PROSPECTUS SUPPLEMENT NO. 2 (TO PROSPECTUS DATED May 15, 2008)		Filed pursuant to Rule 424(b)(3) under the Securities Act of 1933 in connection with Registration Statement No. 333-150595

OXiGENE, INC.

5,958,035 Shares of Common Stock

     This Prospectus Supplement No. 2 supplements and amends the prospectus dated May 15, 2008 relating to the resale of up to 5,958,035 shares of our common stock by Kingsbridge Capital Limited, or Kingsbridge.

     This prospectus supplement should be read in conjunction with the prospectus dated May 15, 2008 and Prospectus Supplement No. 1 dated June 9, 2008, which are to be delivered with this prospectus supplement. This prospectus supplement is not complete without, and may not be delivered or utilized except in connection with, the prospectus, including any amendments or supplements to it. We will not receive any proceeds from the sale of the shares of common stock by Kingsbridge.

     On August 8, 2008, we filed our Quarterly Report on Form 10-Q for the three and six months ended June 30, 2008. That Form 10-Q, without exhibits, is attached hereto.

     Investing in our common stock involves risks. See “Risk Factors” beginning on page 12 of the prospectus, as well as the section entitled “Risk Factors” included in our recent quarterly and annual reports filed with the Securities and Exchange Commission.

     Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus supplement or the prospectus to which it relates are truthful or complete. Any representation to the contrary is a criminal offense.

The date of this prospectus supplement is August 8, 2008.

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2008

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

For the transition period from            to

OXiGENE, INC.

Delaware   (State or other jurisdiction of incorporation or organization)		13-3679168   (I.R.S. Employer Identification No.)

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. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of July 18, 2008, there were 29,176,207 shares of the Registrant’s Common Stock issued and outstanding.

 

 

OXiGENE, INC.
Cautionary Factors that May Affect Future Results

     The disclosure and analysis by OXiGENE, Inc. (the “Company”) in this report contain “forward-looking statements.” Forward-looking statements give management’s current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historic or current facts. They use words, such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” and other words and terms of similar meaning. These include statements, among others, relating to our planned future actions, our clinical trial plans, our research and development plans, our prospective products or product approvals, our beliefs with respect to the sufficiency of our financial resources, our plans with respect to funding operations, projected expense levels, and the outcome of contingencies.

     Any or all of our forward-looking statements in this report may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Consequently, no forward-looking statement can be guaranteed. Actual results may vary materially from those set forth in forward-looking statements. The uncertainties that may cause differences include, but are not limited to: the Company’s history of losses, anticipated continuing losses and uncertainty of future revenues or profitability; the early stage of product development; uncertainties as to the future success of ongoing and planned clinical trials; the unproven safety and efficacy of products under development; the sufficiency of the Company’s existing capital resources; the possible need for additional funds; uncertainty of future funding; the Company’s dependence on others for much of the clinical development of its product candidates under development, as well as for obtaining regulatory approvals and conducting manufacturing and marketing of any product candidates that might successfully reach the end of the development process; the impact of government regulations, health care reform and managed care; competition from other companies and other institutions pursuing the same, alternative or superior technologies; the risk of technological obsolescence; uncertainties related to the Company’s ability to obtain adequate patent and other intellectual property protection for its proprietary technology and product candidates; dependence on officers, directors and other individuals; and risks related to product liability exposure.

     We will not update forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law. You are advised to consult any further disclosures we make in our reports to the Securities and Exchange Commission, including our reports on Form 10-Q, 8-K and 10-K. Our filings list various important factors that could cause actual results to differ materially from expected results. We note these factors for investors as permitted by the Private Securities Litigation Reform Act of 1995. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider any such list to be a complete set of all potential risks or uncertainties.

INDEX

		Page
		No.
PART I—FINANCIAL INFORMATION			4
Item 1. Unaudited Financial Statements			4
Condensed Balance Sheets			4
Condensed Statements of Operations			5
Condensed Statements of Cash Flows			6
Notes to Condensed Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			13
Item 3. Quantitative and Qualitative Disclosures about Market Risk			20
Item 4. Controls and Procedures			20
PART II—OTHER INFORMATION			22
Item 1. Legal Proceedings			22
Item 1A. Risk Factors			22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			22
Item 3. Defaults Upon Senior Securities			22
Item 4. Submission of Matters to a Vote of Security Holders			22
Item 5. Other Information			22
Item 6. Exhibits			23
SIGNATURES			24

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements—Unaudited

OXiGENE, Inc.
Condensed Balance Sheets
(All amounts in thousands, except per share data)
(Unaudited)

		June 30, 2008				December 31, 2007
ASSETS
Current assets:
Cash and cash equivalents		$	14,682			$	8,527
Available-for-sale securities			3,591				19,911
Prepaid expenses			730				354
Other current assets			16				72
Total current assets			19,019				28,864
Furniture and fixtures, equipment and leasehold improvements			1,396				1,343
Accumulated depreciation			(1,188	)			(1,122	)
			208				221
License agreements, net of accumulated amortization of $871 and $822 at June 30, 2008 and December 31, 2007, respectively			630				679
Other assets			171				300
Total assets		$	20,028			$	30,064
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable			1,718				1,370
Accrued research and development			3,516				2,713
Accrued other			820				901
Total current liabilities			6,054				4,984
Rent loss accrual			77				223
Total liabilities			6,131				5,207
Commitments and contingencies
Stockholders’ equity:
Common stock, $.01 par value, 100,000 shares authorized; 29,176 shares at June 30, 2008 and 28,505 shares at December 31, 2007, issued and outstanding			292				285
Additional paid-in capital			163,890				162,358
Accumulated deficit			(150,293	)			(137,801	)
Accumulated other comprehensive income			8				15
Total stockholders’ equity			13,897				24,857
Total liabilities and stockholders’ equity		$	20,028			$	30,064

See accompanying notes.

OXiGENE, Inc.
Condensed Statements of Operations
(All amounts in thousands, except per share data)
(Unaudited)

		Three months ended								Six months ended
		June 30,								June 30,
		2008				2007				2008				2007
License Revenue:		$	—			$	7			$	—			$	7
Operating costs and expenses:
Research and development			5,176				3,502				8,865				5,891
General and administrative			2,023				2,380				4,070				4,504
Total operating costs and expenses			7,199				5,882				12,935				10,395
Loss from operations			(7,199	)			(5,875	)			(12,935	)			(10,388	)
Investment income			158				523				445				1,094
Other income (expense), net			(7	)			(17	)			(2	)			(24	)
Net loss		$	(7,048	)		$	(5,369	)		$	(12,492	)		$	(9,318	)
Basic and diluted net loss per common share		$	(0.25	)		$	(0.19	)		$	(0.44	)		$	(0.33	)
Weighted-average number of common shares outstanding			28,258				27,875				28,164				27,875

See accompanying notes.

