SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For The Quarterly Period Ended March 31, 2005

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 þ No £

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

     As of May 13, 2005, the registrant had outstanding 19,078,048 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

NORTHWEST BIOTHERAPEUTICS, INC .
(A Development Stage Company)

Balance Sheets
(in thousands)
(Unaudited)

See accompanying notes to condensed 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)

Condensed Statement of Cash Flows
(in thousands)
(Unaudited)

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See accompanying notes to condensed 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. have been prepared in accordance with accounting principles generally accepted in the United States 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 three-month period ended March 31, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005.

     For further information, refer to the financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2004, as filed with the Securities and Exchange Commission.

     The auditor’s report on our financial statements for the fiscal year ended December 31, 2004 states that because of recurring operating losses, a working capital deficit, and a deficit accumulated during the development stage, 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.

Stock-Based Compensation

     We account for our 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. We apply 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, we recognize stock compensation costs utilizing the fair value methodology prescribed in SFAS No. 123 over the related period of benefit.

     Had we 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 three months ended March 31, 2004. The per share weighted average fair value of stock options granted during the three months ended March 31, 2005 was $0.21. The weighted average fair values were determined on the date of grant using the following weighted average assumptions:

2. Liquidity

      From February 2, 2004 to March 31, 2005, we have undergone a significant recapitalization pursuant to which Toucan Capital Fund II, L.P., or Toucan Capital, has loaned us $4.35 million. On January 26, 2005, we entered into a securities purchase agreement with Toucan Capital pursuant to which they purchased 32.5 million shares of our newly designated series A preferred stock at a purchase price of 0.04 per share, for a net purchase price of $1.276 million, net of issue related costs of approximately $24,000.

     As of March 31, 2005, we had cash of approximately $82,000. We will have to seek additional funds from Toucan Capital, which Toucan Capital is not obligated to provide to us. Any additional financing with Toucan Capital or any other third party is likely to be dilutive to stockholders, and any debt financing, if available, may include additional restrictive covenants. If we are unable to obtain significant additional capital in the near-term, we may cease operations at anytime. We do not believe that our assets would be sufficient to satisfy the claims of all of our creditors in full. Therefore, if we were to pursue a liquidation it is highly unlikely that any proceeds would be received by our stockholders.

     Our independent auditors have indicated in their report on our financial statements, included in our December 31, 2004 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.

3. Net Loss Per Share Applicable to Common Stockholders

     Basic and diluted net loss per share applicable to common stockholders has been computed using the weighted-average number of shares of common stock outstanding during the period, less, for the three months ended March 31, 2005, options to purchase 784,000 shares of common stock and warrants to purchase 117 million shares of common and preferred stock as such securities were antidilutive. Options to purchase 1.2 million shares of common stock and warrants to purchase 5 million shares of common and preferred stock were excluded from the calculation of diluted net loss per share for the three months ended March 31, 2004 as such securities were antidilutive.

4. Notes Payable to Related Parties

     Management Loans

     On November 13, 2003, we borrowed an aggregate of $335,000 from members of our management enabling us to continue operating into the first quarter of 2004. Net of repayments, the loan liability remaining at March 31, 2005 is $235,000, as more fully described in the following table:

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     The notes initially had a 12-month term, accrue interest at an annual rate equal to the prime rate plus 2% and were initially secured by substantially all of our assets not otherwise collateralized. 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 and $50,000, including interest of $4,479, was repaid on February 24, 2005. In connection with the April 26, 2004 recapitalization agreement with Toucan Capital, holders of notes representing 70% of the principal amount of the notes agreed to an amendment to their notes 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. The maturity date for these notes was subsequently changed to July 12, 2005.

     As part of the November 13, 2003 loan, the investors received warrants initially exercisable to acquire an aggregate of 3.7 million shares of the Company’s common stock, expiring November 2008 subject to certain antidilution adjustments, at an exercise price to be determined as follows: (i) in the event that the Company completes an offering of its common stock generating gross proceeds of at least $1 million, then the price per share paid by investors in that offering; or (ii) if the Company does not complete such an offering, then $0.18, which was the closing price of its common stock on the date of the financing. 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 anti-dilution provisions and set the warrant exercise price at the lesser of (i) $0.10 per share or (ii) a 35% discount to the average closing price during the twenty trading days prior to the first closing of the sale by the Company of convertible preferred stock as contemplated by the recapitalization agreement but not less than $0.04 per share.

     Proceeds from the offering were allocated between the Notes and Warrants on a relative fair value basis. The value allocated to the warrants on the date of the grant was approximately $221,000. The fair value of the warrants was determined using the Black-Scholes option pricing model with the following assumptions: expected dividend yield of 0%, risk-free interest rate of 3.36%, volatility of 194%, and a contractual life of 5-years. The value of the warrants was recorded as a deferred debt discount against the $335,000 proceeds of the Note. In addition, a beneficial conversion feature related to the Notes was determined to be approximately $221,000 but is capped at the remaining value originally allocated to the Notes of approximately $114,000. As a result, the total discount on the Notes equalled the face value of $335,000 which was fully amortized by December 31, 2004.

