SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

For The Quarterly Period Ended June 30, 2004

OR

Commission File Number 0-26825

NORTHWEST BIOTHERAPEUTICS, INC.

Canyon Park Building 8, 22322 20th Avenue S.E., Suite 150, Bothell, Wa. 98021
(Address of Principal Executive Offices, Including Zip Code)

(425) 608-3000
(Registrant’s Telephone Number, Including Area Code)

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

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

     As of August 13, 2004, the registrant had outstanding 19,028,779 shares of common stock, $0.001 par value.

TABLE OF CONTENTS

NORTHWEST BIOTHERAPEUTICS, INC.

TABLE OF CONTENTS

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Part I — Financial Information

     Item 1. Financial Statements

NORTHWEST BIOTHERAPEUTICS, INC.
(A Development Stage Company)

BALANCE SHEETS
(in thousands)
(Unaudited)

See accompanying notes to financial statements.

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NORTHWEST BIOTHERAPEUTICS, INC.
(A Development Stage Company)

STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)

See accompanying notes to condensed financial statements.

4

NORTHWEST BIOTHERAPEUTICS, INC.
(A Development Stage Company)

STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)

5

See accompanying notes to financial statements.

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Northwest Biotherapeutics, Inc.

(A Development Stage Company)

Notes to Condensed Financial Statements

(unaudited)

1. Basis of Presentation

     The accompanying unaudited financial statements for Northwest Biotherapeutics, Inc. (the “Company”) have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six-month period ended June 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004.

     For further information, refer to the financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, as filed with the Securities and Exchange Commission.

     The auditor’s report on the foregoing financial statements of the Company for the fiscal year ended December 31, 2003 states that because of recurring operating losses, a working capital deficit, and a deficit accumulated during the development stage, there is substantial doubt about the Company’s ability to continue as a going concern. A “going concern” opinion indicates that the financial statements have been prepared assuming the Company 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.

Stock-Based Compensation

     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:

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     There were no stock options granted during the six months ended June 30, 2004. The per share weighted average fair value of stock options granted during the three months ended June 30, 2003 was $0.02. The per share weighted average fair values of stock options granted during the six months ended June 30, 2003 was $0.09. These weighted average fair values were determined on the dates of grants using the following weighted average assumptions:

2. Liquidity

     Since the beginning of 2002, the Company’s management and Board of Directors recognized that the Company did not have sufficient working capital to fund its operations for more than 12 months and needed to raise additional capital from third parties in order to continue its clinical and research programs. In April 2002 the Company retained an investment bank to assist it in raising capital. Due to the economic climate in 2002 and declining stock prices of biotechnology companies, including the Company’s stock price, the Company was unable to raise additional capital. In July 2002 the Company retained an additional investment banking firm to assist it in exploring various strategic options including raising additional capital, licensing our technology to a third party, or merger with another company. The Company contacted over 50 biotechnology companies and over 20 large pharmaceutical companies in an attempt to explore these options without success. With Board approval, and in order to conserve cash, from September of 2002 through April of 2003 we reduced our staff from 67 to 8 employees, shut down the Phase III clinical trial for hormone refractory prostate cancer, our Phase I trial for non-small cell lung cancer and inactivated our Phase II clinical trial for brain cancer which currently remains open with the Food and Drug Administration.

     In addition, the Company moved its corporate headquarters to a smaller facility and reduced lease payments by $75,000 per month. The Company’s management attempted to negotiate several bridge loans with various investment banks, but did not

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consummate any of them because the Company’s Board of Directors did not consider the terms to be in the best interest of the Company or its stockholders. In October of 2003, the Company obtained bridge funding from management raising $335,000 which enabled the Company to continue operating into the first quarter of 2004. The Company retained another investment bank to help raise additional working capital, contacting several hundred prospective investors including numerous venture capital funds. After much discussion by our Board of Directors taking into consideration the Board’s and management’s comprehensive search of a viable option for the Company, including winding up our operations, the Board believed it in the best interest of the Company and its stockholders to enter into a bridge loan with Toucan Capital Fund, L.P. (“Toucan”). While the terms of the bridge loan imposed significant restraints on how the Company operated its business, obtaining the funding was the Company’s only viable option for continuing its operations and attempting to create future value for its stockholders. To date the Company has entered into several bridge loans beginning in February 2004 through July 2004, and an Amended and Restated Recapitalization Agreement, with the objective of potentially raising $40 million, provided a syndicate of investors could be identified. To date, the Company has accepted $3.1 million in loans from Toucan, using the proceeds to fund operations and to develop jointly, with Toucan, a new business strategy focusing on the Company’s strengths.

