NORTHWEST BIOTHERAPEUTICS INC - 10-K Annual Report

Position

Alton L. Boynton, Ph.D

President, Chief Scientific Officer, Chief Operating Officer and Secretary

Marnix Bosch, Ph.D.

Vice President of Vaccine Research and Development

Larry L. Richards

Controller (Principal Financial and Accounting Officer)

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. þ

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

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

The aggregate market value of the voting stock held by non-affiliates of the Registrant, computed by reference to the closing price on the consolidated transaction reporting system on June 30, 2003 was approximately $4.2 million.

As of May 11, 2004, the Registrant had outstanding 19,028,779 shares of common stock.

The following description of our business, discussion and analysis of our financial condition and results of operations should be read in conjunction with the information included elsewhere in this Annual Report on Form 10-K. In addition to historical information, this report contains forward-looking statements that are subject to certain risks and uncertainties that could cause our actual results to differ materially from those projected. The words “believe,” “expect,” “intend,” “anticipate,” and similar expressions are used to identify forward-looking statements, but their absence does not mean that such statement is not forward-looking. You are encouraged to carefully review the various disclosures made by us in this report and in the documents incorporated herein by reference, in our previous SEC filings, and those factors described under “Factors That May Affect Results of Operations and Financial Condition, beginning on page 17 of this Annual Report on Form 10-K.” These factors, among others, could cause results to differ materially from those presently anticipated by us. Readers are cautioned not to place undue reliance on these forward-looking statements. In this Annual Report on Form 10-K, references to “Northwest Biotherapeutics,” “company,” “we,” “us,” and “our” refer to Northwest Biotherapeutics, Inc.

On April 26, 2004 we entered into a Recapitalization Agreement with Toucan Capital Fund II, L.P. (“Toucan”). The Recapitalization Agreement calls for the possible recapitalization of the Company. At Toucan’s option, and if successfully implemented, the recapitalization could provide the company with up to $40 million through the issuance of new securities to Toucan and a syndicate of investors selected by Toucan. Following the recapitalization, Toucan and the investor syndicate would potentially own, on a combined basis, over 90% of the outstanding capital stock of the Company. The proposed recapitalization would occur in two stages, a bridge period which expires July 23, 2004, unless earlier terminated or extended by Toucan, followed by a potential equity financing.

On April 26, 2004 Toucan loaned the Company $500,000. Since February 1, 2004 Toucan has loaned the Company a total of $600,000, including the $500,000 loan on April 26, 2004. The recent borrowing from Toucan should allow the Company to fund its operations for approximately 30 days, or until approximately May 26, 2004. Toucan has the option to loan additional amounts to the Company during this bridge period, but is not obligated to do so. These loans accrue interest at 10% per year and are also convertible into capital stock of the Company. Generally, Toucan may, in its sole discretion, elect to convert the principal and interest due under the notes into any equity security and/or debt security of the Company at anytime prior to full repayment. The conversion price for any conversion of a note at the election of Toucan will be the lowest of (i) with certain exceptions, the lowest nominal or effective price per share paid by any investor of the Company at any time on or after one year prior to April 26, 2004, (ii) with certain exceptions, the lowest nominal or effective price at which any investor of the Company has a right to acquire shares of the Company pursuant to any security, instrument, or promise, undertaking, commitment, agreement or letter of intent outstanding on or after April 26, 2004 or granted, issued, extended or otherwise made available by the Company at any time on or after one year prior to April 26, 2004 and (iii) the lesser of $0.10 per share or 35% discount to the average closing price per share of the Company’s common stock during any 20 consecutive trading days (beginning with the 20 consecutive trading days prior to the effective date of the Recapitalization Agreement), but not less than $0.04 per share under this clause (iii). In addition to these conversion rights, the notes will automatically be converted into convertible preferred stock of the Company in the event the Company raises $15 million through the issuance of convertible preferred stock. In this event the conversion price would be the lowest nominal or effective price per share paid by investors other than Toucan who purchase shares of convertible preferred stock (excluding shares issuable upon exercise of the bridge warrants). If the bridge notes, including principal and accrued interest, were converted into common stock on May 12, 2004 the conversion price would be $0.04 per share and Toucan would own 15,113,000 million shares (or 44.3%) of the Company’s outstanding capital stock.

In connection with the loans, Toucan has received warrants to purchase up to 36.0 million shares of the Company’s capital stock at an exercise price of $0.01 per share. Any future bridge loans by Toucan up to an additional $500,000, or $1.1 million in the aggregate, would include similar conversion features and warrant coverage.

As part of the Recapitalization Agreement, at the election of Toucan, the Company will be required to enter into an equity financing with Toucan and other investors to be determined by Toucan. If Toucan elects to pursue the equity financing, the parties have agreed that the Company will sell to Toucan and other investors up to $40 million of convertible preferred stock. The preferred stock would be priced at the lower of $0.10 per share or a 35% discount to the average closing price of the Company’s common stock during the 20 trading days prior to the first closing of the equity financing, but not less than $0.04 per share. The equity financing is contingent upon the Company complying with certain covenants in the Recapitalization Agreement and locating investors who are willing to invest in the Company on the terms proposed. The equity financing is also subject to a number of closing conditions, including approval of the Company’s stockholders.

As of April 26, 2004, including the $600,000 borrowed from Toucan, we had approximately $561,000 in cash and cash equivalents. We believe, based on recurring operating and associated financing costs, our cash will be sufficient to fund our operations through May 26, 2004. After that date we will have to seek additional funds from Toucan which Toucan is not obligated to provide to us. Under the terms of the Recapitalization Agreement, if Toucan elects not to provide additional funding to us we are prohibited from seeking funds from any party other than Toucan for up to ten business days after May 26, 2004.

Any additional financing with Toucan and any other third party is likely to be dilutive to stockholders, and debt financing, if available, may include additional restrictive covenants.

Unless we receive significant additional funding in the future, continuing our operations would require us to use assets that otherwise would be required to liquidate the Company and pay our obligations. For this reason, if we are unable to obtain additional capital, we may choose to cease operations at any time to meet our obligations and to maximize the value, if any, to be paid to our stockholders following a potential liquidation.

Northwest Biotherapeutics, Inc. was incorporated in Delaware in July 1998. We are a development stage biotechnology company focused on discovering, developing, and commercializing immunotherapy products that safely generate and enhance immune system responses to effectively treat cancer. Currently approved cancer treatments are frequently ineffective and can cause undesirable side effects. Our approach in developing cancer therapies utilizes our expertise in the biology of dendritic cells, which are a type of white blood cells that activate the immune system. Our primary activities since incorporation have been antibody research and development, strategic and financial planning, and raising capital to fund our operations.

We have two basic technology platforms applicable to cancer therapeutics; dendritic cell-based cancer vaccines (DCVax) and monoclonal antibodies (HuRx) for cancer therapeutics, (DCVax and HuRx are trademarks of Northwest Biotherapeutics, Inc.). Our DCVax dendritic cell-based cancer vaccines continue to be our main technology platform.

We completed an initial public offering of our common stock in December 2001. Following that offering, our dendritic cell (DC) vaccine technology was moved into a Phase III clinical trial for prostate cancer. In addition, we submitted a Phase II Clinical Trial protocol to the FDA for DCVax-Brain and a Phase I Clinical Trial protocol for DCVax-Lung. Both of these submissions were cleared by the FDA for patient recruitment.

In 2002, however, we were unable to raise the additional money needed to fund our ongoing operations and clinical trial activities. Consequently, on October 9, 2002, our Board of Directors authorized management to initiate immediate actions to conserve cash. For that purpose, we reduced staff, eliminated certain future commitments, and sold some of our fixed assets and continued to assess our alternatives.

In November 2002, we suspended all clinical trial activity for our DCVax product candidates. We withdrew our Investigational New Drug Application (IND) for DCVax-Prostate, a prostate cancer treatment, and for DCVax-Lung, a potential treatment for non-small cell lung cancer. We maintained our FDA clearance and our Orphan Drug designation for a multi-site Phase II clinical trial to evaluate the DCVax-Brain product candidate as a possible treatment for Glioblastoma Multiforme. However, this trial cannot be initiated without additional funding. The DCVax-Brain trial was moved to an inactive status and no patients were recruited. That trial remains open with the FDA.

During our restructuring activities from October 2002 through March 22, 2004, approximately sixty-three members of our research and administrative staff were discharged, including our Chief Executive Officer, Chief Financial Officer, and Chief Medical Officer. Through December 31, 2003, severance and other related costs of the staff reductions totaled approximately $1.1 million and there were no unpaid severance liabilities as of December 31, 2003. Our remaining staff, as of March 31, 2004, consisted of six full-time employees and two part-time employees.

Our financial statements for the year ended December 31, 2003 have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. Nevertheless, we have experienced recurring losses from operations and have a deficit accumulated during the development stage of $64.2 million. Our independent auditors indicated in their report on our December 31, 2003 financial statements included in our Form 10-K that there is substantial doubt about our ability to continue as a going concern.

Our website is located at: http://www.nwbio.com Our periodic SEC filings are available through clicking on “News and Investor” to “Stock Quote” to “Real-Time SEC Filings”.

Additionally, our Press Releases can be accessed through clicking on “News and Investor” to “Stock Quote” to “Press Releases”. The “Archive” button will display our historical Press Releases.

The American Cancer Society estimates that in the United States, men have a 1 in 2 lifetime risk of developing cancer, while women have a risk of 1 in 3. Doctors were expected to diagnose approximately 1.37 million new cases of cancer in the United States during 2002. Cancer is the second leading cause of death in the United States after heart disease and is estimated to result in approximately 563,700 deaths, or 1,544 per day, in 2004. The direct medical costs related to treating cancer in the United States were estimated to be $56 billion in 2002. Our initial therapeutic targets, prostate, brain and lung cancers, cause approximately 36% of the cancer deaths in the United States each year. The American Cancer Society estimated that the incidence of new diagnosis and deaths resulting from several common cancers during 2004 would be as follows:

Cancer is characterized by aberrant cells that multiply uncontrollably. As cancer progresses, the cancer cells may invade other tissues throughout the body producing additional cancers, called metastases. Cancer growth can cause tissue damage, organ failure and, ultimately, death. Many immunologists believe that cancer cells occur frequently in the human body, yet are effectively controlled by the immune system because these cells are recognized as aberrant. Cancer growth occurs if this natural process fails.

Cancer cells produce abnormal kinds and amounts of substances called antigens, which may be distinguishable from those produced by healthy cells. The use of these cancer-associated antigens is essential to the successful development of products capable of stimulating the immune system to seek and destroy cancer cells marked by these antigens.

The immune system is the body’s defense mechanism responsible for recognizing and eliminating cancer cells, viruses, bacteria and other disease-causing organisms. This system consists of populations of white blood cells whose components are responsible for initiating the cellular immune response, and the humoral, or antibody-based, immune response.

Dendritic cells, a component of white blood cells, initiate the cellular immune response by processing and displaying disease-associated antigen fragments on their outer cell surface, where they are recognized by white blood cells, known as naive T cells, that have not yet been exposed to antigens. Upon exposure to these antigen fragments, naive T cells become disease-specific Helper T cells or Killer T cells. Helper T cells then induce Killer T cells to seek and destroy the cells marked by the disease-associated antigen.

B cells direct the humoral immune response by binding to disease-associated antigens on the surface of various cell types, producing disease-specific antibodies. Helper T cells also enhance B cell production of disease-specific antibodies. These antibodies bind to and initiate the destruction of cells marked by the associated disease-specific antigens.

A small population of activated Helper T cells, Killer T cells, and antibody-producing B cells survive for long periods of time, retaining the memory of what the disease fragment looks like. These cells can respond very rapidly to subsequent exposure to disease-specific antigens and fragments. The most effective natural immune response is one in which both Killer T cells and antibody-producing B cells are activated.

The immune system response to cancer is generally characterized by the following sequence:


	•	Step 1. Dendritic cells ingest cancer antigens, break them into small fragments and display them on their outer cell surfaces.

	•	Step 2. Dendritic cells bearing these cancer antigen fragments bind to and activate naive T cells, which become disease-specific Helper T and Killer T cells.

	•	Step 3. The activated Helper T cells produce factors that greatly enhance the cell division of Killer T cells and mature their cancer-killing properties.

	•	Step 4. Cancer cells and their cancer-associated antigens are also recognized by antibody-producing B cells.

	•	Step 5. The activated Helper T cells produce factors that greatly enhance antibody production by B cells that in turn are specific for the cancer-associated antigens.

	•	Step 6. The Killer T cells and antibodies, acting alone or in combination, destroy cancer cells.

Cancer is characterized by aberrant cells that multiply uncontrollably. As cancer progresses, the cancer cells may invade other tissues throughout the body producing additional cancers, called metastases. Effective therapies must attack the cancer both at its site of origin and at sites of metastases. Traditional treatments for cancer include:


	•	Surgery. Surgery may be used to remove cancer cells, but not all cancer cells can be removed surgically. Surgery may also result in significant adverse side effects such as collateral damage to healthy tissue, bleeding and infection.

	•	Radiation Therapy. Radiation therapy may be used to treat cancers but it can cause significant damage to healthy tissue surrounding the targeted cancer cells. Recurrent cancers may not be treatable with further radiation therapy. Radiation therapy may also cause additional significant adverse side effects such as burns to treated skin, organ damage and hair loss.

	•	Chemotherapy. Chemotherapy may be used to treat cancer, but involves the use of toxic chemical agents. These toxic chemical agents affect both healthy and diseased cells and may cause additional significant adverse side effects such as hair loss, immune suppression, nausea and diarrhea.

	•	Hormone Therapy. Hormone therapy may be used to treat cancer, but involves the use of substances that chemically inhibit the production of growth and reproductive hormones and is also limited in effectiveness. Hormone therapy may cause significant adverse side effects such as bone loss, hot flashes, impotence and blood clots.

Immunotherapy can stimulate and enhance the body’s natural mechanism for destroying pathogens, such as cancer cells, and may overcome many of the limitations of traditional cancer therapies. Immunotherapy may be particularly useful to augment traditional cancer therapies. In recent years, two cancer immunotherapy approaches have emerged, with FDA approved products to address the limitations of traditional therapies:


	•	Antibody-Based Therapies. Currently approved antibody-based cancer therapies have improved survival rates with reduced side effects when compared with traditional therapies. However, these antibody-based therapies can elicit an immune response against themselves because they contain mouse proteins or fragments of such proteins. This can limit their effectiveness and potentially endanger a patient’s health.

	•	Immune-Modulating Agents. Currently approved immune-modulating agents, such as IL-2, GM-CSF and alpha-interferon, are known to have some ability to enhance the immune system and control cancer growth. However, these therapies involve delivery of the immune modulating agent through the blood system and therefore cannot be directed exclusively to cancer cells. This lack of selectivity may result in significant toxicity to healthy tissue.

We have developed two proprietary approaches, DCVax and HuRx, for stimulating and enhancing a patient’s cellular and humoral immune response to cancer. Given appropriate funding for future development, which is not available to us at this time, we believe that DCVax and HuRx products may overcome the limitations of current cancer therapies and offer cancer patients safe and effective treatment alternatives, alone or in combination with other therapies.

Our DCVax platform combines our expertise in dendritic cell biology, immunology and antigen discovery with our proprietary process of producing and activating dendritic cells outside a patient’s body to develop


	•	Activates The Natural Immune System. Our DCVax products are designed to elicit a natural immune response. We believe that our pre-clinical and clinical trials have demonstrated that our DCVax product candidates can train a patient’s own Killer T cells to seek and destroy specifically targeted cancer cells. Our clinical trials have also shown that DCVax-Prostate stimulates the body to produce antibodies and T cells that bind to cancer-associated antigens and potentially destroy cancer cells marked by these antigens.

	•	Multiple Cancer Targets. If we secure the necessary funding, we intend to apply our DCVax platform to treat a wide variety of cancers. The DCVax platform affords the flexibility to target many different forms of cancer through the possible direct intra-tumoral injection of partially mature dendritic cells or the pairing of dendritic cells with cancer-associated antigens, fragments of cancer-associated antigens or deactivated whole cancer cells.

	•	No Significant Adverse Side Effects Or Toxicity. Our initial, but now withdrawn, DCVax-Prostate IND, has shown mild injection site reactions, which were typical and fully anticipated, but no significant adverse side effects in over 110 clinically administered injections. We believe that we minimize the potential for toxicity by using the patient’s own cells to create our DCVax product candidate. Additionally, because our DCVax products are designed to target the cancer-associated antigens in the patient, we believe they minimize collateral damage to healthy cells.

	•	Rapid Pre-Clinical Development. We believe that our DCVax technology, which was safely administered in a Phase I/ II clinical trial for prostate cancer, will enable us to rapidly move new potential products into clinical trials within six to nine months of concept, subject to FDA approval and the availability of adequate resources. New DCVax product candidates simply require the direct injection of partially mature dendritic cells into solid tumors or the identification of cancer-associated antigens, fragments of cancer-associated antigens or whole cancer cells added to partially mature dendritic cells prior to injection into patients. To date, we have identified six cancer-associated antigens over a period of approximately two years.

	•	Ease Of Administration. We initially collect a patient’s white blood cells in a single standard outpatient procedure called leukapheresis. After patient-specific manufacturing and quality control testing, each small dose of a DCVax product candidate is administered by a simple direct injection into a solid tumor or an intradermal injection in an outpatient setting.

	•	Complementary With Other Treatments. Our DCVax product candidates are designed to stimulate the patient’s own immune system to safely target cancer cells. Consequently, we believe these products may be used as an adjuvant to traditional therapies such as chemotherapy, radiation therapy, hormone therapy and surgery.

Our HuRx platform is based on combining our expertise in monoclonal antibodies, immunology and antigen discovery with the efforts of partners who have expertise in humanized and, or fully human monoclonal antibody development and production. We co-developed an initial HuRx product with Medarex, our first HuRx partner. This partnership enabled us to create a proprietary fully human monoclonal antibody-based prostate cancer product candidate. That product candidate now has been acquired by Medarex and is in a FDA Phase I clinical trial. Products derived from our HuRx efforts are intended to have the following characteristics, the total of which, we believe, will make them potentially attractive alternatives to current therapies:


	•	Fully Human Antibodies. Current monoclonal antibody-based therapies contain mouse proteins or fragments of such proteins. Consequently, these therapies have the potential to elicit unwanted immune responses against the mouse proteins or protein fragments. Our first HuRx product candidate,


		which was co-developed with and acquired by Medarex, is based on monoclonal antibodies that are fully human, and thus do not contain any mouse proteins. As a result, we expect these products to exhibit a favorable safety profile and minimal, if any, unwanted immune response against the HuRx antibody-based therapy itself.

	•	Rapid Pre-Clinical Development. We developed our initial HuRx product candidate in collaboration with Medarex. This partnership combined our collective expertise in fully human monoclonal antibody technology, in-house development and clinical supply manufacturing. Our agreement with Medarex enables us to rapidly develop additional product candidates from our antigen-discovery program. Consequently, we believe that, subject to FDA approval and the availability of adequate resources, we can progress from antigen discovery to clinical trials for each new HuRx product candidate in less than two years.

	•	Cancer Specificity. Our proprietary antigens are significantly over-expressed in cancer cells. Our HuRx antibodies bind to these targeted cancer-associated antigens and potentially destroy cancer cells marked by these antigens. To date, we have identified five clinically validated antigens associated with twelve different cancers. Certain rights to three of our antigen targets have been acquired by Medarex.

	•	Multiple Therapeutic Applications. We believe that HuRx antibodies may be used as stand-alone products that bind to cancer-associated antigens and potentially destroy cancer cells marked by these antigens. HuRx antibodies may also enable the targeted delivery of existing therapies such as radiation and cytotoxic agents. The inherent toxic effects of cytotoxic agents and radioactive materials on normal tissue could be minimized by coupling these agents to antibodies that have a high degree of specificity to cancer cells.

	•	Commercialization. Based on our experience with the manufacturing of HuRx antibodies, we believe the manufacturing of these antibodies can be scaled to meet market demand. Antibody-based products are typically characterized by an inherent stability, resulting in a commercially acceptable shelf-life.

	•	Complementary With Other Treatments. We believe that our HuRx product candidates may be suitable for use alone or in combination with currently approved therapies due to their complementary cell-killing properties.

In addition, we believe that HuRx antibodies may be useful for the development of cancer diagnostic imaging products.

Although we have suspended our clinical trials in order to conserve cash, we are continuing our efforts to develop DCVax- and HuRx-based therapeutic product candidates for the treatment of cancer. We have completed or largely completed our research and pre-clinical testing phases for four product candidates.

The following table summarizes the targeted indications and status of our product candidates:


(1)	Pre-clinical means that a product is undergoing efficacy and safety evaluation in disease models in preparation for human clinical trials. Phase I-III clinical trials denote safety and efficacy tests in humans as follows:

The DCVax platform uses our proprietary process to efficiently produce and activate dendritic cells outside of a patient’s body. Our Phase I/ II clinical trial for DCVax-Prostate demonstrated that these cells can generate an effective immune system response when administered therapeutically. Manufacture of a DCVax product takes approximately 30 days to complete, and is characterized by the following sequence:


	•	Collection. A patient’s white blood cells are collected in a single and simple outpatient procedure called leukapheresis.

	•	Isolation of Precursors. These cells are sent to our manufacturing facility, where dendritic cell precursors are isolated from the patient’s white blood cells.

	•	Transformation by Growth Factors. Dendritic cell precursors are transformed, through the application of specific growth factors, into highly pure populations of immature dendritic cells during a six-day culture period.

	•	Maturation. Immature dendritic cells are exposed to a proprietary maturation factor in order to maximize Helper T cell, Killer T cell and B cell activation.


	•	Harvest for DCVax-Direct. These dendritic cells can be harvested for DCVax-Direct and separated into single-use DCVax administration vials, frozen and stored for the quality control sequence without the antigen display step. These cells are ready for direct intratumoral injection into patients.

	•	Antigen Display. Cancer-associated antigens, fragments of cancer-associated antigens or deactivated whole cancer cells are added to, ingested and processed by the maturing dendritic cells, causing the dendritic cells to display fragments of cancer-associated antigens on their outer cell surfaces.

	•	Harvest. These dendritic cells are harvested and separated into single-use DCVax administration vials, frozen and stored.

	•	Quality Control. Each DCVax product lot undergoes rigorous quality control testing, including 14-day sterility testing for bacterial and mycoplasma contamination, and potency testing prior to shipment to the administration site for injection.

We believe that our DCVax platform affords us the flexibility to target many different forms of cancer through the direct intra-tumoral injection of dendritic cells or the pairing of dendritic cells with cancer-associated antigens, pieces of cancer-associated antigens or deactivated whole cancer cells. We have either patented or licensed critical intellectual property encompassing this technology.