     Toucan Capital Loans

     On April 26, 2004 we entered into a recapitalization agreement with Toucan Capital which contemplates the possible recapitalization of our company. At Toucan Capital’s option, and if successfully implemented, the recapitalization could provide us with up to $40 million through the issuance of new securities to Toucan Capital and a syndicate of other investors. Following the recapitalization, Toucan Capital and the investor syndicate would potentially own, on a combined basis, over 90% of our outstanding capital stock. As part of our recapitalization plan we borrowed $4.35 million from Toucan Capital, from February 2, 2004 through March 31, 2005, comprised of the following transactions:

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(1)	As of March 31, 2005. Interest accrues at 10% per annum based on a 365-day basis compounded annually from their respective original issuance dates.
(2)	The warrant shares are exercisable for shares of convertible preferred stock if the convertible preferred stock is approved and authorized and other investors have purchased in cash a minimum of $15 million of such convertible preferred stock, on the terms and conditions set forth in the recapitalization agreement. However, if, for any reason, such convertible preferred stock is not approved or authorized and/or if other investors have not purchased in cash a minimum of $15 million of such convertible preferred stock, on the terms and conditions set forth in the recapitalization agreement, these warrants shall be exercisable for any equity security and/or debt security and/or any combination thereof.
(3)	Exercise period is 7-years from the issuance date of the convertible note except for the February 2 and March 1, 2004 warrants which have an April 26 exercise date.
(4)	Per share exercise price is $0.01
(5)	Per share exercise price is $0.04
(6)	The notes issued February 2, March 1, and April 26, 2004 to Toucan Capital were each amended subsequently to change their respective maturity dates to June 26, 2005.

     The notes are secured by a first priority senior security interest in all of our assets.

5. Unregistered Sales of Equity Securities

Toucan Capital Series A Cumulative Convertible Preferred Stock

          On January 26, 2005, we entered into a securities purchase agreement with Toucan Capital pursuant to which they purchased 32.5 million shares of our newly designated series A preferred stock at a purchase price of $0.04 per share, for a net purchase price of $1.276 million, net of issue related costs of approximately $24,000. The series A preferred stock:

	(i)	is entitled to cumulative dividends at the rate of 10% per year;
	(ii)	is entitled to a liquidation preference in the amount of its initial purchase price plus all accrued and unpaid dividends (to the extent of legally available funds);
	(iii)	has a preference over the common stock with respect to dividends and distributions;
	(iv)	is entitled to participate on an as-converted basis with the common stock on any distributions after the payment of any preferential amounts to the series A stock;

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	(v)	votes on an as converted basis with the common stock on matters submitted to the common stockholders for approval and as a separate class on certain other material matters; and
	(vi)	is convertible into common stock on a one-for-one basis (subject to adjustment in the event of stock dividends, stock splits, reverse stock splits, recapitalizations, etc.).

     The number of shares of common stock issuable upon conversion of each share of series A stock is also subject to increase in the event of certain dilutive issuances in which we sell or are deemed to have sold shares below the then applicable conversion price (currently $0.04 per share). The consent of the holders of a majority of the series A preferred stock is required in the event that we elect to undertake certain significant business actions.

Toucan Capital Series A Warrant

     On January 26, 2005, we issued Toucan Capital a warrant, with a contractual life of 7-years, to purchase 13.0 million shares of series A preferred stock, with an exercise price of $0.04 per share, in connection with Toucan Capital’s purchase of series A preferred stock on January 26, 2005. The number of shares issuable pursuant to the exercise of the warrant and the exercise price thereof is subject to adjustment in the event of stock splits, reverse stock splits, stock dividends, dilutive events and the like.

6. Subsequent Events

     On April 12, 2005, we borrowed an additional $450,000 from Toucan Capital and issued warrants to purchase up to 4.5 million additional shares of our capital stock. The warrant, with a contractual life of 7-years, has an exercise price of $0.04 per share. The number of shares issuable pursuant to the exercise of the warrant and the exercise price thereof is subject to adjustment in the event of stock splits, reverse stock splits, stock dividends, dilutive events and the like.

     On May 13, 2005, we borrowed an additional $450,000 from Toucan Capital and issued warrants to purchase up to 4.5 million additional shares of our capital stock. The warrant, with a contractual life of 7-years, has an exercise price of $0.04 per share. The number of shares issuable pursuant to the exercise of the warrant and the exercise price thereof is subject to adjustment in the event of stock splits, reverse stock splits, stock dividends, dilutive events and the like.

