure controls and procedures were effective as of
June 30, 2005. During the quarter ending on June 30, 2005, there was no change in the Companys internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Companys internal
control over financial reporting.



Part II - Other Information



Item 4. Submission of Matters to a Vote of Security Holders



On June 30, 2005, we held our Annual Meeting of Stockholders (the Annual Meeting). At the Annual Meeting, our stockholders voted on the election of three Class 3 directors to serve a term of three years
and, in each case, until his successor is duly elected and qualified.



The
voting results were as follows:



|                   |  |            |  |          
|------------------ |  | ---------- |  | ---------
|Name of Nominee    |  | For        |  | Withheld 
|Robert S. Basso    |  | 30,308,480 |  | 8,165,805
|Vincent D. Enright |  | 37,388,176 |  | 1,086,109
|David H. Sachs, MD |  | 37,387,740 |  | 1,086,545



Item. 5 Other Information



We
entered into a Severance Agreement and Full Waiver and Release (the Severance Agreement), effective June 9, 2005 (the Effective Date), with Dov Michaeli, our former Chief Medical Officer. Pursuant to the terms of the
Severance Agreement, Dr. Michaeli released us and our directors, officers and other affiliates from any and all claims, rights, liabilities, damages, losses, demands, obligations and causes of action of any kind that he had or may have had against
us on or prior to the Effective Date. In addition, Dr. Michaeli agreed that he would continue to be bound after termination of his employment by the terms of the Companys Confidentiality and Inventions Policies. In exchange for the foregoing,
we agreed to pay Dr. Michaeli a severance amount equal to approximately three weeks of his annual salary for each year of service with the Company, or $246,093, which is payable by us to Dr. Michaeli over the six month period immediately following
the Effective Date.



23



---

##### Table of Contents

Separately, we entered into a Consulting Agreement (the Consulting Agreement), dated June 9,
2005, with Dr. Michaeli, whereby Dr. Michaeli agreed to provide certain business development and other services to us, including, without limitation, assisting us in finding a viable partner to financially support the further development of Insegia.
In accordance with the terms of the Consulting Agreement, Dr. Michaeli will receive an annual consulting fee of $125,000. In addition, in the event that during the consultancy period Dr. Michaeli is able to secure a long-term financial commitment
acceptable to us by an Asian Partner (as defined in the Consulting Agreement), we will pay Dr. Michaeli a 1% finders fee for any initial cash payment made to us by any such partner. The Consulting Agreement also provides for certain
non-compete, non-solicitation and confidentiality provisions. The initial term of the Consulting Agreement is one-year, but is terminable by either party upon thirty days prior written notice to the other party.



On April 21, 2005, after consultation with outside compensation advisors, our
Compensation Committee and Board of Directors approved an increase of $7,500 to the annual cash compensation paid to outside directors. In addition, based on the significantly increased levels of responsibility and time commitment required by those
directors who serve on our Boards standing committees, our Compensation Committee and Board of Directors approved the following cash compensation for such committee members: (i) an annual fee of $10,000 for the Chairperson of our Audit
Committee and $5,000 for each other member of our Audit Committee and (ii) an annual fee of $5,000 for the Chairperson of our Compensation and Nominating Committees and $2,500 for each other member of such committees.



Item 6. Exhibits



|      |  |                                                                                                                              
|----- |  | -----------------------------------------------------------------------------------------------------------------------------
|10.17 |  | Severance Agreement and Full Waiver and Release, effective June 9, 2005, between Dov Michaeli and Aphton Corporation.        
|      | 
|10.18 |  | Consulting Agreement, dated June 9, 2005, between Dov Michaeli and Aphton Corporation.                                       
|      | 
|31.1  |  | Certification by Patrick T. Mooney, M.D., Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|      | 
|31.2  |  | Certification by James F. Smith, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.         
|      | 
|32.1  |  | Certification by Patrick T. Mooney, M.D., Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|      | 
|32.2  |  | Certification by James F. Smith, Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.         



24



---

##### Table of Contents

Signatures



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



|                     |  |                    |  |                                      
|-------------------- |  | ------------------ |  | -------------------------------------
|                     |  | APHTON CORPORATION
|                     |  |                   
|Date: August 3, 2005 |  | By:                |  | /s/ Patrick T. Mooney, M.D.          
|                     |  |                    |  | Patrick T. Mooney, M.D.              
|                     |  |                    |  | Chief Executive Officer and President
|                     |  |                    |  | (Principal Executive Officer)        
|                     |  |                   
|Date: August 3, 2005 |  | By:                |  | /s/ James F. Smith                   
|                     |  |                    |  | James F. Smith                       
|                     |  |                    |  | Senior Vice President and            
|                     |  |                    |  | Chief Financial Officer              
|                     |  |                    |  | (Principal Financial Officer)        



25



---

##### Table of Contents

Exhibit Index



|      |  |                                                                                                                              
|----- |  | -----------------------------------------------------------------------------------------------------------------------------
|10.17 |  | Severance Agreement and Full Waiver and Release, effective June 9, 2005, between Dov Michaeli and Aphton Corporation.        
|      | 
|10.18 |  | Consulting Agreement, dated June 9, 2005, between Dov Michaeli and Aphton Corporation.                                       
|      | 
|31.1  |  | Certification by Patrick T. Mooney, M.D., Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|      | 
|31.2  |  | Certification by James F. Smith, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.         
|      | 
|32.1  |  | Certification by Patrick T. Mooney, M.D., Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|      | 
|32.2  |  | Certification by James F. Smith, Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.