OXiGENE, Inc.
Condensed Statements of Cash Flows
(All amounts in thousands)
(Unaudited)

		Six months ended June 30,
		2008				2007
Operating activities:
Net loss		$	(12,492	)		$	(9,318	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation			66				55
Other-than-temporary impairment of available-for-sale securities			6
Amortization of license agreement			49				50
Rent loss accrual			(201	)			(37	)
Stock-based compensation			710				1,102
Changes in operating assets and liabilities:
Prepaid expenses and other current assets			(320	)			(452	)
Accounts payable, accrued expenses and other payables			1,125				1,262
Net cash used in operating activities			(11,057	)			(7,338	)
Investing activities:
Purchase of available-for-sale securities			(4,016	)			(18,566	)
Proceeds from sale of available-for-sale securities			20,323				20,054
Purchase of furniture, fixtures and equipment			(53	)			(59	)
Other assets			129				(405	)
Net cash provided by investing activities			16,383				1,024
Financing activities:
Proceeds from issuance of common stock, net of acquisition costs			829				—
Net cash provided by financing activities			829				—
Increase (Decrease) in cash and cash equivalents			6,155				(6,314	)
Cash and cash equivalents at beginning of period			8,527				15,687
Cash and cash equivalents at end of period		$	14,682			$	9,373

See accompanying notes.

OXiGENE, Inc.
Notes to Condensed Financial Statements
June 30, 2008
(Unaudited)

     1. Summary of Significant Accounting Policies

Basis of Presentation

     The accompanying unaudited condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting primarily of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008.

     The balance sheet at December 31, 2007 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the financial statements and footnotes thereto included in the Annual Report on Form 10-K for OXiGENE, Inc. (the “Company”) for the year ended December 31, 2007, which can be found at www.oxigene.com.

     The Company has experienced net losses and negative cash flow from operations each year since its inception, except in fiscal 2000. As of June 30, 2008, OXiGENE had an accumulated deficit of approximately $150,293,000. The Company expects to continue to incur expenses, resulting in operating losses, over the next several years due to, among other factors, our continuing clinical trials, planned future clinical trials, and other anticipated research and development activities. OXiGENE’s cash, cash equivalents and available-for-sale securities balance was approximately $18,273,000 at June 30, 2008. Based on current plans, the Company expects its current available cash and cash equivalents to meet its cash requirements into the first quarter of fiscal 2009. The Company will require significant additional funding to remain a going concern and to fund operations until such time, if ever, it becomes profitable. The Company intends to augment its cash, cash equivalents and marketable securities balances as of June 30, 2008 with the utilization of its Committed Equity Financing Facility (See Note 3 — Agreements), if available by its terms, as well as through other forms of capital infusion, including strategic alliances with organizations that have capabilities and/or products that are complementary to the Company’s capabilities and products, as well as program structured financing arrangements in order to continue the development of its potential product candidates. However, there can be no assurance that adequate additional financing under such arrangements will be available to the Company on terms that it deems acceptable, if at all.

Available-for-Sale Securities

     In accordance with the Company’s investment policy, surplus cash is invested primarily in investment-grade corporate bonds, commercial paper, U.S. government agency debt securities, and certificates of deposit. In accordance with Statement of Financial Accounting Standards No. 115 (“SFAS 115”), “Accounting for Certain Investments in Debt and Equity Securities,” the Company separately discloses cash and cash equivalents from investments in marketable securities. The Company designates its marketable securities as available-for-sale securities. Available-for-sale securities are carried at fair value with the unrealized gains and losses, net of tax, if any, reported as accumulated other comprehensive income (loss) in stockholders’ equity. The Company reviews the status of the unrealized gains and losses of its available-for-sale marketable securities on a regular basis. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in investment income. Interest and dividends on securities classified as available-for-sale are included in investment income.

     The Company’s investment objectives are to preserve principal, maintain a high degree of liquidity to meet operating needs and obtain competitive returns subject to prevailing market conditions. The Company assesses the market risk of its investments on an ongoing basis so as to avert risk of loss. The Company assesses the market risk of its investments by continuously monitoring the market prices of its investments and related rates of return, continuously looking for the safest, most risk-averse investments that will yield the highest rates of return in their category.

     The following is a summary of the fair values of the Company’s available-for-sale securities: (amounts in thousands)

		June 30, 2008				December 31, 2007
Corporate bonds maturing in less than one year		$	1,839			$	5,819
Commercial paper maturing in less than one year			750				10,703
Asset backed securities maturing in less than one year			1,002				3,389
Total available-for-sale securities		$	3,591			$	19,911

     As of June 30, 2008, the Company’s available-for-sale securities are at a net unrealized gain position totaling approximately $8,000. As of June 30, 2008, two of the Company’s available-for-sale securities, both corporate bonds, were in an unrealized loss position totaling approximately $6,000. The loss position was primarily attributable to the fluctuation in short-term interest rates over the course of the three months ended June 30, 2008. The Company determined that these unrealized losses were other than temporary, after taking into consideration the time of ownership and the length of time such securities have been in a loss position and accordingly have adjusted the cost basis of the securities to their fair value as of June 30, 2008. Based on the recent difficulties in the credit markets, the Company performed a further review of its securities and concluded that the fair values are appropriate.

Fair Value

     In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements,” effective for financial statements issued for fiscal years beginning after November 15, 2007. SFAS No. 157 replaces multiple existing definitions of fair value with a single definition, establishes a consistent framework for measuring fair value and expands financial statement disclosures regarding fair value measurements. This Statement applies only to fair value measurements that already are required or permitted by other accounting standards and does not require any new fair value measurements. In February 2008, the FASB issued FASB Staff Position (FSP) No. 157-2, which delayed the effective date of SFAS No. 157 until the first quarter of 2009 for nonfinancial assets and liabilities that are not recognized or disclosed at fair value in the financial statements on a recurring basis.

     The adoption of SFAS No. 157 for our financial assets and liabilities in the first quarter of 2008 did not have a material impact on our financial position or results of operations. Pursuant to the provisions of SFAS 157, we are required to disclose information on all assets and liabilities reported at fair value that enables an assessment of the inputs used in determining the reported fair values. SFAS 157 establishes a fair value hierarchy that prioritizes valuation inputs based on the observable nature of those inputs. The SFAS 157 fair value hierarchy applies only to the valuation inputs used in determining the reported fair value of our investments and is not a measure of the investment credit quality. The hierarchy defines three levels of valuation inputs:

Level 1 inputs		Quoted prices in active markets;
Level 2 inputs		Generally include inputs with other observable qualities, such as quoted prices in active markets for similar assets or quoted prices for identical assets in inactive markets; and
Level 3 inputs		Valuations based on unobservable inputs.

     The following table summarizes our assets that were measured at fair value as of June 30, 2008 (in thousands):

		Fair Value Measurement at Reporting Date Using:
						Significant Other				Significant
		Quoted Prices in				Observable				Unobservable
		Active Markets				Inputs				Inputs				Fair Value
		(Level 1)				(Level 2)				(Level 3)				June 30, 2008
Cash Equivalents
Money Market Fund		$	13,045			$	—			$	—			$	13,045
Total Cash Equivalents			13,045				—				—				13,045
Available-for-Sale
Corporate Bonds			—				1,839				—				1,839
Commercial paper			—				750				—				750
Asset-backed securities			—				1,002				—				1,002
Total Available-for-Sale			—				3,591				—				3,591
Total		$	13,045			$	3,591			$	—			$	16,636

Cash of $1,637,000 is not included in our SFAS 157 level hierarchy disclosure.