DCVax-Prostate, our initial dendritic cell-based product candidate, resulted from combining our DCVax platform with the cancer-associated antigen prostate specific membrane antigen, or PSMA. PSMA is located on the surface of prostate cells. It is expressed at very low levels on benign or healthy prostate cells, and at much higher levels on prostate cancer cells. Because PSMA is over-expressed in virtually all prostate cancers, it represents an effective target for prostate cancer therapeutics. The results from our Phase I/ II clinical trial provided us with important results supporting the potential value of our DCVax platform as the basis for new cancer immunotherapies.

In September 1999, we filed an application to conduct a Phase I/ II clinical trial for DCVax-Prostate to treat late-stage prostate cancer patients for whom hormone therapy was no longer effective. This trial was carried out at M.D. Anderson Cancer Center and at UCLA, involved the administration of DCVax-Prostate to thirty-two evaluable patients in order to establish the safety and efficacy of three different dosage levels of DCVax-Prostate.

We observed stabilization of disease at 26 weeks in 52% (16 of 31) of the patients in our Phase I/ II clinical trial. Twelve of these stable patients did not have measurable metastatic disease at the time of treatment and all twelve were stable, as measured by radiographic criteria, at weeks 26 to 28 with a median time to progression of 40 weeks. These results can be compared to results for another experimental therapy given to similar patients without metastatic disease that had a median time to progression of 29 weeks. Patients with measurable metastatic disease in our Phase I/ II clinical trial had a median time to progression of 20 weeks. These results can be compared to results for another experimental therapy given to patients with metastatic disease that had a median time to progression of 16 weeks with control or placebo progression occurring at 9 weeks. Eighty-three percent (83%) of patients had an immune response following treatment with DCVax-Prostate, as measured by the amount of immune-reactive substances found in the blood of patients, which formed specifically in response to PSMA.

DCVax-Brain uses our DCVax platform in combination with glioblastoma-associated antigen fragments. Our clinical collaborators at UCLA conducted a Phase I clinical trial to assess the safety and efficacy of dendritic cell-based immunotherapy for glioblastoma. They have informed us that it has been safely administered to 12 patients and provided us with preliminary data. Seven of these patients were newly diagnosed and to date have a mean time to progression of 18.2 months (two patients have yet to progress after

19 and 29 months respectively) compared to 7 months for historical controls. Survival to date averages 20.7 months compared to 15 months of survival for historical controls. Only one patient, from the newly diagnosed group, has died (at 19 months). The five patients with recurrent disease all progressed with a mean of 15.2 months compared to 5 months for historical controls. Average survival to date is 11.8 months compared to 10 months for historical controls. Three of these patients, from the recurring group, remain alive. Based on these results, we have received clearance from the FDA to conduct a Phase II clinical trial with DCVax-Brain and we have been granted Orphan Drug designation for this application of DCVax.

DCVax-Direct uses our DCVax platform to produce dendritic cells suitable for direct injection into solid tumors. Several scientific studies have shown that dendritic cells injected into solid tumors in animal models can result in tumor regression. We have continued pre-clinical development of this application with positive preclinical animal data.

Target Market. The American Cancer Society estimated that about 17,000 new cases of brain cancer would be diagnosed in the United States during 2004. Deaths from brain cancer are estimated at about 13,100 per year. The most common and lethal form of brain cancer is glioblastoma, the indication we are targeting with DCVax-Brain and DCVax-Direct. We estimate that our DCVax products could address a population consisting of approximately 10,000 new patients per year.

Current Treatments. Existing treatments for glioblastoma include surgery, radiation and chemotherapy. These existing treatments are often used in various combinations and/or sequences and have significant adverse side effects. In its most recent study, The National Institutes of Health reported that the 1989-1996 five-year survival rate for all brain cancer patients was only 31%. Following initial treatment, virtually all cases of this cancer recur, with a life expectancy of approximately one year following recurrence. Few effective therapies exist for these patients. We believe that DCVax-Brain and DCVax-Direct may address this critical unmet medical need.

DCVax-Lung was designed to use our DCVax platform in combination with isolated and deactivated lung cancer cells as antigens. Although we received clearance from the FDA to conduct a Phase I clinical trial to assess the safety and efficacy of DCVax-Lung, due to lack of financial resources, we suspended the initiation of this trial.

Target Market. The American Cancer Society estimated that 178,000 new cases of lung cancer would be diagnosed in the United States during 2004. Approximately 80% of these cases are expected to be attributable to non-small cell lung cancer, the indication we were targeting with DCVax-Lung and are now targeting with DCVax-Direct. Deaths from all forms of lung cancer are estimated at 161,300 per year for 2004.

Current Treatments. Existing treatments for non-small cell lung cancer include surgery and radiation therapy, which are used in various combinations. These treatments have significant adverse side effects. In its most recent study, the National Institutes of Health reported that the 1989-1996 five-year survival rate for non-small cell lung cancer patients was only 6.2%. Following initial treatment, virtually all cases of this cancer recur, with a life expectancy of approximately one year following recurrence. No effective therapy exists for these patients. We believe that DCVax-Direct may address this critical unmet medical need.

Our HuRx platform is based on combining our expertise in monoclonal antibodies, immunology and antigen discovery with potential partners who have expertise in humanized and, fully human monoclonal antibody development. We co-developed our initial HuRx products with Medarex. We believe our relationship with Medarex and future partners may enable us to create proprietary humanized and fully human monoclonal antibody-based cancer therapies. We develop our HuRx products in the following sequence:


	•	Identification. We identify, validate and select a potentially useful cancer-associated antigen for our HuRx platform.


	•	Immunization. This cancer-associated antigen is used to immunize non-transgenic or transgenic mice. These mice create B cells, which produce non-human or fully human cancer-associated antigen-specific antibodies.

	•	Selection And Culturing. From the B cells created during immunization, we select single antibody-producing cells, which we then culture to large quantities. These cells produce identical antibodies with high specificity to the targeted cancer-associated antigen.

	•	Analysis And Evaluation. These non-human or fully human monoclonal antibodies are analyzed for specificity to the cancer-associated antigen, ability to bind to live cancer cells with high affinity and ability to kill those cells. In addition, the antibody-producing cells are evaluated for their ability to generate high quantities of the selected antibodies.

	•	Humanization. The non-human antibody with the most favorable properties can then be humanized, or stripped of its mouse characteristics.

	•	Manufacturing. Our HuRx humanized or fully human monoclonal antibodies are then manufactured for clinical trials under FDA guidelines.

We believe that, given additional funding, our antigen discovery program may enable us to identify and develop cancer-associated antigens for the HuRx platform, potentially expanding our portfolio of potential therapeutic products. We expect that the antibodies generated by the HuRx platform may be useful as potential products or as products coupled with cytotoxins or radioactive agents.

HuRx-Lung, HuRx-Breast, HuRx-Brain, HuRx-Colon, HuRx-Melanoma, and HuRx-Prostate

We have selected cancer-associated antigens for non-small cell lung cancer, breast cancer, glioblastoma, colon cancer, melanoma, prostate, pancreas, kidney, ovarian, and certain blood cancers. We are currently developing antibodies to be humanized or immunizing materials for the generation of fully human monoclonal antibodies targeted to antigens associated with these cancers.

We have limited manufacturing facilities for the production of our product candidates currently under development. We expect to rely upon third-party manufacturers to produce some of our product candidates for pre-clinical, clinical and commercial purposes. Furthermore, the product candidates under development by us have never been manufactured on a commercial scale and may not be able to be manufactured at a cost or in sufficient quantities to make commercially viable products.

In the event that we secure funding and develop an approved product, we plan to market that product in partnership with one or more established pharmaceutical companies. Our collaboration with these companies may take the form of royalty agreements, licensing agreements or other co-marketing arrangements. The U.S. oncology market is characterized by highly concentrated distribution channels. To be successful in producing a commercially viable product, we may need to develop a direct sales force to market that product in the United States.

We seek to protect our commercially relevant proprietary technologies through patents both in the United States and abroad. We have seven issued patents (four in the United States and six in foreign jurisdictions) and 68 patent applications pending (18 in the United States and 50 in foreign jurisdictions) which cover the use of dendritic cells in DCVax as well as targets for either our dendritic cell or fully human monoclonal antibody therapy candidates. Our issued patents expire on dates between 2015 and 2017. We intend to

Any patents that we obtain may be circumvented, challenged or invalidated by our competitors. Our patent applications may not result in the issuance of any patents, and any patents that may issue may not offer any protection against others who seek to practice the claimed inventions. We have obtained licenses for certain technologies that we use, but we may be unable to maintain those licenses and may be unable to secure additional licenses in the future. Thus, we may be forced to abandon certain product areas or develop alternative methods for operating in those areas.

In addition to patents, we rely on copyright protection, trade secrets, proprietary know-how and trademarks to maintain our competitive position. Our success will depend in part on our ability to preserve our copyrights and trade secrets. Although our officers, employees, consultants, contractors, manufacturers, outside scientific collaborators, sponsored researchers and other advisors are required to sign agreements obligating them not to disclose our confidential information, these parties may nevertheless disclose such information and compromise our trade secrets. We may not have adequate remedies for any such breach. It is also possible that our trade secrets or proprietary know-how will otherwise become known or be independently replicated or otherwise circumvented by competitors.

Our technologies may infringe the patents or violate other proprietary rights of third parties. In the event of infringement or violation, we may be prevented from pursuing further licensing, product development or commercialization. Such a result would materially adversely affect our business, financial condition and results of operations.

If we become involved in any litigation, interference or other administrative proceedings, we will incur substantial expenses and the efforts of our technical and management personnel will be significantly diverted. An adverse determination may subject us to significant liabilities or require us to seek licenses, which may not be available. We may also be restricted or prevented from manufacturing and selling our products, if any, in the event of an adverse determination in a judicial or administrative proceeding, or if we fail to obtain necessary licenses. In addition, any potential litigation or dispute may, as a result of our lack of funding, require us to further reduce or even curtail our operations entirely.

The biotechnology and biopharmaceutical industries are characterized by rapidly advancing technologies, intense competition and a strong emphasis on proprietary products. Several companies, such as Cell Genesys, Inc., Dendreon Corporation and Genzyme Molecular Oncology, a division of Genzyme Corporation, are actively involved in research and development of cell-based cancer therapeutics. Of these companies, we believe that only Dendreon is carrying-out Phase III clinical trials with a cell-based therapy. No cell-based therapeutic product is currently available for commercial sale. Additionally, several companies, such as Abgenix, Inc., Agensys, Inc., and Genentech, Inc. are actively involved in research and development of monoclonal antibody-based cancer therapies. Currently, at least three antibody-based products are approved for commercial sale for cancer therapy. Genentech is also engaged in several Phase III clinical trials for additional antibody-based therapeutic products for a variety of cancers, and several other companies are in early stage clinical trials for such products. Many other third parties compete with us in developing alternative therapies to treat cancer, including:


	•	biopharmaceutical companies;

	•	biotechnology companies;

	•	pharmaceutical companies;

	•	academic institutions; and

	•	other research organizations.

Most of our competitors have significantly greater resources and expertise in research and development, manufacturing, pre-clinical testing, conducting clinical trials, obtaining regulatory approvals and marketing. In addition, many of these competitors have become more active in seeking patent protection and licensing arrangements in anticipation of collecting royalties for use of technology they have developed. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These competitors may prevent us from recruiting and retaining qualified scientific and management personnel, or from acquiring technologies complementary to our programs.

We expect that our ability to compete effectively will be dependent upon our ability to:


	•	Secure the necessary funding to continue our development efforts with respect to our product candidates;

	•	successfully complete clinical trials and obtain all requisite regulatory approvals;

	•	maintain a proprietary position in our technologies and products;

	•	attract and retain key personnel; and

	•	maintain existing or enter into new partnerships.

Governmental authorities in the United States and other countries extensively regulate the pre-clinical and clinical testing, manufacturing, labeling, storage, record-keeping, advertising, promotion, export, marketing and distribution, among other things, of immunotherapeutics. In the United States, the Food and Drug Administration subjects pharmaceutical and biologic products to rigorous review. Even if we ultimately receive FDA approval for one or more of our products, if we or our partners do not comply with applicable requirements, we may be fined, our products may be recalled or seized, our production may be totally or partially suspended, the government may refuse to approve our marketing applications or allow us to distribute our products, and we may be criminally prosecuted. The FDA also has the authority to revoke previously granted marketing authorizations.

In order to obtain approval of a new product from the FDA, we must, among other requirements, submit proof of safety and efficacy as well as detailed information on the manufacture and composition of the product. In most cases, this proof requires documentation of extensive laboratory tests, and pre-clinical and clinical trials. This testing, and the preparation of necessary applications and processing of those applications by the FDA are expensive and typically take several years to complete. The FDA may not act quickly or favorably in reviewing these applications, and we may encounter significant difficulties or costs in our efforts to obtain FDA approvals that could delay or preclude us from marketing any products we may develop. The FDA also may require post-marketing testing and surveillance to monitor the effects of approved products or place conditions on any approvals that could restrict the commercial applications of these products. Regulatory authorities may withdraw product approvals if we fail to comply with regulatory standards or if we encounter problems following initial marketing. With respect to patented products or technologies, delays imposed by the governmental approval process may materially reduce the period we might have the exclusive right to exploit the products or technologies.

After an investigational new drug application becomes effective, a sponsor may commence human clinical trials. The sponsor typically conducts human clinical trials in three sequential phases, but these phases may overlap. In Phase I clinical trials, the product is tested in a small number of patients or healthy volunteers, primarily for safety at one or more doses. In Phase II, in addition to safety, the sponsor evaluates the efficacy of the product in a patient population somewhat larger than Phase I clinical trials. Phase III clinical trials typically involve additional testing for safety and clinical efficacy in an expanded population at geographically dispersed test sites. The sponsor must submit to the FDA a clinical plan, or protocol, accompanied by the approval of a clinical site responsible for ongoing review of the investigation, prior to commencement of each clinical trial. The FDA or a clinical site may order the temporary or permanent

The sponsor must submit to the FDA the results of the pre-clinical and clinical trials, together with, among other things, detailed information on the manufacture and composition of the product, in the form of a new drug application or, in the case of a biologic, a biologics license application. The FDA is regulating our therapeutic vaccine product candidates as biologics and, therefore, we must submit biologics license applications to the FDA to obtain approval of our products. In a process which generally takes several years, the FDA reviews this application and, when and if it decides that adequate data is available to show that the new compound is both safe and effective and that all other applicable requirements have been met, approves the drug or biologic for marketing. The amount of time taken for this approval process is a function of a number of variables, including the quality of the submission and studies presented, the potential contribution that the compound will make in improving the treatment of the disease in question, and the workload at the FDA. It is possible that our product candidates will not successfully proceed through this approval process or that the FDA will not approve them in any specific period of time.

Congress enacted the Food and Drug Administration Modernization Act of 1997, in part, to ensure the availability of safe and effective drugs, biologics and medical devices by expediting the FDA review process for new products. The Modernization Act establishes a statutory program for the approval of fast-track products, including biologics. A fast-track product is defined as a new drug or biologic intended for the treatment of a serious or life-threatening condition that demonstrates the potential to address unmet medical needs for this condition. Under the fast-track program, the sponsor of a new drug or biologic may request the FDA to designate the drug or biologic as a fast-track product at any time during the clinical development of the product, prior to marketing approval.

The Modernization Act specifies that the FDA must determine if the product qualifies for fast-track designation within 60 days of receipt of the sponsor’s request. The FDA can base approval of a marketing application for a fast-track product on an effect, on a surrogate endpoint, or on another endpoint that is reasonably likely to predict clinical benefit. The FDA may subject approval of an application for certain fast-track products to post-approval studies to validate the surrogate endpoint or confirm the effect on the clinical endpoint and prior review of all promotional materials. In addition, the FDA may withdraw its approval of a fast-track product on a number of grounds, including the sponsor’s failure to conduct any required post-approval study with due diligence.

If a preliminary review of clinical data suggests that a fast-track product may be effective, the FDA may initiate review of entire sections of a marketing application for a fast-track product before the sponsor completes the application. This rolling review is available if the applicant provides a schedule for submission of remaining information and pays applicable user fees. However, the time periods specified under the Prescription Drug User Fee Act concerning timing goals to which the FDA has committed in reviewing an application, do not begin until the sponsor submits the entire application.

The FDA may, during its review of a new drug application or biologics license application, ask for additional test data. If the FDA does ultimately approve a product, it may require post-marketing testing, including potentially expensive Phase IV studies, and surveillance to monitor the safety and effectiveness of the drug. In addition, the FDA may in some circumstances impose restrictions on the use of an approved drug, which may be difficult and expensive to administer, and may require prior approval of promotional materials.

Before approving a new drug application or biologics license application, the FDA also will inspect the facilities at which the product is manufactured and will not approve the product unless the manufacturing facilities are in compliance with guidelines for the manufacture, holding, and distribution of a product. Following approval, the FDA periodically inspects drug and biologic manufacturing facilities to ensure continued compliance with manufacturing guidelines. Manufacturers must continue to expend time, money and effort in the areas of production, quality control, record keeping and reporting to ensure full compliance with those requirements. The labeling, advertising, promotion, marketing and distribution of a drug or biologic product must also be in compliance with FDA regulatory requirements. Failure to comply with applicable requirements can lead to the FDA demanding that production and shipment cease, and, in some cases, that

We, and our partners, are also subject to regulation by the Occupational Safety and Health Administration, the Environmental Protection Agency, the Nuclear Regulatory Commission and other foreign, federal, state and local agencies under various regulatory statutes, and may in the future be subject to other environmental, health and safety regulations that may affect our research, development and manufacturing programs. We are unable to predict whether any agency will adopt any regulation, which could limit or impede on our operations.

Sales of pharmaceutical products outside the United States are subject to foreign regulatory requirements that vary widely from country to country. Whether or not we have obtained FDA approval, we must obtain approval of a product by comparable regulatory authorities in foreign countries prior to the commencement of marketing the product in those countries. The time required to obtain this approval may be longer or shorter than that required for FDA approval. The foreign regulatory approval process includes all the risks associated with FDA regulation set forth above, as well as country-specific regulations.

Our remaining staff, as of March 31, 2004, consisted of six full-time employees and two part-time employees. Each of our employees has signed a confidentiality agreement and none are covered by a collective bargaining agreement. We have never experienced employment-related work stoppages and consider our employee relations to be positive.

This section briefly discusses certain risks that should be considered by our stockholders and prospective investors. You should carefully consider the risks described below, together with all other information included in this Annual Report on Form 10-K and the information incorporated by reference. If any of the following risks actually occur, our business, financial condition or operating results could be harmed. In such case, you could lose all of your investment.

As of April 26, 2004, including the $600,000 borrowed from Toucan, we had approximately $561,000 in cash and cash equivalents. We believe, based on recurring operating and associated financing cost, our cash will be sufficient to fund our operations through May 26, 2004. After that date we will have to seek additional funds from Toucan which Toucan is not obligated to provide to us. Under the terms of the Recapitalization Agreement, if Toucan elects not to provide additional funding to us we are prohibited from seeking funds from any party other than Toucan for up to ten business days after May 26, 2004.

Any additional financing with Toucan and any other third party is likely to be dilutive to stockholders, and any debt financing, if available, may include additional restrictive covenants.

Unless we receive significant additional funding in the future, continuing our operations will require us to use assets that otherwise would be available to liquidate the Company and pay our obligations. For this reason, if we are unable to obtain additional capital, we may choose to cease operations at anytime to meet our obligations and to maximize the value, if any, to be paid to our stockholders following a potential liquidation.

Our independent auditors have indicated in their report on our December 31, 2003 financial statements included in our Form 10-K that there is substantial doubt about our ability to continue as a going concern. A “going concern” opinion indicates that the financial statements have been prepared assuming we will continue as a going concern and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

We have reduced business umbrella, auto, crime and fiduciary, and directors and officers liability insurance coverage.

With rising insurance premiums for most business insurance coverage, with our reduced level of operating activity, and reduced liability exposure through the stopping of all clinical trials, we lowered the levels of all of our insurance coverage. When our finances permit and when our level of operating activities rise, our insurance needs will be reassessed. Making a material reduction in our insurance coverage may make it difficult for us to retain our existing directors and officers, and will also result in increased exposure to potential liabilities arising from any future litigation, either of which may materially harm our business and results of operations.

As a result of questions concerning our status as a going concern, potential customers and partners may decide not to do business with us.

The success of our restructured operations will depend on our ability to attract partners to our research initiatives and to a lesser extent our ability to attract customers to our research products. Due to concerns regarding our ability to continue operations, these third parties may decide not to conduct business with us, or may conduct business with us on terms that are less favorable than those customarily extended by them. If either of these events occurs, our business will suffer significantly.

We expect to continue to incur substantial losses, and we may never achieve profitability.

We have incurred net losses every year since our incorporation in July 1998 and, as of December 31, 2003, we had a deficit accumulated during the development stage of approximately $64.2 million. We have had net losses applicable to common stockholders as follows:


	•	$5.0 million in 1998;

	•	$6.0 million in 1999;

	•	$13.2 million in 2000;

	•	$17.3 million in 2001;

	•	$12.8 million in 2002; and

	•	$5.8 million in 2003.

We expect that these losses will continue and anticipate negative cash flows from operations for the foreseeable future. Because of our current cash position, we will need to secure additional funding to continue operations. In addition, we will need to generate revenue sufficient to cover operating expenses and research and development costs to achieve profitability. We may never achieve or sustain profitability.

As a company in the early stage of development with an unproven business strategy, our limited history of operations makes an evaluation of our business and prospects difficult.

We have had a limited operating history and are at an early stage of development. We may not be able to achieve revenue growth in the future. We have generated the following limited revenues:


	•	$385,000 in 1998;

	•	$211,000 in 1999;

	•	$156,000 in 2000;

	•	$129,000 in 2001;

	•	$9,000 in 2002; and

	•	$529,000 in 2003.


	•	the sale of research products to a single customer;

	•	contract research and development from related parties; and

	•	research grants.

In the future, we anticipate that our revenues will be derived primarily through the commercialization of our product candidates.

From approximately October 2002 through March 22, 2004, we reduced our research and administrative staff by sixty-three members. Our remaining staff, as of March 22, 2004, consisted of six full-time employees and two part-time employees.

The uncertainty of our cash position, workforce reductions, the volatility in our stock price and our recent asset sales may create anxiety and uncertainty, which may adversely affect employee morale and cause us to lose employees whom we would prefer to retain. To the extent that we are unable to retain our existing personnel, our business and financial results may suffer.

Because we lack sales and marketing experience, we may experience significant difficulties commercializing our research products.

