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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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(Mark One)

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



For the quarterly period ended September 30, 2004



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



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APHTON CORPORATION

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 95-3640931                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|80 SW Eighth Street, Miami, Florida 33130                      |  | 33130                               
|(address of principal executive offices)                       |  | (Zip Code)                          



(305) 374-7338

(Registrants telephone number, including area code)





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



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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 |  | 37,796,726                   |  | October 26, 2004



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##### Table of Contents

APHTON CORPORATION



Index



|                                                                                               |  |     
|---------------------------------------------------------------------------------------------- |  | ----
|                                                                                               |  | Page
|Part I -
Financial Information                                                                 |  | 1   
|                                                                                               | 
|Item 1.
Financial Statements:                                                                  |  | 1   
|                                                                                               | 
|Balance Sheets  September 30, 2004 (unaudited) and December 31, 2003                          |  | 2   
|                                                                                               | 
|Statements of Operations (unaudited) - Three and nine months ended September 30, 2004 and 2003 |  | 3   
|                                                                                               | 
|Statements of Cash Flows (unaudited) - Nine months ended September 30, 2004 and 2003           |  | 4   
|                                                                                               | 
|Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations  |  | 7   
|                                                                                               | 
|Item 3.
Quantitative and Qualitative Disclosures About Market Risk                             |  | 16  
|                                                                                               | 
|Item 4.
Controls and Procedures                                                                |  | 16  
|                                                                                               | 
|Part II -
Other Information                                                                    |  | 17  
|                                                                                               | 
|Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds                            |  | 17  
|                                                                                               | 
|Item 6.
Exhibits                                                                               |  | 17  
|                                                                                               | 
|Signatures                                                                                     |  | 18  



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##### Table of Contents

Part I - Financial Information



Item 1. Financial Statements



The interim
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 financial statements include all adjustments (consisting
of normal recurring entries) necessary to present fairly our financial position as of September 30, 2004 and December 31, 2003 and the results of our operations for the three and nine months ended September 30, 2004 and 2003; and our cash flows for
the nine months ended September 30, 2004 and 2003. It is suggested that these financial statements be read in conjunction with the financial statements and the notes thereto included in our latest annual report on Form 10-K.



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##### Table of Contents

APHTON CORPORATION



Balance
Sheets



|                                                                                                                                                                    |  |                   |              |   |                  |   |              |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------------ | - | ---------------- | - | ------------ | -
|                                                                                                                                                                    |  | September 30,2004 |              |   | December 31,2003 |  
|                                                                                                                                                                    |  | (Unaudited)       |              |   |                  |  
|Assets                                                                                                                                                              |  |                   |              |   |                  |   |              |  
|Current assets:                                                                                                                                                     |  |                   |              |   |                  |   |              |  
|Cash and current investments:                                                                                                                                       |  |                   |              |   |                  |   |              |  
|Cash and short-term cash investments                                                                                                                                |  | $                 | 48,449,093   |   |                  | $ | 18,378,988   |  
|Investment securities-trading                                                                                                                                       |  |                   | 980,677      |   |                  |   | 836,587      |  
|                                                                                                                                                                    |  |                   |              |   |                  |   |              |  
|Total cash and current investments                                                                                                                                  |  |                   | 49,429,770   |   |                  |   | 19,215,575   |  
|Other assets (including current portion of unconditional supply commitment)                                                                                         |  |                   | 658,755      |   |                  |   | 517,627      |  
|                                                                                                                                                                    |  |                   |              |   |                  |   |              |  
|Total current assets                                                                                                                                                |  |                   | 50,088,525   |   |                  |   | 19,733,202   |  
|Equipment and improvements, net                                                                                                                                     |  |                   | 593,886      |   |                  |   | 158,534      |  
|Deferred financing costs, net of accumulated amortization of $32,875 September 30, 2004 and $8,990 as of December 31, 2003                                          |  |                   | 532,125      |   |                  |   | 556,010      |  
|Unconditional supply commitment                                                                                                                                     |  |                   | 6,797,900    |   |                  |   | 6,797,900    |  
|                                                                                                                                                                    |  |                   |              |   |                  |   |              |  
|Total assets                                                                                                                                                        |  | $                 | 58,012,436   |   |                  | $ | 27,245,646   |  
|                                                                                                                                                                    |  |                   |              |   |                  |   |              |  
|Liabilities and Stockholders Equity (Deficit)                                                                                                                      |  |                   |              |   |                  |   |              |  
|Liabilities:                                                                                                                                                        |  |                   |              |   |                  |   |              |  
|Current liabilities:                                                                                                                                                |  |                   |              |   |                  |   |              |  
|Trade accounts payable                                                                                                                                              |  | $                 | 2,003,056    |   |                  | $ | 1,604,435    |  
|Due to related party                                                                                                                                                |  |                   | 3,234,000    |   |                  |   | 3,234,000    |  
|Accrued liabilities                                                                                                                                                 |  |                   | 1,311,911    |   |                  |   | 1,114,464    |  
|Accrued interest payable                                                                                                                                            |  |                   | 547,500      |   |                  |   | 630,000      |  
|                                                                                                                                                                    |  |                   |              |   |                  |   |              |  
|Total current liabilities                                                                                                                                           |  |                   | 7,096,467    |   |                  |   | 6,582,899    |  
|Note payable and deferred rent                                                                                                                                      |  |                   | 128,572      |   |                  |   |             |  
|Convertible debentures, net of discount of $11,456,811 as of September 30, 2004 and $12,261,508 as of December 31, 2003                                             |  |                   | 11,543,189   |   |                  |   | 10,738,492   |  
|Deferred revenue                                                                                                                                                    |  |                   | 10,000,000   |   |                  |   | 10,000,000   |  
|                                                                                                                                                                    |  |                   |              |   |                  |   |              |  
|Total liabilities                                                                                                                                                   |  |                   | 28,768,228   |   |                  |   | 27,321,391   |  
|                                                                                                                                                                    |  |                   |              |   |                  |   |              |  
|Commitments                                                                                                                                                         |  |                   |              |   |                  |   |              |  
|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: 60,000,000 shares; issued and outstanding: 37,712,218 at September 30, 2004 and 29,217,257 shares
at December 31, 2003 |  |                   | 37,712       |   |                  |   | 29,217       |  
|Additional paid in capital                                                                                                                                          |  |                   | 216,017,087  |   |                  |   | 166,501,394  |  
|Purchase warrants                                                                                                                                                   |  |                   | 298,900      |   |                  |   | 298,900      |  
|Accumulated deficit                                                                                                                                                 |  |                   | (187,109,491 | ) |                  |   | (166,905,256 | )
|                                                                                                                                                                    |  |                   |              |   |                  |   |              |  
|Total stockholders equity (deficit)                                                                                                                                |  |                   | 29,244,208   |   |                  |   | (75,745      | )
|                                                                                                                                                                    |  |                   |              |   |                  |   |              |  
|Total liabilities and stockholders equity (deficit)                                                                                                                |  | $                 | 58,012,436   |   |                  | $ | 27,245,646   |  
|                                                                                                                                                                    |  |                   |              |   |                  |   |              |  