Accrued Research and Development

     The Company charges all research and development expenses, both internal and external costs, to operations as incurred. The Company’s research and development costs represent expenses incurred from the engagement of outside professional service organizations, product manufacturers and consultants associated with the development of the Company’s potential product candidates. The Company recognizes expense associated with these arrangements based on the completion of activities as specified in the applicable contracts. Costs incurred under fixed fee contracts are accrued ratably over the contract period absent any knowledge that the services will be performed other than ratably. Costs incurred under contracts with clinical trial sites and principal investigators are generally accrued on a patient-treated basis consistent with the terms outlined in the contract. In determining costs incurred on some of these programs, the Company takes into consideration a number of factors, including estimates and input provided by internal program managers. Upon termination of such contracts, the Company is normally only liable for costs incurred and committed to date. As a result, accrued research and development expenses represent the Company’s estimated contractual liability to outside service providers at any relevant time.

Net Loss Per Share

     Basic and diluted net loss per share was calculated in accordance with the provisions of Statement of Financial Accounting Standards No. 128, “Earnings Per Share,” by dividing the net loss per share by the weighted-average number of common shares outstanding. Diluted net loss per share includes the effect of all dilutive, potentially issuable common equivalent shares as defined using the treasury stock method. All of the Company’s common stock equivalents are anti-dilutive due to the Company’s net loss position for all periods presented. Accordingly, common stock equivalents of approximately 2,867,000 and 2,825,000 at June 30, 2008 and 2007, respectively, were excluded from the calculation of weighted average shares for diluted net loss per share.

Stock-based Compensation

     The Company follows the provisions of Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (SFAS 123R), which requires the expense recognition of the estimated fair value of all share-based payments issued to employees. For the periods prior to the adoption of SFAS 123R, the Company had elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25), and related interpretations in accounting for share-based payments. The Company had elected the disclosure-only alternative under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS 123). Accordingly, when options granted to employees had an exercise price equal to the market value of the stock on the date of grant, no compensation expense was recognized. The Company adopted SFAS 123R under the modified prospective method. Under this method, beginning January 1, 2006, the Company recognizes compensation cost for all share-based payments to employees (1) granted prior to but not yet vested as of January 1, 2006 based on the grant date fair value determined under the provisions of SFAS 123 and (2) granted subsequent to January 1, 2006 based on the grant date estimate of fair value determined under SFAS 123R for those awards. Prior period financial information has not been restated.

For the three and six months ended June 30, 2008, the Company recorded approximately $355,000 and $710,000 of expense associated with share-based compensation, respectively. For the three and six months ended June 30, 2007, the Company recorded approximately $559,000 and $1,102,000 of expense associated with share-based compensation, respectively.

     The Company’s stock options are valued using the Black-Scholes option pricing model, and the resulting fair value is recorded as compensation cost on a straight-line basis over the performance period, which is generally the same as the option vesting period.

     During the three and six months ended June 30, 2008, options to purchase 20,000 and 44,000 shares, respectively, of the Company’s common stock were granted, with 20,000 of those options being granted to non-employees. The weighted average fair values of the options granted based on the assumptions outlined in the table below were $0.62 and $0.93 per share, respectively, for the three and six months ended June 30, 2008. During the three and six months ended June 30, 2007, options to purchase 276,000 and 437,000 shares, respectively, of the Company’s common stock were granted. The weighted average fair values of the options granted based on the assumptions outlined in the table below were $2.12 and $2.45 per share, respectively, for the three and six months ended June 30, 2007.

     In April 2007, the Company granted options to purchase 100,000 shares of its common stock to its Chief Operating Officer at a grant price of $4.69 per share. The options were valued using the Black-Scholes option pricing model with assumptions consistent with other options granted by the Company. These options shall vest upon the achievement of milestones as outlined in the Chief Operating Officer’s employment agreement and approved by the Board of Directors. As of June 30, 2008, the Company determined that the achievement of the milestones as outlined in the Chief Operating Officer’s employment agreement is not probable and accordingly, no compensation expense has been recorded for these options for the period to date.

     The fair values for the stock options granted in the 2008 year to date period were estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions for the three and six months ended June 30, 2008 and three and six months ended June 30, 2007:

		Three months ended June 30,								Six months ended June 30,
		2008				2007				2008				2007
Weighted Average Assumptions
Risk-free interest rate			3.38	%			4.50	%			3.03	%			4.62	%
Expected life		5 years				5 years				5 years				5 years
Expected volatility			54	%			88	%			65	%			89	%
Dividend yield			0.00	%			0.00	%			0.00	%			0.00	%

     Options, Warrants and Non-Vested Stock

     The following is a summary of the Company’s stock option activity under its 1996 and 2005 Stock Plans for the six months ended June 30, 2008:

										Weighted Average
						Weighted Average				Remaining				Aggregate Intrinsic
		Shares				Exercise Price				Contractual Life				Value
		(In thousands)								(Years)				(In thousands)
Options outstanding at December 31, 2007			2,148			$	5.61				7.07			$	44
Granted			44								—				—
Exercised			—								—				—
Forfeited			(23	)							—				—
Options outstanding at June 30, 2008			2,169			$	5.55				6.64			$	—
Options exercisable at June 30, 2008			1,380			$	6.51
Options vested or expected to vest at June 30, 2008			2,011			$	5.75				6.46			$	—

     As of June 30, 2008, there was approximately $1,634,000 of unrecognized compensation cost related to stock option awards that is expected to be recognized as expense over a weighted average period of 1.5 years. The total fair value of stock options that vested during the six months ended June 30, 2008 and 2007 was approximately $522,000 and $131,000, respectively.

     In the three months ended June 30, 2008, the Company awarded 20,000 options to purchase common stock of the Company to two non-employees at an exercise price of $1.29 which vest in equal installments over four years. The Company will record expense for these options in accordance with FAS 123R and EITF 96-18.

Non-Vested Stock

     The following table summarizes the activity for unvested stock in connection with restricted stock grants during the six months ended June 30, 2008:

						Weighted Average
		Shares				Fair Value
		(In thousands)
Unvested at December 31, 2007			468			$	4.73
Granted			—
Vested			(20	)		$	4.09
Forfeited			—
Unvested at June 30, 2008			448			$	4.76

     The Company recorded expense of approximately $196,000 and $392,000 related to outstanding restricted stock awards during the three and six months ended June 30, 2008, respectively. As of June 30, 2008, there was approximately $1,299,000 of unrecognized compensation expense related to restricted stock awards that will be recognized as expense over a weighted average period of 1.5 years.

     In January 2007, the Company granted 250,000 shares of restricted common stock to its Chief Executive Officer pursuant to his employment agreement. In June 2007, the Company granted an aggregate of 80,000 shares of restricted common stock to two new members of the Board of Directors. The restricted stock awards were valued based on the closing price of the Company’s common stock on their respective grant dates. Compensation expense is being recognized on a straight —line basis over the vesting period of the awards.

Warrants

     In June 2003, the Company issued five-year warrants in connection with a private placement with three large institutional investors. As of June 30, 2008, all of such warrants have expired without being exercised.

     In February 2008, the Company issued five year warrants to purchase common stock exercisable beginning six months after February 19, 2008 to Kingsbridge Capital Limited in consideration for entering into a Committed Equity Financing Facility. Kingsbridge may purchase from the Company up to 250,000 shares of common stock at an exercise price of $2.74 per share. As of June 30, 2008, none of such warrants were exercisable.