The commercial success of any of our research products will depend upon the strength of our sales and marketing efforts. We do not have a sales force and have no experience in the sales, marketing or distribution of our research products. To fully commercialize our research products, we will need to create a substantial marketing staff and sales force with technical expertise and the ability to distribute these products. As an alternative, we could seek assistance from a third party with a large distribution system and a large direct sales force. We may be unable to put either of these plans in place. In addition, if we arrange for others to market and sell our products, our revenues will depend upon the efforts of those parties. Such arrangements may not succeed. If we fail to establish adequate sales, marketing and distribution capabilities, independently or with others, our business will be seriously harmed.

We have limited manufacturing capabilities, which could adversely impact our ability to commercialize our research products.

We have limited manufacturing facilities and expertise to produce our research products. We have never manufactured, on a commercial scale, any of our research products. We may be unable to manufacture these products at a reasonable cost or in sufficient quantities to be profitable.

The success of our business strategy may partially depend upon our ability to develop and maintain multiple partnerships and to manage them effectively. Therefore, our success depends partially upon the performance of our partners. We cannot directly control the amount and timing of resources that our existing or future partners devote to the research, development or marketing of our products. As a result, those partners:


	•	may not commit sufficient resources to our programs or products;

	•	may not conduct their agreed activities on time, or at all, resulting in delay or termination of the development of our products and technology;

	•	may not perform their obligations as expected;

	•	may pursue product candidates or alternative technologies in preference to ours; or

	•	may dispute the ownership of products or technology developed under our partnerships.

We may have disputes with our partners, which could be costly and time consuming. Our failure to successfully defend our rights could seriously harm our business, financial condition and operating results.

We intend to continue to enter into partnerships in the future. However, we may be unable to successfully negotiate any additional partnerships and any of these relationships, if established, may not be scientifically or commercially successful.

We also work with scientists and medical professionals at academic and other institutions, including the University of California, Los Angeles, M.D. Anderson Cancer Center, and the H. Lee Moffitt Cancer Center some of whom conduct research for us or assist us in developing our research and development strategy. These scientists and medical professionals are not our employees. They may have commitments to, or contracts with, other businesses or institutions that limit the amount of time they have available to work with us. We have little control over these individuals. We can only expect them to devote to our projects the amount of time required by our license, consulting and sponsored research agreements. In addition, these individuals may have arrangements with other companies to assist in developing technologies that may compete with ours. If these individuals do not devote sufficient time and resources to our programs, our business could be seriously harmed.

Competition in our industry is intense and most of our competitors have substantially greater resources than we have.

The research products market recently entered by us is very competitive with many well-established large and small distribution companies, such as BioWhittaker, a Cambrex Company, DakoCytomation, and Cellsignalling Technology.

We have marketed our research products through direct mail, the Internet, and select participation in trade shows frequented by researchers who could be interested in our research products. We are also seeking distribution relationships with established and well-positioned distribution companies. There can be no assurances that we will be successful in establishing a market demand for our research products nor that we will be successful in finding a suitable distributor interested in selling our research products.

The biotechnology and biopharmaceutical industries are characterized by rapidly advancing technologies, intense competition and a strong emphasis on proprietary products. Several companies, such as Cell Genesys, Inc., Dendreon Corporation and Genzyme Molecular Oncology, a division of Genzyme Corporation, are actively involved in the research and development of cell-based cancer therapeutics. Of these companies, we believe that only Dendreon is carrying-out Phase III clinical trials with a cell-based therapy. No dendritic cell-based therapeutic product is currently approved for commercial sale. Additionally, several companies, such as Abgenix, Inc., Agensys, Inc., and Genentech, Inc., are actively involved in the research and development of monoclonal antibody-based cancer therapies. Currently, at least six antibody-based products are approved for commercial sale for cancer therapy. Genentech is also engaged in several Phase III clinical trials for additional antibody-based therapeutics for a variety of cancers, and several other companies are in early stage clinical trials for such products. Many other third parties compete with us in developing alternative therapies to treat cancer, including:


	•	biopharmaceutical companies;

	•	biotechnology companies;

	•	pharmaceutical companies;

	•	academic institutions; and

	•	other research organizations.

Many of our competitors have significantly greater financial resources and expertise in research and development, manufacturing, pre-clinical testing, conducting clinical trials, obtaining regulatory approvals and marketing than we do. In addition, many of these competitors have become active in seeking patent protection and licensing arrangements in anticipation of collecting royalties for use of technology they have developed.

Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These third parties compete with us in recruiting and retaining qualified scientific and management personnel, as well as in acquiring technologies complementary to our programs.

We expect that our ability to compete effectively will be dependent upon our ability to:


	•	obtain additional funding;

	•	successfully complete clinical trials and obtain all requisite regulatory approvals;

	•	maintain a proprietary position in our technologies and products;

	•	attract and retain key personnel; and

	•	maintain existing or enter into new partnerships.

Our competitors may develop more effective or affordable products, or achieve earlier patent protection or product marketing and sales than we may. As a result, any products we develop may be rendered obsolete and noncompetitive.

Our intellectual property rights may not provide meaningful commercial protection for our research products or product candidates, which could enable third parties to use our technology, or very similar technology, and could reduce our ability to compete in the market.

We rely on patent, copyright, trade secret and trademark laws to limit the ability of others to compete with us using the same or similar technology in the United States and other countries. However, as described below, these laws afford only limited protection and may not adequately protect our rights to the extent necessary to sustain any competitive advantage we may have. The laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the United States, and we may encounter significant problems in protecting our proprietary rights in these countries.

We have seven issued patents (four in the United States and six in foreign jurisdictions) and 68 patent applications pending (18 in the United States and 50 in foreign jurisdictions) which cover the use of dendritic cells in DCVax as well as targets for either our dendritic cell or fully human monoclonal antibody therapy candidates. The issued patents expire at dates from 2015 to 2017.

We will only be able to protect our technologies from unauthorized use by third parties to the extent that they are covered by valid and enforceable patents or are effectively maintained as trade secrets. The patent positions of companies developing novel cancer treatments, including our patent position, generally are uncertain and involve complex legal and factual questions, particularly concerning the scope and enforceability of claims of such patents against alleged infringement. Recent judicial decisions are prompting a reinterpretation of the limited case law that exists in this area, and historical legal standards surrounding questions of infringement and validity may not apply in future cases. A reinterpretation of existing law in this area may limit or potentially eliminate our patent position and, therefore, our ability to prevent others from using our technologies. The biotechnology patent situation outside the United States is even more uncertain. Changes in either the patent laws or in interpretations of patent laws in the United States and other countries may therefore diminish the value of our intellectual property.

We own, or have rights under licenses to a variety of issued patents and pending patent applications. However, the patents on which we rely may be challenged and invalidated, and our patent applications may not result in issued patents. Moreover, our patents and patent applications may not be sufficiently broad to prevent others from practicing our technologies or from developing competing products. We also face the risk that others may independently develop similar or alternative technologies or design around our patented technologies.

We have taken security measures to protect our proprietary information, especially proprietary information that is not covered by patents or patent applications. These measures, however, may not provide adequate protection of our trade secrets or other proprietary information. We seek to protect our proprietary information

by entering into confidentiality agreements with employees, partners and consultants. Nevertheless, employees, partners or consultants may still disclose our proprietary information, and we may not be able to protect our trade secrets in a meaningful way. If we lose any employees, we may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by those former employees despite the existence of nondisclosure and confidentiality agreements and other contractual restrictions to protect our proprietary technology. In addition, others may independently develop substantially equivalent proprietary information or techniques or otherwise gain access to our trade secrets.

Our success will depend partly on our ability to operate without infringing or misappropriating the proprietary rights of others.

Our success will depend to a substantial degree upon our ability to develop, manufacture, market and sell our research products and product candidates without infringing the proprietary rights of third parties and without breaching any licenses we have entered into regarding our product candidates.

There is a substantial amount of litigation involving patent and other intellectual property rights in the biotechnology and biopharmaceutical industries generally. Infringement and other intellectual property claims, with or without merit, can be expensive and time-consuming to litigate and can divert management’s attention from our core business. We may be exposed to future litigation by third parties based on claims that our products infringe their intellectual property rights. This risk is exacerbated by the fact that there are numerous issued and pending patents in the biotechnology industry and the fact that the validity and breadth of biotechnology patents involve complex legal and factual questions for which important legal principles remain unresolved.

Our competitors may assert that our products and the methods we employ are covered by U.S. or foreign patents held by them. In addition, because patent applications can take many years to issue, there may be currently pending applications, unknown to us, which may later result in issued patents that our products may infringe. There could also be existing patents of which we are not aware that one or more of our products may inadvertently infringe.

If we lose a patent infringement lawsuit, we could be prevented from selling our research products or product candidates unless we can obtain a license to use technology or ideas covered by such patent or are able to redesign our products to avoid infringement. A license may not be available at all or on terms acceptable to us, or we may not be able to redesign our products to avoid any infringement. If we are not successful in obtaining a license or redesigning our products, we may be unable to sell our products and our business could suffer.

We use hazardous materials and must comply with environmental, health and safety laws and regulations, which can be expensive and restrict how we do business.

We store, handle, use and dispose of controlled hazardous, radioactive and biological materials in our business. Our current use of these materials generally is below thresholds giving rise to burdensome regulatory requirements. Our development efforts, however, may result in our becoming subject to additional requirements, and if we fail to comply with applicable requirements we could be subject to substantial fines and other sanctions, delays in research and production, and increased operating costs. In addition, if regulated materials were improperly released at our current or former facilities or at locations to which we send materials for disposal, we could be strictly liable for substantial damages and costs, including cleanup costs and personal injury or property damages, and incur delays in research and production and increased operating costs.

Insurance covering certain types of claims of environmental damage or injury resulting from the use of these materials is available but can be expensive and is limited in its coverage. We have no insurance specifically covering environmental risks or personal injury from the use of these materials and if such use results in liability, our business may be seriously harmed.

Our principal stockholders, executive officers and directors own a significant percentage of our stock and, as a result, the trading price for our shares may be depressed and these stockholders can take actions that may be adverse to your interests.

Our principal stockholders, executive officers, and directors and entities affiliated with them, in the aggregate, beneficially owned approximately 67.6% of our common stock and shares of common stock issuable pursuant to options and warrants exercisable within 60 days of April 26, 2004. This significant concentration of ownership may adversely affect the trading price for our common stock because investors often perceive disadvantages in owning stock in companies with controlling stockholders. Company management and Toucan, as a result of the security ownership described above, has the ability to exert substantial influence over all matters requiring approval by our stockholders, including the election and removal of directors and any proposed merger, consolidation or sale of all or substantially all of our assets. In addition, they can dictate the management of our business and affairs. This concentration of ownership could have the effect of delaying, deferring or preventing a change in control, or impeding a merger or consolidation, takeover or other business combination that could be favorable to you.

On December 14, 2001, our common stock was listed on the NASDAQ National Market. Prior to that time there was no public market for our common stock. On December 23, 2002, we were delisted from the NASDAQ National Market and our common stock is currently listed on the Over The Counter Bulletin Board (OTCBB), which is generally recognized as being a less active market than the NASDAQ National Market. You may not be able to sell your shares at the time or at the price desired.

Our common stock may experience extreme price and volume fluctuations, which could lead to costly litigation for us and make an investment in us less appealing.

The market price of our common stock may fluctuate substantially due to a variety of factors, including:


	•	announcements of technological innovations or new products by us or our competitors;

	•	development and introduction of new cancer therapies;

	•	media reports and publications about cancer therapies;

	•	announcements concerning our competitors or the biotechnology industry in general;

	•	new regulatory pronouncements and changes in regulatory guidelines;

	•	general and industry-specific economic conditions;

	•	changes in financial estimates or recommendations by securities analysts; and

	•	changes in accounting principles.

The market prices of the securities of biotechnology companies, particularly companies like ours without earnings and consistent product revenues, have been highly volatile and are likely to remain highly volatile in the future. This volatility has often been unrelated to the operating performance of particular companies. In the past, securities class action litigation has often been brought against companies that experience volatility in the market price of their securities. Moreover, market prices for stocks of biotechnology-related and technology companies occasionally trade at levels that bear no relationship to the operating performance of such companies. These market prices generally are not sustainable and are subject to wide variations. Whether or not meritorious, litigation brought against us could result in substantial costs, divert management’s attention and resources and harm our financial condition and results of operations.

Our incorporation documents, bylaws and stockholder rights plan may delay or prevent a change in our management.

Our amended and restated certificate of incorporation, bylaws and stockholder rights plan contain provisions that could delay or prevent a change in our management team. Some of these provisions:


	•	authorize the issuance of preferred stock that can be created and issued by the board of directors without prior stockholder approval, commonly referred to as “blank check” preferred stock, with rights senior to those of common stock;

	•	authorize our board of directors to issue dilutive shares of common stock upon certain events; and

	•	provide for a classified board of directors.

These provisions could allow our board of directors to affect your rights as a stockholder since our board of directors can make it more difficult for common stockholders to replace members of the board. Because our board of directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt to replace our current management team.

Control by Toucan Capital Fund II, LP of a large percentage of our voting stock and Toucan’s rights under the Recapitalization Agreement may permit Toucan to influence the Company in a way that can adversely affect our stock price

As of May 12, 2004 Toucan has the right to acquire up to 15,113,000 million shares (or 44.3%) of our outstanding capital stock and an additional 36.0 million shares upon exercise of a warrant. In addition, under the terms of the Recapitalization Agreement, we are required to consult with Toucan on how we conduct many aspects of our business. As a result, Toucan has significant authority over how we presently conduct our business, and with its stock acquisition rights, could influence all matters requiring stockholder approval. This control may cause us to conduct our business differently from the way we have in the past. The concentration of ownership may also delay, deter or prevent acts that would result in a change in control, which, in turn, could reduce the market price of our common stock.

We maintain our headquarters in Bothell, Washington where we lease approximately 14,000 square feet of laboratory, research and development, expansion and general administration space. Our lease expires on September 30, 2006 and, at our option, may be extended for 3 additional years.

No matters were submitted to a vote of our stockholders during the year ended December 31, 2003.

Our common stock is quoted on the OTC Bulletin Board under the symbol “NWBT.” Public trading of our common stock commenced on December 14, 2001 on the NASDAQ National Market. Prior to that time, there was no public market for our stock. On December 23, 2002, we were delisted form NASDAQ and subsequently commenced trading on the OTC Bulletin Board. The following table summarizes our common stock’s high and low sales prices for the periods indicated as reported by either the NASDAQ National

As of December 31, 2003, there were approximately 253 holders of record of our common stock. Such holders include any broker or clearing agencies as holders of record but exclude the individual stockholders whose shares are held by brokers or clearing agencies

We have never declared or paid cash dividends on our capital stock. We currently intend to retain any future earnings to fund the development and growth of our business and do not currently anticipate paying any cash dividends in the foreseeable future. Future dividends, if any, will be determined by our board of directors.

In connection with the Recapitalization Agreement described below, certain members of management who hold warrants to purchase common stock agreed to an amendment to their warrants. The amendment applies to all warrants held by management. The purpose of the amendment was to remove the economic anti-dilution provisions and set the warrant exercise price at the lesser of, (i) $0.10 per share, or (ii) at a 35% discount to the average closing price during the twenty trading days prior to the first closing of the sale by the Company of convertible preferred stock as contemplated by the Recapitalization Agreement, but not less than $0.04 per share.

In an effort to continue to fund our operations, we entered into a Recapitalization Agreement on April 26, 2004 with Toucan. The Recapitalization Agreement calls for the possible recapitalization of the Company in two stages consisting of a bridge period which began on February 1, 2004 and is scheduled to end on July 23, 2004, unless earlier terminated or further extended by Toucan, followed by a potential equity financing through the issuance of convertible preferred stock. Toucan will serve as the lead in the bridge funding and the bridge period activities. At its election, and at its sole discretion, Toucan will also serve as the lead investor in the potential equity financing.

Since February 1, 2004, Toucan has loaned the Company a total of $600,000, including a $500,000 loan on April 26, 2004 that should allow the Company, based on recurring operating and associated financial costs, to fund its operations for approximately 30 days, or until approximately May 26, 2004. Toucan has the option to loan additional amounts to the Company during the bridge period, but is not obligated to do so. All funding to date and any future funding during the bridge period will be provided in the form of senior secured convertible debt. These loans accrue interest at 10% per year and are also convertible into capital stock of the Company. Generally, Toucan may, in its sole discretion, elect to convert the principal and interest due under the notes into any equity security and/or debt security of the Company at any time prior to full repayment. The conversion price for any conversion of a note at the election of Toucan will be the lowest of (i) with certain exceptions, the lowest nominal or effective price per share paid by any investor of the Company at any time on or after one year prior to April 26, 2004, (ii) with certain exceptions, the lowest nominal or effective price at which any investor of the Company has a right to acquire shares of the Company pursuant to any security, instrument, or promise, undertaking, commitment, agreement or letter of intent outstanding on or after April 26, 2004 or granted, issued, extended or otherwise made available by the Company at any time on or after one year prior to April 26, 2004 and (iii) the lesser of $0.10 per share or 35% discount to the average closing price per share of the Company’s common stock during any 20 consecutive trading days (beginning with the 20 consecutive trading days prior to April 26, 2004), but not less than $0.04 per share under this clause(iii). In addition to these conversion rights, the notes will automatically be converted into convertible

preferred stock of the Company in the event the Company raises $15 million through the issuance of convertible preferred stock. In this event the conversion price would be the lowest nominal or effective price per share paid by investors other than Toucan who purchase shares of convertible preferred stock (excluding shares issuable upon exercise of the warrants issued in connection with the loans from Toucan). If the bridge notes, including principal and accrued interest, were converted into common stock on May 12, 2004 the conversion price would be $0.04 per share and Toucan would own 15,113,000 million shares (or 44.3%) of the Company’s outstanding capital stock.

In connection with the loans, Toucan has received a warrant to purchase up to 36.0 million shares of the Company’s capital stock at an exercise price of $0.01 per share. Any future bridge loans by Toucan up to an additional $500,000, or $1.1 million in the aggregate, would include similar conversion features and warrant coverage. Therefore, if Toucan were to loan the Company an additional $500,000, it would receive warrants to purchase an additional 30 million shares of the Company’s capital stock. The warrants are exercisable for up to seven years from the date of issuance and have an exercise price of one cent ($0.01) per share. The warrants are exercisable upon the earliest of (i) the time at which the Company has raised at least $2 million through the issuance of any class or series of equity securities, debt securities or any combination thereof, (ii) at such time as the Company breaches any provision of the Recapitalization Agreement or any documents executed in connection with the Recapitalization Agreement, (iii) the time at which the Company elects to exercise its fiduciary out under the Recapitalization Agreement and accept a unsolicited proposal, or (iv) 61 days after the date Toucan provides the Company with notice that it intends to exercise the warrant. In the event that the Company commences the proposed equity financing and issues at least $15 million of convertible preferred stock to investors other than Toucan, then the bridge warrants will automatically be exercisable for such convertible preferred stock. If, for any reason, the convertible preferred stock is not approved or authorized, or if authorized and the Company fails to issue at least $15 million of convertible preferred stock, then the bridge warrants will be exercisable for any equity security and/or debt security in any combination thereof at the election of Toucan.

The following table shows selected financial data for each of the years ending December 31, 1999 to December 31, 2003 and for the period from our inception through December 31, 2003 and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our financial statements and notes thereto and other financial information included elsewhere in this Annual Report on Form 10-K.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the notes to those statements included with this report. In addition to historical information, this report contains forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. The words “believe,” “expect,” “intend,” “anticipate,” and similar expressions are used to identify forward-looking statements, but some forward-looking statements are expressed differently. Many factors could affect our actual results, including those factors described under “Factors That May Affect Results of Operations and Financial Condition.” These factors, among others, could cause results to differ materially from those presently anticipated by us. You should not place undue reliance on these forward-looking statements.

We believe that primarily due to the difficult financial markets of 2002, we were unable to raise the additional money needed to fund our ongoing operations and clinical trial activities. Consequently, on

Through an Assignment and License Agreement dated December 9, 2002, we sold our PSMA (Prostate Specific Membrane Antigen) rights, and certain other intellectual property, to Medarex and acquired the rights to certain additional intellectual property from Medarex. On June 20, 2003, under a First Amendment to Assignment and License Agreement with Medarex, which owns approximately 13.3% of our outstanding common stock, we released Medarex from future royalty obligations in exchange for a cash payment of $816,000. The purchase price of $816,000 was negotiated based on the expected discounted net present value (NPV) of a future 2% royalty obligation under that certain Assignment and License Agreement dated December 9, 2002. We received the cash payment on July 1, 2003.

Our financial statements for the year ended December 31, 2003 have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. Nevertheless, we have experienced recurring losses from operations and have a deficit accumulated during the development stage of $64.2 million that raises substantial doubt about our ability to continue as a going concern and our auditors have issued an opinion which states that there is substantial doubt about our ability to continue as a going concern.

While continuing as a restructured company, we intend to advance our monoclonal antibody and dendritic cell-based product candidates, pursue potential corporate partnerships, and further consider other alternatives including the possible sale of some or all of our assets.

Operating costs and expenses consist primarily of research and development expenses, including clinical trial expenses when the Company is actively participating in clinical trials, and general and administrative expenses.

Research and development expenses include salary and benefit expenses and costs of laboratory supplies used in our internal research and development projects.

From our inception through December 31, 2003, we incurred costs of approximately $23.9 million associated with our research and development activities. Because our technologies are unproven, we are unable to estimate with any certainty the costs we will incur in the continued development of our product candidates for commercialization.

General and administrative expenses include salary and benefit expenses related to administrative personnel, cost of facilities, insurance, legal support, as well as amortization costs of stock options granted to employees and warrants issued to consultants for entering into commercial arrangements.

To date, our revenues have primarily been derived from the manufacture and sale of research materials, contract research and development services and research grants from the federal government. For the year ended December 31, 2003, we earned approximately $24,000 in revenues from the manufacture and sale of research materials. All research material sales prior to 2002 were to one customer and sales to this one customer peaked at $129,000 in 2001. If we are to rely exclusively on revenues from the sale of our research products to fund our operations, we will need to significantly increase both the number of customers and the size of such sales. We lack high-volume manufacturing, sales and marketing experience and, as a result, we may experience significant difficulties in funding our operations through the manufactured sale of research products.

Accounting principles generally accepted in the United States of America require our management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of our financial statements, as well as the amounts of revenues and expenses during periods covered by our financial statements. The actual amounts of these items could differ materially from those estimates.

For example, previously under EITF 94-3, Accounting for Costs Associated with Exit or Disposal Activities, if an entity remains responsible, without realizing ongoing economic benefit, for continued rental payments for premises being vacated, an estimate of the loss over the remaining life of the primary lease must be made. Sublease rental income is an allowable offset against the total accrued cost of the rental payments that the entity continues to be liable for related to the vacated space.