     On April 26, 2004 we entered into a Recapitalization Agreement with Toucan Capital Fund II, L.P. (“Toucan”). On July 30, 2004, the Company and Toucan agreed to amend and restate the Recapitalization Agreement (the “Amended and Restated Recapitalization Agreement”). In connection with entering into the Amended and Restated Recapitalization Agreement, the Company received a $2.0 million loan from Toucan on July 30, 2004. The Amended and Restated Recapitalization Agreement contemplates a proposed equity financing that would provide for the potential 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 Amended and Restated Recapitalization Agreement and locating investors who are willing to invest in the Company on the terms proposed. If fully implemented, the proposed equity financing would result in Toucan and other investors potentially owning, on a combined basis, over 90% of the outstanding capital stock of the Company.

     In connection with entering into the Amended and Restated Recapitalization Agreement, the Company received a $2.0 million loan from Toucan on July 30, 2004. The loan has (i) a 12 month term, (ii) accrues interest at 10% per annum on a 365 day basis compounded annually from the issue date, is (iii) secured by a first priority senior security interest in all of the Company’s assets, and (iv) warrant coverage equal to one hundred percent (100%) of the $2.0 million loan. The principal and interest is convertible into capital stock of the Company, generally at Toucan’s option, prior to 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).

     In connection with the July 30, 2004 $2.0 million loan from Toucan, the Company issued a warrant to Toucan which is exercisable immediately for up to 20 million shares of the Company’s Capital Stock. This warrant is exercisable for up to seven years. The exercise price of the warrant is the lesser of (i) $0.10 per share (subject to certain adjustments); or (ii) 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 sale of convertible preferred stock of the Company, but not less than $0.04 per share. To date the Company has issued warrants to Toucan to purchase up to 86 million shares of the Company’s capital stock, including the July 2004 warrant and a warrant for 66 million shares originally issued on April 26, 004 and adjusted on June 11, 2004. This warrant was separated into two warrants (the “Prior Warrants”) on July 30, 2004. The Prior Warrants are now exercisable for 36 million shares and 30 million shares respectively. The Prior Warrants are exercisable for up to seven years and have an exercise price of one cent ($0.01) per share.

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     On April 26, 2004 we issued Toucan a senior secured convertible promissory note and warrants, in the amount of $500,000. Proceeds from the April 26, 2004 loan 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 $375,000. 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 3.57%, volatility of 218%, and a contractual life of 7-years. The value of the warrants was recorded as a deferred debt discount against the $500,000 proceeds of the notes. In addition, a beneficial conversion feature related to the notes was determined to be approximately $375,000 but is capped at the remaining value originally allocated to the notes of approximately $125,000. As a result, the total discount on the notes equaled the face value of $500,000 which is being amortized over the twelve-month term of the notes. Amortization of deferred debt discount of approximately $89,000 along with interest accretion on the note of approximately $9,000 was recorded during the six months ended June 30, 2004 for the April 26, 2004 note balance.

     On June 11, 2004 we issued Toucan a senior secured convertible promissory note and warrants, in the amount of $500,000. Proceeds from the June 11, 2004 loan 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 $353,000. 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 3.70%, volatility of 219%, and an contractual life of 7-years. The value of the warrants was recorded as a deferred debt discount against the $500,000 proceeds of the notes. In addition, a beneficial conversion feature related to the notes was determined to be approximately $353,000 but is capped at the remaining value originally allocated to the notes of approximately $147,000. As a result, the total discount on the notes equaled the face value of $500,000 which is being amortized over the twelve-month term of the notes. Amortization of deferred debt discount of approximately $26,000 along with interest accretion on the note of approximately $3,000 was recorded during the six months ended June 30, 2004 for the June 11, 2004 note balance.

     On July 30, 2004 we issued Toucan a senior secured convertible promissory note and warrants, in the amount of $2.0 million, pursuant to the Amended and Restated Recapitalization Agreement. Toucan has the option to loan additional amounts to the Company, on terms mutually acceptable to the Company and Toucan, but is not obligated to do so.

5. Contingency

     Through abandoning the tenant improvements at our 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 $492,000 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 and accrues interest at 7% until paid. This contingent assessment is being carried as an estimated liability on the balance sheet as of June 30, 2004, and for the year ended December 31, 2003, was included in general and administrative expense.

     The net assessment has been reduced by $27,000 based upon the State of Washington, Department of Revenue’s, reduced assessment received on August 2, 2004 which also extended the tax assessment payment date for the $465,000 balance of the assessment, excluding interest, to August 31, 2004. The length of time that has elapsed since the completion of the leasehold improvement, the major subject of the assessment, has made it difficult to provide the State with specific segment specifications, and respective segment costs. We believe the blueprints for the construction project will make it possible to provide the State with the requested construction detail and costs. Therefore, we expect to file an additional appeal for further reduction in this assessment, before the August 31, 2004 payment deadline, as provided under the revised code of Washington (WAC 458-20-100). While an appeal is pending, it is our understanding of Washington ‘s code, payment of the assessment is suspended until the appeal process is finally exhausted.

     In addition, regarding a separate tax matter, in February 2004, a refund request of approximately $175,000 related to certain other State taxes was submitted to the State. This review is ongoing with the State recently requesting approximately 350 paid invoices for review. The finalization of our appeal process for the tax assessment, and our request for a tax refund related to other State taxes, is expected to take several more months. We cannot with any certainty determine any amount that may be deducted from the August 2, 2004 assessed liability or that will be recovered, if any, from our tax refund request.