Comprehensive Income (Loss)

     The Company’s only item of other comprehensive income (loss) relates to unrealized gains and losses on available-for-sale securities and is presented separately on the balance sheet, as required.

     A reconciliation of comprehensive loss is as follows:

		Three months ended								Six months ended
		June 30,								June 30,
		2008				2007				2008				2007
		(In thousands)
Net loss as reported		$	(7,048	)		$	(5,369	)		$	(12,492	)		$	(9,318	)
Unrealized gains			(4	)			(6	)			(7	)			(5	)
Comprehensive loss		$	(7,052	)		$	(5,375	)		$	(12,499	)		$	(9,323	)

     2. License Agreements

     In August 1999, the Company entered into an exclusive license for the commercial development, use and sale of products or services covered by certain patent rights owned by Arizona State University. The Company has paid a total of $1,800,000 in connection with the initial terms of the license. The Company capitalized the net present value of the total amount paid, or $1,500,000, and is amortizing this amount over the patent life or 15.5 years. In June 2002, this agreement was amended and provides for additional payments in connection with the license arrangement upon the initiation of certain clinical trials or the completion of certain regulatory approvals, which payments could be accelerated upon the achievement of certain financial milestones, as defined in the agreement. The license agreement also provides for additional payments upon the Company’s election to develop certain additional compounds, as defined in the agreement. As of June 30, 2008, additional accelerated payments that have previously been expensed and paid, due to achievement of certain financial milestones, totaled $700,000, and future milestone payments under this agreement could total up to an additional $200,000. These accelerated payments were expensed to research and development as triggered by the achievements defined in the agreement. The Company is also required to pay royalties on future net sales of products associated with these patent rights.

     In March 2007, the Company entered into an exclusive license agreement for the development and commercialization of products covered by certain patent rights owned by Intracel Holdings, Inc., a privately held corporation. The Company paid Intracel $150,000 in March 2007 as an up-front license fee that provides the Company with full control over the development and commercialization of licensed compounds/molecular products. The Company expensed the up-front payment to research and development expense. The agreement provides for additional payments by the Company to Intracel based on the achievement of certain clinical milestones and royalties based on the achievement of certain sales milestones. The Company has the right to sublicense all or portions of its licensed patent rights under this agreement.

     3. Agreements

     In February 2008, the Company entered into a Committed Equity Financing Facility, or CEFF with Kingsbridge Capital Limited, or Kingsbridge, pursuant to which Kingsbridge committed to purchase, subject to certain conditions, up to 5,708,035 shares of the Company’s common stock or up to an aggregate of $40,000,000 during the three years from the date of the agreement. Under the CEFF, the Company is able to draw down shares in tranches of up to a maximum of 3.5 % of its closing market value at the time of the draw down or the alternative draw down amount calculated pursuant to the Common Stock Purchase Agreement whichever is less, subject to certain conditions. The purchase price of these shares will be at a discount of between 5 and 12 % from the volume weighted average price of the Company’s common stock for each of the eight trading days following the election to sell shares. Kingsbridge is not obligated to purchase shares if the volume weighted average price of our stock is less than $1.25 per share or 85% of the closing share price of the Company’s stock on the trading day immediately preceding the commencement of the draw down, whichever is higher. In connection with the CEFF, the Company issued a warrant to Kingsbridge to purchase 250,000 shares of its common stock at a price of $2.74 per share exercisable beginning six months after February 19, 2008 for a period of five years thereafter. The fair value of the warrant was determined on the date of issuance using the Black-Scholes option valuation model applying the following assumptions: (i) a risk-free interest rate of 2.75% ( ii) an expected term of 5.5 years, which represents the contractual term (iii) no dividend yield and (iv) volatility of 83%. The estimated fair value of this warrant was $349,000, which was recorded as contra-equity within additional paid in capital.

     In connection with the CEFF, the Company entered into a Registration Rights Agreement, or RRA with Kingsbridge. The RRA is effective through the term of the CEFF and for two years thereafter. Pursuant to the RRA, the Company is required to file a registration statement with respect to the resale of the shares of common stock issuable under the CEFF and the warrant within 60 days after entering into the CEFF and to use commercially reasonable efforts to have such registration statement declared effective by the SEC within 180 days of entering into the CEFF. The RRA requires the Company to maintain effectiveness of the registration statement throughout the term of the RRA. If the Company (1) fails to maintain effectiveness of the registration statement, or (2) has a deferral or suspension of registration due to a black-out period, the Company may be subject to liquidated damages. The liquidated damages are equal to the loss that Kingsbridge would incur by holding shares of the Company’s common stock and being unable to sell those shares because of an ineffective registration statement or black-out period. There is no limit to the amount of the liquidated damages that could be received in those circumstances. In accordance with the RRA, the Company has filed a Registration Statement on Form S-1 (File No. 333-150595) with the SEC, which was declared effective on May 15, 2008. As of June 30, 2008, the Company has not accrued for any liquidated damages. The Company received net proceeds of $900,000 from the sale of approximately 635,000 shares of common stock under the CEFF during the three months ended June 30, 2008.

     4. Recent Accounting Pronouncements

     In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141 (revised 2007) (SFAS 141R), entitled “Business Combinations”. SFAS 141R will change how business acquisitions are accounted for and will impact financial statements both on the acquisition date and in subsequent periods. SFAS 141R will be effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company does not expect the adoption of SFAS 141R to have a material effect on its financial position or results of operations.

     In December 2007, the Emerging Issues Task Force (“EITF”) issued EITF 07-1 entitled “Accounting for Collaborative Arrangements”. EITF 07-1 defines collaborative arrangements and establishes reporting requirements for transactions between participants in a collaborative arrangement and between participants in the arrangement and third parties. EITF 07-1 will be effective for fiscal years beginning after December 15, 2008. The Company does not expect the adoption of EITF 07-1 to have a material effect on its financial position or results of operations.

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

     Our Management’s Discussion and Analysis of Financial Condition and Results of Operations as of June 30, 2008 and June 30, 2007 should be read in conjunction with the sections of our audited consolidated financial statements and notes thereto, as well as our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” that is included in our Annual Report on Form 10-K for the year ended December 31, 2007, and also with the unaudited financial statements set forth in Part I, Item 1 of this Quarterly Report.

Overview

     We are a clinical-stage, biopharmaceutical company developing novel therapeutics to treat cancer and eye diseases. Our primary focus is the development and commercialization of product candidates referred to as vascular disrupting agents (VDAs) that selectively disrupt abnormal blood vessels associated with solid tumor progression and visual impairment, which are characterized by abnormal blood vessel growth. Because our VDA product candidates act via a well-validated therapeutic mechanism, inhibition of blood flow to tumors and neovascular lesions within the eye, we believe that the risk associated with our product development programs may be lower than that of many other agents that act via unvalidated therapeutic mechanisms.