Consequently, we recognized, for the year ended December 31, 2002, a liability of approximately $929,000 and a loss on facility sublease of $721,000, net of deferred rent write off in estimating the loss of economic benefit from vacating approximately 22,000 square feet of laboratory and administrative space at our prior facility.

On June 30, 2003, we entered into a Settlement Agreement with Nexus Canyon Park, our prior landlord. Under this Settlement Agreement, Nexus Canyon Park agreed to permit premature termination of our prior lease and excuse us from future performance of lease obligations in exchange for 90,000 shares of our unregistered common stock with a fair value of $35,000 and Nexus’ retention of our $1.0 million lease security deposit. The Settlement Agreement resulted in an additional loss on facility sublease and lease termination of $174,000, net of deferred rent of $202,000. FASB 146 Accounting for Costs Associated with Exit or Disposal Activities has replaced EITF 94-3 but similar charges may occur if we have to cancel our current lease or enter into other restructuring transactions.

We also determine our employee stock option compensation costs as the difference between the estimated fair value of our common stock and the exercise price of options on their date of grant. Prior to our initial public offering, our common stock was not actively traded. The fair value of our common stock for purposes of determining compensation expense for this period was determined based on our review of the primary business factors underlying the value of our common stock on the date such option grants were made, viewed in light of the expected initial public offering price per share prior to the initial public offering of our common stock. The actual initial public offering price was significantly lower than the expected price used in determining compensation expense. Also, on an ongoing basis the estimate of expense for stock options and warrants is dependant on factors such as expected life and volatility of our stock. To the extent actual expense is different than that estimated, the actual expense that would have been recorded may be substantially different.

In April 2001, we entered into a collaboration agreement with Medarex to produce fully human monoclonal antibodies to certain antigen targets identified by us. In conjunction with the collaboration agreement, Medarex purchased 800,000 shares of our Series D preferred stock at $5.00 per share.

On December 9, 2002, we entered into an Assignment and License Agreement wherein we sold certain intellectual property to Medarex, acquired certain intellectual property from Medarex and acquired the rights to certain additional intellectual property from Medarex. Pursuant to this agreement, we issued to Medarex 2.0 million unregistered shares of common stock and warrants to purchase 800,000 shares of our unregistered common stock.

The 2.0 million shares of unregistered common stock were issued as follows: On December 26, 2002, we issued 1.0 million shares; on January 8, 2003 we issued 500,000 shares; and on February 9, 2003 we issued the final 500,000 shares. On December 9, 2002, the fair market value of the 2.0 million unregistered shares of common stock was $400,000. As of December 31, 2002, we recorded $200,000 of additional paid in capital and a Long Term Liability for $200,000 for the 1.0 million unregistered shares to be issued in fiscal 2003.

In conjunction with the December 9, 2002 Agreement, we issued warrants to purchase unregistered common stock as follows: on December 26, 2002, we issued a warrant to purchase 400,000 shares at an exercise price of $0.216 per share: on January 8, 2003, we issued a warrant to purchase 200,000 shares at an exercise price of $0.177 per share: and on February 9, 2003 we issued the final warrant to purchase 200,000 shares at an exercise price of $0.102 per share. The warrants may be exercised at any time after six months following their issue date and prior to the tenth anniversary of the issue date.

The fair value of the 800,000 warrants was $159,678 on the date of grant which was determined using the Black-Scholes option pricing model with the following assumptions: expected dividend yield 0%, risk-free interest rate of 4.17%, volatility of 191%, and an expected life of 10-years. As of December 31, 2002, one-half of the warrant value, $79,839, was recognized as an increase to additional paid in capital and $79,839 was recognized as a Long Term Liability, for the 400,000 warrants to be issued in fiscal 2003.

Also pursuant to this agreement, we received $3.0 million consisting of $1.0 million in cash and two payments of $1.0 million each payable in Medarex (MEDX) common stock. Medarex guaranteed the value of each payment of common stock at $1.0 million if sold within 30 days of issuance. Remaining Medarex common stock that had not been sold at December 31, 2002 was recorded as marketable securities and the $1.0 million issued in January 2003 was included as a receivable from Medarex at December 31, 2002. All such securities were sold by February 10, 2003.

The net gain recognized on the above sale of intellectual property was $2.8 million made up of the receipt of $3.0 million of cash and stock from Medarex and forgiveness of the $400,000 payable to Medarex offset by the issuance of 2.0 million shares of unregistered common stock and warrants to purchase 800,000 shares of common stock valued at approximately $560,000.

On June 20, 2003, under a First Amendment to Assignment and License Agreement with Medarex, which owns approximately 13.3% of our outstanding common stock, we released Medarex from future royalty obligations in exchange for a cash payment of $816,000. The purchase price of $816,000 was negotiated based on the expected discounted net present value (NPV) of a future 2% royalty obligation under that certain Assignment and License Agreement dated December 9, 2002. We received the cash payment on July 1, 2003.

On November 13, 2003, we entered into an Amended and Restated Employment Agreement with our President, Chief Operating Officer, Chief Science Officer and Secretary, wherein we eliminated any potential award of severance compensation in exchange for a one-time payment of $281,571. We also eliminated any potential award of severance compensation, totaling $33,635, to our Vice President of Vaccine Research and Development and our Controller. Subsequently, the after-tax portions of those payments, totaling $210,000, were invested in the Secured Convertible Promissory Note and Warrant financing.

It was also Management’s understanding that Washington State law considers accrued, but unpaid, wages (including possibly severance payments) a personal liability of our Directors. Management, by electing to take potential severance payments in cash in November 2003, eliminated this potential personal liability on the part of our Directors.

In addition to the above sums, our Vice President of Vaccine Research and Development invested an additional $25,000 and another $100,000 was received from non-employee investors. These additional funds, including the after-tax severance funds, brought the total invested in this Secured Convertible Promissory Note and Warrants financing to $335,000.

These notes have a 12 month term, accrue interest at an annual rate equal to the prime rate plus 2% and initially were secured by substantially all of our assets. On April 26, 2004, in signing a Consent To Loan and Amendment Of Security Agreement with Toucan, note holders of 70% of the principal amount of the notes, agreed to subordinate their notes and security interest in our assets to all the Company’s indebtedness and obligations to Toucan. One of the notes is convertible into the number of shares of our common stock equal to the principal and accrued interest amount divided by (i) in the event that we complete an offering of our common stock generating gross proceeds to us of at least $1 million, then the price per share paid by investors in that offering; or (ii) if we do not complete such an offering, then $0.18, which was the closing price of our common stock on the date of the financing.

In connection with the Recapitalization Agreement with Toucan, note holders of 70% of the principal amount of the notes agreed to an amendment to their notes. The purpose of the amendment was to set the conversion price of the amended notes at $0.10 per share and change the maturity date to November 12, 2004 in the event the Company raises at least $15 million in a financing prior to that time or May 12, 2005 if the Company has not completed a $15 million financing by May 12, 2005.

As part of this investment, the investors received warrants initially exercisable to acquire an aggregate of 3.7 million shares of our common stock, expiring November 2008 subject to certain antidilution adjustments, at an initial exercise price determined as follows: (i) in the event that we complete an offering of our common stock generating gross proceeds to us of at least $1 million, then the price per share paid by investors in that offering; or (ii) if we do not complete such an offering, then $0.18, which was the closing price of our common stock on the date of the financing. In connection with the Recapitalization Agreement with Toucan, certain members of management who hold warrants agreed to an amendment to their warrants. The amendment applies to all warrants held by management. The purpose of the amendment was to remove the economic anti-dilution provisions and set the warrant exercise price at the lesser of, (i) $0.10 per share, or (ii) a 35% discount to the average closing price during the twenty trading days prior to the first closing of the sale by the Company of convertible preferred stock as contemplated by the Recapitalization Agreement but not less than $0.04 per share.

Proceeds from the offering were allocated between the Notes and Warrants on a relative fair value basis. The value allocated to the warrants on the date of the grant was approximately $221,000. The fair value of the warrants was determined using the Black-Scholes option pricing model with the following assumptions: expected dividend yield of 0%, risk-free interest rate of 3.36%, volatility of 194%, and an contractual life of 5-years. The value of the warrants was recorded as a deferred debt discount against the $335,000 proceeds of the Note. In addition, a beneficial conversion feature related to the Notes was determined to be approximately $221,000 but is capped at the remaining value originally allocated to the Notes of approximately $114,000. As a result, the total discount on the Notes equaled the face value of $335,000 which is being amortized over the twelve-month term of the Notes. One and one-half months amortization of deferred debt discount of approximately $42,000, along with interest accretion on the Note of approximately $2,000, was recorded at December 31, 2003 resulting in notes payable to related parties, net of discount, at December 31, 2003 of approximately $44,000.

In an effort to continue to fund our operations, we entered into a Recapitalization Agreement on April 26, 2004 with Toucan. In connection with the Recapitalization Agreement we issued Toucan three 10% convertible promissory notes in the aggregate principal amount of $600,000. We also issued Toucan a warrant to purchase 36.0 million shares of our capital stock.

The initial bridge funding period commenced on February 2, 2004 when we issued Toucan an unsecured convertible promissory note, in the amount of $50,000. On March 1, 2004, we issued Toucan a secured convertible promissory note, in the amount of $50,000. On April 26, 2004, we issued Toucan a senior secured convertible promissory note and warrants, in the amount of $500,000.

The Recapitalization Agreement stipulated that the February and March 2004 notes for $50,000 each were to be cancelled and reissued effective April 26, 2004 as two separate notes for $50,000 each and conforming to the conditions of the note signed for the April 26, 2004 bridge loan for $500,000. As a result, the notes issued in February and March 2004, respectively, (i) have a 12 month term, (ii) accrue interest at 10% per annum on a 365 day basis compounded annually from their respective original issuance dates, and are (iii) secured by a first priority senior security interest in all of the Company’s assets. The initial bridge funding period expires May 26, 2004, unless extended by Toucan.

During the bridge period, Toucan and the Company have agreed to cooperate and use their best efforts to restart the Company’s development programs and to take the necessary actions to enable the Company to ultimately complete an equity financing. At its election, Toucan will lead all bridge period activities after consultation with the Company. The bridge period activities will include without limitation: (i) negotiation

and execution of contract manufacturing arrangements for good manufacturing practice sourcing and handling of dendritic cells, (ii) analysis of the intellectual property of the Company, (iii) identification and pursuit of additional antigens to establish a product pipeline for the Company, through negotiation and execution of binding letters of intent or agreements for one or more licensing and/or merger and acquisition transactions, (iv) clarification and analysis of licensing terms and costs for license of IL-4, (v) preparation of an updated business plan, budgets, regulatory plan, manufacturing plans, and intellectual property analyses, (vi) preparation of an investor package and due diligence binders to facilitate review and due diligence by prospective equity investors, (vii) evaluation of potential structures for the anticipated equity financing, (viii) analysis and determination, satisfactory to Toucan, of what reverse stock splits should be taken by the Company (including terms, conditions and timing), and preparations for implementation of the transactions decided upon, including, without limitation, Toucan’s consent and regulatory filings, and (ix) assembly of a financing syndicate for the anticipated equity financing, and determination of the amounts and timing of such financing.

Toucan, in its sole discretion, may provide up to an additional $500,000 of bridge funding, in one or more tranches, during the 60 day period following May 26, 2004. Any additional bridge funding during this 60 day period would be provided on the same terms and conditions as the initial bridge funding. Following the expiration of the 60 day period, or 90 days from April 26, 2004, Toucan in its sole discretion, may loan additional funds to the Company on terms mutually acceptable to the Company and Toucan.

During the bridge period and so long as any bridge funding remains outstanding, the Company is required to comply with certain covenants relating to financial matters, handling of intellectual property, issuance of any equity or debt securities, handling of Tangential Flow Filtration devices, confidentiality and exclusivity and other material matters. Specifically, during the bridge period and the equity financing period the Company is required to: (i) coordinate with Toucan on the preparation and filing of its reports under the Securities Exchange Act of 1934, and (ii) refrain from hiring any new people in any capacity except in accordance with the Company’s budget that has been approved by the Company’s board of directors and Toucan, (iii) refrain from entering into or revising any severance or similar agreements without the prior written approval of Toucan, (iv) refrain from acquiring or leasing any asset or facility outside the ordinary course of business in an amount in excess of $10,000, in the aggregate, except in accordance with the Company’s budget that has been approved by the Company’s board of directors and Toucan.

The bridge period is scheduled to last 90 days but can be terminated sooner by Toucan upon the occurrence of one of the following events: (i) in the event that Toucan makes a written election to cease providing bridge funding, the bridge period will end upon the later of expiration of the portion of the bridge period covered by the funding already provided by Toucan, as specified in the note evidencing such funding or ten business days after Toucan’s written election, (ii) in the event Toucan does not make a written election to cease providing bridge funding, but Toucan fails to offer or provide additional bridge funding, on terms and conditions set forth in the Recapitalization Agreement, during the ten business days after the completion of the funded bridge period and the Company needs additional funding at the time to avoid termination of its operations, the Company has used and spent the bridge funding provided by Toucan in accordance with the provisions of the Recapitalization Agreement and the applicable note, and on or after completion of the bridge funding period the Company has made a written request to Toucan for additional bridge funding. In the event that this does occur, the bridge period will end on the later of twenty business days after completion of the funded bridge period, or ten business days after the Company’s written request for additional bridge funding.

The bridge period may be extended beyond the 90 day period referenced above by mutual agreement of the parties, or by Toucan if Toucan determines in its sole discretion that further time is needed to complete the bridge period activities.

The principal amount of the bridge notes as well as any accrued and unpaid interest will automatically convert into convertible preferred stock in the event investors, other than Toucan, have purchased a minimum of $15.0 million of convertible preferred stock. The conversion price for any automatic conversion will be the lowest nominal or effective price per share paid by the other investors who purchase such convertible preferred stock (excluding shares issuable upon exercise of the bridge warrants).

Until, and/or in the absence of a purchases for cash of a minimum of $15 million of convertible preferred stock, by investors other than Toucan, Toucan may, in its sole discretion, elect to convert any or all of the principal and/or interest due under the notes into any equity security and/or debt security and/or any combination thereof of the Company. Toucan may make such determinations from time to time and at any time before the notes have been discharged in full, and, as applicable, at any time on or before the expiration of the thirty (30) day notice period required under the notes in the event the Company wishes to prepay the notes.

The conversion price for any discretionary conversion will be the lowest of, (i) with certain exceptions, the lowest nominal or effective price per share paid by any investor at any time on or after the date one year prior to April 26, 2004, (ii) with certain exceptions, the lowest nominal or effective price at which any investor has the right to acquire shares pursuant to any other security, instrument, or promise, undertaking, commitment, agreement or letter of intent of the Company outstanding on or after April 26, 2004 or granted, issued, extended or otherwise made available by the Company at any time on or after the date one year prior to April 26, 2004 and (iii) the lesser of $0.10 per share or 35% discount to the average closing price per share of the common stock during any twenty consecutive trading days (beginning with the twenty consecutive trading days prior to April 26, 2004) but not less than $0.04 per share under this clause (iii).

As of May 12, 2004, the bridge notes, including principal and accrued interest, are convertible at $0.04 per share for a total of 15,113,000 million shares (or 44.3%) of common stock.

As part of the bridge funding Toucan received warrants with coverage equal to three hundred percent (300%) of the principal amount due under the bridge notes. As a result, the Company has issued $1.8 million dollars in coverage on $600,000 of the initial bridge funding and, if Toucan elects, to provide $500,000 of additional bridge funding, the Company will issue $1.5 million in warrant coverage on that $500,000 in additional bridge funding. The number of shares subject to bridge warrants to be issued, but not the exercise price, will be determined on the same basis for all bridge funding and shall be on the basis of $0.05 per share (subject to adjustment for stock splits, stock dividends and the like). The number of shares for which Toucan will be able to exercise the bridge warrants from the initial bridge funding is 36 million shares. If Toucan provides additional bridge funding it will receive the same warrant coverage on any loans up to $1.1 million in the aggregate. As a result Toucan could potentially receive warrants for up to an additional 30 million shares.

The bridge warrants are exercisable upon the earliest of (i) the time at which the Company has raised at least $2 million for the issuance of any class or series of equity security, debt security and/or combinations thereof (including without limitation, any conversion of any notes and/or other convertible or exercisable securities and/or instruments other than the bridge warrants), (ii) the time at which the Company breaches any provision of the Recapitalization Agreement or any related recapitalization document, (iii) the time at which the Company decides to accept an unsolicited proposal, or (iv) sixty-one (61) days after notice from Toucan that it intends to exercise. The warrants are exercisable for up to seven (7) years after their respective issuance dates. The exercise price of the bridge warrants is $0.01 per share (subject to adjustment for stock

dividends, stock splits, certain dilutive issuances and similar transactions, as more fully provided in the bridge warrants). In the event the issuance of the Company’s convertible preferred stock is approved and authorized, and investors other than Toucan have closed on the purchase in cash of a minimum of $15 million of such convertible preferred stock, then the bridge warrant will be exercisable for such convertible preferred stock. In the event that the convertible preferred stock is not approved or authorized, or if investors other than Toucan have not closed on the purchase of at least $15 million of the Company’s convertible preferred stock, then the bridge warrants will be exercisable for any equity security and/or debt security and/or any combination thereof in each case that Toucan shall designate in its sole discretion.

The proposed equity financing would consist of the issuance and sale of up to $40 million of convertible preferred stock (including any shares issuable upon conversion of bridge funding, but not including any shares issuable upon exercise of warrants, options, and similar instruments or obligations), in one or more closings over a period of 12 months from the first closing of the sale of convertible preferred stock. If issued, the convertible preferred stock will be issued at a price per share equal to the lesser of $0.10 (as adjusted for stock splits, stock dividends and the like) or a 35% discount to the average closing price of the Company’s common stock during the twenty trading days prior to the first closing of the proposed equity financing, but not less than $0.04 per share. The proposed equity financing is contingent upon the Company complying with covenants in the Recapitalization Agreement and locating investors who are willing to invest in the Company on the terms proposed.

As part of the Recapitalization Agreement, we have already agreed to the principal terms of the equity financing with Toucan. If and when the Company has raised at least $2 million through the issuance of any class or series of equity security, debt security and/or combinations thereof (including any conversion of any notes and/or other convertible or exercisable securities and/or instruments other than the bridge warrants), a new board of directors of the Company will be constituted. In the event a sale can not be achieved as a public company, we would consider deregistering the Company’s common stock under the Securities Exchange Act of 1934 and conducting the proposed equity offering on the same terms but as a private company.

The Company has also agreed to issue $8 million in warrant coverage on the first $8 million of convertible preferred stock purchased for cash. The preferred stock warrants will be exercisable for additional shares of convertible preferred stock. Preferred stock warrants shall not be issued upon conversion of notes, exercise of warrants, or other conversion or exercise. The number of shares issuable upon exercise of warrants to be so issued will be determined on the basis of $0.10 per share (subject to adjustment for stock splits, stock dividends and the like), and the aggregate number of shares for which the holders of preferred stock warrants will be able to exercise such warrants will be 80.0 million shares.

The exercise price of the preferred stock warrants will be the lesser of $0.10 per share (subject to adjustment for stock splits, stock dividends and the like) or a 35% discount to the average closing price of our common stock during the twenty trading days prior to the first closing of the sale of convertible preferred stock; provided, however that in no event will the exercise price be less than $0.04 per share (subject to adjustment for stock splits, stock dividends and the like). The exercise period will commence upon issuance of the Preferred Stock Warrants, and shall continue for a period of seven years after their respective issuance dates.

The Company’s obligations to enter into the proposed equity financing is subject to a fiduciary exception pursuant to which the Company may respond to or accept a proposal for an equity financing or merger, consolidation, business accommodation or sale of all or substantially all of the Company’s assets from another party or parties, but only as to the extent required by applicable law, only in regard to an alternative proposal that has not been directly or indirectly solicited by the Company or any of its officers, directors or employees or SOMA Partners LLC, or any advisors, agents or consultants and only if the board of directors of the Company provides written certification to Toucan that the alternative proposal was unsolicited. In the event that the Company exercises this fiduciary exception, it is required to notify Toucan. If the Company’s board of directors determines that acceptance of any unsolicited proposal is required in order to fulfill its fiduciary

obligations, prior to accepting such unsolicited proposal, the Company is required to notify Toucan of its intent to accept such a proposal. Toucan will then have twenty-one (21) days from the date it receives notice from the Company to present a revised proposal of its own to the Company (although Toucan is under no obligation to do so) which the Company’s board of directors is required to consider in good faith. In the event that, following the consideration of any revised proposal from Toucan or, in the absence of any such revised proposal, following the expiration of twenty-one (21) days, if the Company’s board of directors determines that acceptance of the unsolicited proposal is required in order to fulfill its fiduciary obligations, the Company will be under no obligation to proceed with the anticipated equity financing.

Standstill; Termination of Obligation to Effect Anticipated Equity Financing

During the bridge period and the equity financing period (but excluding the periods from February 18, 2004 through February 29, 2004 and March 16, 2004 through April 26, 2004, collectively, we have agreed to refrain from working with, or entering into discussions with any other party, other than Toucan, for a potential equity financing, debt financing, joint venture, license, co-development or other business arrangement, or merger, consolidation, business combination or sale of all or substantially all of our assets.

The Company’s obligation to effect the proposed equity financing will terminate in the event that the Company has not raised at least $2 million through the issuance of any class or series of equity security, debt security and/or combinations thereof (including, without limitation, any conversion of any notes and/or other convertible or exercisable securities and/or instruments of any kind) within 180 days of April 26, 2004. In the event that the Company’s obligation to effect the proposed equity financing is terminated, the standstill period described above will immediately end and the Company will be free to solicit investments from parties other than the Toucan.

In late 2002, we initiated actions to conserve cash and restructured our operations. Our staffing was reduced by sixty-three positions and, as of December 31, 2003, our remaining staff consisted of seven full-time employees, three in administration and four in research. As a result, expenses decreased from those incurred in 2002 as discussed below.

Total Revenues. Revenues increased from $9,000 for the year ended December 31, 2002 to $529,000 for the year ended December 31, 2003. The research material sales component of revenue increased from $9,000 for the year ended December 31, 2002 to $24,000 for the year ended December 31, 2003. The license fees component of revenue increased from $0 for the year ended December 31, 2002 to $25,000 for the year ended December 31, 2003. Research grant income is the remaining revenue component which increased from $0 for the year ended December 31, 2002 to $480,000 for the year ended December 31, 2003. This increase in grant revenue was attributable to the receipt of research grant awards in the first and second quarters of 2003.