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

     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.

Overview

     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 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 certain fixed assets. We are continuing 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.

     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.

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     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 June 30, 2004, we incurred costs of approximately $24.3 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 six months ended June 30, 2004, we earned approximately $34,000 in revenues from the manufacture and sale of research materials. 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, it is unlikely we will be able to fund our operations through the manufacture and sale of research products.

     Our financial statements for the year ended December 31, 2003 and six months ended June 30, 2004 were 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, have a working capital deficit, and have a deficit accumulated during the development stage of $66.1 million, as of June 30, 2004, that raises substantial doubt about our ability to continue as a going concern and our auditors have issued an opinion on the December 31, 2003 financial statements which states that there is substantial doubt about our ability to continue as a going concern.

Critical Accounting Policies and Estimates

     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.

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Also, on an ongoing basis the estimate of expense for stock options and warrants is dependent 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.

Related Party Transactions

     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 portion of those payments, totaling $210,000, were invested in the November 13, 2003 completed 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 the November 13, 2003 secured convertible promissory note and warrants financing to $335,000.

     The November 13, 2003 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. The aggregate principal amount of the five notes was $335,000 of which $50,000, including interest of $1,674, was repaid on June 1, 2004. In connection with the April 26, 2004 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 the November 13, 2003 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 exercise price to be 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 April 26, 2004 Recapitalization Agreement, certain members of management who hold warrants agreed to an amendment to their warrants. The amendment applies to all warrants issued in the November 13, 2003 financing. 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 November 13, 2003 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 notes. 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. Amortization of deferred debt discount of approximately $168,000 along with interest accretion on the note of approximately $11,000 was recorded during the six months ended June 30, 2004 for the November 13, 2003 note balances.

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Toucan Financing

     In an effort to continue to fund our operations, on April 26, 2004 the Company entered into a Recapitalization Agreement with Toucan. On July 30, 2004 the Company and Toucan amended and restated the Recapitalization Agreement (the “Amended and Restated Recapitalization Agreement”). To date, we have issued Toucan five 10% convertible promissory notes in the aggregate principal amount of $3.1 million, including a $2.0 million loan extended on July 30, 2004, in connection with the execution of the Amended and Restated Recapitalization Agreement. The notes accrue interest at 10% per year from their respective issuance dates and are convertible into capital stock of the Company. We have also issued Toucan warrants to purchase up to 86 million shares of our capital stock. The recent borrowing from Toucan should enable the Company to fund its operations to approximately September 30, 2004. Toucan has the option to loan additional amounts to the Company, on terms mutually acceptable to the Company and Toucan, but is not obligated to do so.

Initial Bridge Funding

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. The notes were convertible at prices below the current price of our common stock at the date of issuance resulting in a beneficial conversion cost of approximately $100,000 which is being amortized over the term of the notes. Amortization of deferred debt discount of approximately $37,000 along with interest accretion on the note of approximately $4,000 was recorded during the six months ended June 30, 2004 for the February 2, and March 1, 2004 note balances.

     The April 26, 2004 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, have (i) a 12 month term, (ii) accrue interest at 10% per annum on a 365 day basis compounded annually from their respective original issuance dates, (iii) are secured by a first priority senior security interest in all of the Company’s assets, and (iv) warrants with coverage equal to three hundred percent (300%) of the amount due under the bridge notes. The initial bridge funding period expired May 26, 2004.

     On April 26, 2004 we issued Toucan a senior secured convertible promissory note and warrants, in the amount of $500,000. Proceeds from the April 26, 2004 loan 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 $375,000. 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 3.57%, volatility of 218%, and an contractual life of 7-years. The value of the warrants was recorded as a deferred debt discount against the $500,000 proceeds of the notes. In addition, a beneficial conversion feature related to the notes was determined to be approximately $375,000 but is capped at the remaining value originally allocated to the notes of approximately $125,000. As a result, the total discount on the notes equaled the face value of $500,000 which is being amortized over the twelve-month term of the notes. Amortization of deferred debt discount of approximately $89,000 along with interest accretion on the note of approximately $9,000 was recorded during the six months ended June 30, 2004 for the April 26, 2004 note balance.

Additional Bridge Funding

     Toucan, during the 60 day period following May 26, 2004, or to July 25, 2004, in its sole discretion, could provide up to an additional $500,000 of bridge funding, in one or more tranches, on the same terms and conditions as the initial bridge funding

On June 11, 2004 we issued Toucan a senior secured convertible promissory note and warrants, in the amount of $500,000. Proceeds from the June 11, 2004 loan 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 $353,000. 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 3.70%, volatility of 219%, and an contractual life of 7-years. The value of the warrants was recorded as a deferred debt discount against the $500,000 proceeds of the notes. In addition, a beneficial conversion feature related to the notes was determined to be approximately $353,000 but is capped at the remaining value originally allocated to the notes of approximately $147,000. As a result, the total discount on the notes equaled the face value of $500,000 which is being amortized over the twelve-month term of the notes. Amortization of deferred debt discount of approximately $26,000 along with interest accretion on the note of approximately $3,000 was recorded during the six months ended June 30, 2004 for the June 11, 2004 note balance.