     Our most advanced therapeutic product candidate, ZYBRESTAT™, is currently being evaluated in a Phase II/III pivotal registration study as a potential treatment for anaplastic thyroid cancer (ATC), a highly aggressive and lethal malignancy for which there are, currently, no approved therapeutics and extremely limited treatment options. In addition, ZYBRESTAT is being evaluated in Phase Ib and II clinical trials, in combination with established cancer treatment modalities, as a potential treatment for other solid tumors, including non-small cell lung cancer (NSCLC), platinum-resistant ovarian cancer, and head-and-neck cancer. Based upon preclinical results first published by our collaborators in the November 2007 online issue of the journal Blood, we believe that ZYBRESTAT and our other VDA product candidates may also have utility in the treatment of hematological malignancies or “liquid tumors.”

     In addition to developing ZYBRESTAT as an intravenously administered therapy for cancer indications, we are developing a topical formulation of ZYBRESTAT for ophthalmological diseases and conditions, such as age-related macular degeneration that are characterized by abnormal blood vessel growth within the eye that results in loss of vision. We believe that a safe, effective, convenient and topically-administered anti-vascular therapeutic would have advantages over currently-approved anti-vascular, ophthalmological therapeutics, which must be injected directly into patients’ eyes on a frequent basis. We are currently evaluating the most effective route to a topical formulation of ZYBRESTAT in an ophthalmological indication.

     We are currently evaluating a second-generation VDA product candidate, OXi4503, in a Phase I clinical trial in patients with advanced solid tumors. We refer to OXi4503 as an ortho-quinone prodrug (OQP). In preclinical studies, OXi4503 has shown potent anti-tumor activity, both as a single-agent, and in combination with other cancer treatment modalities. We believe that OXi4503 is differentiated from other VDAs by its ability to exert (i) potent vascular disrupting effects on tumor vasculature; and (ii) direct cytotoxic effects on tumor cells in a tumor-preferential fashion.

     Finally, under a sponsored research agreement with Baylor University, we are pursuing discovery and development of novel, small-molecule therapeutics for the treatment of cancer that we believe will be complementary with our later-stage VDA product candidates.

     We are committed to a disciplined financial strategy and as such maintain a limited employee and facilities base, with development, scientific, finance and administrative functions, which include, among other things, product development, regulatory oversight and clinical testing, managed from our corporate headquarters. Our research and development team members typically work on a number of development projects concurrently. Accordingly, we do not separately track the costs for each of these research and development projects to enable separate disclosure of these costs on a project-by-project basis. We conduct substantial scientific activities pursuant to collaborative arrangements with universities. Regulatory and clinical testing functions are generally contracted out to third-party, specialty organizations.

     Based on our current plans, we expect our current available cash and cash equivalents to meet our cash requirements into the first quarter of fiscal 2009. We will require significant additional funding to remain a going concern and to fund operations until such time, if ever, we become profitable. However, there can be no assurance that adequate additional financing will be available to the Company on terms that it deems acceptable, if at all. Our failure to successfully complete human clinical trials, develop and market products over the next several years, or to realize product revenues, would materially adversely affect our business, financial condition and results of operations. Royalties or other revenue generated by us from commercial sales of our potential products are not expected for several years, if at all.

     We have generated a cumulative net loss of approximately $150,293,000 for the period from our inception through June 30, 2008. We expect to incur significant additional operating losses over at least the next several years, principally as a result of our continuing

clinical trials and anticipated research and development expenditures. The principal source of our working capital has been the proceeds of private and public equity financings and the exercise of warrants and stock options. We currently have no material amount of licensing or other fee income. As of June 30, 2008, we had no long-term debt or loans payable

Results of Operations

Six Months Ended June 30, 2008 and 2007

Revenue

     We reported $0 and $7,000 in license revenue for the six months ended June 30, 2008 and 2007, respectively. Currently, our only source of revenue is from the license to a third party of our formerly owned nutritional and diagnostic technology. Future revenues from this license agreement are expected to be minimal. We do not expect to generate material revenue or fee income unless we enter into a major licensing arrangement.

Costs and expenses

     The following table summarizes our operating expenses for the periods indicated, in thousands and as a percentage of total expenses. This table also provides the changes in our operating expense components and their percentages:

		Six Months ended June 30,
		2008								2007								Increase (Decrease)
						% of Total								% of Total
						Operating								Operating
		Amount				Expenses				Amount				Expenses				Amount				%
Research and development		$	8,865				69	%		$	5,891				57	%		$	2,974				50	%
General and administrative			4,070				31	%			4,504				43	%			(434	)			-10	%
Total operating expenses		$	12,935				100	%		$	10,395				100	%		$	2,540				24	%

Research and development expenses

     The table below summarizes the most significant components of our research and development expenses for the periods indicated, in thousands and as a percentage of total research and development expenses. The table also provides the changes in these components and their percentages:

		Six Months ended June 30,
		2008								2007								Increase (Decrease)
						% of Total								% of Total
		Amount				Expenses				Amount				Expenses				Amount				%
External services		$	6,610				74	%		$	3,877				66	%		$	2,733				70	%
Employee compensation and related			1,941				22	%			1,681				28	%			260				15	%
Stock-based compensation			158				2	%			152				3	%			6				4	%
Other			156				2	%			181				3	%			(25	)			-14	%
Total research and development		$	8,865				100	%		$	5,891				100	%		$	2,974				50	%

     The most significant increase in research and development expenses for the six month period ended June 30, 2008, as compared to the six months ended June 30, 2007, of $2,733,000 is due to an increase in costs incurred on our clinical development programs, including primarily our Anaplastic Thyroid Cancer study and our Non-Small Cell Lung Cancer studies which represent 50% and 52% of the increase in external services expenses, respectively. This increase was offset in part by decreases in expenses relating to some of our other smaller studies in the six months ended June 30, 2008. These increases were attributable to costs associated with trial site initiation and other related study initiation activities. The increases in external services expenses were accompanied by an increase in employee compensation and related costs required to manage these ongoing studies. We expect this trend of increases in research and development expenses to continue for the foreseeable future as we anticipate the continued development of our potential product candidates.

General and administrative expenses

     The table below summarizes the most significant components of our general and administrative expenses for the periods indicated, in thousands and as a percentage of total general and administrative expenses. The table also provides the changes in these components and their percentages:

		Six Months ended June 30,
		2008								2007								Increase (Decrease)
						% of Total								% of Total
		Amount				Expenses				Amount				Expenses				Amount				%
Employee compensation and related		$	1,409				35	%		$	1,519				34	%		$	(110	)			-7	%
Stock-based compensation			551				13	%			950				21	%			(399	)			-42	%
Consulting and professional services			1,448				36	%			1,127				25	%			321				28	%
Facilities related			290				7	%			368				8	%			(78	)			-21	%
Other			372				9	%			540				12	%			(168	)			-31	%
Total general and administrative		$	4,070				100	%		$	4,504				100	%		$	(434	)			-10	%

     Decreases in employee compensation, stock-based compensation, facilities related and other expenses totaling $755,000 for the six months ended June 30, 2008, as compared to the six months ended June 30, 2007, were partially offset by an increase in consulting and professional services expenses of $321,000. The decreases in employee compensation and related expenses and stock-based compensation expense totaling $509,000 are attributable to one-time charges in the 2007 six-month period in connection with our Chief Executive Officer’s compensation agreement. The decrease in other expenses of $168,000 includes reductions in a number of miscellaneous spending categories. The increase in consulting and professional services expenses includes increases in our contracted services costs to assist in the administration of our ongoing potential product development costs and legal services. We anticipate increased general and administrative costs as we continue to prepare for and manage activities for both current and anticipated development programs.