7. Contingency

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

     Beginning on October 9, 2002, we initiated a series of substantial steps to conserve cash, including the relocation and consolidation of our facilities. On June 30, 2003, future lease obligations of approximately $9.1 million were eliminated through the termination of our prior lease when moving to a smaller facility. However, through abandoning the tenant improvements at the prior facility, on which use tax payments to the State of Washington had been deferred, including the disposal and impairment of previously qualified tax deferred equipment, we received a tax assessment of $491,802 on October 21, 2003. The tax assessment payment was initially due on November 20, 2003. This assessment, and accrued interest, is being carried as an estimated liability on the balance sheet as of March 31, 2005 and is included in general and administrative expense. The Company appealed this assessment and does not expect final resolution of this matter until late 2005.

     In February 2004, we filed a refund request of approximately $175,000 related to certain other state taxes to the State of Washington’s Department of Revenue. The finalization of this refund request is expected to take several more months.

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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 within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements 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 are a development stage biotechnology company focused on discovering, developing, and commercializing immunotherapy products that safely generate and enhance immune system responses to effectively treat cancer. Our primary activities since incorporation have been focused on advancing a proprietary dendritic cell immunotherapy for prostate and brain cancer together with strategic and financial planning, and raising capital to fund our operations. We completed an initial public offering of our common stock in December 2001.

     Since 2002, we have only been able to obtain enough capital resources to pursue our strategic plans at a very minimal level. We presently have approval from the U.S. Food and Drug Administration, or FDA, to conduct a Phase III trial for DCVax-Prostate, our product candidate for a possible prostate cancer treatment and a Phase II clinical trial to evaluate our DCVax-Brain product candidate as a possible treatment for Glioblastoma Multiforme. However we do not presently have adequate resources to conduct either of those trials.

     During 2004 and to date in 2005, we have undergone a significant recapitalization pursuant to which Toucan Capital Fund II, L.P. has loaned us $5.25 million and invested $1.3 million in equity, in return for debt securities, preferred stock and warrants.

     As of May 13, 2005, we had cash of approximately $524,000 which we believe will be sufficient to cover short-term payables to approximately June 15, 2005, exclusive of the aggregate loan repayments due Toucan Capital. In addition, we have a $500,000 note (plus accrued interest) from Toucan Capital maturing on June 11, 2005 and additional notes from Toucan Capital in aggregate principal amount of $600,000 (plus accrued interest) maturing on June 26, 2005. We are in discussions with Toucan Capital to negotiate a potential extension of these obligations, but we may not be able to do so. If we fail to negotiate an extension or make other arrangements to refinance these obligations, we will need additional financing on or before June 11, 2005 in order to satisfy these obligations. There can be no assurance that such additional financing would be available on acceptable terms, or at all. We will have to seek additional funds from Toucan Capital, which Toucan Capital is not obligated to provide us. Any additional financing with Toucan Capital and any third party is likely to be dilutive to stockholders, and debt financing, if available, may include additional restrictive covenants.

     Our financial statements for the year ended December 31, 2004 and three months ended March 31, 2005 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 since inception, have a working capital deficit of $6.6 million, and have a deficit accumulated during the development stage of $75.3 million, as of March 31, 2005, that raises substantial doubt about our ability to continue as a going concern and our auditors have issued an opinion on the December 31, 2004 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.

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

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     In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (revised 2004), (SFAS 123R), “Share-Based Payment.” Effective with our fiscal year ending December 31, 2006, SFAS 123R requires the measurement of cost of employee services received in exchange for an award of an equity instrument, such as stock options, based on the grant-date fair-value of the award. The associated cost must be recognized over the period during which an employee is required to provide service in exchange for the award (usually the vesting period). SFAS 123R provides for a variety of implementation alternatives, including accounting for the change prospectively or restating previously reported amounts to reflect the compensation expense that would have been recorded under SFAS 123R. We are in the process of determining the impact of SFAS 123R on our financial statements, including which implementation alternative we will select.

     SFAS No. 151, Inventory Costs an amendment of ARB No. 43, Chapter 4 deals with inventory pricing with respect to abnormal amounts of idle facility expenses, freight, handling costs, and spoilage. Management is analyzing the requirements of this new Statement and believes that its adoption will not have any significant impact on the Company’s financial statements.

     SFAS No. 153, Exchanges of Nonmonetary Assets amends Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. Management is analyzing the requirements of this new standard and believes that its adoption will not have any significant impact on the Company’s financial statements.

     FIN No. 46(R) revised FIN No. 46, “Consolidation of Variable Interest Entities”, requiring the consolidation by a business of variable interest entities in which it is the primary beneficiary. The adoption of FIN No. 46 did not have an impact on the Company’s financial statements.