Cost of Research Material Sales. Cost of research material sales increased from $7,000 for the year ended December 31, 2002 to $79,000 for the year ended December 31, 2003. This increase was due to increased direct labor costs attributed to our entry into the sale of research reagents. We are unable to project when, if ever, our sales of research materials will attain profitability.

Research and Development Expense. Research and development expense decreased 73.3% from $6.0 million for the year ended December 31, 2002 to $1.6 million for the year ended December 31, 2003. This decrease was primarily due to the November 2002 suspension of all clinical trial activity for our DCVax product candidates and the withdrawal of our Investigational New Drug Application (IND) for DCVax-Prostate, and for DCVax-Lung.

General and Administrative Expense. General and administrative expense decreased 45.3% from $7.5 million for the year ended December 31, 2002 to $4.1 million for the year ended December 31, 2003. This decrease was primarily due to the October 9, 2002 directive from our Board of Directors to initiate immediate actions to conserve cash and the resulting staff reductions.

Depreciation and Amortization. Depreciation and amortization decreased 65.1% from $593,000 for the year ended December 31, 2002 to $207,000 for the year ended December 31, 2003. This decrease was primarily due to the disposal or impairment of $1.0 million of equipment and leasehold improvements in the fourth quarter 2002 and approximately $904,000, net of equipment and leasehold improvements write-offs, for the year ended December 31, 2003.

Loss on Facility Sublease and Lease Cancellation. Lease cancellation costs decreased 75.9% from $721,000 for the year ended December 31, 2002 to $174,000 for the year ended December 31, 2003 and are associated with the June 30, 2003 termination of our primary lease at our former facility and release from future lease obligations thereunder.

Asset Impairment Loss. Asset disposal costs decreased 10.0% from $1.0 million for the year ended December 31, 2002 to $904,000 for the year ended December 31, 2003. This decrease was primarily related to the write-off of leasehold improvements and equipment associated with the June 30, 2003 termination of our primary lease at our previous 38,000 square foot facility and our resulting move to another facility of approximately 14,000 square feet whereby such assets will not be utilized.

Total Other Income (Expense), Net. Other income (expense), net, consists primarily of gain on sale of intellectual property discussed below. In addition, interest expense increased 92.1% from $38,000 for the year ended December 31, 2002 to $73,000 for the year ended December 31, 2003. This increase was due primarily to recognizing approximately $42,000 of interest expense relative to the debt discount associated with the November 13, 2003 Secured Convertible Promissory Note and Warrants debt financing. Interest income decreased 85.3% from $157,000 for the year ended December 31, 2002 compared to $23,000 for the year ended December 31, 2003. This decrease was primarily due to the decline in market interest rates and having lower average cash balances during the year ended December 31, 2003.

Gain on Sale of Intellectual Property. The December 31, 2002 gain of $2.8 million was recognized on the sale of intellectual property which relates to the December 2002 Assignment and Licensing agreement with Medarex in which we received $3.0 million in working capital and $400,000 of accrued liabilities to Medarex were forgiven offset by the issuance of 2.0 million shares of unregistered common stock and warrants to purchase 800,000 shares of common stock. The stock and warrants were valued at a combined total of approximately $560,000. The $816,000 gain was realized on the sale of royalty rights for the year ended December 31, 2003 and was negotiated based on the expected discounted net present value (NPV) of the future 2% royalty obligation under that certain Assignment and License Agreement dated December 9, 2002 with Medarex and was received in cash on July 1, 2003.

Total Revenues. Total revenues decreased 93% from $129,000 for the year ended December 31, 2001 to $9,000 for the year ended December 31, 2002. Total revenues consisted primarily of research material sales. Our revenues from research material sales will fluctuate depending upon the timing of purchases by BioWhittaker, Inc., our sole customer.

Cost of Research Material Sales. Cost of research material sales decreased 90% from $67,000 for the year ended December 31, 2001 to $7,000 for the year ended December 31, 2002. This decrease was due to a decrease in sales of research materials.

Research and Development Expense. Research and development expense increased 22.4% from $4.9 million for the year ended December 31, 2001 to $6.0 million for the year ended December 31, 2002. This increase was primarily due to increased costs associated with continued patient enrollment in our initial clinical trials, clinical trial monitoring, manufacture of DCVax-Prostate for clinical trial use, research and development costs associated with improving DCVax production techniques and research and development expenditures relating to our HuRx platform. The majority of the R&D cost increase occurred prior to restructuring our operations to conserve cash and prior to suspension of all clinical trial activity in November 2002.

General and Administrative Expense. General and administrative expense increased 57% from $4.8 million for the year ended December 31, 2001 to $7.5 million for the year ended December 31, 2002. The increase in costs was primarily due to higher monthly rental costs, and for increased legal costs related to entering into certain contractual arrangements, increased patent related costs, increased directors and officers liability insurance cost and increased medical benefit plan cost.

Depreciation and Amortization. Depreciation and amortization increased 27% from $467,000 for the year ended December 31, 2001 to $593,000 for the year ended December 31, 2002. This increase was primarily due to additional leasehold improvements, purchase of additional research equipment, and additional capital expenditure on computers.

Loss on Facility Sublease. Restructuring costs of $721,000 are associated with vacating approximately 22,000 square feet of laboratory and administrative space in 2002 as a result of suspending all clinical trial activity and downsizing through the elimination of approximately 45 positions in 2002.

Asset Impairment Loss. The asset impairment loss of $1.0 million represents impairment of leasehold improvements related to vacated space at our 21720 23rd Drive S.E., Bothell Washington facility for which sublease payments will not recover the value of the improvements and impairment of certain equipment to be sold.

Total Other Income (Expense), Net. Other income (expense), net, consists primarily of gain on sale of intellectual property discussed below. In addition, interest expense decreased 96% from $1.0 million for the year ended December 31, 2001 to $38,000 for the year ended December 31, 2002. The decrease in interest expense was primarily due to the 2001 period including amortization related to debt discount and the fact that we had no outstanding debt through November 2002. Interest income decreased 19% from $193,000 for the year ended December 31, 2001 compared to $157,000 for the year ended December 31, 2002.

Gain on Sale of Intellectual Property. The gain realized on the sale of intellectual property of $2.8 million for the year ended December 31, 2002 relates to the December 2002 Assignment and Licensing agreement with Medarex in which we received $3.0 million in working capital and $400,000 of accrued liabilities to Medarex were forgiven offset by the issuance of 2.0 million shares of unregistered common stock and warrants to purchase 800,000 shares of common stock. The stock and warrants are valued at a combined total of approximately $560,000.

Previously, on January 7, 2000, we qualified for the State of Washington’s (Chapter 82.63 Revised Code of Washington) use tax deferral program for businesses engaged in high technology and research and development activities. Under the deferral program, a business may defer paying sales and use tax upon investments in qualified buildings, qualified machinery and equipment, or pilot scale manufacturing. No repayment of the taxes deferred under this program is required if the business uses the investment project for qualified research and development during the calendar year the investment project is certified by the State of Washington’s Department of Revenue as operationally complete, and for an additional seven calendar years.

Beginning on October 9, 2002, we initiated a series of substantial steps to conserve cash, including: (i) the suspension of all clinical trial activities; (ii) the sale of certain fixed assets; (iii) the relocation and consolidation of our facilities; (iv) a significant reduction in force (including the termination of our Chief Financial Officer and Chief Medical Officer and the conversion of our Chief Executive Officer to unpaid advisor status); and (v) the sale of significant portions of our intellectual property portfolio.

We appealed this assessment and were granted an extension until January 21, 2004 in which to file an appeal. Our February 4, 2004 documentation to the State, citing the legal authority under which our request for a reduction was based, resulted in a meeting with the State on February 26, 2004. In response to this February 26, 2004 meeting, we have submitted, during the week of May 3, 2004, a proposal we feel fairly represents the exempt amounts that should be excluded from the State’s sales and/or use tax which, if accepted, could result in a liability of approximately $164,000. In addition, in February 2004, a refund request of approximately $175,000 related to certain other state taxes was submitted to the State. The finalization of our appeal process is expected to take several more months. We cannot currently determine any amount that may be deducted from the assessed liability or that will be recovered, if any, from our refund request.

As of April 26, 2004, including the $600,000 borrowed from Toucan, we had approximately $561,000 in cash and cash equivalents. We believe, based on recurring operating and associated financing costs, our cash will be sufficient to fund our operations through May 26, 2004. After that date we will have to seek additional funds from Toucan which Toucan is not obligated to provide to us. Under the terms of the Recapitalization Agreement, if Toucan elects not to provide additional funding to us, we are prohibited from seeking funds from any party other than Toucan for up to ten business days after May 26, 2004.

Any additional financing with Toucan and any other third party is likely to be dilutive to stockholders, and debt financing, if available, may include additional restrictive covenants.

Unless we receive significant additional funding in the future, continuing our operations will require us to use assets that otherwise would be required to liquidate the Company and pay our obligations. For this reason, if we are unable to obtain additional capital, we may choose to cease operations at anytime to meet our obligations and to maximize the value, if any, to be paid to our stockholders following a potential liquidation.

Our independent auditors have indicated in their report on our financial statements included with this annual report on Form 10-K, that there is substantial doubt about our ability to continue as a going concern. We need to raise significant additional funding to continue our operations, conduct research and development activities, pre-clinical studies and clinical trials necessary to bring our product candidates to market. However, additional funding may not be available on terms acceptable to us or at all. The alternative of issuing additional equity or convertible debt securities also may not be available and, in any event, would result in additional dilution to our stockholders.

On December 9, 2002, we entered into a Assignment and License Agreement wherein we sold certain intellectual property to Medarex, acquired certain intellectual property from Medarex and acquired the rights to certain additional intellectual property from Medarex. These targets were previously co-owned by the companies. The agreement also provides Medarex with the assignment of certain patents related to the acquired targets for the development and commercialization of antibody-based products including fully human PSMA (Prostate Specific Membrane Antigen) antibodies for the potential treatment of cancer. Medarex submitted an IND to the FDA in January 2003 to initiate a Phase I clinical trial to evaluate the fully human PSMA antibody co-developed by Medarex and ourselves as a possible treatment for hormone refractory prostate cancer. In addition, this agreement allowed for us to reacquire all development and commercialization rights we previously granted Medarex to five potential additional cancer-related disease targets. Pursuant to this agreement, we issued to Medarex 2.0 million unregistered shares of common stock and warrants to purchase 800,000 shares of our unregistered common stock.

On April 8, 2003, we were awarded a National Institutes of Health (NIH) cancer research grant. The total first year grant award was for $318,137 and has been earned under the grant and was recognized in revenue through the year ended December 31, 2003. The total award for fiscal 2004 is $327,681, comprised of approximately $197,398 authorized for direct grant research expenditures and approximately $130,283 authorized for use to cover our facilities and administrative overhead costs. Grant revenues of $480,000 have been recognized through December 31, 2003.

We were also awarded, as a subcontractor to the University of Washington’s award from NIH, a one-year cancer research subcontract on February 26, 2003. The total award for fiscal 2003 was $146,563 and has been earned and is recognized in revenue through the year ended December 31, 2003.

On April 21, 2003, because we had received frequent requests from researchers for access to our cancer-associated monoclonal antibodies, human dendritic cells, and dendritic cell precursors (monocytes), we announced our entry into the Research Reagents Market. We earned approximately $24,000 in revenue for the year ended December 31, 2003 from the manufacture and sale of research materials. However, we have limited manufacturing facilities and expertise to produce our research products and the commercial success of any of our research products will depend upon the strength of our sales and marketing efforts. We are unable to project when, if ever, its sales of research materials will attain profitability.

Our effort to license certain rights, title, and interest to technology relating to specific cell lines resulted in the July 1, 2003 License Agreement with DakoCytomation with the payment of a one-time $25,000 license fee and future non-refundable minimum annual royalty payments of $10,000 credited against any royalty payments made to NWBT. The $25,000 one-time license fee was received on August 25, 2003.

Net cash was increased by $125,000 in completing the November 13, 2003 Secured Convertible Promissory Notes and Warrants offering. The elimination of certain severance liabilities through their payout and subsequent reinvestment of after-tax proceeds of $210,000, while resulting in a reclassifying of underlying liability categories, did not result in a new injection of cash operating funds.

In connection with the Recapitalization Agreement with Toucan, certain members of management who hold warrants agreed to an amendment to their warrants. The amendment applies to all warrants held by management. The purpose of the amendment was to remove the economic anti-dilution provisions and set the warrant exercise price at the lesser of, (i) $0.10 per share, or (ii) a 35% discount to the average closing price during the twenty trading days prior to the first closing of the sale by the Company of convertible preferred stock as contemplated by the Recapitalization Agreement provided but not less than $0.04 per share.

Proceeds from the offering were allocated between the Notes and Warrants on a relative fair value basis. The value allocated to the warrants on the date of the grant was approximately $221,000. The fair value of the warrants was determined using the Black-Scholes option pricing model with the following assumptions: expected dividend yield of 0%, risk-free interest rate of 3.36%, volatility of 194%, and an contractual life of 5-years. The value of the warrants was recorded as a deferred debt discount against the $335,000 proceeds of the Note. In addition, a beneficial conversion feature related to the Notes was determined to be approximately $221,000 but is capped at the remaining value originally allocated to the Notes of approximately $114,000. As a result, the total discount on the Notes equaled the face value of $335,000 which is being amortized over the twelve-month term of the Notes. One and one-half months amortization, of deferred debt discount of approximately $42,000, along with interest accretion on the Note of approximately $2,000 was recorded at December 31, 2003 resulting in notes payable to related parties, net of discount, at December 31, 2003 of approximately $44,000.

In an effort to continue to fund our operations, we entered into a Recapitalization Agreement on April 26, 2004 with Toucan. In connection with this agreement we issued Toucan three 10% convertible promissory notes in the aggregate principal amount of $600,000. We also issued Toucan a warrant to purchase 36.0 million shares of our capital stock.

The initial bridge funding period commenced on February 2, 2004 when we issued Toucan an unsecured convertible promissory note, in the amount of $50,000. On March 1, 2004, we issued Toucan a secured

We used $4.7 million in cash for the operating activities during the year ended December 31, 2003, compared to $13.1 million for the year ended December 31, 2002. The decrease in cash used in operating activities from 2002 to 2003 was primarily the result of the October 9, 2002, initiation of substantial steps to conserve cash, including: (i) the suspension of all clinical trial activities; (ii) the sale of certain fixed assets; (iii) the relocation and consolidation of our facilities; (iv) a significant reduction in force (including the termination of our Chief Executive Officer, Chief Financial Officer, and Chief Medical Officer; and (v) the sale of significant portions of our intellectual property portfolio.

We generated $2.5 million in cash from investing activities during the year ended December 31, 2003 compared to $536,000 provided by investing activities during the year ended December 31, 2002. The cash provided during the year ended December 31, 2003 consisted primarily of $1.8 million received from Medarex and the sale of Medarex common stock held as marketable securities on December 31, 2002 arising from the December 9, 2002 Assignment and License Agreement and the June 20, 2003, amendment to this agreement wherein Medarex purchased the expected discounted net present value (NPV) of the future 2% royalty obligation for $816,000.

On June 18, 2003, we signed a Industrial Lease — Multiple Tenant agreement with Benaroya Capital Company, LLC (the “Lessor”) for 14,022 square feet of space at a building located at 22322 20th S.E. in Bothell, Washington. This lease is for a term of 39 months commencing July 1, 2003 and terminating September 30, 2006 for base rent in the amounts scheduled below:

We have also entered into other collaborative arrangements under which we may be obligated to pay royalties or milestone payments if product development is successful. We do not anticipate that the aggregate amount of any royalty or milestone obligations under these arrangements will be material.

In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations, which is applicable for fiscal years beginning after June 15, 2002. SFAS No. 143 requires an enterprise to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of a tangible long-lived asset. Statement No. 143 also requires the enterprise to record the contra to the initial obligation as an increase to the carrying amount of the related long-lived asset (i.e., the associated asset retirement costs) and to depreciate that cost over the remaining useful life of the asset. The liability is changed at the end of each period to reflect the passage of time (i.e., accretion expense) and changes in the estimated future cash flows underlying the initial fair value measurement. The provisions of SFAS No. 143 did not have a material impact on our financial position or operating results.

In July 2002, the FASB issued Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which addresses financial accounting and reporting for costs associated with exit or disposal activities. Statement No. 146 nullifies EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The principal difference between Statement No. 146 and Issue No. 94-3 relates to the recognition of a liability for a cost associated with an exit or disposal activity. Statement No. 146 requires that a liability be recognized for those costs only when the liability is incurred, that is, when it meets the definition of a liability in the FASB’s conceptual framework. In contrast, under Issue No. 94-3, a company recognized a liability for an exit cost when it committed to an exit plan. Statement No. 146 also establishes fair value as the objective for initial measurement of liabilities related to exit or disposal activities. The Statement is effective for exit or disposal activities that are initiated after December 31, 2002 and will impact the Company prospectively. We adopted SFAS 146 on January 1, 2003.

In November 2002, the Financial Accounting Standards Board Emerging Issues Task Force issued its consensus concerning Revenue Arrangements with Multiple Deliverables (“EITF 00-21”). EITF 00-21 addresses how to determine whether a revenue arrangement involving multiple deliverables should be divided into separate units of accounting, and, if separation is appropriate, how the arrangement consideration should be measured and allocated to the identified accounting units. The guidance in EITF 00-21 is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of EITF 00-21 did not have a material impact on our financial statements.

Our exposure to market risk is presently limited to the interest rate sensitivity of our cash and cash equivalents which is affected by changes in the general level of U.S. interest rates. We are exposed to interest rate changes primarily as a result of our investment activities. The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive without significantly increasing risk. To minimize risk, we maintain our cash and cash equivalents in interest-bearing instruments, primarily money market funds. Our interest rate risk management objective with respect to our borrowings is to limit the impact of interest rate changes on earnings and cash flows. Due to the nature of our cash and cash equivalents, we believe that we are not subject to any material market risk exposure. We do not have any foreign currency or other derivative financial instruments.

Our financial statements required by this item are submitted as a separate section of this Form 10-K. See Item 15(a)(1) for a listing of financial statements provided in the section titled “Financial Statements”.

Our President (Principal Executive Officer) and our Controller (Principal Financial and Accounting Officer), after evaluating the effectiveness of our “disclosure controls and procedures” (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting, as of the date of this annual report, have concluded that, as of December 31, 2003 our disclosure controls and procedures were adequate to ensure that material information relating to the registrant would be made known to them by others within those entities. In addition, our President and our Controller have determined that our internal control over financial reporting is sufficient to provide reasonable assurance that; (i) our records accurately and fairly reflect our transaction and our disposition of our assets; (ii) allow transactions to be recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures are only being made in accordance with authorizations of management and Company Directors; and (iii) we prevent or timely detect the unauthorized acquisition, use, or disposition of assets that could have a material effect on our financial statements.

To our knowledge, there were no significant changes to our internal controls or in other factors that could significantly affect internal controls during the fourth quarter and year ended December 31, 2003.

The names of our senior executives and our officers as of March 31, 2004 and information about them is presented below.

Alton L. Boynton, Ph.D. Dr. Boynton co-founded our company, has served as Secretary since August 2001, has served as our Executive Vice President since July 2000, has served as our Chief Scientific Officer and a director since our inception in 1998, was appointed our Chief Operating Officer in August 2001, and appointed President in May 2003. Dr. Boynton has also served as Director of the Department of Molecular Medicine of Northwest Hospital from 1995-2003 where he coordinated the establishment of a program centered on carcinogenesis. Prior to moving to Seattle, Dr. Boynton was Associate Director of the Cancer Research Center of Hawaii, The University of Hawaii, where he also held the positions of Director of Molecular Oncology of the Cancer Research Center and Professor of Genetics and Molecular Biology. Dr. Boynton received his Ph.D. in Radiation Biology from the University of Iowa in 1972.

Marnix L. Bosch, Ph.D. Dr. Bosch joined our Company in 2000, and has served as our Vice President for Vaccine R&D since July 2001. Prior to joining us, Dr. Bosch was a member of the faculty of the Department of Pathobiology at the University of Washington, and he continues to serve that Department as an Affiliate Associate Professor. He worked at the National Institutes of Health (Bethesda, MD) and the

National Institutes of Health and Environmental Protection (Bilthoven, the Netherlands) prior to joining the University of Washington. He has authored more than 40 research publications in virology and immunology, and is an inventor on several patent applications on dendritic cell product manufacturing. Dr. Bosch obtained his Ph.D. in Medicine at the University of Leiden, the Netherlands in 1987 and earned an MBA from the University of Washington in 2003.

Larry L. Richards. Mr. Richards joined us in 1998 as our Controller. Prior to joining us, Mr. Richards was Controller for the Department of Molecular Medicine of Northwest Hospital from 1995-1998. Mr. Richards has held positions as Director of a for-profit 4-year proprietary Business College, a small business owner, and from 1968 through 1985, Mr. Richards held positions of managerial responsibility for Equitable Life Assurance Society of the United States, a subsidiary of AXA Financial, Inc. Mr. Richards earned a B.S. in Business Administration from Southern Colorado State College in Colorado and a MBA from Pepperdine University, Los Angeles, Ca.

The Board of Directors created an Audit Committee on June 21, 2001. The committee does not have a formal meeting schedule, but is required to meet at least once each year. In 2003, the audit committee held six meetings. Current members of the Audit Committee are Randall L-W. Caudill, Ph.D., Wayne L. Pines and Haakon Ragde, M.D. The Audit Committee is responsible for recommending the Company’s independent auditors and reviewing the scope, costs and results of the audit engagement. To date we have not identified any of the members of the Audit Committee as an “audit committee financial expert” as defined by the Securities Exchange Commission because we are uncertain at this time whether or not we can continue as a going concern. We will not name an “audit committee financial expert” until we know for certain that we can continue as a going concern.

The Company has not adopted a “code of ethics” as defined by the Securities and Exchange Commission. Because we are uncertain about the future prospects of the Company we will not adopt one and make it publicly available until we know for certain that we can continue as a going concern.

The following table sets forth certain information concerning compensation paid or accrued to our Chairman of the Board of Directors, Chief Executive Officer, our President, and the three most highly compensated executive officers of the Company whose salary and bonus for the Company’s fiscal year ended December 31, 2003 were in excess of $100,000 and for services rendered to the Company in all capacities during each of the years in the three-year period ended December 31, 2003:


(1)	All Other Compensation for each of the years in the three-year period ended December 31, 2003 consists of Company paid premiums on term life insurance coverage up to 1.5 times employee’s annual salary, earned but unpaid accrued vacation payments, matching contribution on 401(k) up to a maximum of $3,000, and employer paid medical benefits.

(2)	Includes $281,252 in severance and $29,028 of earned but unpaid vacation payments to Mr. Wilds upon the termination of his employment with the Company on May 31, 2003. Mr. Wilds resigned as the Company’s non-compensated Chief Executive Officer and as Chairman of the Company’s Board of Directors on February 18, 2004.