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Subsequent Bridge Funding

     On July 30, 2004, the Company and Toucan entered into the Amended and Restated Recapitalization Agreement wherein Toucan agreed to make, and the Company agreed to receive, an additional $2.0 million. The amounts and timing of any further bridge funding will be determined by mutual agreement between the Company and Toucan. Toucan is not obligated to provide the Company with any additional bridge funding.

     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) evaluation of the antigen for the Company’s prostate cancer clinical trial and related production and regulatory issues, (v) clarification and analysis of licensing terms and costs for license of IL-4 in case it is not feasible or not desirable to change the dendritic cell production method to use Tangential Flow Filtration devices in the prostate cancer clinical trial re-start, (vi) preparation of an updated business plan, budgets, regulatory plan, manufacturing plans, and intellectual property analyses, (vii) preparation of an investor package and due diligence binders to facilitate review and due diligence by prospective equity investors, (viii) evaluation of potential structures for the anticipated equity financing and preparations for implementation of the transaction selected, including, without limitation, Toucan’s consent and regulatory filings, (ix) 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 (x) planning for syndication of the anticipated equity financing, and determination of the amounts and timing of such financing.

     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 with the Securities Exchange Commission of any filings and confidential treatment requests covering any commercially sensitive terms (as determined jointly by the Company and Toucan) of the Amended and Restated Recapitalization Agreement and certain agreements entered into in connection with such agreement required to be filed with the SEC under applicable SEC regulations, and use best efforts to obtain confidential treatment of such information from the SEC, (ii) take all steps reasonably necessary to implement the financing structure contemplated by the Amended and Restated Recapitalization Agreement, (iii) not hire, engage, retain or agree to hire, engage or retain, any full or part-time, permanent or temporary employee, consultant, adviser, independent contractor, collaborator, intern or other personnel of any kind, except with Toucan’s express prior written approval, on a case by case basis, (iv) not enter into, increase, expand, extend, renew or reinstate any severance, separation, retention, change of control or similar agreement with any personnel (or agree, promise, commit or undertake to do so), except with Toucan’s prior written approval, on a case by case basis, (v) not purchase, lease, hire, rent or otherwise acquire directly or indirectly any rights in or to any asset or facility outside of the ordinary course of business in an amount in excess of $10,000, in aggregate, or agree, promise or commit to do so, except in accordance with the Company’s budget that has been approved by the Company’s board of directors and Toucan, (vi) make no expenditures in excess of $10,000 in aggregate other than in accordance with a budget pre-approved by Toucan, (vii) report the Company’s cash position and all expenditures and agreements, commitments or undertakings to Toucan on a bi-weekly basis, and (viii) not deviate, during the period covered by a budget pre-approved by Toucan, more than $10,000 in aggregate from such budget,

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nor take any action or make any promise, undertaking or commitment that would result in the Company incurring or accumulating payables and/or other financial obligations of any kind, whether current or deferred, direct or indirect, for purposes other than as set forth in budgets expressly agreed to by Toucan, and/or in any amounts in excess of the amounts set forth in such agreed budgets, which equal or exceed $10,000 in aggregate and which have not been approved in writing in advance by Toucan.

Conversion Of Bridge Notes

Automatic Conversion

     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).

Discretionary Conversion

     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 is entitled to acquire shares (including, without limitation, through purchase, exchange, conversion or exercise) 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 (regardless of whether currently exercisable or convertible), and (iii) the lesser of $0.10 per share or a 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).

Bridge Warrants

     As part of the initial and additional 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 warrant coverage on $600,000 of the initial bridge funding and $1.5 million in warrant coverage on the $500,000 in additional bridge funding received on June 11, 2004. The number of shares subject to bridge warrants to be issued, but not the exercise price, was determined 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 aggregate $1.1 million of loans is 66 million shares. The bridge warrants are currently exercisable and can be exercised for up to seven (7) years. 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).

     As part of the subsequent bridge funding, Toucan received warrants with coverage equal to one hundred percent (100%) of the $2.0 million principal amount due under the subsequent bridge note The number of shares subject to bridge warrants to be issued was based on $0.10 per share basis (subject to adjustment for stock splits, stock dividends and the like). The exercise price is the lesser of (i) $0.10 per share (subject to adjustment for stock splits, stock dividends and the like) 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 Preferred Stock as contemplated by the Recapitalization Agreement; 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 number of shares for which Toucan will be able to exercise the subsequent bridge warrants from the $2.0 million in subsequent bridge funding is 20 million shares (subject to adjustment for stock splits, stock dividends and the like).