     The Emerging Issues Task Force (“EITF”) reached consensus on Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“EITF 03-1”) which provides guidance on determining when an investment is considered impaired, whether that impairment is other than temporary and the measurement of an impairment loss. The FASB issued FSP EITF 03-1-1, “Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, ‘The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments"', which delays the effective date for the measurement and recognition criteria contained in EITF 03-1 until final application guidance is issued. The Company does not expect the adoption of this consensus or FSP to have a material impact on its financial statements.

     The EITF reached a consensus on Issue No. 04-8, “The Effect of Contingently Convertible Debt on Diluted Earnings Per Share” (“EITF 04-8”), which addresses when the dilutive effect of contingently convertible debt instruments should be included in diluted earnings (loss) per share. EITF 04-8 is effective for reporting periods ending after December 15, 2004. The adoption of EITF 04-8 did not have an impact on diluted earnings (loss) per share.

Results of Operations

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

     Research and development expenses include salary and benefit expenses and costs of laboratory supplies used in our internal research and development projects. From our inception through March 31, 2005, we incurred costs of approximately $28.9 million associated with our research and development activities. Because our technologies are unproven, we are unable to estimate with any certainty the costs we will incur in the continued development of our product candidates for commercialization.

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

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Three Months Ended March 31, 2004 and 2005

     Total Revenues. Revenues decreased 32% from $127,000 for the three months ended March 31, 2004 to $87,000 for the three months ended March 31, 2005. The research material sales component of revenue decreased 54% from $24,000 for the three months ended March 31, 2004 to $11,000 for the three months ended March 31, 2005. Research grant income decreased 26% from $103,000 for the three months ended March 31, 2004 to $76,000 for the three months ended March 31, 2005. This decrease in grant revenue was attributable to the cessation of the remaining two research grant awards during the first quarter of 2005.

     Cost of Research Material Sales. Cost of research material sales decreased 92% from $25,000 for the three months ended March 31, 2004 to $2,000 for the three months ended March 31, 2005. This lower sales volume resulted primarily from lower direct advertising in select trade journals in the first quarter 2005. 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 increased from $229,000 for the three months ended March 31, 2004 to $1.3 million for the three months ended March 31, 2005. This increase was primarily due to increased expenditures for consultants in preparation of and filing an IND with the FDA and for entering into a service agreement for drug manufacturing, regulatory advice, and research and development related to preclinical activities.

     General and Administrative Expense. General and administrative expense decreased 17% from $557,000 for the three months ended March 31, 2004 to $464,000 for the three months ended March 31, 2005. This decrease was primarily due to the October 9, 2002 directive from our Board of Directors to initiate immediate actions to conserve cash and the resulting staff reductions.

     Depreciation and Amortization. Depreciation and amortization decreased 35% from $37,000 the three months ended March 31, 2004 to $24,000 for the three months ended March 31, 2005. This decrease was primarily due to the disposal or impairment of $337,000 of property and equipment in the third and fourth quarters 2004.

          Total Other Income (Expense), Net. Interest expense increased from $107,000 for the three months ended March 31, 2004 to $809,000 for the three months ended March 31, 2005. This increase was due primarily to recognizing interest expense relative to the debt discount and interest accretion associated with the secured convertible promissory notes and warrants debt financing.

Liquidity and Capital Resources

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

     Beginning on October 9, 2002, we initiated a series of substantial steps to conserve cash, including the relocation and consolidation of our facilities. We received a tax assessment of $491,802 on October 21, 2003 due to our abandonment of tenant improvements at the prior facility, on which use tax payments had been deferred, including the disposal and impairment of previously qualified tax deferred equipment. The tax assessment payment was initially due on November 20, 2003. This assessment, and accrued interest, is being carried as an estimated liability on our balance sheet as of March 31, 2005 and is included in general and administrative expense. We have appealed this assessment and do not expect final resolution of this matter until late 2005.

     In February 2004, we filed a refund request of approximately $175,000 related to certain state taxes previously paid to the State of Washington. The finalization of this refund request is expected to take several more months.

     From February 1, 2004 through May 13, 2005, we borrowed $5.25 million from Toucan Capital. Toucan Capital has the right, as of May 14, 2005, to convert principal and interest on the loans to acquire up to approximately 139.6 million shares of our capital stock and has the right to acquire up to approximately 120.5 million shares upon exercise of related warrants, inclusive of the 13.0 million series A warrants. Including the 32.5 million shares of series A preferred stock held by Toucan Capital, they have beneficial ownership of approximately 292.6 million shares of our capital stock, representing a as-converted beneficial ownership of approximately 93.9% of our common stock. Toucan Capital has a right of first refusal to participate in our future issuances of debt or equity securities.