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



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APHTON CORPORATION

Statements of Operations (Unaudited)

For the three and nine months ended September 30, 2004 and 2003



|                                                     |  |                                  |                  |   |                                 |   |                  |      |  |   |                     |   |  |   |                     |  
|---------------------------------------------------- |  | -------------------------------- | ---------------- | - | ------------------------------- | - | ---------------- | ---- |  | - | ------------------- | - |  | - | ------------------- | -
|                                                     |  | Three months ended September 30, |                  |   | Nine months ended September 30, |  
|                                                     |  | 2004                             |                  |   | 2003                            |   |                  | 2004 |  |   | 2003                |  
|Revenue:                                             |  | $                                |                 |   |                                 | $ |                 |      |  | $ |                    |   |  | $ |                    |  
|                                                     |  |                                  |                  |   |                                 |   |                  |      |  |   |                     |   |  |   |                     |  
|Costs and expenses:                                  |  |                                  |                  |   |                                 |   |                  |      |  |   |                     |   |  |   |                     |  
|General and administrative Research and development  |  |                                  | 935,2625,813,667 |   |                                 |   | 709,4875,653,169 |      |  |   | 2,597,39315,977,851 |   |  |   | 1,988,45616,542,202 |  
|                                                     |  |                                  |                  |   |                                 |   |                  |      |  |   |                     |   |  |   |                     |  
|Total costs and expenses                             |  |                                  | 6,748,929        |   |                                 |   | 6,362,656        |      |  |   | 18,575,244          |   |  |   | 18,530,658          |  
|                                                     |  |                                  |                  |   |                                 |   |                  |      |  |   |                     |   |  |   |                     |  
|Loss from operations                                 |  |                                  | (6,748,929       | ) |                                 |   | (6,362,656       | )    |  |   | (18,575,244         | ) |  |   | (18,530,658         | )
|                                                     |  |                                  |                  |   |                                 |   |                  |      |  |   |                     |   |  |   |                     |  
|Other income (expense):                              |  |                                  |                  |   |                                 |   |                  |      |  |   |                     |   |  |   |                     |  
|Dividend and interest income                         |  |                                  | 224,046          |   |                                 |   | 12,602           |      |  |   | 368,177             |   |  |   | 43,087              |  
|Interest expense including amortized discount        |  |                                  | (677,457         | ) |                                 |   | (671,000         | )    |  |   | (1,976,858          | ) |  |   | (1,306,500          | )
|Unrealized gains (losses) from investments           |  |                                  | (30,558          | ) |                                 |   | 15,576           |      |  |   | (20,310             | ) |  |   | 47,506              |  
|                                                     |  |                                  |                  |   |                                 |   |                  |      |  |   |                     |   |  |   |                     |  
|Net loss                                             |  | $                                | (7,232,898       | ) |                                 | $ | (7,005,478       | )    |  | $ | (20,204,235         | ) |  | $ | (19,746,565         | )
|                                                     |  |                                  |                  |   |                                 |   |                  |      |  |   |                     |   |  |   |                     |  
|Per share data:                                      |  |                                  |                  |   |                                 |   |                  |      |  |   |                     |   |  |   |                     |  
|Basic and fully diluted loss per common share        |  | $                                | (0.19            | ) |                                 | $ | (0.28            | )    |  | $ | (0.56               | ) |  | $ | (0.80               | )
|                                                     |  |                                  |                  |   |                                 |   |                  |      |  |   |                     |   |  |   |                     |  
|Weighted average number of common shares outstanding |  |                                  | 37,711,850       |   |                                 |   | 25,255,552       |      |  |   | 35,775,722          |   |  |   | 24,831,529          |  
|                                                     |  |                                  |                  |   |                                 |   |                  |      |  |   |                     |   |  |   |                     |  