Three Months Ended June 30, 2008 and 2007

Revenue

     We reported $0 and $7,000 in license revenue for the three months ended June 30, 2008 and 2007, respectively.

Costs and expenses

     The following table summarizes our operating expenses for the periods indicated, in thousands and as a percentage of total expenses. This table also provides the changes in our operating components and their percentages:

		Three Months ended June 30,
		2008								2007								Increase (Decrease)
						% of Total								% of Total
						Operating								Operating
		Amount				Expenses				Amount				Expenses				Amount				%
Research and development		$	5,176				72	%		$	3,502				60	%		$	1,674				48	%
General and administrative			2,023				28	%			2,380				40	%			(357	)			-15	%
Total operating expenses		$	7,199				100	%		$	5,882				100	%		$	1,317				22	%

Research and development expenses

     The table below summarizes the most significant components of our research and development expenses for the periods indicated, in thousands and as a percentage of total research and development expenses. The table also provides the changes in these components and their percentages:

		Three Months ended June 30,
		2008								2007								Increase (Decrease)
						% of Total								% of Total
		Amount				Expenses				Amount				Expenses				Amount				%
External services		$	4,125				80	%			2,375				68	%			1,750				74	%
Employee compensation and related			879				17	%			963				28	%			(84	)			-9	%
Stock-based compensation			79				1	%			77				2	%			2				3	%
Other			93				2	%			87				2	%			6				7	%
Total research and development		$	5,176				100	%		$	3,502				100	%		$	1,674				48	%

     The most significant increase in research and development expenses for the three months ended March 31, 2008 from the comparable period in 2007 of $1,750,000 is due to an increase in costs incurred on our clinical development programs, including primarily our Anaplastic Thyroid Cancer study and our Non-Small Cell Lung Cancer studies which represent 47% and 49% of the increase in external services expenses, respectively, for the reasons described above.

General and administrative expenses

     The table below summarizes the most significant components of our general and administrative expenses for the periods indicated, in thousands and as a percentage of total general and administrative expenses. The table also provides the changes in these components and their percentages:

		Three Months ended June 30,
		2008								2007								Increase (Decrease)
						% of Total								% of Total
		Amount				Expenses				Amount				Expenses				Amount				%
Employee compensation and related		$	654				32	%		$	833				35	%		$	(179	)			-21	%
Stock-based compensation			276				14	%			482				20	%			(206	)			-43	%
Consulting and professional services			675				33	%			623				26	%			52				8	%
Facilities related			224				11	%			169				7	%			55				33	%
Other			194				10	%			273				12	%			(79	)			-29	%
Total general and administrative		$	2,023				100	%		$	2,380				100	%		$	(357	)			-15	%

     The two most significant factors in the overall decrease in general and administrative expenses in the three month period of 2008 in comparison to the three month period of 2007 were decreases in employee compensation and stock-based compensation expenses totaling $385,000. Both of these decreases are attributable to one-time charges in the 2007 three-month period in connection with our Chief Executive Officer’s compensation agreement.

Liquidity and Capital Resources

     We have experienced net losses and negative cash flow from operations each year since our inception, except in fiscal 2000. As of June 30, 2008, we had an accumulated deficit of approximately $150,293,000. We expect to continue to incur expenses, resulting in operating losses, over the next several years due to, among other factors, our continuing clinical trials, planned future clinical trials, and other anticipated research and development activities. Our cash, cash equivalents and available-for-sale securities balance was approximately $18,273,000 at June 30, 2008, compared to approximately $28,438,000 at December 31, 2007.

     The following table summarizes our cash flow activities for the period indicated, in thousands:

		Six Months Ended
		June 30, 2008
Operating activities:
Net loss		$	(12,492	)
Non-cash adjustments to net loss			630
Changes in operating assets and liabilities			805
Net cash used in operating activities			(11,057	)
Investing activities:
Net decrease in available-for-sale securities			16,307
Purchase of furniture, fixtures and equipment			(53	)
Other			129
Net cash provided by investing activities			16,383
Financing activities:
Net proceeds from issuance of common stock			829
Net cash provided by financing activities			829
Increase in cash and cash equivalents			6,155
Cash and cash equivalents at beginning of period			8,527
Cash and cash equivalents at end of period		$	14,682

     A major component of the non-cash adjustments to net loss in the six month period ended June 30, 2008 is compensation expense of $710,000 related to the issuance of options and restricted stock. The net increase in operating assets and liabilities is attributable to an increase in accounts payable, accrued expenses and other payables of $1,125,000 offset by an increase in prepaid expenses and other current assets of $320,000. The decrease in available-for-sale securities is primarily attributable to our short-term product development-related cash requirements.

     In February 2008, we entered into the CEFF with Kingsbridge, pursuant to which Kingsbridge committed to purchase, subject to certain conditions, up to 5,708,035 shares of our common stock or up to an aggregate of $40,000,000 during the three years from the date of the agreement. Under the CEFF, we are able to draw down shares in tranches of up to a maximum of 3.5 % of our closing market value at the time of the draw down or the alternative draw down amount calculated pursuant to the Common Stock Purchase Agreement, whichever is less, subject to certain conditions. The purchase price of these shares will be at a discount of between 5 and 12 % from the volume weighted average price of our common stock for each of the eight trading days following the election to sell shares. Kingsbridge is not obligated to purchase shares if the volume weighted average price of our stock is less than $1.25 per share or 85% of the closing share price of our stock on the trading day immediately preceding the commencement of a draw down, whichever is higher. In connection with the CEFF, we issued a warrant to Kingsbridge to purchase 250,000 shares of our common stock at a price of $2.74 per share exercisable beginning six months after February 19, 2008 and for a period of five years thereafter. We have filed a registration statement on Form S-1 to register the resale by Kingsbridge of the shares issuable to Kingsbridge under the CEFF, which was declared effective by the SEC on May 15, 2008. In June 2008, we completed our first drawdown under the CEFF, netting approximately $900,000.

     Our anticipated cash requirement for fiscal 2008 is expected to be between $22,000,000 and $28,000,000. For the first six months of 2008 our cash utilization from operations totaled $11,057,000 for an average of approximately $5,500,000 per quarter. Based on our current projections, our cash utilization for the next six quarters is expected to increase to between $7,000,000 and $8,000,000 per quarter. Based on these plans, we expect our current available cash and cash equivalents to meet our cash requirements into the first quarter of fiscal 2009. Our cash utilization amount is highly dependent on the progress of our potential product development programs, particularly the rate of recruitment of patients in our human clinical trials, much of which is not within our control as well as the timing of hiring development and administrative staff to support our product development plans. However, we expect to augment our cash, cash equivalent and marketable securities balances as of June 30, 2008 of $18,273,000 with the utilization of our CEFF, if available by its terms, as well as through other forms of capital infusion. Our primary anticipated uses of funds during the 2008 fiscal year involve the preclinical and clinical development of our product candidates under development.