(3)	Includes $281,572 in severance payment to Dr. Boynton. The after tax portion of the severance of $183,000 was invested in the Company’s November 13, 2003 Secured Convertible Note and Warrants financing.

(4)	Includes $19,570 in severance payment to Dr. Bosch. The after tax portion of the severance of $16,000 was invested in the Company’s November 13, 2003 Secured Convertible Note and Warrants financing.

(5)	Includes $11,846 in severance payment to Dr. Lodge upon the termination of her employment in December 2002. Dr. Lodge was rehired on February 28, 2003. Dr. Lodge resigned on February 27, 2004.

(6)	Includes $30,144 in severance and $24,774 of earned but unpaid vacation payments to Dr. Holmes upon the termination of his employment with the Company on September 5, 2003.

The following table sets forth information concerning option grants during the 2003 fiscal year to the named Executive Officers:


(1)	Mr. Wilds’ stock options, when employed by the Company, generally vested over a three-year period at the rate of 2.7% monthly.

(2)	Dr. Boynton’s stock options generally vest over a three-year period at the rate of 2.7% monthly.

(3)	Dr. Bosch’s stock options generally vest over a four-year period, 25% on the one-year anniversary of the grant and 2% each month thereafter.

(4)	Dr. Lodge’s stock options generally vest over a four-year period, 25% on the one-year anniversary of the grant and 2% each month thereafter.

(5)	Dr. Holme’s stock options, when employed by the Company, generally vested over a four-year period, 25% on the one-year anniversary of the grant and 2% each month thereafter.

(6)	These assumed rates of appreciation are provided in order to comply with requirements of the Securities and Exchange Commission, and do not represent the Company’s expectation as to the actual rate of appreciation of the Common Stock. The actual value of the options will depend on the performance of the Common Stock, and may be greater or less than the amounts shown.

Aggregated Option Exercises in Fiscal Year Ended December 31, 2003 and Fiscal Year End Option Values

The following table contains information concerning the options exercised by the Named Executive Officers in the fiscal year ended December 31, 2003, and the year-end number and value of unexercised options with respect to each of the Named Executive Officers.

The following table sets forth, as of April 26, 2004 the number of Common Stock shares held by beneficial owners of more than five percent of the Company’s Common Stock, by directors and nominees, by the executive officers named in the Summary Compensation Table on page 44, and by all directors and executive officers of the Company as a group:


(1)	Based on a Schedule 13D filed by Toucan Capital Fund II, L.P. and related persons pursuant to the Securities Exchange Act of 1934. The address for Toucan Capital Fund II, L.P. is 7600 Wisconsin Avenue, 7th Floor, Bethesda, MD 20814.

(2)	Based on a Schedule 13G filed by Medarex pursuant to the Securities and Exchange Act of 1934. The address for Medarex, Inc. is 707 State Road, Suite 206, Princeton, NJ 08540.

(3)	Includes 451,040 shares of Common Stock held by Dr. Boynton and 2,322,287 shares of Common Stock issuable pursuant to options and warrants exercisable within 60 days of April 26, 2004.

(4)	Based on a Schedule 13G filed by Northwest Hospital pursuant to the Securities and Exchange Act of 1934. The address for Northwest Hospital is 1550 North 115th St., Seattle, Washington 98133.

(5)	Includes 72,500 shares of Common Stock held by Mr. Wilds and 1,218,890 shares of Common Stock issuable pursuant to options and warrants exercisable within 60 days of April 26, 2004.

(6)	Includes 64,825 shares of Common Stock held by Dr. Bosch and 502,689 shares of Common Stock issuable pursuant to options and warrants exercisable within 60 days of April 26, 2004.

(7)	Includes 5,700 shares of Common Stock held by Prudential Securities C/ F Randall L-W. Caudill IRA Rollover dated 2/19/93, 39,314 shares of Common Stock held by Dr. Caudill as co-trustee of the JPS Irrevocable Trust under Agreement dated April 1, 1998 and warrants exercisable within 60 days of April 26, 2004., and 171,247 shares held by Dunsford Hill Capital Partners, Inc., a California corporation owned and controlled by Dr. Caudill, and warrants exercisable within 60 days of April 26, 2004 and 5,000 shares of Common Stock issuable pursuant to options exercisable within 60 days of April 26, 2004.

(8)	Includes 15,382 shares of Common Stock held by Dr. Ragde and 22,101 shares of Common Stock issuable pursuant to options exercisable within 60 days of April 26, 2004.

(9)	Includes 2,500 shares of Common Stock held by Mr. Pines and 5,000 shares of Common Stock issuable pursuant to options exercisable within 60 days of April 26, 2004.

The Company believes that each of the transactions described below was carried out on terms that were no less favorable to it than those that would have been obtained from unaffiliated third parties. Any future transactions between Northwest Biotherapeutics and any of its directors, officers or principal stockholders will

The fair value of the 800,000 warrants was $159,678 on the date of grant which was determined using the Black-Scholes option pricing model with the following assumptions: expected dividend yield 0%, risk-free interest rate of 4.17%, volatility of 191%, and an expected life of 10-years. As of December 31, 2002, one-half of the warrant value, $79,839, was recognized as an increase to additional paid in capital and $79,839 was recognized as a long term liability, for the 400,000 warrants to be issued in fiscal 2003.

In addition to the above sums, our Vice president of Vaccine Research and Development invested an additional $25,000 and another $100,000 was received from non-employee investors. These additional funds, including the after-tax severance funds, brought the total invested in this Secured Convertible Promissory Note and Warrants financing to $335,000.

These notes have a 12 month term, accrue interest at an annual rate equal to the prime rate plus 2% and initially were secured by substantially all of our assets. On April 26, 2004, in signing a Consent To Loan and Amendment Of Security Agreement with Toucan, note holders of 70% of the principal amount of the notes, agreed to subordinate their notes and security interest in our assets to all the Company’s indebtedness and obligations to Toucan. One of the notes is convertible into the number of shares of our common stock equal to the principal amount divided by (i) in the event that we complete an offering of our common stock generating gross proceeds to us of at least $1 million, then the price per share paid by investors in that offering; or (ii) if we do not complete such an offering, then $0.18, which was the closing price of our common stock on the date of the financing.

Proceeds from the offering were allocated between the Notes and Warrants on a relative fair value basis. The value allocated to the warrants on the date of the grant was approximately $221,000. The fair value of the warrants was determined using the Black-Scholes option pricing model with the following assumptions: expected dividend yield of 0%, risk-free interest rate of 3.36%, volatility of 194%, and an contractual life of 5-years. The value of the warrants was recorded as a deferred debt discount against the $335,000 proceeds of the Note. In addition, a beneficial conversion feature related to the Notes was determined to be approximately $221,000 but is capped at the remaining value originally allocated to the Notes of approximately $114,000. As a result, the total discount on the Notes equaled the face value of $335,000 which is being amortized over the twelve-month the Notes. One and one-half months amortization, of deferred debt discount of approximately $42,000, along with interest accretion on the Note of approximately $2,000 was recorded at December 31, 2003 resulting in notes payable to related parties, net of discount, at December 31, 2003 of approximately $44,000.

On November 13, 2003, we entered into an Amended and Restated Employment Agreement with our President, Chief Operating Officer, Chief Science Officer and Secretary, wherein we eliminated any potential award of severance compensation in exchange for a one-time payment of $281,571. The $183,000 after-tax portion of this payment was invested in our November 13, 2003, Secured Convertible Promissory Note and Warrant financing. Although the term of this employment agreement expired on January 31, 2004, Dr. Boynton continues to serve at the discretion of the Board of Directors.

The aggregate fees billed for professional audit services rendered by KPMG LLP for services performed relating to the fiscal year ended December 31, 2003 were $92,935. Such fees include professional services performed for the audit of the Company’s annual financial statements for the Company’s 2003 fiscal year and for reviews of the Company’s interim financial statements for the Company’s 2003 fiscal year. Such fees were $92,604 in 2002.

The aggregate fees billed for tax preparation services were $9,000 and $10,500 in 2003 and 2002, respectively.


	The financial statements required by this item are submitted in a separate section as indicated below.


	All financial statement schedules are omitted since the required information is not applicable, not required or the required information is included in the financial statements or notes thereto.

We have audited the accompanying balance sheets of Northwest Biotherapeutics, Inc. (a development stage company) (Company) as of December 31, 2002 and 2003, and the related statements of operations, stockholders’ equity (deficit) and comprehensive loss, and cash flows for each of the years in the three-year period ended December 31, 2003 and for the period from March 18, 1996 (inception) through December 31, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Northwest Biotherapeutics, Inc. (a development stage company) as of December 31, 2002 and 2003, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2003 and the period from March 18, 1996 (inception) through December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in note 1 to the financial statements, the Company has experienced recurring losses from operations, has a working capital deficit and has a deficit accumulated during the development stage which raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

The Company has experienced recurring losses from operations, has a working capital deficit of $392,000, and has a deficit accumulated during the development stage of $64.2 million at December 31, 2003.

On April 26, 2004 we entered into a Recapitalization Agreement with Toucan Capital Fund II, L.P. (“Toucan”). The Recapitalization Agreement calls for the possible recapitalization of the Company. At Toucan’s option, and if successfully implemented, the recapitalization could potentially provide the company with up to $40 million through the issuance of new securities to Toucan and a syndicate of investors selected by Toucan. Following the recapitalization, Toucan and the investor syndicate would potentially own, on a combined basis, over 90% of the outstanding capital stock of the Company. The proposed recapitalization would occur in two stages, a bridge period which expires July 23, 2004, unless earlier terminated or extended by Toucan, followed by a potential equity financing.

As part of the Recapitalization Agreement, at the election of Toucan, the Company will be required to enter into an equity financing with Toucan and other investors to be determined by Toucan. If Toucan elects to pursue the equity financing, the parties have agreed that the Company will sell to Toucan and other investors up to $40 million of convertible preferred stock. The preferred stock would be priced at the lower of $0.10 per share or at a 35% discount to the average closing price of the Company’s common stock during the 20 trading days prior to the closing, but not be less than $0.04 per share. If Toucan elects to proceed with the equity financing, the closing would be subject to a number of closing conditions, including approval of the Company’s stockholders.

As of April 26, 2004, including the $600,000 borrowed from Toucan, we had approximately $561,000 in cash and cash equivalents. We believe, based on recurring operating and associated financing costs, our cash will be sufficient to fund our operations through May 26, 2004. After that date we will have to seek additional funds from Toucan which Toucan is not obligated to provide to us. Under the terms of the Recapitalization Agreement we are prohibited from seeking funds from any party other than Toucan for up to ten business days after May 26, 2004.

The Company’s actual cash needs will depend on many unpredictable factors, including the timing of research and development activities, the timeframe for successful development of an effective product, if ever, and the commercialization of such product, all of which includes the regulatory approval process. The regulatory approval process is uncertain, includes extensive pre-clinical testing and clinical trials of each product in order to establish its safety and effectiveness, can take many years and requires the expenditure of substantial resources. Also, the Company is disputing an assessed tax liability as discussed in note 8. As a result of these factors, the Company cannot accurately predict the amount or timing of future cash needs.

The Company will need to raise more money to continue its operations. The Company may seek additional funds which may come from public and private stock offerings, partnerships and licenses, borrowing under lease lines of credit or other sources. These additional forms of capital may not be available on terms acceptable to the Company, or at all. Any additional equity financing will likely be dilutive to stockholders, and debt financing, if available, may include restrictive covenants.

There can be no assurance that the Recapitalization or any other alternatives will be successful. If the Recapitalization is unsuccessful, the Company’s inability to obtain additional cash as needed could have a material adverse effect on its financial position, results of operations and its ability to continue its existence. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Northwest Biotherapeutics, Inc. (Company) was organized to discover and develop innovative diagnostics and immunotherapies for prostate cancer. During 1998, the Company incorporated as a Delaware corporation. Prior to 1998, the Company was a limited liability company (LLC) formed on March 18, 1996. The Company is a development stage company, has yet to generate significant revenues from its intended business purpose and has no assurance of future revenues. While in the development stage, the Company’s principal activities have included defining and conducting research programs, conducting clinical trials, raising capital and recruiting scientific and management personnel.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The Company considers cash equivalents to be only those investments which are highly liquid, readily convertible to cash and which mature within three months from date of purchase. Cash equivalents consist of money market accounts.

The Company considers its marketable securities available-for-sale as defined in Statement of Financial Accounting Standards (SFAS) No. 115 and accordingly, these investments are recorded at fair value. The Company’s marketable securities on December 31, 2002 are made up of 178,341 shares of Medarex (MEDX) common stock relative to the December 9, 2002 Assignment and License Agreement. See note 4(e).

The primary objectives for the Company’s investment portfolio are liquidity and safety of principal. Investments are made to achieve the highest rate of return to the Company, consistent with these two objectives. The Company’s investment policy limits investment to certain types of instruments issued by institutions with investment grade credit ratings and places restrictions on the maturities and concentration by type and issuer. The Company invests its excess cash in securities with varying maturities to meet projected cash needs.

The Company’s financial instruments consist of cash, cash equivalents, accounts receivable, restricted cash, accounts payable, accrued expenses, and notes payable which approximate fair value due to their short term maturity. Marketable securities are carried at market value based on quoted prices.

Credit is extended based on an evaluation of a customer’s financial condition and collateral is generally not required. Accounts receivable are generally derived from revenue earned from entities located in the United States. The Company records an allowance for potential credit losses based upon the expected collectibility of the accounts receivable. To date, the Company has not experienced any material credit losses.

The Company had one customer for its contract research and development services from its July 1998 date of incorporation through 2002. Starting in January 2003, research materials sales were made to multiple customers, primarily in the United States of America, with whom there were no other contractual relationships.

Inventories are included in prepaid expenses and other current assets and are stated at the lower of cost, primarily determined by the first-in, first-out method, or market.

Property and equipment are stated at cost. Property and equipment are depreciated or amortized over the following estimated useful lives using the straight-line method:

Long-lived assets including property and equipment are reviewed for possible impairment whenever significant events or changes in circumstances, including changes in our business strategy and plans, indicate that an impairment may have occurred. An impairment is indicated when the sum of the expected future undiscounted net cash flows identifiable to that asset or asset group is less than its carrying value. Impairment losses are determined from actual or estimated fair values, which are based on market values, net realizable values or projections of discounted net cash flows, as appropriate.

Restricted cash of $1.1 million on December 31, 2002 primarily represents a $1.0 million lease security deposit and approximately $105,000 as a deposit to secure the Company’s credit card liabilities. At December 31, 2003, restricted cash of $105,000 represents a deposit to secure the Company’s credit card liabilities.

The Company’s lease for its main operating facility includes rent increases yearly through the 39-month lease term. The Company recognizes expense for the lease using the straight-line method. Additional expense recognized in excess of cash payments is recorded as deferred rent.

The Company earns revenues through sale of research materials, providing research services to third parties and through research grants. Revenues from sale of research materials are to multiple customers with whom there is no other contractual relationship and are recognized when shipped to the customer and title has passed.

Research contracts and grants require the Company to perform research activities as specified in each respective contract or grant on a best efforts basis, and the Company is paid based on the fees stipulated in the respective contracts and grants which approximate the costs incurred by the Company in performing such activities. The Company recognizes revenue under the research contracts and grants based on completion of performance under the respective contracts and grants where no ongoing obligation on the part of the Company exists. Direct costs related to these contracts and grants are reported as research and development expenses.

Deferred income taxes are provided based on the estimated future tax effects of carryforwards and temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those carryforwards and temporary differences are expected to be recovered or settled. The effect on the deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. A valuation allowance is recorded for deferred tax assets when it is more likely than not that such deferred tax assets will not be realized. Prior to 1998, the Company was an LLC and the Company’s tax losses and credits generally flowed directly to the members.

The Company accounts for its stock option plans for employees in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense related to employee stock options is recorded if, on the date of grant, the fair value of the underlying stock exceeds the exercise price. The Company applies the disclosure-only requirements of SFAS No. 123, Accounting for Stock-Based Compensation, which allows entities to continue to apply the provisions of APB Opinion No. 25 for transactions with employees, and to provide pro-forma results of operations disclosures for employee stock option grants as if the fair-value-based method of accounting in SFAS No. 123 had been applied to those transactions.

Stock compensation costs related to fixed employee awards with pro rata vesting are recognized on a straight-line basis over the period of benefit, generally the vesting period of the options. For options and warrants issued to non-employees, the Company recognizes stock compensation costs utilizing the fair value methodology prescribed in SFAS No. 123 over the related period of benefit.

Had the Company recognized the compensation cost of employee stock options based on the fair value of the options on the date of grant as prescribed by SFAS No. 123, the pro-forma net loss applicable to common stockholders and related loss per share would have been adjusted to the pro-forma amounts indicated below:

The per share weighted average fair value of stock options granted during the years ended December 31, 2001, 2002 and 2003 was $5.96, $3.38, and $0.10, respectively, on the date of grant using the minimum-value method for grants prior to August 13, 2001 and an option valuation method that considers expected volatility for grants thereafter with the following assumptions:

Basic loss per share is computed on the basis of the weighted average number of shares outstanding for the reporting period excluding 4,000 unvested restricted shares as of December 31, 2003. Diluted loss per share is computed on the basis of the weighted average number of common shares plus dilutive potential common shares outstanding using the treasury stock method.

The Company is principally engaged in the discovery and development of innovative immunotherapies for cancer and has a single operating segment as management reviews all financial information together for the purposes of making decisions and assessing the financial performance of the company.

In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations, which is applicable for fiscal years beginning after June 15, 2002. SFAS No. 143 requires an enterprise to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of a tangible long-lived asset. Statement No. 143 also requires the enterprise to record the contra to the initial obligation as an increase to the carrying amount of the related long-lived asset (i.e., the associated asset retirement costs) and to

depreciate that cost over the remaining useful life of the asset. The liability is changed at the end of each period to reflect the passage of time (i.e., accretion expense) and changes in the estimated future cash flows underlying the initial fair value measurement. The adoption of SFAS No. 143 did not have a material impact on the Company’s financial position or operating results.

The Company issued a total of 500,000 LLC membership units in 1996 for a combination of cash and certain rights. The Company received cash of $3.0 million for 100,000 mandatorily redeemable LLC membership units. The Company received rights to research and development revenues and future royalties under a license agreement in exchange for 100,000 LLC units. Other unit holders contributed research, know-how and intellectual property rights for their 300,000 LLC units. The contributed royalty rights and other intangibles were recorded at the contributing unit holders’ reported book value, which was zero.

During 1998, as part of the Company’s reincorporation as a Delaware corporation, the 100,000 mandatorily redeemable LLC membership units were canceled and exchanged for 550,700 shares of Mandatorily Redeemable Series A Preferred Shares (Series A shares). The Series A shares were entitled to dividends at a rate of $0.08 per share per annum if and when declared by the Board of Directors and in preference to dividends paid to common stockholders. In the event of liquidation, the holders of the Series A shares were entitled to receive $5.447 per share held plus declared and unpaid dividends. Each share of the Series A Preferred Stock was convertible into one share of common stock at the holder’s option. The holder had the option to redeem the Series A shares for $5.447 per share plus an increasing redemption premium based on the prime rate plus 1%. In December 2001, the Company paid the holder of the Series A shares a $1.7 million fee in consideration for the holder not redeeming the shares. The Series A shares were converted upon the initial public offering (IPO). The Company accounted for the difference between the carrying amount of the Series A shares and the redemption value by increasing the carrying amount for periodic accretion, so that the carrying amount equaled the redemption value, including amounts accrued under the redemption premium, at the conversion date.

Also as part of the reincorporation, the 400,000 other LLC membership units were canceled and exchanged for 2,202,800 shares of common stock. Another 550,700 shares of common stock were issued to a stockholder of which 275,350 shares were held in escrow subject to certain milestones being reached by the Company related to the originally

contributed intellectual property of that stockholder. These shares were subsequently returned to the Company during 2000. See note 5(b).

In September 1998, the Company sold 897,489 shares of Series B Preferred Stock at $2.33 per share resulting in proceeds, net of offering costs, of $2,088,330.

During 1999, the Company sold 3,350,600 shares of Series C Preferred Stock at $2.50 per share resulting in proceeds, net of offering costs, of $7,647,122. In conjunction with the sale, the Company issued fully vested warrants to purchase 234,542 shares of Series C Preferred Stock to third parties for services performed related to the sale of the Series C shares. The warrants are exercisable at $2.50 per share and will expire upon the earlier of October 31, 2008 or a change of control of the Company. The fair value of the warrants was $394,031 on the date of grant determined using the Black-Scholes option pricing model with the following assumptions: expected dividend yield of 0%, risk-free interest rate of 6.55%, volatility of 50%, and life of 9 years. The value of the warrants was recorded as a reduction in the proceeds from the sale of the Series C shares.

The Company closed a private placement offering of $5,064,100, 6% convertible promissory notes (Notes) and warrants in May 2000 resulting in proceeds, net of financing costs, of $4,744,301. The Notes, including accrued interest, were required to be converted into shares of Series D Preferred Stock no later than January 1, 2001. The purchasers of the Notes also received fully vested warrants to purchase 1,064,895 shares of Series D Preferred Stock. The warrants had an exercise price of $5.00 per share and the unexercised warrants expired upon the IPO. The fair value of the warrants was $4,038,525 on the date of grant determined using the Black-Scholes option pricing model with the following assumptions: expected dividend yield of 0%, risk-free interest rate of 6.23%, volatility of 96%, and life of 5 years.

The Company recorded $1,025,575 as additional paid-in capital in 2000 for the beneficial conversion feature on the Notes. In accordance with the Emerging Issues Task Force Issue No. 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios” (EITF 98-5), the beneficial conversion feature was limited to the proceeds allocated to the Notes after the initial allocation of the total proceeds to the warrants and Notes, and was charged to interest expenses over the term of the Notes.

The Notes, plus accrued interest of $260,378, were converted at $5.00 per share into 1,064,895 shares of Series D Preferred Stock in December 2000. In the fourth quarter of 2000, the Company sold an additional 467,460 shares of the Series D Preferred Stock at $5.00 per share resulting in proceeds, net of offering costs, of $2,146,301. In conjunction with the sale, the Company issued 96,890 fully vested warrants to purchase shares of Series D Preferred Stock to third parties for services performed related to the sale of the Series D shares. The warrants are exercisable at $5.00 per share and will expire upon the earlier of April 30, 2010 or a change in control of the Company. The fair value of the warrants was $368,182 on the date of grant determined using the Black-Scholes option pricing model with the following assumptions: expected dividend yield of 0%, risk-free interest rate of 6.59%, volatility of 96%, and an contractual life of 5 years. The value of the warrants was recorded as a reduction in the proceeds from the sale of the Series D shares.