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



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APHTON CORPORATION

Statements of Cash Flows (Unaudited)

For the nine months ended September 30, 2004 and 2003



|                                                                            |  |                                 |             |   |      |   |             |  
|--------------------------------------------------------------------------- |  | ------------------------------- | ----------- | - | ---- | - | ----------- | -
|                                                                            |  | Nine Months Ended September 30, |            
|                                                                            |  | 2004                            |             |   | 2003 |  
|Cash flows from operating activities:                                       |  |                                 |             |   |      |   |             |  
|Cash paid to suppliers and employees                                        |  | $                               | (18,260,702 | ) |      | $ | (24,986,272 | )
|                                                                            |  |                                 |             |   |      |   |             |  
|Net cash used in operating activities                                       |  |                                 | (18,260,702 | ) |      |   | (24,986,272 | )
|                                                                            |  |                                 |             |   |      |   |             |  
|Cash flows from investing activities:                                       |  |                                 |             |   |      |   |             |  
|Capital expenditures                                                        |  |                                 | (293,381    | ) |      |   | (6,049      | )
|                                                                            |  |                                 |             |   |      |   |             |  
|Net cash used in investing activities                                       |  |                                 | (293,381    | ) |      |   | (6,049      | )
|                                                                            |  |                                 |             |   |      |   |             |  
|Cash flows from financing activities:                                       |  |                                 |             |   |      |   |             |  
|Proceeds from convertible debentures                                        |  |                                 |            |   |      |   | 19,935,000  |  
|Proceeds from sale of common stock and warrants                             |  |                                 | 48,624,188  |   |      |   | 22,297,927  |  
|                                                                            |  |                                 |             |   |      |   |             |  
|Net cash received from financing activities                                 |  |                                 | 48,624,188  |   |      |   | 42,232,927  |  
|                                                                            |  |                                 |             |   |      |   |             |  
|Net increase in cash and short-term cash investments                        |  |                                 | 30,070,105  |   |      |   | 17,240,606  |  
|Cash and short-term cash investments:                                       |  |                                 |             |   |      |   |             |  
|Beginning of period                                                         |  |                                 | 18,378,988  |   |      |   | 7,824,182   |  
|                                                                            |  |                                 |             |   |      |   |             |  
|End of period                                                               |  | $                               | 48,449,093  |   |      | $ | 25,064,788  |  
|                                                                            |  |                                 |             |   |      |   |             |  
|Reconciliation of net loss to net cash used in operating activities         |  |                                 |             |   |      |   |             |  
|Net loss                                                                    |  | $                               | (20,204,235 | ) |      | $ | (19,746,565 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                                 |             |   |      |   |             |  
|Common stock issued for interest payment                                    |  |                                 | 900,000     |   |      |   |             |  
|Depreciation and amortization                                               |  |                                 | 54,664      |   |      |   | 70,227      |  
|Amortization of deferred financing costs                                    |  |                                 | 23,885      |   |      |   |             |  
|Amortization of discount on convertible debentures                          |  |                                 | 804,697     |   |      |   | 508,960     |  
|Unrealized loss (gain) on investments                                       |  |                                 | 20,310      |   |      |   | (47,506     | )
|Non-cash employee compensation expense                                      |  |                                 | (20,310     | ) |      |   | 47,506      |  
|Changes in - Investment securities - trading                                |  |                                 | (144,091    | ) |      |   | 34,708      |  
|Other assets                                                                |  |                                 | (141,127    | ) |      |   | 45,775      |  
|Current liabilities                                                         |  |                                 | 445,505     |   |      |   | (5,899,377  | )
|                                                                            |  |                                 |             |   |      |   |             |  
|Net cash used in operating activities:                                      |  | $                               | (18,260,702 | ) |      | $ | (24,986,272 | )
|                                                                            |  |                                 |             |   |      |   |             |  



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



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Notes to the Financial Statements (unaudited)



1. Organization and Operations



Aphton is a clinical stage biopharmaceutical company developing targeted immunotherapies for
cancer and other diseases. Aphtons products neutralize hormones involved in the growth and proliferation of cancers of the gastrointestinal system and reproductive system, as well as other diseases. Aphtons most advanced product
candidate is Insegia, an anti-gastrin product,
which has completed a Phase III monotherapy pancreatic cancer trial and is in a Phase III combination therapy pancreatic cancer trial, and a Phase II combination therapy trial against advanced gastric cancer.



2. Summary of Significant Accounting Policies



Comprehensive Loss



The net loss for the three and nine months ended September 30, 2004 and 2003 was the
comprehensive loss for those periods.