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          As of May 13, 2005, we had cash of approximately $524,000 which we believe will be sufficient to cover short-term payables to approximately June 15, 2005, exclusive of the aggregate loan repayments due Toucan Capital. In addition, we have a $500,000 note (plus accrued interest) from Toucan Capital maturing on June 11, 2005 and additional notes from Toucan Capital in aggregate principal amount of $600,000 (plus accrued interest) maturing on June 26, 2005. We are in discussions with Toucan Capital to negotiate a potential extension of these obligations, but we may not be able to do so. If we fail to negotiate an extension or make other arrangements to refinance these obligations, we will need additional financing on or before June 11, 2005 in order to satisfy these obligations. There can be no assurance that such additional financing would be available on acceptable terms, or at all. We will have to seek additional funds from Toucan Capital, which Toucan Capital is not obligated to provide us. Any additional financing with Toucan Capital and any third party is likely to be dilutive to stockholders, and debt financing, if available, may include additional restrictive covenants.

     If we are unable to obtain significant additional capital in the near-term, we may cease operations at anytime. We do not believe that our assets would be sufficient to satisfy the claims of all of our creditors in full. Therefore, if we were to pursue a liquidation it is highly unlikely that any proceeds would be received by our stockholders.

     Our independent auditors have indicated in their report on our financial statements, included in our December 31, 2004 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.

Sources of Cash

Federal Grants

     On April 8, 2003, we were awarded a NIH cancer research grant. The total first year grant award was approximately $318,000, was earned under the grant, and was recognized in revenue through the year ended December 31, 2003. The total award for fiscal 2004 — 2005 was approximately $328,000, comprised of approximately $198,000 authorized for direct grant research expenditures and approximately $130,000 authorized for use to cover our facilities and administrative overhead costs. This grant’s remaining $35,000 award was recognized in January 2005. This grant ended January 31, 2005.

     Effective September 10, 2004, we were awarded a small business innovation research grant. The grant award for $100,000 had an award period that commenced September 10, 2004. There was approximately $59,000 earned under the grant and recognized in revenue through the year ended December 31, 2004, with the remaining $41,000 of the grant’s aggregate award recognized through the three months ended March 31, 2005.

Research Reagent Sales

     On April 21, 2003, we announced our entry into the research reagents market. We earned approximately $11,000 in revenue for the three months ended March 31, 2005 from the manufacture and sale of research materials. We are unable to project when, if ever, our sales of research materials will attain a consistent profitability.

License Fees

     Our effort to license certain rights, title, and interest to technology relating to the worldwide use of specific antibodies for the diagnostic immunohistochemical market resulted in the July 1, 2003 license agreement with DakoCytomation California, Inc. 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 us. The $25,000 one-time license fee was received on August 25, 2003. We waived the payment of the July 1, 2004 annual royalty payment because of costs incurred by DakoCytomation, on our behalf, regarding purity issues with the initial cell lines.

Management Loan

     On November 13, 2003, we borrowed an aggregate of $335,000 from members of our management. The notes accrue interest at an annual rate equal to the prime rate plus 2% and are payable by July 12, 2005 and were initially secured by substantially all of our assets not otherwise collateralized. We repaid $50,000, including interest of $1,674, on June 1, 2004 and repaid an additional $50,000, including interest of $4,497, on February 24, 2005.

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     As part of the management loan, the lenders were issued 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 completed 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 did 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 our April 26, 2004 recapitalization agreement these warrants were amended to remove the 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 us of convertible preferred stock as contemplated by the recapitalization agreement but not less than $0.04 per share.

Uses of Cash

     We used $260,000 in cash for operating activities during the three months ended March 31, 2004, compared to $1.5 million for the three months ended March 31, 2005. The increase in cash used in operating activities from 2004 to 2005, was primarily the result of increased expenditures for consultants in preparation of and filing an IND with the FDA and for entering into a service agreement for drug manufacturing, regulatory advice, and research and development related to preclinical activities.

     We generated $76,000 in cash from investing activities during the three months ended March 31, 2004 compared to $81,000 provided by investing activities during the three months ended March 31, 2005. The cash provided during the three months ended March 31, 2005 consisted of net proceeds from the sale of property and equipment.

     We generated $89,000 in cash from financing activities for the three months ended March 31, 2004 primarily from the February 2 and March 1, 2004 loans, $50,000 each, from Toucan Capital. We generated $1.2 million in cash from financing activities during the three months ended March 31, 2005 consisting primarily of the January 26, 2005 securities purchase agreement with Toucan Capital pursuant to which they purchased 32.5 million shares of our newly designated series A preferred stock at a purchase price of $0.04 per share, for a net purchase price of $1.276 million, net of issue related costs of approximately $24,000.

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 our annual report on Form 10-K for the year ended December 31, 2004 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.

We will need to raise additional capital which may not be available.