     As of July 30, 2004, Toucan has the right to acquire up to 78 million shares of the Company’s outstanding capital stock upon conversion of outstanding principal of $3.1 million and interest of $24,000 under the bridge loans, and up to 86 million shares upon

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exercise of warrants. This represents a beneficial ownership of approximately 85% of the outstanding capital stock of the Company on a fully diluted basis. The Company does not currently have enough authorized shares to satisfy conversion of all outstanding convertible notes and warrants and the Company plans to request authorization of additional shares at its annual meeting to be held before the end of 2004.

     In the event the issuance of the Company’s convertible preferred stock is approved and authorized pursuant to the terms of the Amended and Restated Recapitalization Agreement and investors other than Toucan have closed on the purchase in cash of a minimum of $15 million of such convertible preferred stock, then all of the warrants issued to Toucan 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 all of the warrants issued to Toucan 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.

Anticipated Equity Financing

     The proposed equity financing provides for the potential 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 Amended and Restated Recapitalization Agreement and locating investors who are willing to invest in the Company on the terms proposed.

     As part of the Amended and Restated Recapitalization Agreement, we have already agreed to the principal terms of the equity financing with Toucan. Under the terms of the initial Recapitalization Agreement, the Company and Toucan agreed that the board of directors of the Company would be reconstituted once the Company raised at least $2 million through the issuance of its securities. In connection with amending and restating the Amended and Restated Recapitalization Agreement, Toucan has requested that the current members of the company’s board of directors remain in place until the earlier of (i) the approval of the transactions contemplated by the Amended and Restated Recapitalization Agreement by the Company’s stockholders, or (ii) the expiration of the bridge period on October 23, 2004.

     In the event a sale of the Company’s equity securities or debt securities, or any combination thereof cannot 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. 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 therefore 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

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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; 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), 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.

     Under the initial Recapitalization Agreement, the agreement terminated unless the Company raised at least $2 million within 180 days of April 26, 2004. With the recent loan from Toucan of $2 million, this condition has been satisfied. Therefore, the Company is obligated to enter into a financing with Toucan pursuant to the terms of the Amended and Restated Recapitalization Agreement. This applies even after the expiration of the standstill agreement and the bridge period, except where doing so would conflict with the Company’s fiduciary exception under the Amended and Restated Recapitalization Agreement.

Results of Operations

Three Months Ended June 30, 2004 and 2003

     Total Revenues. Revenues decreased 40% from $187,000 for the three months ended June 30, 2003 to $116,000 for the three months ended June 30, 2004. The research material sales component of revenue increased from $7,000 for the three months ended June 30, 2003 to $10,000 for the three months ended June 30, 2004. This slightly higher sales volume resulted from direct advertising in select trade journals in the first quarter 2004. We are unable to project when, if ever, our sales of research materials will attain consistent profitability. Research grant income is the remaining revenue component which decreased from $180,000 for the three months ended June 30, 2003 to $106,000 for the three months ended June 30, 2004. The decrease in grant revenue reflects decreased direct research activity, and therefore a decrease in reimbursable direct and indirect costs associated with the remaining grant award.

     Cost of Research Material Sales. Cost of research material sales decreased 85% from $40,000 for the three months ended June 30, 2003 to $6,000 for the three months ended June 30, 2004. Our efforts to sell research reagents to a broader base of customers commenced approximately mid-year 2003 with an expected increase in direct material and direct labor costs. During the three months ended June 30, 2004, we contracted with a third party in lowering direct labor costs of manufacturing our research materials. We are unable to project when, if ever, our sales of research materials will attain consistent profitability.

     Research and Development Expense. Research and development expense decreased 72% from $500,000 for the three months ended June 30, 2003 to $142,000 for the three months ended June 30, 2004. 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 and the accompanying reduction in material and personnel costs associated with these activities.

     General and Administrative Expense. General and administrative expense decreased 50% from $1.4 million for the three months ended June 30, 2003 to $706,000 for the three months ended June 30, 2004. 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 and other cost reduction steps implemented.

     Depreciation and Amortization. Depreciation and amortization decreased 26% from $50,000 for the three months ended June 30, 2003 to $37,000 for the three months ended June 30, 2004. This decrease was primarily due to the approximately $904,000, net, of equipment and leasehold improvements write-offs for the year ended December 31, 2003 and because there have been no capital expenditures for the three months ended June 30, 2004.

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     Total Other Income (Expense), Net Interest expense increased from $8,000 for the three months ended June 30, 2003 to $245,000 for the three months ended June 30, 2004. This increase was due primarily to recognizing interest expense relative to the debt discount and interest accretion associated with the November 13, 2003 Secured Convertible Promissory Note and Warrants debt financing and the bridge loans from Toucan. Interest income decreased 86% from $8,000 for the three months ended June 30, 2003 to $1,000 for the three months ended June 30, 2004. This decrease was primarily due to the decline in market interest rates and having lower average cash balances during the three months ended June 30, 2004.

     Gain on Sale of Intellectual Property. The $816,000 gain realized on the sale of royalty rights 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.