Earnings (loss) per share



At September 30, 2004, shares of our common stock issuable upon the
exercise of approximately 1.7 million warrants and 3.9 million options were excluded from the computation of net loss per share because their effect was anti-dilutive. At September 30, 2003, shares of our common stock issuable upon the exercise of
approximately 2.1 million warrants and 3.7 million options were excluded from the computation of net loss per share because their effect was anti-dilutive.



Stock-Based Compensation



On December 31, 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure. This Statement amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for an entity that voluntarily changes to the fair value
based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of that Statement to require prominent disclosure about the effects on reported net income of an entitys accounting policy decisions
with respect to stock-based employee compensation. Finally, this Statement amends APB Opinion No. 28, Interim Financial Reporting, to require disclosure about those effects in interim financial information. We continue to account for
stock-based compensation based on the provisions of APB Opinion No. 25.



The
following table summarizes our results as if we had recorded stock-based employee compensation expense for the three and nine months ended September 30, 2004 and 2003, based on the provisions of SFAS 123, as amended by SFAS 148:



|                                 |  |                                 |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|-------------------------------- |  | ------------------------------- | ---------- | - | ------------------------------- | - | ---------- | ---- |  | - | ----------- | - |  | - | ----------- | -
|                                 |  | Three months endedSeptember 30, |            |   | Nine months ended September 30, |  
|                                 |  | 2004                            |            |   | 2003                            |   |            | 2004 |  |   | 2003        |  
|Net loss:                        |  |                                 |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|As reported                      |  | $                               | (7,232,898 | ) |                                 | $ | (7,005,478 | )    |  | $ | (20,204,235 | ) |  |   | (19,746,565 | )
|Compensation expense, net of tax |  |                                 | (320,626   | ) |                                 |   | (161,608   | )    |  |   | (1,618,704  | ) |  |   | (897,165    | )
|                                 |  |                                 |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|Pro forma                        |  | $                               | (7,553,524 | ) |                                 | $ | (7,167,086 | )    |  | $ | (21,822,939 | ) |  | $ | (20,643,730 | )
|                                 |  |                                 |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|Basic loss per share:            |  |                                 |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|As reported                      |  | $                               | (0.19      | ) |                                 | $ | (0.28      | )    |  | $ | (0.56       | ) |  | $ | (0.80       | )
|Compensation expense, net of tax |  |                                 | (0.01      | ) |                                 |   | (0.00      | )    |  |   | (0.05       | ) |  |   | (0.03       | )
|                                 |  |                                 |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|Pro forma                        |  | $                               | (0.20      | ) |                                 | $ | (0.28      | )    |  | $ | (0.61       | ) |  | $ | (0.83       | )
|                                 |  |                                 |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|Diluted loss per share:          |  |                                 |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|As reported                      |  | $                               | (0.19      | ) |                                 | $ | (0.28      | )    |  | $ | (0.56       | ) |  | $ | (0.80       | )
|Compensation expense, net of tax |  |                                 | (0.01      | ) |                                 |   | (0.00      | )    |  |   | (0.05       | ) |  |   | (0.03       | )
|                                 |  |                                 |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|Pro forma                        |  | $                               | (0.20      | ) |                                 | $ | (0.28      | )    |  | $ | (0.61       | ) |  | $ | (0.83       | )
|                                 |  |                                 |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  



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In March 2004, the FASB issued an Exposure Draft titled Share-Based Payment, an Amendment of FASB Statements No.
123 and 95. The Exposure Draft would require the recognition of compensation expense over the vesting period for all share-based payments, including stock options, based on the fair value of the payment at the grant date. The Exposure Draft is
not final and was subject to a comment period that ended on June 30, 2004 and the FASB continues to deliberate and propose revisions to the Exposure Draft. Although the provisions of the Exposure Draft are not final, the Exposure Draft is proposed
to be effective starting with the first interim period beginning after June 15, 2005. We are currently assessing the potential impact the proposed Exposure Draft could have on our financial position and results of operations.



Reclassifications



Certain amounts have been reclassified in the September 30, 2003 presentation to conform to
the 2004 presentation.



3. March 2004 sale of common stock



In March 2004, the Company sold 8,050,000 shares of registered common stock at $6.50 per
share or approximately $52.3 million and received net proceeds of approximately $48.6 million, after deducting all costs related to the sale of the common stock.



4. Convertible Debentures



As of September 30, 2004 and December 31, 2003 we have outstanding $23.0 million in convertible debentures. There was an initial discount calculated against the value of
the notes of $12.9 million, comprised of the beneficial conversion feature of $8.3 million and other discounts of $4.6 million on the notes. The unamortized discount as of September 30, 2004 is $11.5 million which is offset against the $23.0 million
and is shown as $11.5 million of convertible debentures in the accompanying financial statements. The unamortized discount as of December 31, 2003 is $12.3 million, which is offset against the $23.0 million and was shown as $10.7 million of
convertible debentures.



Of the $23.0 million, $3.0 million is our Series A
Convertible Debenture. Our Series A Convertible Debenture is a convertible, redeemable, five-year note that matures on December 19, 2007. 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 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.