     As of May 13, 2005, we had cash of approximately $524,000 which we believe will be sufficient to cover short-term payables to approximately June 15, 2005, exclusive of the aggregate loan repayments due Toucan Capital. In addition, we have a $500,000 note (plus accrued interest) from Toucan Capital maturing on June 11, 2005 and additional notes from Toucan Capital in aggregate principal amount of $600,000 (plus accrued interest) maturing on June 26, 2005. We are in discussions with Toucan Capital to negotiate a potential extension of these obligations, but we may not be able to do so. If we fail to negotiate an extension or make other arrangements to refinance these obligations, we will need additional financing on or before June 11, 2005 in order to satisfy these obligations. There can be no assurance that such additional financing would be available on acceptable terms, or at all. We will have to seek additional funds from Toucan Capital, which Toucan Capital is not obligated to provide us. Any additional financing with Toucan Capital and any third party is likely to be dilutive to stockholders, and debt financing, if available, may include additional restrictive covenants.

If we are unable to obtain significant additional capital in the near-term, we may cease operations at anytime. We do not believe that our assets would be sufficient to satisfy the claims of all of our creditors in full. Therefore, if we were to pursue a liquidation it is highly unlikely that any proceeds would be received by our stockholders.

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

     Our independent auditors have indicated in their report on our December 31, 2004 financial statements 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. Therefore, you should not rely on our consolidated balance sheet as an

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indication of the amount of proceeds that would be available to satisfy claims of creditors, and potentially be available for distribution to stockholders, in the event of a liquidation.

     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 March 31, 2005, we had a deficit accumulated during the development stage of approximately $75.3 million. We have had net losses applicable to common stockholders as follows:

	•	$12.8 million in 2002;
	•	$5.8 million in 2003; and
	•	$8.6 million in 2004.

     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 still in development. We may not be able to achieve revenue growth in the future. We have generated the following limited revenues:

	•	$9,000 in 2002;
	•	$529,000 in 2003; and
	•	$390,000 in 2004.

     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 revenues, if any, will be derived through grants, partnering agreements, and, ultimately, the commercialization of our product candidates.

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

     Due to rising insurance premiums for most business insurance coverage, our reduced level of operating activity, and reduced liability exposure through the cessation of all clinical trials, we lowered the levels of all of our insurance coverage. Making a material reduction in our insurance coverage may make it difficult for us to acquire new 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.

We may not be able to retain or recruit personnel.

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     Since September 2002, we reduced our research and administrative staff approximately 94%, from 67 employees to a remaining staff of four full-time employees, as of May 14, 2005. 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 or prevent us from hiring qualified staff. To the extent that we are unable to retain our existing personnel, our business and financial results may suffer.

Failure to obtain regulatory approval for one or more of our product candidates could significantly harm our business.

     All of our product candidates are still under development. None of our product candidates will be commercially available prior to FDA approval. Significant further financial resources and personnel will be required to develop commercially viable products and obtain regulatory approvals. Much of our efforts and expenditures over the next few years will be devoted to completing the last clinical trials and seeking FDA approval for our lead product candidates, DCVax-Prostate and DCVax-Brain.

     Success in pre-clinical studies and prior clinical trials does not ensure that subsequent large-scale trials will likewise be successful, nor is it a basis for predicting final results. A number of companies in the biotechnology industry have suffered significant setbacks in advanced clinical trials, even after promising results have been achieved in earlier trials. Failure to obtain Food and Drug Administration, or FDA, approval for one or more of our product candidates could significantly harm our business.

We have no manufacturing capabilities, which could adversely impact our ability to commercialize our product candidates.

     We have no manufacturing facilities nor expertise to produce our product candidates. We have never manufactured, on a commercial scale, any of our product candidates. We currently have manufacturing arrangements in place with a contract manufacturer (Cognate Therapeutics). However, we may not be able to enter into agreements with contract manufactures for the manufacture of any of our product candidates at a reasonable cost or in sufficient quantities to be profitable.

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

     The commercial success of any of our product candidates 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 products. To fully commercialize our product candidates, 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.

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. The success of our restructured operations will depend on our ability to attract partners to our research initiatives. 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.

     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 product candidates. As a result, those partners:

	•	may not commit sufficient resources to our programs or product candidates;
	•	may not conduct their agreed activities on time, or at all, resulting in delay or termination of the development of our product candidates and technology;

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	•	may not perform their obligations as expected;
	•	may pursue products or alternative technologies in preference to ours; or
	•	may dispute the ownership of products or technology developed under our partnerships.