Six Months Ended June 30, 2004 and 2003

     Total Revenues. Revenues decreased 5% from $256,000 for the six months ended June 30, 2003 to $243,000 for the six months ended June 30, 2004. The research material sales component of revenue increased from $7,000 for the six months ended June 30, 2003 to $34,000 for the six months ended June 30, 2004. This slightly higher sales volume resulted from direct advertising in select trade journals in the first quarter 2004. We are unable to project when, if ever, our sales of research materials will attain consistent profitability. Research grant income is the remaining revenue component which decreased 16% from $249,000 for the six months ended June 30, 2003 to $209,000 for the six months ended June 30, 2004. The decrease in grant revenue reflects decreased direct research activity, and therefore a decrease in reimbursable direct and indirect costs associated with the remaining grant award.

     Cost of Research Material Sales. Cost of research material sales decreased 23% from $40,000 for the six months ended June 30, 2003 to $31,000 for the six months ended June 30, 2004. Our efforts to sell research reagents to a broader base of customers commenced approximately mid-year 2003 with an expected increase in direct material and direct labor costs. During the three months ended June 30, 2004, we contracted with a third party in lowering direct labor costs of manufacturing our research materials. We are unable to project when, if ever, our sales of research materials will attain consistent profitability.

     Research and Development Expense. Research and development expense decreased 63% from $1.0 million for the six months ended June 30, 2003 to $371,000 for the six months ended June 30, 2004. 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 and the accompanying reduction in material and personnel costs associated with these activities.

     General and Administrative Expense. General and administrative expense decreased 48% from $2.5 million for the six months ended June 30, 2003 to $1.3 million for the six months ended June 30, 2004. 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 and other cost reduction steps implemented.

     Depreciation and Amortization. Depreciation and amortization decreased 46% from $137,000 for the six months ended June 30, 2003 to $74,000 for the six months ended June 30, 2004. This decrease was primarily due to the approximately $904,000, net, of equipment and leasehold improvements write-offs for the year ended December 31, 2003 and because there have been no capital expenditures for the six months ended June 30, 2004.

     Total Other Income (Expense), Net Interest expense increased from $19,000 for the six months ended June 30, 2003 to $352,000 for the six months ended June 30, 2004. This increase was due primarily to recognizing interest expense relative to the debt discount and interest accretion associated with the November 13, 2003 Secured Convertible Promissory Note and Warrants debt financing and the bridge loans from Toucan. Interest income decreased 95% from $20,000 for the six months ended June 30, 2003 to $1,000 for the six months ended June 30, 2004. This decrease was primarily due to the decline in market interest rates and having lower average cash balances during the three months ended June 30, 2004.

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Liquidity and Capital Resources

General Discussion

     Through abandoning the tenant improvements at our 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 $492,000 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 and accrues interest at 7% until paid. This contingent assessment is being carried as an estimated liability on the balance sheet as of June 30, 2004, and for the year ended December 31, 2003, was included in general and administrative expense.

     The net assessment has been reduced by $27,000 based upon the State of Washington, Department of Revenue’s, reduced assessment received on August 2, 2004 which also extended the tax assessment payment date for the $465,000 balance of the assessment, excluding interest, to August 31, 2004. The length of time that has elapsed since the completion of the leasehold improvement, the major subject of the assessment, has made it difficult to provide the State with specific segment specifications, and respective segment costs. We believe the blueprints for the construction project will make it possible to provide the State with the requested construction detail and costs. Therefore, we expect to file an additional appeal for further reduction in this assessment, before the August 31, 2004 payment deadline, as provided under the revised code of Washington (WAC 458-20-100). While an appeal is pending, it is our understanding of Washington ‘s code, payment of the assessment is suspended until the appeal process is finally exhausted.

     In addition, regarding a separate tax matter, in February 2004, a refund request of approximately $175,000 related to certain other State taxes was submitted to the State. This review is ongoing with the State recently requesting approximately 350 paid invoices for review. The finalization of our appeal process for the tax assessment, and our request for a tax refund related to other State taxes, is expected to take several more months. We cannot with any certainty determine any amount that may be deducted from the August 2, 2004 assessed liability or that will be recovered, if any, from our tax refund request.

     As of August 2, 2004, after giving effect to aggregate borrowings from Toucan of $3.1 million, the Company had approximately $2 million in cash and cash equivalents. Of the $2 million in cash and cash equivalents, $1,177,801 was paid to Cognate Therapeutics, Inc. pursuant to a service agreement between the Company and Cognate dated July 30, 2004. The fees the Company paid to Cognate consist of a $750,000 non-refundable contract initiation fee and a $427,801 contract service fee for the month of August. The payments were made on August 4 and August 5, 2004, respectively.