The remaining $20.0 million in convertible notes were issued in two tranches to accredited investors during the three months ended June 30,
2003. On April 4, 2003, we issued $15.0 million of convertible, redeemable, 5-year, interest-bearing senior convertible notes (which we refer to as our senior convertible notes) and 5-year warrants to purchase an aggregate total of 1,080,000 shares
of our common stock to



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various accredited investors. On June 12, 2003 we issued an additional $5 million of our 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 senior convertible notes mature on March 31, 2008. The 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 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 senior convertible notes will be lowered
in the event of a sale by us of our common stock or securities convertible into our common stock at a per share offering price less than the conversion price of the 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 senior convertible notes. The 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. This cap, which is 19.99% of our common stock outstanding in the case of two of the
noteholders and 4.99% of our common stock outstanding in the case of the third noteholder, restricts the ability of the holder to convert or exercise any portion of its respective notes or warrants to the extent that after giving effect to such
conversion the holder would beneficially own more than its respective cap.



5. Leases



On August 18, 2004, the Company entered into a
lease for office space in Philadelphia at an initial base monthly rate of $12,331, with an annual increase of approximately 3% starting at month 19, for a term of 126 months. The lease may be terminated by the Company after five years.



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



Overview



General



We are a clinical stage biopharmaceutical company developing targeted immunotherapies for cancer and other diseases. Our products neutralize hormones involved in the growth and proliferation of cancers of the
gastrointestinal system and reproductive system, as well as other diseases. Our most advanced product candidate is InsegiaTM, an anti-gastrin product, which has completed a Phase III monotherapy pancreatic cancer trial and is in a Phase III combination therapy pancreatic cancer trial, and a Phase II combination therapy trial against advanced gastric
cancer. We believe that our human data and the safety profile of Insegia support the broad applicability and corresponding commercial potential for this therapy in gastrointestinal cancer.



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 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.



Our net loss for the nine months ended September 30, 2004 was $20.2 million and as of September 30, 2004 we had an accumulated deficit of approximately $187.1 million.
Our operating losses are primarily due to the costs of development of our potential products. These costs can vary significantly from year to year depending on the number of potential products in development, the stage of development of each



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potential product, 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 products, to obtain required regulatory approvals and to manufacture, market and sell such products. It is
possible that we may never be profitable.



Because we have not yet generated
any revenue from the sale of our products, we have primarily relied on the capital markets as our source of funding. In addition, we may seek funding through arrangements with collaborative partners or others that may require us to relinquish 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 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.



Results of Operations



Three months ended September 30, 2003 and 2004



|                                              |  |                                 |        |   |                           |   |        |   |  |       |   
|--------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------- | - | ------ | - |  | ----- | --
|                                              |  | Three months EndedSeptember 30, |        |   | % Changefrom 2003 to 2004 |  
|                                              |  | 2003                            |        |   | 2004                      |   |       
|                                              |  | (in thousands)                  |       
|Revenue:                                      |  | $                               |       |   |                           | $ |       |   |  |      |   
|Costs and expenses:                           |  |                                 |        |   |                           |   |        |   |  |       |   
|General and administrative                    |  |                                 | 709    |   |                           |   | 935    |   |  | 32    | % 
|Research and development                      |  |                                 | 5,654  |   |                           |   | 5,814  |   |  | 5     | % 
|                                              |  |                                 |        |   |                           |   |        |   |  |       |   
|Total costs and expenses                      |  |                                 | 6,363  |   |                           |   | 6,749  |   |  | 8     | % 
|                                              |  |                                 |        |   |                           |   |        |   |  |       |   
|Loss from operations                          |  |                                 | (6,363 | ) |                           |   | (6,749 | ) |  | 8     | % 
|                                              |  |                                 |        |   |                           |   |        |   |  |       |   
|Other income (expense):                       |  |                                 |        |   |                           |   |        |   |  |       |   
|Dividend and interest income                  |  |                                 | 13     |   |                           |   | 224    |   |  | 1,678 | % 
|Interest expense including amortized discount |  |                                 | (671   | ) |                           |   | (677   | ) |  | (14   | )%
|Unrealized gains (losses) from investments    |  |                                 | 16     |   |                           |   | (31    | ) |  | (296  | )%
|                                              |  |                                 |        |   |                           |   |        |   |  |       |   
|Net loss                                      |  | $                               | (7,005 | ) |                           | $ | (7,233 | ) |  | 3     | % 
|                                              |  |                                 |        |   |                           |   |        |   |  |       |   



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 September 30, 2004 compared to the three months ended September 30, 2003 was primarily due to an increase in premiums for our director and officer insurance policy and an increase in our
salary and benefits expense resulting from an increase in the number of administrative personnel we employ in connection with our establishment of a Philadelphia headquarters and compliance with the provisions of the Sarbanes-Oxley Act of 2002.



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 September 30, 2004 compared to the three months ended September
30, 2003 was primarily due to the increased costs



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associated with finalizing the analysis of our PC4 clinical trial and the preparation of documentation necessary to
submit Insegia to regulatory authorities. We do not accumulate cost information by major development product. Many costs are applicable to more than one product.



