In May 2007, we further reduced our workforce to decrease operating costs. The cash outflow of this RIF was $0.6 million during 2007. This RIF mostly impacted R&D. Beginning in July 2007, additional wage savings were $0.1 million per month. We do not expect these savings to be materially offset by any anticipated increases in other expenses.
In June 2007, we terminated by mutual consent our agreement with the Chemo-Sero-Therapeutic Research Institute of Japan, or Kaketsuken, to co-develop a next-generation, attenuated smallpox vaccine, LC16m8, for use in the United States and elsewhere. Under the terms of the termination agreement, we transferred to Kaketsuken or its designee all reports, data and materials and all intellectual property rights that relate to conducting non-clinical and clinical development of LC16m8 in the U.S. In return, Kaketsuken has released us from all ongoing obligations.
In September 2007, we further reduced our workforce to decrease operating costs. Restructuring costs included employee termination and benefit costs. Costs of the restructuring were $1.1 million. The cash outflow of this RIF was $0.9 million during 2007 and is expected to be $0.2 million during 2008. Beginning in October 2007, additional wage savings were $0.3 million per month. We do not expect these savings to be materially offset by any anticipated increases in other expenses.
In October 2007, we amended our lease agreement, dated October 26, 1998. The Lease Amendment calls for us to relinquish occupancy of one of our two buildings subject to the lease, effective March 1, 2008. The Lease Amendment will reduce our lease obligations by $12.2 million over the remaining lease term, which runs through December 31, 2016. We paid a surrender fee to the landlord of $0.1 million. Under the Lease Amendment, the amount of the $2.4 million letter of credit we delivered in favor of the landlord was reduced by $1.0 million, with further reductions over the remaining term of the lease upon our achievement of financial benchmarks.
In November 2007, we entered into the Merger Agreement with Raven. Raven is a private, development stage biopharmaceutical company focused on the discovery, development and commercialization of monoclonal antibody-based products for the treatment of cancer. Upon the terms and subject to the conditions set forth in the Merger Agreement, we will issue, and holders of Raven Series D preferred stock will receive, approximately 32 million shares of our common stock (subject to adjustment in certain conditions as described in the Merger Agreement), such that following the consummation of the transactions contemplated by the Merger Agreement, our current stockholders will own approximately 50.9% of the combined company and current Raven Series D preferred stockholders will own approximately 49.1% of the combined company. The merger is intended to qualify as a tax-free reorganization under the provisions of Section 368(a) of the Code. The merger is subject to customary closing conditions, including approval by our stockholders. A special meeting of our stockholders has been called for March 28, 2008 to vote on, among other things, a proposal to approve the issuance of our shares in the proposed merger. If approved by stockholders, the merger is expected to close in early April 2008.
The October 2007 Lease Amendment and the November 2007 announcement of the proposed merger with Raven acted as triggers for an assessment of an impairment of our equipment and leasehold improvements in our California manufacturing and office facilities. Based on the impairment analysis performed, we recorded an impairment charge of $10.7 million for the quarter ended December 31, 2007. The impairment charge primarily includes $6.2 million relating to the write-down of our manufacturing facility to fair market value based on discussions with sales agents and our attempts to market the facility previously, and $3.2 million relating to the anticipated sale or abandonment of software and other information technology assets and their consequential write-down to fair market value.
Because our stockholders will own approximately 50.9% of the voting stock of the combined company after the merger and have four out of seven Board seats, we expect to be the acquiring company for accounting purposes in accordance with accounting principles generally accepted in the United States. Accordingly, the assets and liabilities of Raven will be recorded as of the merger closing date at their estimated fair values.
Celltrion
Celltrion, Inc., or Celltrion, is a development stage biologics manufacturing company incorporated on February 26, 2002. Since that date, its principal activities have consisted of design, construction and operation of a manufacturing facility in Incheon, Republic of Korea, and partially funding the construction of our U.S. biopharmaceutical manufacturing facility, as well as raising capital and recruiting scientific and management personnel. Prior to implementing the consolidation provisions within FIN 46R, we had reflected our investment in Celltrion in our Consolidated Financial Statements using the equity method. All comparative financial data included in this report for periods prior to January 1, 2004 reflects our accounting for Celltrion as an equity method investee and consolidates the accounts of Celltrion from January 1, 2004 through June 30, 2005.
In September 2005, we entered into agreements to sell 1.2 million of our shares in Celltrion to a group of Korean investors and raise $15.1 million in gross proceeds. Nexol purchased 250,000 of these shares. Subsequent to this transaction, Nexol and its affiliates, collectively, became the largest stockholder of Celltrion. Upon this reconsideration event, we were no longer the primary beneficiary of Celltrion and, in accordance with FIN 46R, Celltrion was deconsolidated from our consolidated financial statements; therefore, from July 1, 2005 to June 30, 2006, our investment in Celltrion was again accounted for under the equity method.