During 2001, the Company sold an additional 2,603,468 shares of Series D preferred stock at $5.00 per share resulting in proceeds, net of offering costs, of $12,549,850. In conjunction with the sale, the Company issued 227,093 fully vested warrants to purchase shares of Series D Preferred Stock to third parties for services performed related to the sale. The warrants are exercisable at $5.00 per share and were to expire upon the earlier of (i) ten years from the issuance date, (ii) a change in control of the Company or (iii) an IPO. The fair value of the warrants was $1,062,135 on the date of grant determined using the Black-Scholes option pricing model with the following assumptions: expected dividend yield of 0%, risk-free interest rate of 6.00%, volatility of 108%, and a life of 10 years. The value of the warrants was recorded as a reduction in the proceeds from the sale of the Series D shares. Of the Series D preferred shares issued during 2001, 2,209,568 shares were issued with a conversion price, which was less than the fair value of the common stock into which the Series D preferred stock is convertible. This beneficial conversion feature aggregated $4,273,566 and was charged as

an increase to the net loss applicable to common stockholders immediately upon issuance of the related Series D preferred shares since the Series D shares were immediately convertible at the option of the stockholder. In August 2001, with respect to the Series D preferred stock warrants issued to third parties for services performed related to the sale of Series D preferred shares, the Company eliminated the provision that the warrants would expire upon completion of an IPO as both the holders and the Company agreed that the original intent of the agreement was to not include this provision. This change resulted in no expense to the Company.

Each share of Series B Preferred Stock converted into approximately 1.93785 shares of the Company’s common stock upon completion of the IPO. Each share of Series C and D Preferred Stock converted into one share of the Company’s common stock upon completion of the IPO.

In December 2001, the Company completed an initial public offering (IPO) of 4.0 million shares of its common stock at a price per share of $5.00 resulting in proceeds to the Company, net of offering costs, of $17,155,432. In conjunction with the IPO, all of the outstanding shares of preferred stock were converted into an aggregate of 9,776,322 shares of common stock. Additionally, 1,154,850 warrants were exercised and 1,085,367 warrants expired unexercised.

On December 9, 2002, the Company entered into a Assignment and License Agreement that provided for the transfer of certain intellectual property from the Company to Medarex and for the Company to acquire the rights to certain other intellectual property from Medarex, which included issuing 2.0 million unregistered common shares and warrants to purchase 800,000 common shares. See note 5(c).

On June 30, 2003, the Company entered into a Settlement Agreement with Nexus Canyon Park, its prior landlord. Under this Settlement Agreement, Nexus Canyon Park agreed to permit premature termination of its prior lease and excuse the Company from future performance of lease obligations in exchange for 90,000 shares of its unregistered common stock with a fair value of $35,000 and Nexus’ retention of our $1.0 million lease security deposit. The Settlement Agreement resulted in an additional loss on facility sublease and lease termination of $174,000, net of deferred rent of $202,000. In June 2003, the Company moved from its previous facilities and signed a new lease commencing July 1, 2003 for a term of 39 months with a remaining future lease obligation of approximately $733,000 as of December 31, 2003.

On December 9, 2002, the Company entered into an Assignment and License Agreement wherein the Company sold certain intellectual property to Medarex and obtained certain intellectual property from Medarex and acquired the rights to certain other intellectual property from Medarex. Also in conjunction with the December 9, 2002 Agreement, the Company issued warrants to purchase unregistered common stock as follows: on December 26, 2002, the Company issued a warrant to purchase 400,000 shares at an exercise price of $0.216 per share; on January 8, 2003, the Company issued a warrant to purchase 200,000 shares at an exercise price of $0.177 per share; and on February 9, 2003 the Company issued the final warrant to purchase 200,000 shares at an exercise price of $0.102 per share. The warrants may be exercised at any time after six months following their issue date and prior to the tenth anniversary of the issue date.

The fair value of the 800,000 warrants was $159,678 on the date of grant which was determined using the Black-Scholes option pricing model with the following assumptions: expected dividend yield 0%, risk-free interest rate of 4.17%, volatility of 191%, and life of 10-years. As of December 31, 2002, one-half of the warrant value, $79,839, was recognized as an increase to additional paid in capital and $79,839 was recognized as a Long Term Liability, for the 400,000 warrants to be issued in fiscal 2003.

The Company closed a $335,000 Secured Convertible Promissory Note and Warrant financing on November 13, 2003. The Notes have a twelve-month term and bear interest at the prime rate plus 2% ($1,749 of interest accrued at December 31, 2003). The Notes are convertible into the number of shares of common stock equal to the principal and accrued interest amount divided by (i) the price paid by investors in an offering of common stock that generates gross proceeds of at least $1.0 million; or (ii) if no such offering is completed, $0.18 which equals approximately 1,861,000 shares as of December 31, 2003.

As part of this investment, the investors received warrants initially exercisable to acquire an aggregate of 3.7 million shares of the Company’s common stock, expiring in November 2008 subject to certain antidilution adjustments, at an exercise price to be determined as follows: (i) in the event that the Company completes an offering of its common stock generating gross proceeds to the Company of at least $1 million, then the price per share paid by investors in that offering; or (ii) if the Company does not complete such an offering, then $0.18, which was the closing price of its common stock on the date of the financing.

Proceeds from the offering were allocated between the Notes and Warrants on a relative fair value basis. The value allocated to the warrants on the date of the grant was approximately $221,000. The fair value of the warrants was determined using the Black-Scholes option pricing model with the following assumptions: expected dividend yield of 0%, risk-free interest rate of 3.36%, volatility of 194%, and an contractual life of 5-years. The value of the warrants was recorded as a deferred debt discount against the $335,000 proceeds of the Note. In addition, a beneficial conversion feature related to the Notes was determined to be approximately $221,000 but is capped at the remaining value originally allocated to the Notes of approximately $114,000. As a result, the total discount on the Notes equaled the face value of $335,000 which is being amortized over the twelve-month the Notes. One and one-half months amortization, of deferred debt discount of approximately $42,000, along with interest accretion on the Note of approximately $2,000 was recorded at December 31, 2003 resulting in Notes Payable to related parties, net of discount, at December 31, 2003 of approximately $44,000.

A summary of stock purchase warrants outstanding at December 31, 2003 is as follows:


(1)	In the event that the Company completes an offering of its common stock generating gross proceeds to the Company of at least $1.0 million at a per share price of less than $0.18 per share, the exercise price of the warrants shall be at the price of such transaction. Otherwise, the exercise price of the warrants will be $0.18 per share.

The exercise of preferred stock warrants will result in the issuance of an equal number of shares of the Company’s common stock and no issuance of preferred stock.

The Company’s stock option plans are administered by the Board of Directors, which determines the terms and conditions of the options granted, including exercise price, number of options granted and vesting period of such options.

Options granted under the plans are generally priced at or above the estimated fair market value of the Company’s common stock on the date of grant and generally vest over four years. Compensation expense, if any, is charged over the period of vesting. All options, if not previously exercised or canceled, expire ten years from the date of grant, or the expiration date specified in the individual option agreement, if earlier.

During the year ended December 31, 2001, the Company granted options to purchase an aggregate of 221,900 shares of common stock to various employees with exercise prices which were less than the fair value of the underlying common stock on the date of grant resulting in deferred compensation of $1.3 million.

During the year ended December 31, 2002, the Company granted options to purchase an aggregate of 78,749 shares of common stock to various employees with weighted average exercise prices of $4.14 which were less than the fair value of the underlying common stock on the date of grant resulting in deferred compensation of approximately $22,000. The weighted average fair value of such options was approximately $3.73.

During the year ended December 31, 2003, the Company granted options to purchase an aggregate of 895,000 shares of common stock to various employees with weighted average exercise prices of $0.10 which was equal to the fair value of the underlying common stock on the date of grant resulting in no deferred compensation recognition for the year ended December 31, 2003.

The Company has a 1998 Stock Option Plan (1998 Plan) under which 413,026 shares of common stock have been reserved for stock option grants to employees, directors and consultants of the Company. As of December 31, 2003 a total of 148,295 shares remain available for granting under the 1998 Plan.

The Company also has a 1999 Executive Stock Option Plan (1999 Plan) under which 586,166 shares of common stock were reserved for issuance, none of which remained available for grant at December 31, 2003.

In June 2001, the Company adopted the 2001 Stock Option Plan (2001 Plan) and the 2001 Nonemployee Director Stock Incentive Plan (2001 Director Plan). Under the 2001 Plan, 1,800,000 shares of the Company’s common stock have been reserved for grant of stock options to employees and consultants. Additionally, on January 1 of each year, commencing January 1, 2002, the number of shares reserved for grant under the 2001 Plan will increase by the lesser of (i) 15% of the aggregate number of shares available for grant under the 2001 Plan or (ii) 300,000 shares. As of December 31, 2003, net of forfeitures, a total of 786,995 stock options have been granted under the 2001 Stock Option Plan. There are 1,866,325 options available for grant as of December 31, 2003.

Under the 2001 Nonemployee Director Stock Incentive Plan, 200,000 shares of the Company’s common stock have been reserved for grant of stock options to nonemployee directors of the Company. There have been 42,500 stock options granted under the 2001 Nonemployee Director Stock Incentive Plan. There are 157,500 options available for grant as of December 31, 2003.

Additional information regarding stock options outstanding and exercisable at December 31, 2003 is as follows, in thousands except option price and weighted average exercise price.

Options exercisable as of December 31, 2002 and 2001 was 873,169 and 550,550, respectively.

The following table presents the reconciliation of the Company’s reported net loss to net loss applicable to common stockholders used for basic and diluted net loss per share:

The following common stock equivalents on an as-converted basis were excluded from the calculation of diluted net loss per share, as the effect would be antidilutive:

In June 2001, the Company adopted an employee stock purchase plan which became effective upon consummation of the IPO and reserved 500,000 shares of common stock for issuance under this plan. Under this plan, employees may purchase up to 1,000 shares of the Company’s common stock during each six-month offering period commencing on April 1 and October 1 of each year. The purchase price of the common stock is equal to the lower of 85% of the market price on the first and last day of each offering period. As of December 31, 2003, a total of 13,374 shares have been issued under the plan.

On March 6, 2002, the Company adopted a Stockholder Rights Agreement, under which each common stockholder of record at the close of business on March 4, 2002 will receive a dividend of one right per share of common stock held. Each right entitles the holder to purchase one share of common stock from the Company at a price equal to $19.25 per share, subject to certain anti-dilution provisions. The rights become exercisable only in the event that a third party acquires beneficial ownership of, or announces a tender or exchange offer for, at least 15% of the then outstanding shares of the Company’s common stock and such acquisition or offer is determined by the Board of Directors to not be in the best interests of the stockholders. If the acquisition or offer were determined by the Board of Directors to be in the best interests of the stockholders, the rights may be redeemed by the Company for $0.0001 per right. The rights will expire on

February 25, 2012, unless earlier redeemed, exchanged or terminated in accordance with the rights agreement. As more fully described in note 13, this agreement was amended April 26, 2004.

The Company had a $2.9 million line of credit through the Hospital, a stockholder. Borrowings bore interest at the prime rate plus 1% (9.5% at December 31, 2000), became due upon the earlier of (i) June 30, 2001, (ii) consummation of an IPO or (iii) consummation of a significant merger or substantial sale of the Company’s assets, and were secured by substantially all the assets of the Company, subordinated to the note payable to stockholder discussed in note 4(d). In 2001, the Hospital agreed to extend the line of credit through the earlier of June 30, 2002 or completion of the IPO. Interest expense related to the line of credit was $211,000 for the year ended December 31, 2001.

The Company shared certain employees with the Hospital. The Company received reimbursement for shared employees totaling $81,000 and $28,000 in 2001 and 2002 respectively. In 2000, the Hospital began subleasing office and laboratory space from the Company for which the Company received $247,000 and $112,000 in 2001 and 2002, respectively. The subleasing of space from the Company and the sharing of certain employees with the Hospital ceased on December 31, 2002.

The Hospital owned all of the Company’s outstanding Series A preferred stock. In August 2001, the Company entered into an agreement whereby the Hospital agreed to not require redemption but allow for conversion of all of the outstanding Series A preferred stock in exchange for a $1.7 million fee. Such fee is considered to be a deemed dividend and accordingly increases the net loss applicable to common stockholders. Upon completion of the IPO, the Company paid the $1.7 million fee to the Hospital. Just prior to the IPO, the Company fully repaid the outstanding balance of the line of credit, including accrued unpaid interest and the line of credit with the Hospital expired.

In July 1998, the Company acquired exclusive rights from Prostagen to manufacture and sell the PSMA protein in the Company’s cell-based immunotherapy for prostate cancer.

In June 1999, Cytogen Corporation (Cytogen) acquired all of the outstanding capital stock of Prostagen.

In August 2000, the Company, Northwest Clinicals, a limited liability company owned jointly by the Company and Cytogen, and Cytogen entered into a Release and Settlement Agreement which effectively terminated the agreement between the Company and Prostagen. In addition, this agreement dissolved Northwest Clinicals with all of its assets going to the Company. The terms of the agreement also provided the release and return to the Company of 275,350 shares of common stock held in escrow for the above former director of the Company.

Under the terms of a separate sublicense agreement with Cytogen dated August 28, 2000, the Company obtained the right to make, use and sublicense PSMA.

In November 2002, the Company suspended all clinical trial activity for its DCVax product candidates and withdrew its Investigational New Drug Application (IND) for its DCVax-Prostate, a prostate cancer treatment. As a result of the Company withdrawing its Investigational New Drug Application (IND) for its DCVax-Prostate vaccine for prostate cancer, the right to make, use and sublicense Prostate Specific Membrane Antigen (PSMA), granted the company under the August 28, 2000 PSMA Sublicense Agreement with Cytogen, reverted back to Cytogen, Inc.

In April 2001, the Company entered into a collaboration agreement with Medarex to produce fully human monoclonal antibodies to certain antigen targets identified by us. The agreement called for joint development of antibodies

to at least eight cancer-associated antigen targets. Under the agreement, certain profits, losses and costs associated with the development of our HuRx products were to be shared equally by both of us, and certain other costs were borne entirely by each party. This relationship was governed by a joint steering committee composed of representatives of both companies to make development and commercialization decisions concerning jointly developed fully human monoclonal antibody product candidates. Each of us had the right to elect not to participate in the joint development of antibodies to a given antigen target and receive instead certain milestone and royalty payments on net sales. The agreement was to terminate upon the latter of one year after completion of the research activities there under, or the date on which neither party is exploiting any products developed there under. The agreement was also subject to termination if either party breached its material obligations under the agreement. In conjunction with the collaboration agreement, Medarex purchased 800,000 shares of the Company’s Series D preferred stock at $5.00 per share.

On December 9, 2002, the Company entered into an Assignment and License Agreement wherein the Company sold certain intellectual property to Medarex, acquired certain intellectual property from Medarex and acquired the rights to certain additional intellectual property from Medarex. These targets were previously co-owned by the companies. The agreement also provides Medarex with the assignment of certain patents related to the acquired targets for the development and commercialization of antibody-based products including fully human PSMA (Prostate Specific Membrane Antigen) antibodies for the potential treatment of cancer. Medarex submitted an IND to the FDA in January 2003 to initiate a Phase I clinical trial to evaluate the fully human PSMA antibody co-developed by Medarex and ourselves as a possible treatment for hormone refractory prostate cancer. In addition, this agreement allowed for us to reacquire all development and commercialization rights the Company previously granted Medarex to five potential additional cancer-related disease targets. Pursuant to this agreement, the Company issued to Medarex 2.0 million unregistered shares of common stock and warrants to purchase 800,000 shares of our unregistered common stock.

The 2.0 million shares of unregistered common stock were issued as follows: On December 26, 2002, the Company issued 1.0 million shares; on January 8, 2003 the Company issued 500,000 shares; and on February 9, 2003 the Company issued the final 500,000 shares. On December 9, 2002, the fair market value of the 2.0 million unregistered shares of common stock was $400,000. As of December 31, 2002, the Company recorded $200,000 of additional paid in capital and a long term liability for $200,000 for the 1.0 million unregistered shares to be issued in fiscal 2003.

In conjunction with the December 9, 2002 Agreement, the Company issued warrants to purchase unregistered common stock as follows: on December 26, 2002, the Company issued a warrant to purchase 400,000 shares at an exercise price of $0.216 per share: on January 8, 2003, the Company issued a warrant to purchase 200,000 shares at an exercise price of $0.177 per share: and on February 9, 2003 the Company issued the final warrant to purchase 200,000 shares at an exercise price of $0.102 per share. The warrants may be exercised at any time after six months following their issue date and prior to the tenth anniversary of the issue date.

The fair value of the 800,000 warrants was $159,678 on the date of grant which was determined using the Black-Scholes option pricing model with the following assumptions: expected dividend yield 0%, risk-free interest rate of 4.17%, volatility of 191%, and a life of 10-years. As of December 31, 2002, one-half of the warrant value, $79,839, was recognized as an increase to additional paid in capital and $79,839 was recognized as a long term liability, for the 400,000 warrants to be issued in fiscal 2003.

Also pursuant to this agreement, the Company received $3.0 million consisting of $1.0 million in cash and two payments of $1.0 million each payable in Medarex (MEDX) common stock. Medarex guaranteed the value of each payment of common stock at $1.0 million if sold within 30 days of issuance. Remaining Medarex common stock that had not been sold at December 31, 2002 was recorded as marketable securities and the $1.0 million issued in January 2003 was included as a receivable from Medarex at December 31, 2002. All such securities were sold by February 10, 2003

2.0 million shares of unregistered common stock and warrants to purchase 800,000 shares of common stock valued at approximately $560,000.

On June 20, 2003, under a First Amendment to Assignment and License Agreement with Medarex, which owns approximately 13.3% of our outstanding common stock, we released Medarex from future royalty obligations in exchange for a cash payment of $816,000. The sales price of $816,000 was negotiated based on the expected discounted net present value (NPV) of a future 2% royalty obligation under that certain Assignment and License Agreement dated December 9, 2002. We received the cash payment on July 1, 2003 and recorded a non-operating gain of $816,000 in the Company’s Statements of Operations.

In July 2000, the Company obtained $1.65 million in financing in the form of a promissory note from Holmes Harbor Company, Inc., a stockholder of the Company. The note was secured by substantially all assets of the Company and bore interest at 13% with interest only payments until due on July 11, 2001.

As an inducement to obtain the note, the Company issued fully vested warrants to purchase 10,000 shares of the Company’s common stock to the stockholder. The warrants are exercisable at $5.50 per share and expire upon the earlier of July 10, 2010 or a change in control of the Company. The fair value of the warrants was $3,238 on the date of grant determined using the Black-Scholes option pricing model with the following assumptions: expected dividend yield of 0%, risk-free interest rate of 6.09%, volatility of 96%, and an expected life of 10 years. The fair value of the warrants was recorded as a discount on the note and was amortized to interest expense over the term of the note.

The note was restructured in April 2001. Under the terms of the restructured note agreement, the Company repaid $825,000 plus accrued and unpaid interest. In addition, in settlement of the remaining balance due, the Company issued a convertible promissory note in the amount of $825,000 and a ten-year warrant to purchase up to 50,000 shares of the Company’s Series D preferred stock at an exercise price of $5.00 per share. The note was secured by substantially all of the assets of the Company, except for certain intellectual property, and accrued interest at a rate of 13% per annum with quarterly principal and interest payments due beginning on September 30, 2001. The fair value of the warrant was $224,935 on the date of grant determined using the Black-Scholes option pricing model. The following assumptions were used in the Black-Scholes calculation: expected dividend yield of 0%, risk free interest rate of 6.00%, volatility of 108%, and an expected life equal to the contractual term of 10 years. The fair value of the warrant was accounted for as a discount on the note and was recognized as interest expense over the stated term of the note. Additionally, the Company recorded $455,935 as additional paid-in capital for the beneficial conversion feature on the note. The beneficial conversion amount was also accounted for as a discount on the note and was charged to interest expense over the term of the note.

Upon completion of the IPO, the Company fully repaid the outstanding balance of the note, including accrued unpaid interest, and the Series D preferred stock warrant expired unexercised.

Interest expense on the note was approximately $141,642 for the year ended December 31, 2001.

There was no income tax benefit attributable to net losses for 2001, 2002, and 2003. The difference between taxes computed by applying the U.S. federal corporate rate of 34% and the actual income tax provisions in 2001, 2002, and 2003 is primarily the result of establishing a valuation allowance on the Company’s deferred tax assets.

The tax effects of temporary differences and tax loss and credit carryforwards that give rise to significant portions of deferred tax assets at December 31 are comprised of the following:

The increase in the valuation allowance for deferred tax assets for 2001, 2002, and 2003 of $3.5 million, $4.6 million, and $2.2 million, respectively, was due to the inability to utilize net operating losses and research and development credits.

At December 31, 2003, the Company had net operating loss carryforwards for income tax purposes of approximately $43.2 million and unused research and development tax credits of approximately $1.1 million available to offset future taxable income and income taxes, respectively, expiring beginning 2018 through 2022. The Company’s ability to utilize net operating loss and credit carryforwards is limited pursuant to the Tax Reform Act of 1986, due to cumulative changes in stock ownership in excess of 50% such that some net operating losses may never be utilized.

The Company has also entered into certain collaborative arrangements under which it may be obligated to pay royalties or milestone payments if product development is successful. It is not anticipated that the aggregate amount of any royalty or milestone obligations under these other arrangements will be material to the Company’s operations.

The Company leases its facilities and certain equipment. Commitments for minimum rentals under noncancelable leases in effect as of December 31, 2003 are as follows (in thousands):

Included in property and equipment are assets under capital leases totaling $352,000 and $271,000 and related accumulated amortization totaling $154,000 and $158,000 at December 31, 2002 and 2003, respectively.

Rent expense was $798,000, $1.0 million, and $635,000 in 2001, 2002, and 2003, respectively, net of sublease income of $247,000 and $112,000 in 2001 and 2002 respectively.

The Company is involved from time to time in claims, proceedings and litigation arising in the normal course of business. The Company does not believe that any present claims, proceedings or litigation, either alone or in the aggregate, will have a material adverse effect on the Company’s financial position or results of operations.

On June 30, 2003, future lease obligations of approximately $9.1 million were eliminated through the termination of our prior lease when moving to a smaller facility. However, through abandoning the tenant improvements at the prior facility, on which use tax payments to the State of Washington had been qualified for tax deferral, including the disposal and impairment of previously qualified tax deferred equipment, we received a tax assessment of $491,802 on October 21, 2003 for 87.5% of the gross tax deferred on such qualified investments. The tax assessment payment was initially due on November 20, 2003. This contingent assessment is being carried as an estimated liability on the balance sheet as of December 31, 2003 and is included in general and administrative expense.