Interest expense including amortized discount. Interest expense, including amortized discount of $284,000, was
$677,000 for the three months ended September 30, 2004 compared with interest expense, including amortized discount of $289,000 of $671,000 for the three months ended September 30, 2003. Interest expense included the amortized discount that was
incurred in connection with the $20.0 million senior convertible notes we issued in 2003 and the interest thereon, as well as the interest expense on our $3.0 million Series A Convertible Debenture. The amortized discount and the interest expense
associated with the senior convertible notes were non-cash expenses and had no effect on our available cash or our cash burn rate.



Net loss. The slight increase in net loss for the three months ended September 30, 2004 compared to the three months ended September 30, 2003 was
primarily a result of our higher research and development expenses and an increase in our general and administrative expenses which was offset by a decrease in our interest expense and by an increase in interest income. We had no revenues from
operations for the three months ended September 30, 2003 or 2004.



Nine
months ended September 30, 2003 and 2004



|                                              |  |                                |         |   |                          |   |         |   |  |      |   
|--------------------------------------------- |  | ------------------------------ | ------- | - | ------------------------ | - | ------- | - |  | ---- | --
|                                              |  | Nine months EndedSeptember 30, |         |   | % Changefrom 2003to 2004 |  
|                                              |  | 2003                           |         |   | 2004                     |   |        
|                                              |  | (in thousands)                 |        
|Revenue:                                      |  | $                              |        |   |                          | $ |        |   |  |     |   
|Costs and expenses:                           |  |                                |         |   |                          |   |         |   |  |      |   
|General and administrative                    |  |                                | 1,988   |   |                          |   | 2,597   |   |  | 31   | % 
|Research and development                      |  |                                | 16,543  |   |                          |   | 15,978  |   |  | (3   | )%
|                                              |  |                                |         |   |                          |   |         |   |  |      |   
|Total costs and expenses                      |  |                                | 18,531  |   |                          |   | 18,575  |   |  |      | * 
|                                              |  |                                |         |   |                          |   |         |   |  |      |   
|Loss from operations                          |  |                                | (18,531 | ) |                          |   | (18,575 | ) |  |      | * 
|                                              |  |                                |         |   |                          |   |         |   |  |      |   
|Other income (expense):                       |  |                                |         |   |                          |   |         |   |  |      |   
|Dividend and interest income                  |  |                                | 43      |   |                          |   | 368     |   |  | 754  | % 
|Interest expense including amortized discount |  |                                | (1,307  | ) |                          |   | (1,977  | ) |  | 51   | % 
|Unrealized gains (losses) from investments    |  |                                | 48      |   |                          |   | (20     | ) |  | (143 | )%
|                                              |  |                                |         |   |                          |   |         |   |  |      |   
|Net loss                                      |  | $                              | (19,747 | ) |                          | $ | (20,204 | ) |  | 2    | % 
|                                              |  |                                |         |   |                          |   |         |   |  |      |   

---

|* | Less than 1 percent.
|- | --------------------



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 nine months ended September 30, 2004 compared to the nine months ended September 30, 2003 was
primarily due to an increase in premiums for our director and officer insurance policy and an increase in our salary and benefits expense resulting from an increase in the number of administrative personnel we employ in connection with our
establishment of a Philadelphia headquarters and compliance with the provisions of the Sarbanes-Oxley Act of 2002.



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



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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 decrease in our research and development expenses for the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003 was primarily due
to the fact that during the nine months ended September 30, 2003 we were involved in active clinical trials, whereas we had no active clinical trials during the comparable period in 2004. This reduction was offset by the increased costs associated
with finalizing the analysis of our PC4 clinical trial and the preparation of documentation necessary to submit Insegia to regulatory authorities. We do not accumulate cost information by major development product. Many costs are applicable to more
than one product.



Interest expense including amortized
discount. Interest expense including amortized discount of $805,000 was $2.0 million for the nine months ended September 30, 2004 compared with interest expense, including amortized discount of $443,000, of $1.3 million for the nine months ended
September 30, 2003. This increase is related to our senior convertible notes of $20.0 million being outstanding for less than six months in the nine months ended September 30, 2003, as $15.0 million of these notes were issued in April 2003 and $5.0
million were issued in June 2003. Interest expense included the amortized discount that was incurred in connection with the $20.0 million senior convertible notes we issued in 2003 and the interest thereon, as well as the interest expense on our
$3.0 million Series A Convertible Debenture. The amortized discount and the interest expense associated with the senior convertible notes were non-cash expenses and had no effect on our available cash or our cash burn rate.



Net loss. The slight increase in net loss for the nine months ended
September 30, 2004 compared to the nine months ended September 30, 2003 was primarily a result of increases in our general and administrative expenses and our interest expense including amortized discount which was offset by a slight decrease in our
research and development expenses and an increase in interest income. We had no revenues from operations for the nine months ended September 30, 2003 or 2004.



Liquidity and Capital Resources



We finance our operations through the sale of our equity securities, convertible debentures and licensing fees. These funds provide us with the resources to operate our
business, attract and retain key personnel and scientific staff, fund our research and development program, preclinical testing and clinical trials, apply and obtain the necessary regulatory approvals and develop our technology and products.