During June and December 2006, we received aggregate gross proceeds of $130.3 million from the sale of substantially all of our Celltrion common stock to Nexol and affiliates of Nexol. As a result, we were no longer entitled to hold two seats on Celltrion's Board of Directors or appoint a Representative Director. Accordingly, we no longer had the ability to exercise significant influence over operating and financial policies of Celltrion, and beginning July 1, 2006, we accounted for our investment in Celltrion under the cost method. At December 31, 2007 and 2006, we held a nominal ownership interest in Celltrion.
Significant Debt Transaction
In April 2005, we raised aggregate net proceeds of $29.7 million through a private placement of $31.5 million of Convertible Senior Subordinated Notes, or Notes, due April 1, 2010. The Notes have the following terms:
• semi-annual payments of interest in cash at a rate of 5 1/2%, due April 1 and October 1;

• convert, at the option of the holder, into shares of our common stock at an initial conversion price of $14.76 per share subject to adjustment;

• provisionally redeemable at our option for a redemption price of 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, plus an interest make-whole payment, under certain circumstances, including among others, that the closing price of our common stock has exceeded $22.14 per share, subject to adjustment, for at least 20 trading days within a period of 30 consecutive trading days;

• constitute our senior subordinated obligations; and

• if a change in control occurs, as defined in the indenture, on or prior to the stated maturity of the Notes, in certain circumstances the holders of the Notes may require us to repurchase the Notes and pay a make-whole premium to the holders of the Notes. If the stock price on the effective date of redemption is less than $12.30 per share, no make-whole premium will be paid. If the holders request such a repurchase, we or our successor entity, may choose to pay in cash, common stock or a combination of cash and common stock. This feature constitutes a put-option derivative liability.

Significant Equity Transaction
In February 2006, we raised net proceeds of $25.2 million through a private placement of 3.5 million shares of common stock at $7.70 per share to a group of accredited institutional investors. We also issued to the investors five-year warrants initially exercisable to purchase 698,637 shares of common stock at an exercise price of $9.24 per share. Because we did not file all of our delinquent periodic reports with the SEC by January 31, 2007, the warrants became exercisable for an additional 698,630 shares of common stock, at a price of $9.24 per share.
Bridge Loan
In November 2007, we entered into a loan agreement with Raven, or Bridge Loan, which provides for us to lend Raven up to $6 million in the aggregate, beginning December 1, 2007. Under the Bridge Loan, we are obligated to provide monthly loan advances to Raven based on a schedule attached to the Bridge Loan. Our obligations to make loan advances to Raven will end on the earliest to occur of
(1) the closing of the merger, (2) April 1, 2008, (3) 30 days after a termination of the Merger Agreement other than for breach, or (4) immediately if we terminate the Merger Agreement, either because of a breach by Raven or because we decide to pursue an alternative transaction as permitted in the Merger Agreement and we pay the $2 million break up fee specified in the Merger Agreement. The loans to be made under the Bridge Loan are intended to provide working capital for Raven's business operations and its continued development of its technology. The loans will not be used for transaction expenses or for severance or retention of Raven employees. Upon the closing of the merger, the loans will be forgiven. If the merger does not close and Raven has not breached the Merger Agreement and neither party has elected to pursue an alternative transaction, then the loans are to be repaid in full on June 1, 2009. If the Merger Agreement is terminated because of a breach by Raven, then the loans are subject to repayment 60 days after termination. If the Merger Agreement is terminated because Raven has determined to pursue an alternative transaction, the loans are subject to repayment on the earlier of 10 days after the termination or the closing of the Raven alternative transaction. The loans are subject to repayment in full if there is an event of default under the promissory note. The loans are also subject to mandatory prepayment if the merger does not close and Raven obtains equity or debt financing. In that event, the amount of prepayment will be 10% of the amount of the proceeds of any equity or debt financing up to $5 million, and will be 20% of the amount of the proceeds of any equity or debt financing in excess of $5 million. The loans are subordinated to the interests of Raven's senior lender, Venture Lending and Leasing, or VLL. The loans are senior to the loans made by Raven's Series D preferred stockholders under a note purchase agreement between such stockholders and Raven dated November 12, 2007. At any time, we can prepay the amount of indebtedness that Raven owes to VLL, and upon such repayment, the loans will be increased by the amount paid to VLL and the loans will automatically become secured by all of Raven's intellectual property. At December 31, 2007, we had loaned Raven $1.3 million under the Loan Agreement.