     We may have disputes with our partners, which could be costly and time consuming. Our failure to successfully defend our rights could seriously harm our business, financial condition and operating results. We intend to continue to enter into partnerships in the future. However, we may be unable to successfully negotiate any additional partnerships and any of these relationships, if established, may not be scientifically or commercially successful. We also work with scientists and medical professionals at academic and other institutions, including the University of California, Los Angeles, M.D. Anderson Cancer Center, and the H. Lee Moffitt Cancer Center some of whom have conducted 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 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 Immuno-Designed Molecules, Inc., are actively involved in the research and development of cell-based cancer therapeutics. 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 seven antibody-based products are approved for commercial sale for cancer therapy. Genentech is also engaged in several Phase III clinical trials for additional antibody-based therapeutics for a variety of cancers, and several other companies are in early stage clinical trials for such products. Many other third parties compete with us in developing alternative therapies to treat cancer, including:

	•	biopharmaceutical companies;
	•	biotechnology companies;
	•	pharmaceutical companies;
	•	academic institutions; and
	•	other research organizations.

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

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

	•	obtain additional funding;
	•	successfully complete clinical trials and obtain all requisite regulatory approvals;
	•	maintain a proprietary position in our technologies and products;

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	•	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 15 issued and licensed patents (eight in the United States and seven in foreign jurisdictions) and 104 patent applications pending (18 in the United States and 86 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 2018.

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

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

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

     There is a substantial amount of litigation involving patent and other intellectual property rights in the biotechnology and biopharmaceutical industries generally. Infringement and other intellectual property claims, with or without merit, can be expensive and time-consuming to litigate and can divert

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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.

     Third parties 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 we may infringe. There could also be existing patents of which we are not aware that we may inadvertently infringe.

     If we lose a patent infringement lawsuit, we could be prevented from commercialing 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 commercialing our product candidates 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.

Toucan Capital owns the vast majority of our stock and, as a result, the trading price for our shares may be depressed as they can take actions that may be adverse to your interests.

     From February 1, 2004 through May 13, 2005, we borrowed $5.25 million from Toucan Capital. Toucan Capital has the right, as of May 14, 2005, to convert principal and interest on the loans to acquire up to approximately 139.6 million shares of our capital stock and has the right to acquire up to approximately 120.5 million shares upon exercise of related warrants, inclusive of the 13.0 million series A warrants. Including the 32.5 million of series A preferred stock held by Toucan Capital, they have beneficial ownership of approximately 292.6 million shares of our capital stock, representing a as-converted beneficial ownership of approximately 93.9% of our common stock.

     The notes held by Toucan Capital are currently convertible into common stock or series A preferred stock at Toucan’s election, at the price of $0.04 per share and the series A stock is similarly convertible into common stock. Finally, the warrants held by Toucan are exercisable at exercise prices ranging from $0.01 to $0.04 per share. 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 Capital, have 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.

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.

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

	•	announcements of technological innovations or new products by us or our competitors;
	•	development and introduction of new cancer therapies;
	•	media reports and publications about cancer therapies;
	•	announcements concerning our competitors or the biotechnology industry in general;
	•	new regulatory pronouncements and changes in regulatory guidelines;
	•	general and industry-specific economic conditions;
	•	changes in financial estimates or recommendations by securities analysts; and
	•	changes in accounting principles.

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

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

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

	•	authorize the issuance of preferred stock that can be created and issued by the board of directors without prior stockholder approval, commonly referred to as “blank check” preferred stock, with rights senior to those of common stock;
	•	authorize our board of directors to issue dilutive shares of common stock upon certain events; and
	•	provide for a classified board of directors.

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

Toucan Capital has the ability to control our company.

      From February 1, 2004 through May 13, 2005, we borrowed $5.25 million from Toucan Capital. Toucan Capital has the right, as of May 14, 2005, to convert principal and interest on the loans to acquire up to approximately 139.6 million shares of our capital stock and has the right to acquire up to approximately 120.5 million shares upon exercise of related warrants, inclusive of the 13.0 million series A warrants. Including the 32.5 million of series A preferred stock held by Toucan Capital, they have beneficial ownership of approximately 292.6 million shares of our capital stock, representing a as-converted beneficial ownership of approximately 93.9% of our common stock. Toucan Capital has a right of first refusal to participate in our future issuances of debt or equity securities.

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     In addition, under the terms of our recapitalization agreement, we are required to consult with Toucan Capital on how we conduct many aspects of our business. As a result, Toucan Capital has significant authority over how we conduct our business, and with its stock acquisition rights, could influence or control all matters requiring stockholder approval. This control may cause us to conduct our business differently from the way we have in the past. The concentration of ownership may also delay, deter or prevent acts that would result in a change in control, which, in turn, could reduce the market price of our common stock.

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.

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 and our controller, after evaluating, as required, the effectiveness of our “disclosure controls and procedures” (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), recognized, as of March 31, 2005, our disclosure controls and procedures contained certain internal control weaknesses that, in the aggregate, represent material weaknesses.

     The identified weaknesses were anticipated given the company’s status with respect to its number of employees (four full-time employees). The weaknesses were comprised of: insufficient segregation of duties, insufficient corporate governance policies, and lack of independent directors as of March 31, 2005. Each of these weaknesses is expected to be corrected with the recapitalization of our company. SEC release #33-8545 extends the deadline for section 404 compliance for non-accelerated filers, such as our company, to the first fiscal year ending on or after July 15, 2006.