We appealed this assessment and were granted an extension until January 21, 2004 in which to file an appeal. Our February 4, 2004 documentation to the State, citing the legal authority under which our request for a reduction was based, resulted in a meeting with the State on February 26, 2004. In response to this February 26, 2004 meeting, we have submitted, during the week of May 3, 2004, (unaudited) a proposal we feel fairly represents the exempt amounts that should be excluded from the State’s sales and/or use tax. The finalization of our appeal process is expected to take several more months. We cannot currently determine any amount that may be deducted from the assessed liability.

Notes was determined to be approximately $221,000 but is capped at the remaining value originally allocated to the Notes of approximately $114,000. As a result, the total discount on the Notes equaled the face value of $335,000 which is being amortized over the twelve-month the Notes. One and one-half months amortization, of debt discount of approximately $42,000, along with interest accretion on the Note of approximately $2,000 was recorded at December 31, 2003 resulting in Notes Payable to related parties, net of discount, at December 31, 2003 of approximately $44,000.

The Company had a note payable of $420,000 as of December 31, 2002 which represented short term financing of a portion of the annual premium for Directors & Officers liability insurance of which approximately $585,000 was included in prepaid assets on December 31, 2002. The note’s rate of interest was 4.546%. There were eight installments of $53,399 paid in 2003 with the note being fully paid off as of August 2003.

After the Company’s fourth quarter 2002 reorganization and downsizing, the Company, as of December 31, 2002, ceased using approximately 22,000 square feet of general laboratory, Good Manufacturing Practices (GMP) space, and general administrative space at its then primary 21720 23rd Drive S.E., Bothell, Washington facility. The Company, as of December 31, 2002, remained contractually bound for the cost of this space, through the September 1, 2009 term of the original lease, and had engaged the services of a commercial real estate broker to locate suitable tenants for potential subleasing of this laboratory area, from the Company.

The Company recognized a loss on facility sublease of $721,000, and a liability of $929,000, including deferred rent of $208,000 previously recorded, for the year ended December 31, 2002 in estimating the loss of economic benefit from vacating approximately 22,000 square feet of laboratory and administrative space at the facility. Payments over the remaining lease term would have totaled $9.9 million. The Company had not subleased any space and made its estimate of expected receipts under sublease payments based on expected fair market value rents.

On June 30, 2003, the Company entered into a Settlement Agreement with Nexus Canyon Park, the landlord of the 21720 23rd Drive S.E., Bothell, Washington facility. Under this Settlement Agreement, Nexus Canyon Park agreed to permit premature termination of the lease and excuse the Company from future performance of lease obligations in

exchange for 90,000 shares of its unregistered common stock with a fair value of $35,000 and Nexus’ retention of the Company’s $1.0 million lease security deposit. The Settlement Agreement resulted in an additional loss on facility sublease and lease termination of $174,000, net of deferred rent of $202,000. In June 2003, the Company moved from the facility and signed a new lease commencing July 1, 2003 for a term of 39 months with a remaining future lease obligation of approximately $733,000 as of December 31, 2003.

In connection with the Company’s fourth quarter 2002 reorganization, downsizing, and ceasing to use approximately 22,000 square feet of general laboratory, Good Manufacturing Practices (GMP) space, and general administrative space, at its 21720 23rd Drive S.E., Bothell, Washington facility, the Company made certain estimates in allocating the cost of tenant improvements to the abandoned space and made certain estimates related to the impairment of certain equipment. As a result of that analysis, the Company recognized an asset impairment loss of approximately $1.0 million in December 2002.

Also, as a result of this fourth quarter 2002 downsizing, the Company sold $1.0 million in fixed assets recognizing a loss on retirement of fixed assets of approximately $400,000, net of depreciation and cash received of approximately $44,000, in December 2002 which is included in general and administrative expense.

Upon signing the June 30, 2003 lease cancellation with Nexus, its prior landlord with respect to the entire prior leased space, the Company on September 30, 2003 recorded an additional loss on disposal of assets of approximately $904,000 primarily related to leasehold improvements and equipment that will not be utilized in its new location.

On April 26, 2004 we entered into a Recapitalization Agreement with Toucan as more fully described in note 1. In connection with the recapitalization the Board of Directors and Mellon Investor Services LLC, its Rights Agent, on April 26, 2004, amended the Stockholder Rights Agreement. The definition of an “Acquiring Person” was amended to exclude Toucan Capital Fund II, L.P. and other investors selected by Toucan from the definition of “Acquiring Person” for those shares of the Company’s capital stock they acquire, or deemed to beneficially own, in connection with the Recapitalization Agreement.

Additionally, in connection with the Recapitalization Agreement, certain members of management who hold warrants to purchase common stock agreed to an amendment to their warrants. The amendment applies to all warrants held by management. The purpose of the amendment was to remove the economic anti-dilution provisions and set the warrant exercise price at the lesser of, (i) $0.10 per share, or (ii) at a 35% discount to the average closing price during the twenty trading days prior to the first closing of the sale by the Company of convertible preferred stock as contemplated by the Recapitalization Agreement discussed in note 1; provided, however, that in no event will the warrant exercise price be less than $0.04 per share.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Bothell, State of Washington, on May 14, 2004.


	By:	/s/ ALTON L. BOYNTON



	Alton L. Boynton
	Its: President (Principal Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report on Form 10-K has been signed below by the following persons in the capacities and on the dates indicated:


+	The Company has applied for confidential treatment for portions of this exhibit.


(1)	Incorporated by reference to the exhibit shown in the preceding parentheses filed with the Registrant’s Form 10-Q on August 14, 2003.

(2)	Incorporated by reference to the exhibit shown in the preceding parentheses filed with the Registrant’s Registration Statement on Form S-1 (File No. 333-67350).

(3)	Incorporated by reference to the exhibit shown in the preceding parentheses filed with the Registrant’s Form 10-Q on November 11, 2003.


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

		For the fiscal year ended December 31, 2003

or

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

		For the transition period from to .


Delaware		94-3306718
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

22322 20th Avenue S.E., Suite 150 Bothell, WA (Address of principal executive offices)		98021 (Zip Code)


			Page

PART I
	Item 1.	Business		2
	Item 2.	Properties		23
	Item 3.	Legal Proceedings		23
	Item 4.	Submission of Matters to a Vote of Security Holders		23
PART II
	Item 5.	Market for Registrant’s Common Stock and Related Stockholder Matters		23
	Item 6.	Selected Financial Data		25
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Result of Operations		26
	Item 7A	Quantitative and Qualitative Disclosures About Market Risk		41
	Item 8.	Financial Statements and Supplementary Data		41
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		42
	Item 9A	Controls and Procedures		42
PART III
	Item 10.	Directors and Executive Officers of the Registrant		42
	Item 11.	Executive Compensation		44
	Item 12.	Security Ownership of Certain Beneficial Owners and Management		46
	Item 13.	Certain Relationships and Related Transactions		46
	Item 14.	Principal Accountant Fees and Services		49
	Item 15.	Exhibits, Financial Statement Schedules and Reports on Form 8-K		49
Signatures				75
Exhibit Index
EXHIBIT 4.2
EXHIBIT 10.3
EXHIBIT 10.4
EXHIBIT 10.5
EXHIBIT 10.6
EXHIBIT 10.7
EXHIBIT 10.8
EXHIBIT 10.9
EXHIBIT 10.10
EXHIBIT 10.11
EXHIBIT 10.12
EXHIBIT 23.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2


Type Of Cancer	New Cases		Deaths

Breast		213,900		41,000
Prostate		221,000		29,100
Colorectal		150,700		56,400
Lung		178,000		161,300
Kidney		31,800		11,600
Melanoma		54,800		7,400
Brain		17,000		13,100



	2003				2002

	High		Low		High		Low

4th Quarter	$	0.29	$	0.11	$	0.84	$	0.10
3rd Quarter		0.42		0.23		2.97		0.60
2nd Quarter		0.41		0.06		5.28		3.00
1st Quarter		0.22		0.06		5.92		2.80




Product Candidate		Target Indications	Status(1)


DCVax Platform

	DCVax-Prostate	Prostate cancer	Phase III — suspended and IND withdrawn in 2002 due to lack of funding

	DCVax-Brain	Glioblastoma	Phase II — postponed until additional funding can be secured — Orphan Drug designation, granted December 2002

	DCVax-Lung	Non-small cell lung cancer	Phase I — suspended and IND withdrawn in 2002 due to lack of funding

	DCVax-Direct	Head and Neck Cancer, Non-small cell lung, brain cancers	Pre-clinical

HuRx Platform

	HuRx-Breast	Breast cancer	Pre-clinical

	HuRx-Brain	Glioblastoma	Pre-clinical

	HuRx-Colon	Colon cancer	Pre-clinical

	HuRx-Melanoma	Melanoma	Pre-clinical


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


Item 5.	Market for Registrant’s Common Stock and Related Stockholder Matters


																		Period from
																		March 18,
																		1996
			Years Ended December 31,															(Inception) to
																		December 31,
			1999			2000			2001			2002			2003			2003


			(In thousands, except per share data)
Statement of Operations Data:
Total revenues			$	211		$	156		$	129		$	9		$	529		$	2,125
Operating costs and expenses
	Cost of research material sales			46			51			67			7			79			330
	Research and development			2,885			3,114			4,907			5,956			1,624			23,974
	General and administrative			2,535			3,682			4,759			7,463			4,059			25,844
	Depreciation and amortization			196			199			467			593			207			2,071
	Loss on facility sublease			—			—			—			721			174			895
	Asset impairment loss			—			—			—			1,032			904			1,936

		Total operating costs and expenses		5,662			7,046			10,200			15,772			7,047			55,050

		Loss from operations		(5,451	)		(6,890	)		(10,071	)		(15,763	)		(6,518	)		(52,925	)
Other Income (expense), net
	Gain on sale of intellectual property to Medarex			—			—			—			2,840			816			3,656
	Interest expense			(319	)		(6,056	)		(1,062	)		(38	)		(73	)		(7,855	)


Item 7.	Management’s Discussion and Analysis of Financial Condition and Result of Operations



				Payments due by period

				Less than						More than
Contractual Obligation		Total		1-year		1-3 Years		3-5 Years		5-years


		(In thousands)
Capital Lease Obligations		$	108	$	52	$	53	$	3		—
Operating Lease Obligations			733		263		470		—		—

	Total	$	841	$	315	$	523	$	3		—


Item 7A.	Quantitative and Qualitative Disclosures About Market Risk


Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure


Item 10.	Directors and Executive Officers of the Registrant


Item 1.	*Business*


Item 2.	Properties


Item 3.	Legal Proceedings


Item 6.	Selected Financial Data



				Annual Compensation				Long-Term
		Fiscal						Compensation		All Other
Name and Principal Position		Year		Salary		Bonus		Option Grants		Compensation(1)

Daniel O. Wilds			2003	$	159,231	$	0		100,000	$	314,799	(2)
	Chairman of the Board of Directors		2002	$	375,108	$	0		0	$	35,044
	and Chief Executive Officer		2001	$	299,000	$	135,000		79,300	$	10,259
Alton L. Boynton, Ph.D.			2003	$	288,967	$			100,00	$	294,909	(3)
	President, Chief Operating		2002	$	331,262	$	0		0	$	43,494
	Officer, Chief Scientific Officer		2001	$	265,000	$	92,750		79,300	$	14,464
	and Secretary
Marnix L. Bosch, Ph.D.			2003	$	159,710	$			130,000	$	32,872	(4)
	Vice President of Vaccine		2002	$	158,208	$	0		12,500	$	13,035
	Research and Development		2001	$	137,927	$	21,750		5,000	$	9,296
Patricia A. Lodge, Ph.D.			2003	$	132,703	$			130,000	$	20,450	(5)
	Vice President of Operations and		2002	$	147,111	$	0		15,000	$	28,191
	Process Development		2001	$	130,000	$	21,000		0	$	8,849
Eric Holmes, Ph.D.			2003	$	127,071	$	0		50,000	$	65,839	(6)
	Former Vice President of Biomedical		2002	$	188,540	$	0		10,000	$	29,010
	Research and Development		2001	$	178,000	$	28,260		10,000	$	11,731



										Potential
										Realizable Value
	Individual Grants									at Assumed
										Annual Rates of
	Number of		Percent of							Stock Price
	Securities		Total Options							Appreciation for
	Underlying		Granted to			Exercise or				Option Terms(6)
	Options		Employees in			Base Price		Expiration
Name	Granted		Fiscal Year			Per Share		Date		5%		10%

Daniel O. Wilds(1)		100,000		11.2	%		0.09		02/18/2013		5,660		14,344
Alton L. Boynton, Ph.D.(2)		100,000		11.2	%		0.09		02/18/2013		5,660		14,344
Marnix L. Bosch, Ph.D.(3)		50,000		14.5	%		0.09		02/18/2013		2,830		7,172
		80,000					0.12		12/01/2013		6,037		15,300
Patricia A. Lodge, Ph.D.(4)		50,000		14.5	%		0.09		02/18/2013		2,830		7,172
		80,000					0.12		12/01/2013		6,037		15,300
Eric Holmes, Ph.D.(5)		50,000		5.6	%		0.09		02/18/2013		2,830		7,172



									Value of Unexercised
					Number of Securities				In-The-Money
	Shares				Underlying Unexercised				Options at Fiscal
	Acquired				Options at Fiscal Year End				Year End(a)
	on		Value
Name	Exercise		Realized		Exercisable		Unexercisable		Exercisable		Unexercisable

Daniel O. Wilds		0	$	0.00		644,599		85,402		27,779		72,222
Alton L. Boynton, Ph.D.		0	$	0.00		168,925		80,071		27,779		72,222
Marnix L. Bosch, Ph.D.		0	$	0.00		13,852		152,409		0		0
Patricia A. Lodge, Ph.D.		0	$	0.00		14,623		139,711		0		0
Eric Holmes, Ph.D.		0	$	0.00		15,834		0		0		0


(a)		Dollar value is based on $0.22, the market value of the Company’s Common Stock at December 31, 2003, minus the exercise price.


Item 12.	Security Ownership of Certain Beneficial Owners and Management


		Number of Shares
		Beneficially
Name of Beneficial Owner		Owned		Percentage

Toucan Capital Fund II, L.P., and related persons(1)			11,904,569		32.0	%
Medarex, Inc.(2)			3,600,000		9.7	%
Alton L. Boynton, Ph.D.(3)			2,773,327		7.5	%
Northwest Hospital(4)			1,896,846		5.1	%
Daniel O. Wilds(5)			1,291,390		3.5	%
Marnix L. Bosch(6)			567,514		1.5	%
Randall L-W. Caudill, Ph.D.(7)			226,261		*
Haakon Ragde, M.D.(8)			37,483		*
Wayne L. Pines(9)			7,500		*
	All current executive officers and directors as a group (6 persons)		3,612,085		9.7	%


Item 13.	Certain Relationships and Related Transactions


Item 15.	Exhibits, Financial Statement Schedules and Reports on Form 8-K


	Page

Report of KPMG LLP, Independent Auditors		50
Balance Sheets		51
Statements of Operations		52
Statements of Stockholders’ Equity (Deficit) and Comprehensive Loss		53
Statements of Cash Flows		55
Notes to Financial Statements		56


												Period from
												March 18, 1996
												(Inception) to
			Years Ended December 31,									December

			2001			2002			2003			2003


			(In thousands except per share data)
Revenues:
	Research materials sales		$	129		$	9		$	24		$	360
	Contract research and development from related parties			—			—			—			1,128
	Research grants and other			—			—			505			637

		Total revenues	$	129		$	9		$	529			2,125

Operating costs and expenses:
	Cost of research material sales			67			7			79			330
	Research and development			4,907			5,956			1,624			23,974
	General and administrative			4,759			7,463			4,059			25,844
	Depreciation and amortization			467			593			207			2,071
	Loss on facility sublease			—			721			174			895
	Asset impairment loss			—			1,032			904			1,936

		Total operating costs and expenses		10,200			15,772			7,047			55,050

Loss from operations			$	(10,071	)	$	(15,763	)	$	(6,518	)	$	(52,925	)
Other income (expense):
	Gain on sale of intellectual property to Medarex			—			2,840			816			3,656
	Interest expense			(1,062	)		(38	)		(73	)		(7,855	)
	Interest income			193			157			23			728

		Net loss	$	(10,940	)	$	(12,804	)	$	(5,752	)	$	(56,396	)
Accretion of Series A preferred stock mandatory redemption obligation				(379	)		—			—			(1,872	)
Series A preferred stock redemption fee				(1,700	)		—			—			(1,700	)
Beneficial conversion feature of Series D preferred stock				(4,274	)		—			—			(4,274	)

Net loss applicable to common stockholders			$	(17,293	)	$	(12,804	)	$	(5,752	)	$	(64,242	)

Net loss per share applicable to common stockholders — basic and diluted				(6.57	)		(0.76	)		(0.30	)

Weighted average shares used in computing basic and diluted loss per share				2,631			16,911			18,908


										Deficit
										Accumulated
	Common Stock					Additional				During the			Total
						Paid-in		Deferred		Development			Stockholders’
	Shares			Amount		Capital		Compensation		Stage			Equity (Deficit)


	(In thousands)
Balances at March 18, 1996		—		$	—	$	—	$	—	$	—		$	—
Accretion of membership units mandatory redemption obligation		—			—		—		—		(106	)		(106	)
Comprehensive loss — net loss		—			—		—		—		(1,233	)		(1,233	)

Balances at December 31, 1996		—			—		—		—		(1,338	)		(1,338	)
Accretion of membership units mandatory redemption obligation		—			—		—		—		(275	)		(275	)
Comprehensive loss — net loss		—			—		—		—		(2,560	)		(2,560	)

Balances at December 31, 1997		—			—		—		—		(4,172	)		(4,172	)
Conversion of membership units to common stock		2,203			2		—		—		(2	)		—
Accretion of Series A preferred stock mandatory redemption obligation		—			—		—		—		(329	)		(329	)
Comprehensive loss — net loss		—			—		—		—		(4,719	)		(4,719	)

Balances at December 31, 1998		2,203			2		—		—		(9,223	)		(9,220	)
Issuance of Series C preferred stock warrants for services related to sale of Series C preferred shares		—			—		394		—		—			394
Accretion of Series A preferred stock mandatory redemption obligation		—			—		—		—		(354	)		(354	)
Comprehensive loss — net loss		—			—		—		—		(5,609	)		(5,609	)

Balances at December 31, 1999		2,203			2		394		—		(15,186	)		(14,790	)
Issuance of Series C preferred stock warrants in connection with lease agreement		—			—		43		—		—			43
Exercise of stock options for cash		2			—		1		—		—			1
Issuance of common stock at $0.85 per share for license rights		5			—		4		—		—			4
Issuance of Series D preferred stock warrants in convertible promissory note offering		—			—		4,039		—		—			4,039
Beneficial conversion feature of convertible promissory notes		—			—		1,026		—		—			1,026
Issuance of Series D preferred stock warrants for services related to sale of Series D preferred shares		—			—		368		—		—			368
Issuance of common stock warrants in conjunction with issuance of promissory note		—			—		3		—		—			3
Cancellation of common stock		(275	)		—		—		—		—			—
Accretion of Series A preferred stock mandatory redemption obligation		—			—		—		—		(430	)		(430	)
Comprehensive loss — net loss		—			—		—		—		(12,779	)		(12,779	)

Balances at December 31, 2000		1,934			2		5,878		—		(28,396	)		(22,515	)


	(a) Use of Estimates in Preparation of Financial Statements


Leasehold improvements		Shorter of life of the lease or useful life
Laboratory equipment		5-7 years
Office furniture and other equipment		3-5 years



			Year Ended December 31,

			2001			2002			2003

Net loss applicable to common stockholders (in thousands) As reported			$	(17,293	)	$	(12,804	)	$	(5,752	)
	Add: Stock-based employee compensation expense included in reported net loss, net			314			350			240
		Deduct: Stock-based employee compensation determined under fair value based method for all awards		(363	)		(650	)		(590	)

		Pro-forma	$	(17,342	)	$	(13,104	)	$	(6,102	)

Net loss per share — basic and diluted:
		As reported	$	(6.57	)	$	(0.76	)	$	(0.30	)

		Pro-forma	$	(6.59	)	$	(0.77	)	$	(0.32	)


	(a) Mandatorily Redeemable Convertible Series A Preferred Stock


	(b) Convertible Preferred Stock and 6% Convertible Promissory Notes


			Weighted-
	Number		Average
Type of Warrant	Outstanding		Exercise Price

Common stock warrant		810,000	$	0.24
Series C preferred stock warrants		234,542		2.50
Series D preferred stock warrants		323,983		5.00
Convertible promissory note stock warrants		3,722,223		(1)



		Options Outstanding

					Weighted-
		Number			Average
		of Shares			Exercise Price


		(In thousands except
		weighted average)
Balance at December 31, 2000			954		$	0.86
	Granted		233			1.31
	Exercised		(3	)		0.76
	Forfeited		(12	)		0.87

Balance at December 31, 2001			1,172			0.95
	Granted		508			3.51
	Exercised		(32	)		0.56
	Forfeited		(440	)		3.6

Balance at December 31, 2002			1,208			1.24
	Granted		895			0.10
	Exercised		(8	)		0.00
	Forfeited		(301	)		1.27

Balance at December 31, 2003			1,794		$	0.71



		Options Outstanding						Options Exercisable

				Weighted-
				Average
				Remaining		Weighted-				Weighted-
Range of		Number		Contractual		Average		Number		Average
Exercise Prices		Outstanding		Life (Years)		Exercise Price		Exercisable		Exercise Price


		(In thousands except weighted average)
$	0.0000 – 0.5050		767		9.4	$	0.10		105	$	0.09
	0.5051 – 1.0100		763		5.7		0.86		749		0.86
	1.0101 – 2.0200		208		6.9		1.25		190		1.25
	2.0201 – 5.5000		56		6.1		4.90		34		4.87

$	0.0000 – 5.5000		1,794		7.4		0.71		1,078		0.98



	Years Ended December 31

	2001			2002			2003


	(In thousands except per share data)
Net loss	$	(10,940	)	$	(12,804	)	$	(5,752	)
Accretion of Series A preferred stock mandatory redemption obligation		(379	)		—			—
Series A preferred stock redemption fee		(1,700	)		—			—
Beneficial conversion feature of Series D preferred stock		(4,274	)		—			—

Net loss applicable to common stockholders		(17,293	)		(12,804	)		(5,752	)
Weighted average common shares outstanding during the period used to compute basic and diluted net loss per share		2,631			16,911			18,908

Basic and diluted net loss per share	$	(6.57	)	$	(0.76	)	$	(0.30	)