Subsequent Events
Bridge Loan to Raven
In January and February 2008, we loaned Raven an additional $1.4 million and $1.4 million, respectively, under the Bridge Loan (see Note 4 to the Consolidated Financial Statements).
Note Repurchase
In February 2008, we repurchased two of our Notes due in 2010 in an aggregate principal amount of $1.5 million at a purchase price of $0.8 million, plus accrued interest.
Second Merger Amendment
In February 2008, we entered into Amendment No. 2 to the Merger Agreement, whereby the parties decreased our guaranteed closing cash balance from $64.0 million to $63.2 million in recognition of our repurchase of $1.5 million principal amount of our outstanding Notes. Registration of Shares
In February 2008, our registration statement on Form S-1 became effective.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our significant accounting policies are described in Note 2 to the Consolidated Financial Statements. Our discussion and analysis of our operating results and financial condition are based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of the financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances; we review our estimates on an ongoing basis. While we believe our estimates, judgments and assumptions are reasonable, the inherent nature of estimates is that actual results will likely be different from the estimates made. We believe that our critical accounting estimates have the following attributes: (1) we are required to make judgments and assumptions about matters that are uncertain at the time of the estimate; (2) our use of reasonably different assumptions would change our estimates and (3) changes in estimates could have a material effect on our financial condition or results of operations. Our estimates, particularly estimates of the fair value of the embedded derivatives associated with our Notes have changed significantly from period to period and we expect that such estimates will continue to fluctuate in future periods. Application of the following critical accounting policies and estimates requires us to exercise judgments that affect our financial statements. Revenue Recognition
Substantially all of our revenues to date relate to cost-plus-fixed-fee contractual arrangements with agencies of the U.S. government. Revenue is recognized as work is performed, based on allowable actual costs incurred. We generally issue invoices on a monthly basis. Under cost-plus-fixed-fee contracts, we are reimbursed for allowable costs and receive a fixed fee, which is negotiated and specified in the contract. Revenues for the fixed fee portion are recognized when milestones are achieved and accepted by the customer. Contract costs include direct and indirect research and development costs and allowable indirect general and administrative expenses.
U.S. government contracts and subcontracts are subject to annual audit, various profit and cost controls and standard provisions for termination at the convenience of the U.S. government. In April 2007, our direct and indirect contract costs were settled with the U.S. government and NIAID agreed to pay us $11.0 million.
For non-government arrangements, the Company recognizes revenues in accordance with SEC Staff Accounting Bulletin, or SAB, No. 104, Revenue Recognition in Financial Statements. In such instances, revenues are recognized when there is persuasive evidence of an arrangement, delivery has occurred or services have been performed, the selling price to the buyer is fixed or determinable and collectibility is reasonably assured.
Property and Equipment
We have a significant investment in long-lived property and equipment. We estimate that the undiscounted future cash flows expected to result from the use of these assets and compare it to the current carrying value of these assets. Any adverse change in the estimate of these undiscounted future cash flows could necessitate an impairment charge that would adversely affect operating results if the fair market value of the assets is less than the net book value. We estimate useful lives for our assets based on historical experience, estimates of assets' commercial lives, and the likelihood of technological obsolescence. Should the actual useful life of a class of assets differ from the estimated useful life, we would record an impairment charge. We review useful lives and obsolescence and we assess commercial viability of these assets periodically.