     Our cash requirements may vary materially from those now planned for or anticipated by management due to numerous risks and uncertainties. These risks and uncertainties include, but are not limited to: the progress of and results of our pre-clinical testing and clinical trials of our VDAs and OQPs under development, including ZYBRESTAT, our lead compound, and OXi4503; the progress of our research and development programs; the time and costs expended and required to obtain any necessary or desired regulatory approvals; the resources, if any, that we devote to developing manufacturing methods and advanced technologies; our ability to enter into licensing arrangements, including any unanticipated licensing arrangements that may be necessary to enable us to continue our development and clinical trial programs; the costs and expenses of filing, prosecuting and, if necessary, enforcing our patent claims, or defending ourselves against possible claims of infringement by us of third party patent or other technology rights; the costs of commercialization activities and arrangements, if any, undertaken by us; and, if and when approved, the demand for our products, which demand is dependent in turn on circumstances and uncertainties that cannot be fully known, understood or quantified unless and until the time of approval, for example the range of indications for which any product is granted approval.

     We will require significant additional funding to remain a going concern and to fund operations until such time, if ever, we become profitable. There can be no assurance that additional financing will be available on acceptable terms when needed, if at all. In addition to equity capital financing, we continue to aggressively pursue other forms of capital infusion including strategic alliances with organizations that have capabilities and/or products that are complementary to our own, as well as program structured financing arrangements in order to continue the development of our potential product candidates.

     In the event that the capital infusion initiatives discussed above are unsuccessful and should we be unable to sell shares under the CEFF due to the limitations contained in the CEFF agreement or our ability to maintain registration of the securities with the SEC, we are prepared to implement cost reduction measures. These cost reduction measures may include any or all of the following activities, which may be undertaken at any time: the cessation, reduction in scope or delay of the current or planned clinical trials of ZYBRESTAT and other supporting projects, the reduction and delay in hiring of development and administrative staff, the cessation of our preclinical study of our in-licensed antibody protein — OXiMAb-24A, the delay or reduction in development efforts in research with respect to our second-generation VDA, OXi4503, and the reduction of certain employee incentive programs.

     The following table presents our contractual obligations and commercial commitments as of June 30, 2008:

		Payments due by Period
		(All amounts in thousands)
		Total				1 Year				1-3 years				4-5 years				After 5 years
Clinical development and related commitments		$	15,941			$	12,962			$	2,979			$	—			$	—
Operating leases			1,183				724				459				—				—
Total contractual cash obligations		$	17,124			$	13,686			$	3,438			$	—			$	—

     Payments under our pre-clinical, product development and clinical development contracts are based on the completion of activities as specified in the contract. The amounts in the table above assume the successful completion by third-party contractors of all activities contemplated in the agreements with such parties. In addition, not included in the operating leases above is sublease income, which is expected to total approximately $269,000 for the 12-month period ending June 30, 2009 and $396,000 during the 1-3 year period thereafter for a total of $665,000 for the periods presented.

     Our primary drug development programs are based on a series of natural products called Combretastatins. In August 1999, we entered into an exclusive license for the commercial development, use and sale of products or services covered by certain patent rights owned by Arizona State University. This agreement was subsequently amended in June 2002. From the inception of the agreement through June 30, 2008, we have paid a total of $2,500,000 in connection with this license. The agreement provides for additional payments in connection with the license arrangement upon the initiation of certain clinical trials or the receipt of certain regulatory approvals, which payments could be accelerated upon the achievement of certain financial milestones, as defined in the agreement. We have made total milestone payments of $700,000 through March 31, 2008. In the six months ended June 30, 2008, we did not make any payments pursuant to meeting a financial milestone under the agreement. The license agreement also provides for additional payments upon our election to develop certain additional compounds, as defined in the agreement. Future milestone payments under this agreement could total up to an additional $200,000. We are also required to pay royalties on future net sales of products associated with these patent rights.

     In March 2007, we entered into an exclusive license agreement for the development and commercialization of products covered by certain patent rights owned by Intracel Holdings, Inc., a privately held corporation. We paid Intracel $150,000 in March 2007 as an up-front license fee that provides us with full control over the development and commercialization of licensed compounds and molecular products. We expensed the up-front payment to research and development expense. The agreement provides for additional payments to Intracel based on the achievement of certain clinical milestones and royalties based on the achievement of certain sales milestones. We have the right to sublicense all or portions of our licensed patent rights under this agreement.

Critical Accounting Policies and Significant Judgments and Estimates

     Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments, including those related to intangible assets. We base our estimates on historical experience and on various other factors that are believed to be appropriate under the circumstances, the results of which form the basis for making the judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

     While our significant accounting policies are more fully described in Note 1 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2007 and in our notes to the financial statements set forth in Item 1 of this Quarterly Report on Form 10-Q, we believe the following accounting policies are most critical to aid in fully understanding and evaluating our reported financial results.

Available-for-Sale Securities

     We designate our marketable securities as available-for-sale securities. Available-for-sale securities are carried at fair value with the unrealized gains and losses, net of tax, if any, reported as accumulated other comprehensive income (loss) in stockholders’ equity. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in investment income. Interest and dividends on securities classified as available-for-sale are included in investment income.

Accrued Research and Development

     We charge all research and development expenses, both internal and external costs, to operations as incurred. External costs consist of fees paid to consultants and other outside providers under service contracts. Costs incurred under fixed fee contracts are accrued ratably over the contract period absent any knowledge that the services will be performed other than ratably. Costs incurred under contracts to perform clinical trials are accrued on a patients-treated basis consistent with the typical terms of reimbursement. Upon termination of such contracts, we are normally only liable for costs incurred to date. As a result, accrued research and development expenses represent our estimated contractual liability to outside service providers at any of the relevant times.

Impairment of Long-Lived Assets

     On August 2, 1999, we entered into an exclusive license for the commercial development, use and sale of products or services covered by certain patent rights owned by Arizona State University. The present value of the amount payable under the license agreement has been capitalized based on a discounted cash flow model and is being amortized over the term of the agreement (approximately 15.5 years). We review this asset for impairment whenever there are indications of impairment based on an undiscounted net cash flow approach, in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets” (SFAS 144). If the undiscounted cash flows of an intangible asset are less than the carrying value of an intangible asset, the intangible asset is written down to the discounted cash flow value.

Stock-Based Compensation

     Effective January 1, 2006, we adopted SFAS 123R, “Share-Based Payment,” which requires the expense recognition of the estimated fair value of all share-based payments issued to employees. Prior to the adoption of SFAS 123R, the estimated fair value associated with such awards was not recorded as an expense, but rather was disclosed in a footnote to our financial statements.

     The valuation of employee stock options is an inherently subjective process, since market values are generally not available for long-term, non-transferable employee stock options. Accordingly, an option pricing model is utilized to derive an estimated fair value. In calculating the estimated fair value of our stock options, we used the Black-Scholes option pricing model which requires the consideration of the following six variables for purposes of estimating fair value:

	•		the stock option exercise price,
	•		the expected term of the option,
	•		the grant date price of our common stock, which is issuable upon exercise of the option,
	•		the expected volatility of our common stock,
	•		the expected dividends on our common stock (we do not anticipate paying dividends in the foreseeable future), and
	•		the risk free interest rate for the expected option term.

     Stock Option Exercise Price & Grant Date Price of our common stock — The closing market price of our common stock on the date of grant.

     Expected Term — The expected term of options represents the period of time for which the options are expected to be outstanding and is based on an analysis of historical behavior of participants over time Expected Volatility — The expected volatility is a measure of the amount by which our stock price is expected to fluctuate during the term of the option granted. We determine the expected volatility based on the historical volatility of our common stock over a period commensurate with the option’s expected term.