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     As part of the communications by Peterson Sullivan with our audit committee with respect to Peterson Sullivan’s audit procedures for 2005, Peterson Sullivan informed the audit committee that these deficiencies constituted material weaknesses, as defined by Auditing Standard No. 2 , “An Audit of Internal Control Over Financial Reporting Performed in Conjunction with an Audit of Financial Statements,” established by the Public Company Accounting Oversight Board, or PCAOB.

Part II — Other Information

Item 1. Legal Proceedings

     We are presently party to an arbitration proceeding with Soma Partners, LLC, an investment bank located in New Jersey. We were parties with Soma to an engagement letter dated October 15, 2003 pursuant to which we engaged them to locate potential investors. Pursuant to the terms of the engagement letter, any disputes arising between the parties would be submitted to arbitration in the New York metropolitan area. Soma filed an arbitration statement of claim against us with the American Arbitration Association in New York, NY claiming unpaid commission fees of $186,000 and seeking declaratory relief regarding potential fees for future transactions that may be undertaken by us with Toucan Capital.

     Soma has filed an amended arbitration statement of claim claiming unpaid commission fees of $339,000, as well as warrants to purchase 6% of the aggregate securities issued, and seeking declaratory relief regarding potential fees for future financing transactions which may be undertaken by us with Toucan Capital and others. If Soma were to prevail, the arbitrator could also award its attorneys’ fees and costs related to the proceedings. The arbitrator might also award declaratory relief to Soma regarding potential fees for future financing transactions that may be undertaken by us with Toucan Capital and others. We strongly dispute Soma’s claims and are defending ourselves. The arbitration proceedings occurred from March 8-10, 2005 and the arbitrator has indicated he will issue his ruling before approximately May 25, 2005.

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

Toucan Capital Series A Cumulative Convertible Preferred Stock

          On January 26, 2005, we entered into a securities purchase agreement with Toucan Capital pursuant to which they purchased 32.5 million shares of our newly designated series A preferred stock at a purchase price of $0.04 per share, for a net purchase price of $1.276 million, net of issue related costs of approximately $24,000. The series A preferred stock:

	(i)	is entitled to cumulative dividends at the rate of 10% per year;
	(ii)	is entitled to a liquidation preference in the amount of its initial purchase price plus all accrued and unpaid dividends (to the extent of legally available funds);
	(iii)	has a preference over the common stock with respect to dividends and distributions;
	(iv)	is entitled to participate on an as-converted basis with the common stock on any distributions after the payment of any preferential amounts to the series A stock;
	(v)	votes on an as converted basis with the common stock on matters submitted to the common stockholders for approval and as a separate class on certain other material matters; and
	(vi)	is convertible into common stock on a one-for-one basis (subject to adjustment in the event of stock dividends, stock splits, reverse stock splits, recapitalizations, etc.).

     The number of shares of common stock issuable upon conversion of each share of series A stock is also subject to increase in the event of certain dilutive issuances in which we sell or are deemed to have sold shares below the then applicable conversion price (currently $0.04 per share). The consent of the holders of a majority of the series A preferred stock is required in the event that we elect to undertake certain significant business actions.

Toucan Capital Series A Warrant

     On January 26, 2005, we issued Toucan Capital a warrant, with a contractual life of 7-years, to purchase 13.0 million shares of series A preferred stock, with an exercise price of $0.04 per share, in connection with Toucan Capital’s purchase of series A preferred stock on January 26, 2005. The number of shares issuable pursuant to the exercise of the warrant and the

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exercise price thereof is subject to adjustment in the event of stock splits, reverse stock splits, stock dividends, dilutive events and the like.

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(1) Incorporated by reference to the exhibit shown in the preceding parenthese filed with the Registrant’s Form DEF 14A on December 2, 2004.

(2) Incorporated by reference to the exhibit shown in the preceding parenthese filed with the Registrant’s Form 8-K on February 1, 2005.

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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.

	NORTHWEST BIOTHERAPEUTICS, INC
Dated: May 13, 2005	By:	/s/ Alton L. Boynton
		Alton L. Boynton
		President (Principal Executive Officer)

Dated: May 13, 2005	By:	/s/ Larry L. Richards
		Larry L. Richards
		Controller (Principal Financial and Accounting Officer)

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NORTHWEST BIOTHERAPEUTICS, INC.
(A Development Stage Company)

EXHIBIT INDEX

(1) Incorporated by reference to the exhibit shown in the preceding parenthese filed with the Registrant’s Form DEF 14A on December 2, 2004.

(2) Incorporated by reference to the exhibit shown in the preceding parenthese filed with the Registrant’s Form 8-K on February 1, 2005.

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