On December 24, 2003, we filed a shelf registration statement with the
Securities and Exchange Commission (the Commission) for the issuance of up to $100.0 million of our common stock. The shelf registration statement was declared effective on January 15, 2004. We believe an effective shelf registration
statement with registered shares of our common stock available for sale gives us the opportunity to raise funding when conditions are favorable. In March 2004, we sold 8,050,000 shares of our common stock in an underwritten offering at $6.50 per
share and received net proceeds in the amount of $48.6 million. We have approximately $47.7 million of common stock that remains available for sale at our discretion, subject to certain limitations under federal securities laws.



As of September 30, 2004, we had cash, cash equivalents, and marketable securities totaling
$49.4 million and working capital of $43.0 million compared to cash, cash equivalents and marketable securities totaling $19.2 million and working capital of $13.2 million at December 31, 2003. This increase is primarily due to the sale of our
common stock in March 2004.



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Indebtedness



As of September 30, 2004 and December 31, 2003 we had outstanding $23.0 million in convertible debentures. There was an initial discount
calculated against a value of the convertible debentures 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
convertible debentures of $4.6 million. The unamortized discount as of September 30, 2004 was $11.5 million which was offset against the $23.0 million and therefore shown as $11.5 million of convertible debentures in the accompanying financial
statements. The unamortized discount as of December 31, 2003 was $12.3 million, which was offset against the $23.0 million and therefore shown as $10.7 million of convertible debentures in the accompanying financial statements.



Of the $23.0 million, $3.0 million is our Series A Convertible Debenture. Our Series A
Convertible Debenture is a convertible, redeemable, five-year note that matures on December 19, 2007. The Series A Convertible Debenture bears interest at a rate of 11.0% per annum, payable annually. The 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 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.



The remaining $20.0 million in convertible notes, which we refer to as our senior convertible notes, were issued in two tranches to accredited investors in 2003. On April 4, 2003, we issued $15.0 million of
convertible, redeemable, 5-year, interest-bearing 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 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 senior convertible notes mature on March 31, 2008. The 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 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 senior convertible notes will be lowered in the event of a sale by us of our common stock or securities convertible into our common stock at a per share offering price less than the conversion price of the 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 senior convertible notes. The 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. This cap, which is 19.99% of our common
stock outstanding in the case of two of the noteholders and 4.99% of our common stock outstanding in the case of the third noteholder, restricts the ability of the holder to convert or exercise any portion of its respective notes or warrants to the
extent that after giving effect to such conversion the holder would beneficially own more than its respective cap.



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Uses of Funds



The primary uses of our cash are to fund our operations and working capital requirements, specifically, to fund the continued clinical
development of Insegia, the clinical and pre-clinical studies for our other product candidates, including monoclonal antibodies, and for potential licenses and acquisitions of complementary products or technologies. Our uses of cash for operating
activities and capital expenditures during the nine months ended September 30, 2003 and 2004 were as follows:



|                                      |  |                                |        |      |   |       
|------------------------------------- |  | ------------------------------ | ------ | ---- | - | ------
|                                      |  | Nine months endedSeptember 30,
|                                      |  | 2003                           |        | 2004
|                                      |  | (in thousands)                
|Net cash used in operating activities |  | $                              | 24,986 |      | $ | 18,193
|Capital expenditures                  |  |                                | 6      |      |   | 490   
|                                      |  |                                |        |      |   |       
|Total                                 |  | $                              | 24,992 |      | $ | 18,683
|                                      |  |                                |        |      |   |       



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



Liquidity



Based on our current
operating plans and our known and anticipated contractual obligations and assuming no further funding or potential revenues that may be generated from product partnering or licensing initiatives we are currently pursuing, we believe that our
existing capital resources, which consist primarily of cash and short-term cash investments, including the proceeds from the financing activities described in the preceding paragraphs, will enable us to maintain operations and satisfy our periodic
interest obligations on our senior convertible notes (which we may, at our option, satisfy in cash or shares of our common stock) into the second half of 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. Many of these factors are beyond our control. In the event that we require additional funds, we may be required to sell additional equity securities, convertible debt or otherwise, or obtain funds through arrangements with collaborative
partners. 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.



Inflation



Inflation and changing prices have not had a material effect on our continuing operations and we do not expect inflation to have any material effect on our continuing
operations in the foreseeable future. Interest and other income were primarily derived from money-market accounts.



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Effect Of Recently Issued Accounting Pronouncements



On January 1, 2003, the Financial Accounting Standards Board issued Financial Accounting Standards Board Interpretation No. 46,
Consolidation of Variable Interest Entities (FIN 46). FIN 46 addresses consolidation of business enterprises of variable interest entities. FIN 46 was effective immediately for all variable interest entities created after January 31,
2003. In December 2003, the FASB issued a revision to FIN 46, which delayed the effective date to periods ending after March 15, 2004 for all VIEs, other than Special Purpose Entities. We have not acquired any variable interest entities subsequent
to January 31, 2003. The adoption of FIN 46 did not have a material impact on our financial position, results of operations or cash flows.



Off-Balance Sheet Arrangements



We do not have nor do we engage in any off-balance sheet arrangements.