For the year ended December 31, 2007, we recorded an impairment charge of $10.7 million triggered by the Merger Agreement signed in November 2007 as well as the October 2007 Lease Amendment. The impairment recognized the write-down of the manufacturing facility, equipment, certain software and leasehold improvements. The Company estimated the fair market value of the impaired assets related to the Merger Agreement based on estimated realizable value upon sale of the facility determined by discussions with sales agents and efforts to date in the marketing of the facility; discussions with resellers relating to the manufacturing equipment; and the depreciation of software over the remaining estimated useful life prior to abandonment, which is expected in May 2008. Because the leasehold improvements related to the building being vacated under the Lease Amendment were abandoned upon vacating the building in February 2008, the fair market value of these assets as of December 31, 2007 was estimated based on the depreciation of these assets for the remaining two months of their useful lives.
Valuation of Derivative Instruments
We value certain embedded features issued in connection with the financing of our Notes in 2005 as a derivative liability. We estimate the fair value of our derivative liability each quarter using the Monte Carlo Simulation methodology. This methodology allows flexibility in incorporating various assumptions such as probabilities of certain triggering events. The valuations are based on the information available as of the various valuation dates. Factors affecting the amount of this liability include the market value of our common stock, the estimated volatility of our common stock, our market capitalization, the risk-free interest rate and other assumptions such as the probability of a change in control event. Of these valuation parameters, management's assessment of the probability of a change in control is the most subjective and also has the greatest influence on fair value. Note that a merger with Raven would not be considered a change of control for this purpose. We assessed the probability of a change in control at 40% at December 31, 2007. A 5% increase or decrease in this assumption would result in a change in fair value of the derivative liability of approximately $0.3 million to $0.4 million. Changes in value are recorded as non-cash valuation adjustments within other income (expense) in our consolidated statements of operations. At December 31, 2007, we estimated the fair value of the derivative liability associated with the Notes to be $3.5 million.
Stock-based Compensation Expense
Effective January 1, 2006, we adopted the fair value recognition provisions of FAS 123R, using the modified prospective transition method, and therefore have not restated prior periods' results. Under this method we recognize compensation expense for all stock-based payments granted after January 1, 2006, and prior to but not yet vested as of January 1, 2006, in accordance with FAS 123R. Under the fair value recognition provisions of FAS 123R, we recognize stock-based compensation net of an estimated forfeiture rate and only recognize compensation cost for those shares expected to vest on a straight-line basis over the requisite service period of the award. Prior to FAS 123R adoption, we accounted for stock-based payments under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, or APB 25, and accordingly, recognized compensation expense for options that were granted at an exercise price below their deemed fair market value and for modifications to options.
Determining the appropriate fair value model and calculating the fair value of stock-based payment awards require the input of various highly-subjective assumptions, including the expected life of the stock-based payment awards, our stock price volatility and the expected forfeiture rate of our options. Management determined the expected stock price volatility assumption based upon our historical volatility. We believe this method of computing volatility is more reflective and a better indicator of the expected future volatility, than using an average of a comparable market index or of a comparable company in the same industry. The expected term of options granted was derived from the short-cut method described in SEC's Staff Accounting Bulletin No. 107. The risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The assumptions used in calculating the fair value of stock-based payment awards represent management's best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. If our actual forfeiture rate is materially different from our estimate, the stock-based compensation expense could be significantly different from what we have recorded in the current period. See Notes 2 and 10 to the Consolidated Financial Statements for more information regarding stock-based compensation. Income Taxes
In July 2006, the Financial Accounting Standards Board, or FASB, issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109, or FIN 48. Effective January 1, 2007, we adopted FIN 48 and FIN 48-1; see Note 11 to the Consolidated Financial Statements for more information regarding our income tax policies. We have filed tax returns with positions that may be challenged by the tax authorities. These positions relate to, among others, deductibility of certain expenses, expenses included in our research and development tax credit computations, as well as other matters. Although the outcome of tax audits is uncertain, in management's opinion, adequate provisions for income taxes have been made for potential liabilities resulting from such matters. We regularly assess the tax positions for such matters and include reserves for those differences in position. The reserves are utilized or reversed once the statute of limitations has expired and/or at the conclusion of the tax examination. We believe that the ultimate outcome of these matters will not have a material impact on our financial position, financial operations or liquidity.

RESULTS OF OPERATIONS
Comparison of Years Ended December 31, 2007, 2006 and 2005

Revenue

                                         Year Ended December 31,                  Annual Percent Change
                                   2007           2006           2005         2007/2006           2006/2005
                                             (in thousands)
Research contracts and grants    $   4,098      $  13,205      $  29,073             (69 %)              (55 %)
Other services                         913              -              -               *                   *
Related party services                   -          1,631            866            (100 %)               88 %

Total revenues                   $   5,011      $  14,836      $  29,939             (66 %)              (50 %)

* Calculation not meaningful.

Revenue was primarily driven by expensed activity reimbursed by the U.S. government. Research contracts and grants revenue in 2007 primarily related to the reimbursement of restructuring costs resulting from the termination of our SNS Contract in December 2006. Research contracts and grants revenue in 2006 and 2005 primarily related to work performed under our Anthrax Contracts. These revenues decreased from 2005 to 2006 as a result of the timing of our anthrax development activities, which were decreasing throughout 2006 as our activities transitioned from the cost-plus Anthrax Contracts to the SNS Contract. Related party services revenues in 2006 and for the last six months of 2005 were earned as part of a consulting services agreement with Celltrion to provide technical assistance related to the design, engineering and construction of Celltrion's manufacturing facility. The amounts earned vary with the level of services required. Related party services revenues for the first six months of 2005 were eliminated due to the consolidation of Celltrion. Celltrion did not earn any revenues during the period of consolidation of their results with those of the Company through June 30, 2005. We provided $0.9 million of services to Celltrion in 2007, which is included in other services revenue, as Celltrion is no longer considered to be a related party due to our sale of substantially all . . .