     Cognate is a Contract Research Organization, majority owned by Toucan and two of the principals of Toucan are board members of Cognate. The Company is committed to utilizing Cognate’s services for a two year period related primarily to manufacturing drugs, regulatory advice, research and development (R&D) preclinical activities and managing clinical trials. Monthly expenditures are expected to range between approximately $427,000 and $718,000. The contract with Cognate includes a penalty of $4.0 million if the Company cancels the contract within one year and $2.0 million if the Company cancels the contract after one year as well as payment for all services performed in winding down any ongoing activities. The Company entered into this contract after consultation with an independent expert in the field of Good Manufacturing Practices (GMP), regulatory affairs, and clinical trial activities. The Company believes entering into this agreement gives it an opportunity to restart its clinical and research programs much more efficiently and rapidly as opposed to rebuilding its infrastructure, internal cGMP facilities, regulatory, clinical and R&D expertise. In addition, if the Company did not enter into this contract with Cognate it is likely that Toucan would not have loaned it the additional $2.0 million on July 30, 2004 because of the significant delay in moving forward with rebuilding these capabilities within the Company, and the potential negative impact on formation of a syndicate of potential investors. Given these facts the Company believes it was in its best interest to enter into this agreement.

     After the payments to Cognate, the Company believes that its remaining cash of approximately $822,000, based on recurring operating and associated financing costs, will be sufficient to fund its operations through approximately September 30, 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 Amended and Restated 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 October 23, 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 Amended and Restated 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 October 23, 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.

     While the Company has attempted to obtain funding for working capital from multiple parties since 2002, Toucan is the only party, to date, that has invested a significant amount of capital in the Company. Therefore, if the Amended and Restated Recapitalization Agreement is not fully implemented, or if Toucan is unwilling to continue to fund the Company’s operations, it is unlikely the Company will obtain additional funding from any third parties and the Company will be required to cease operations and liquidate its assets.

     Our independent auditors have indicated in their report on our financial statements included in our December 31, 2003 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.

Asset Sales and Sources of Cash

     On April 8, 2003, we were awarded a National Institutes of Health (NIH) cancer research grant. The total first year grant award was for approximately $318,000 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 was approximately $328,000, comprised of approximately $198,000 authorized

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for direct grant research expenditures and approximately $130,000 authorized for use to cover our facilities and administrative overhead costs. Approximately $118,000 of the grant’s aggregate award remains to be utilized of which $105,000 has been received and is included in deferred grant revenue as of June 30, 2004.

     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 $34,000 in revenue for the six months ended June 30, 2004 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 consistent 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.

Recapitalization Plan

     In an effort to continue to fund our operations, On April 26, 2004 we entered into a Recapitalization Agreement with Toucan Capital Fund II, L.P. (“Toucan”). The Company and Toucan amended and restated this agreement on July 30, 2004 (the “Amended and Restated Recapitalization Agreement”). The Amended and Restated 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 full implementation of the recapitalization plan, Toucan and the investor syndicate would potentially own, on a combined basis, over 90% of the outstanding capital stock of the Company.

Initial Bridge Funding

     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.

Additional Bridge Funding

     Toucan, during the 60 day period following May 26, 2004, or to July 25, 2004, in its sole discretion, could provide up to an additional $500,000 of bridge funding, in one or more tranches, on the same terms and conditions as the initial bridge funding. On June 11, 2004, we issued Toucan a senior secured convertible promissory note and warrants, in the amount of $500,000.

     The April 26, 2004 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, and the notes issued in April and June 11, 2004 have (i) a 12 month term, (ii) accrue interest at 10% per annum on a 365 day basis compounded annually from their respective original issuance dates, (iii) are secured by a first priority senior security interest in all of the Company’s assets, and (iv) warrants with coverage equal to three hundred percent (300%) of the amount due under the bridge notes. The initial bridge funding period expired May 26, 2004.

Subsequent Bridge Funding

     On July 30, 2004, the Company and Toucan entered into the Amended and Restated Recapitalization Agreement wherein Toucan agreed to make, and the Company agreed to receive, an additional loan from Toucan. In connection with this loan the Company issued Toucan a senior secured convertible promissory note in the amount of $2.0 million, and warrants.

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Uses of Cash

     We used $1.1 million in cash for operating activities during the six months ended June 30, 2004, compared to $3.2 million for the six months ended June 30, 2003. The decrease in cash used in operating activities from 2003 to 2004 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 $111,000 in cash from investing activities during the six months ended June 30, 2004 compared to $1.7 million provided by investing activities during the six months ended June 30, 2003. The cash provided during the six months ended June 30, 2004 consisted primarily of restricted cash released as collateral for the Company’s credit cards and the sale of non-essential equipment.

Factors That May Affect Results of Operations and Financial Condition

     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 the December 31, 2004 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.

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 July 30, 2004, Toucan has the right to acquire up to 78 million shares of the Company’s outstanding capital stock upon conversion of outstanding principal of $3.1 million and interest of $24,000 under the bridge loans, and up to 86 million shares upon exercise of warrants. This represents a beneficial ownership of approximately 85% of the outstanding capital stock of the Company on a fully diluted basis.

     In addition, under the terms of the Amended and Restated 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 operated 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 will need to raise additional capital which may not be available.