Critical Accounting Policies



Our significant accounting policies are described in Note 2 to the financial statements included in our Annual Report on Form 10-K. We believe that our most critical
accounting policies include the use of estimates. The impact of these estimates on results of operations in 2003 was not significant and we believe that the impact of these estimates on results of operations in 2004 will not be 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 APB No. 14, Accounting for Convertible Debt and Debt Issued with Stock Purchase
Warrants, 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.
This requires us to calculate the fair value of warrants and the beneficial conversion features based on certain assumptions and estimates.



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.



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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, 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 beliefs regarding the applicability and corresponding commercial potential of Insegia;
| | - | ------------------------------------------------------------------------------------------



| |  | our expectations regarding losses and negative operating cash flows for the next several years;
| | - | -----------------------------------------------------------------------------------------------



| |  | our beliefs regarding the opportunity to raise funding created by our effective shelf registration statement;
| | - | -------------------------------------------------------------------------------------------------------------



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



| |  | our expectations regarding the effect of inflation on our continuing operations for the foreseeable future; and
| | - | ---------------------------------------------------------------------------------------------------------------



| |  | our belief that the impact of our use of estimates will not be significant on our results of operations in 2004.
| | - | ----------------------------------------------------------------------------------------------------------------



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 develop, obtain regulatory approval for, produce in commercial quantities and gain commercial acceptance for Insegia and our other 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 ability to enforce our patents and proprietary rights;
| | - | ----------------------------------------------------------



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| |  | 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; and
| | - | ------------------------------------------------------------------------------------------------



| |  | changes in healthcare reform.
| | - | -----------------------------



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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 laboratory and staff in Europe. During the three months ended September 30, 2004, we incurred expenses for our pipeline products. If the U.S. dollar weakens relative to a foreign currency,
any losses generated in the foreign currency will, in effect, increase when converted into U.S. dollars and vice versa. We do not speculate in the foreign exchange market and 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 September 30, 2004, we had cash equivalents in
the amount of $48.5 million. We also had net convertible debentures payable of $11.5 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, we are subject to interest rate risk on our convertible debentures. The following table presents the future principal payment obligations and interest rates associated with our convertible debt instruments assuming our
actual level of long-term debt indebtedness as of September 30, 2004:



|                                        |  |                |   |      |   |      |  |      |   |      |   |            |  |       |        |           |   |   |  |   |        |  |   |      
|--------------------------------------- |  | -------------- | - | ---- | - | ---- |  | ---- | - | ---- | - | ---------- |  | ----- | ------ | --------- | - | - |  | - | ------ |  | - | -----
|                                        |  | 2004           |   | 2005 |   | 2006 |  | 2007 |   | 2008 |   | Thereafter |  | Total |        | FairValue
|                                        |  | (in thousands)
|Convertible Debentures:                 |  |                |   |      |   |      |  |      |   |      |   |            |  |       |        |           |   |   |  |   |        |  |   |      
|Series A Convertible Debentures (11.0%) |  | $              |  |      | $ |     |  | $    |  |      | $ | 3,000      |  | $     |       |           | $ |  |  | $ | 3,000  |  | $ | 2,232
|Senior Convertible Notes (6.0%)         |  | $              |  |      | $ |     |  | $    |  |      | $ |           |  | $     | 20,000 |           | $ |  |  | $ | 20,000 |  | $ | 9,999



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



In order to
ensure that the information we must disclose in our filings with the Securities and Exchange Commission is recorded, processed, summarized, and reported on a timely basis, we maintain disclosure controls and procedures. Our principal executive
officer and principal financial officer have reviewed



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and evaluated the effectiveness of our disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and
15d-15(e), as of September 30, 2004. Based on such evaluation, such officers have concluded that, as of September 30, 2004, our disclosure controls and procedures were effective in timely alerting them to material information relating to us required
to be included in our periodic SEC filings. There has been no change in our internal control over financial reporting during the quarter ended September 30, 2004 that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.



Part II - Other Information



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds



In accordance with the original terms of our senior convertible notes, on July 1, 2004, we issued 77,320 shares of our common stock in lieu of $300,000 of
interest payments due these notes for the quarter ended June 30, 2004. Pursuant to the terms of the notes, we have the option to pay cash in interest or in shares of our common stock. The shares were issued to three noteholders, each of which are
accredited investors. The shares were issued in reliance upon Section 4(2) of the Securities Act and Rule 506 promulgated thereunder.



Item 6. Exhibits



|     |  |                                                                                                                              
|---- |  | -----------------------------------------------------------------------------------------------------------------------------
|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.         



17



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##### 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: November 8, 2004 |  | By:                |  | /s/ Patrick T. Mooney, M.D.                                                                   
|                       |  |                    |  | Patrick T. Mooney, M.D. Chief Executive Officer and
President (Principal Executive Officer)   
|                       |  |                   
|Date: November 8, 2004 |  | By:                |  | /s/ James F. Smith                                                                            
|                       |  |                    |  | James F. Smith Senior Vice President and
Chief Financial Officer (Principal Financial Officer)



18



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##### Table of Contents

Exhibit Index



|            |  |                                                                                                                              
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                  
|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.