     Expected Dividends — Because we have never declared or paid any cash dividends on any of our common stock and do not expect to do so in the foreseeable future, we use an expected dividend yield of zero to calculate the grant date fair value of a stock option.

     Risk-Free Interest Rate — The risk-free interest rate is the implied yield available on U.S. Treasury issues with a remaining life consistent with the option’s expected term on the date of grant.

     Of the variables above, the selection of an expected term and expected stock price volatility are the most subjective. In the six-month period ended June 30, 2008, we granted options to purchase 44,000 shares of our common stock valued using these assumptions. The majority of the stock option expense recorded in the six-month period ended June 30, 2008 relates to continued vesting of stock options and restricted stock that were granted after January 1, 2006. In accordance with the transition provisions of SFAS 123R, the grant date estimates of fair value associated with prior awards, which were also calculated using the Black-Scholes option pricing model, have not been changed. The specific valuation assumptions that were utilized for purposes of deriving an estimate of fair value at the time that prior awards were issued are as disclosed in our prior Annual Reports on Form 10-K, as filed with the SEC.

     Upon adoption of SFAS 123R, we were also required to estimate the level of award forfeitures expected to occur and record compensation expense only for those awards that are ultimately expected to vest. This requirement applies to all awards that are not yet vested, including awards granted prior to January 1, 2006. Accordingly, we performed a historical analysis of option awards that were forfeited prior to vesting, and ultimately recorded total stock option expense that reflected this estimated forfeiture rate. In our calculation, we segregated participants into two distinct groups, (1) directors and officers and (2) employees, and our estimated forfeiture rates were calculated at 10% and 50%, respectively. This analysis will be re-evaluated quarterly and the forfeiture rate will be adjusted as necessary. Ultimately, the actual expense recognized over the vesting period will only be for those shares that vest.

Tax Matters

     As of December 31, 2007, we had net operating loss carry-forwards of approximately $130,685,000 for U.S. income tax purposes, which expire through 2027. Due to the degree of uncertainty related to the ultimate use of these loss carry-forwards, we have fully reserved this future benefit. Additionally, the future utilization of the U.S. net operating loss carry-forwards is subject to limitations under the change in stock ownership rules of the Internal Revenue Service.

Item 3.		Quantitative and Qualitative Disclosures About Market Risk

     At June 30, 2008, we did not hold any derivative financial instruments, commodity-based instruments or other long-term debt obligations. We have adopted an Investment Policy and maintain our investment portfolio in accordance with the Investment Policy. The primary objectives of the Investment Policy are to preserve principal, maintain proper liquidity to meet operating needs and maximize yields while preserving principal. Although our investments are subject to credit risk, we follow procedures to limit the amount of credit exposure in any single issue, issuer or type of investment. Our investments are also subject to interest rate risk and will decrease in value if market interest rates increase. However, due to the conservative nature of our investments and their relatively short duration, we believe interest rate risk is mitigated. Our cash and cash equivalents are maintained in U.S. dollar accounts. Although we conduct a number of our trials and studies outside of the United States, we believe our exposure to foreign currency risk to be limited as the arrangements are in jurisdictions with relatively stable currencies.

Item 4.		Controls and Procedures

     Evaluation of Disclosure Controls and Procedures.

     The Securities and Exchange Commission requires that, as of the end of the period covered by this Quarterly Report on Form 10-Q, the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO) evaluate the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e)) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, and report on the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective to provide reasonable assurance that we record, process, summarize and report the information we must disclose in reports that we file or submit under the Exchange Act, within the time periods specified in the SEC’s rules and forms.

     Changes in Internal Control.

     There were no changes in our internal control over financial reporting, identified in connection with the evaluation of such control that occurred during the last fiscal quarter, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

     Important Considerations.

     The effectiveness of our disclosure controls and procedures and our internal control over financial reporting is subject to various inherent limitations, including cost limitations, judgments used in decision making, assumptions about the likelihood of future events, the soundness of our systems, the possibility of human error, and the risk of fraud. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions and the risk that the degree of compliance with policies or procedures may deteriorate over time. Because of these limitations, there can be no assurance that any system of disclosure controls and procedures or internal control over financial reporting will be successful in preventing all errors or fraud or in making all material information known in a timely manner to the appropriate levels of management.

PART II OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

There have been no material changes to the risk factors as described in our Annual Report on Form 10-K for the year ended December 31, 2007 filed with the SEC.

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

On May 23, 2008, we delivered notice to Kingsbridge Capital Limited, or Kingsbridge, to effect a draw down of up to $900,000 pursuant to the Common Stock Purchase Agreement dated as of February 19, 2008, by and between us and Kingsbridge. The first trading day of the eight-day pricing period for this draw down was May 27, 2008, and, in connection with this draw down, on June 2, 2008 and June 6, 2008, we issued an aggregate of 634,600 shares of our common stock to Kingsbridge at an aggregate purchase price of $900,000. The securities were issued to Kingsbridge in a transaction that was exempt from registration under the Securities Act of 1933, as amended, or the Act, pursuant to the exemption from registration set forth in Section 4(2) of the Act. The resale by Kingsbridge of these shares has been registered pursuant to a Registration Statement on Form S-1 (Reg. No. 333-150595).

Item 3. Defaults Upon Senior Securities

None.

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

On July 23, 2008, the Company held its Annual Meeting of Stockholders (the “Meeting”). On June 6, 2008, the record date for the Meeting, there were 29,176,207 shares of outstanding common stock of the Company that could be voted at the Meeting. A total of 16,750,437 shares were present, in person or by proxy and voted at the Meeting. At the Meeting, all nominees for director, Joel-Tomas Citron, David Chaplin, Ph.D., Richard Chin, M.D., Roy Hampton Fickling, Arthur Laffer, Ph.D., William D. Schwieterman, M.D., William N. Shiebler, Per-Olof Söderberg and J. Richard Zecher, Ph.D. were elected by plurality of the votes cast, as follows:

		FOR				Withheld Authority
Name of Director		Number of Shares				Number of Shares
Joel-Tomas Citron			14,352,618				821,109
David Chaplin, Ph.D.			14,596,433				577,924
Richard Chin, M.D.			14,525,703				648,024
Roy Hampton Fickling			14,589,508				584,219
Arthur Laffer, Ph.D.			14,545,567				628,160
William D. Schwieterman, M.D.			14,594,038				579,689
William N. Shiebler			14,558,280				615,447
Per-Olof Söderberg			14,595,006				578,721
J. Richard Zecher, Ph.D.			14,595,438				578,289

At the Meeting, the Company’s stockholders also approved the issuance of up to 5,708,035 shares of its common stock, representing 19.9% of its currently outstanding shares of common stock, to Kingsbridge, pursuant to the Common Stock Purchase Agreement, dated as of February 19, 2008, by and between Kingsbridge and the Company, with 6,655,944 votes cast in favor, 675,007 against and 75,273 abstentions.

Item 5. Other Information

None.

Item 6. Exhibits

31.1		Certification of Principal Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Principal Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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.

EXHIBIT INDEX

Exhibit
Number		Description
31.1		Certification of Principal Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Principal Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.