     As of August 2, 2004, after giving effect to aggregate borrowings from Toucan of $3.1 million, the Company had approximately $2 million in cash and cash equivalents. Of the $2 million in cash and cash equivalents, $1,177,801 was paid to Cognate Therapeutics, Inc. pursuant to a service agreement between the Company and Cognate dated July 30, 2004. The fees the Company paid to Cognate consist of a $750,000 non-refundable contract initiation fee and a $427,801 contract service fee for the month of August. The payments were made on August 4 and August 5, 2004, respectively.

     Cognate is a Contract Research Organization, majority owned by Toucan and two of the principals of Toucan are board members of Cognate. The Company is committed to utilizing Cognate’s services for a two year period related primarily to manufacturing drugs, regulatory advice, research and development (R&D) preclinical activities and managing clinical trials. Monthly expenditures are expected to range between approximately $427,000 and $718,000. The contract with Cognate includes a penalty of $4.0 million if the Company cancels the contract within one year and $2.0 million if the Company cancels the contract after one year as well as payment for all services performed in winding down any ongoing activities. The Company entered into this contract after consultation with an independent expert in the field of Good Manufacturing Practices (GMP), regulatory affairs, and clinical trial activities. The Company believes entering into this agreement gives it an opportunity to restart its clinical and research programs much more efficiently and rapidly as opposed to rebuilding its infrastructure, internal cGMP facilities, regulatory, clinical and R&D expertise. In addition, if the Company did not enter into this contract with Cognate it is likely that Toucan would not have loaned it the additional $2.0 million on July 30, 2004 because of the significant delay in moving forward with rebuilding these capabilities within the Company, and the potential negative impact on formation of a syndicate of potential investors. Given these facts the Company believes it was in its best interest to enter into this agreement.

     After the payments to Cognate, the Company believes that its remaining cash of approximately $822,000, based on recurring operating and associated financing costs, will be sufficient to fund its operations through approximately September 30, 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 Amended and Restated 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 October 23, 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 Amended and Restated 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 October 26, 2004.

     The Company has attempted to obtain funding for working capital from third parties since 2002. To date, Toucan is the only party that has invested a significant amount of capital in the Company. If the Amended and Restated Recapitalization Agreement is not

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fully implemented or if Toucan is unwilling to provide additional funding, it is unlikely that the Company will be able to obtain funding from other parties. If this does occur, the Company will have to cease operations and begin liquidating its assets.

Our auditors have issued a “going concern” audit opinion.

     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 June 30, 2004, we had a deficit accumulated during the development stage of approximately $66.1 million. We have had net losses applicable to common stockholders for the prior three years as follows:

•

$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 for the prior three years.

•

$129,000 in 2001;

•

$9,000 in 2002; and

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•

$529,000 in 2003.

     We have derived most of these limited revenues from:

•

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.

We may not be able to retain existing personnel.

     From approximately October 2002 through March 22, 2004, we reduced our research and administrative staff by approximately sixty-three members. Our remaining staff, as of August 13, 2004 consisted of six full-time employees and one part-time employee.

     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.

Our success partially depends on existing and future partners.

     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

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•

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.

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     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 ten issued patents (four in the United States and six in foreign jurisdictions) and 113 patent applications pending (22 in the United States and 91 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.

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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 94% of our common stock and shares of common stock issuable pursuant to options and warrants exercisable on July 30, 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.

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There may not be an active, liquid trading market for our common stock.

     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 provision 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.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

     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.

Item 4. Controls and Procedures

     (a) Evaluation of disclosure controls, procedures, and internal controls

     Our President (Principal Executive Officer) and our Controller (Principal Financial and Accounting Officer), after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) and internal control over financial reporting, as of the date of this quarterly report, have concluded that, as of June 30, 2004, 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 the Company. 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 of our Company are only being made in accordance with authorizations of management and Company Directors; and (iii) the Company prevents or timely detects the unauthorized acquisition, use, or disposition of assets that could have a material effect on our financial statements.

     (b) Changes in internal controls.

     To our knowledge, there were no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls during the quarter ended June 30, 2004.

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Part II — Other Information

Item 1. Legal Proceedings

     We are not a party to any material legal proceedings.

Item 2. Changes in Securities and Use of Proceeds

     None

Item 3. Defaults upon Senior Securities

     None

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

     No matters were submitted to a vote of our stockholders during the quarter ended June 30, 2004.

Item 5. Other Information

     None

Item 6. Exhibits and Reports on Form 8-K

a) Exhibits

31.1		Certification of President (Principal Executive Officer), Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Controller (Principal Financial and Accounting Officer), Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of President Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of Controller Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

b) Reports on Form 8-K

On August 6, 2004 we filed a report on Form 8-K to report the terms of the Amendment No. 1 To Recapitalization Agreement executed by the Company and Toucan Capital Fund II, LP.

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SIGNATURES

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

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NORTHWEST BIOTHERAPEUTICS, INC.
(A Development Stage Company)

EXHIBIT INDEX

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