• costs to conclude the Viprinex clinical trials, meet our contractual obligations to Nordmark for the snake farm and other expenses related to the suspended development will fall within our estimates;

• XERECEPT will be successfully developed or sold by Celtic Pharma;

• we will be able to comply with Nasdaq's continued listing standards; or

• we will receive sufficient liquidity for our auction-rate securities.

We disclaim any intent to update any forward-looking statement to reflect events after the date of this report.
Overview
We are a biopharmaceutical company historically focused on developing novel, first-in-class treatments for central nervous system conditions and other serious unmet medical needs. We recently terminated development of our most advanced product candidate, Viprinex™ (ancrod), which was studied in phase 3 clinical trials for evaluation as a new drug to treat acute ischemic stroke. We have rights to receive royalty payments from the sales of Namenda® (memantine), an approved drug marketed for Alzheimer's disease, and potential milestone and royalty payments from the development of XERECEPT®, an investigational drug which is in phase 3 clinical trials for the treatment of swelling associated with cerebral tumors. Our earlier stage pipeline also includes rights to a protein in preclinical development for the treatment of Alzheimer's disease. Below is an overview of key developments affecting our business to date in fiscal 2009.
Viprinex™, formerly a phase 3 investigational drug for stroke In December 2008, we announced that an independent Data Safety Monitoring Board, or DSMB, had determined that the phase 3 clinical trials of Viprinex™ for the treatment of acute ischemic stroke were unlikely to show benefit. As a result, we immediately terminated further enrollment in the trials. After further analysis of the data, we subsequently determined that further development of Viprinex for the treatment of acute ischemic stroke was not warranted, since no patient groups appeared to benefit from treatment. We are in the process of fulfilling regulatory and contractual obligations for the Viprinex program and we do not expect to undertake any further development of this compound. XERECEPT®, a Phase 3 investigational drug for which we have rights to receive milestone and royalty/profit-sharing payments Celtic Pharmaceuticals, or Celtic, to whom we sold rights to XERECEPT in 2005, continues to develop XERECEPT (corticorelin acetate) for the treatment of brain edema associated with cerebral tumors. Celtic has announced that it expects to present results from its clinical program at two cancer conferences which will be held in the second quarter of calendar 2009. Celtic has also announced that it has retained an investment bank to assist with the sale of XERECEPT. While we are entitled to receive between 13% and 22% of the net proceeds received by Celtic upon the sale of XERECEPT, we cannot estimate if Celtic will be successful in their sale and whether we will receive any payments under the agreement.

Preclinical Programs licensed from the Buck Institute for Age Research In fiscal 2008, we entered into agreements with the Buck Institute for Age Research, or Buck, for rights to proteins in early preclinical development for the treatment of Alzheimer's and Huntington's diseases. In January 2009, we sent Buck a letter stating that we did not intend to extend the research program term for the Huntington's disease program beyond the first year of the collaboration. As a result, we have ceased making research funding payments to Buck for this program and we expect that Buck will terminate the agreement and we will to lose our rights to that program. The initial year of the Alzheimer's research program will conclude in February 2009, and we are currently evaluating Buck's research plan for the second year of the collaboration. Employees
Following the discontinuance of our Viprinex program we terminated the employment of over 50 percent of our employees. Termination of additional employees is planned as we complete our regulatory and contractual obligations, and we expect that, by March 31, 2009, there will be approximately 7 employees remaining at the Company. We expect that some of these employees will continue to support the clinical development of XERECEPT and that the related costs will continue to be paid by Celtic.
The initial terminations occurred early in January 2009, and employment termination charges of approximately $0.5 million will be included within our research and development and general and administrative expenses for the third quarter of 2009.
The employment of Paul E. Freiman, our President and Chief Executive Officer from May 1997 through December 2008, was terminated by our Board of Directors effective December 31, 2008. On January 30, 2009, the Board appointed William A. Fletcher as Acting Chief Executive Officer.

RESULTS OF OPERATIONS
Revenues
The major components of our revenue are as follows (in thousands):

                                                         Variance
                                                           From                                       Variance
                                                        Period in                                    From Period
                             Three months Ended           Prior            Six Months Ended           in Prior
                                December 31,               Year              December 31,               Year
                             2008           2007        2008/2007         2008          2007          2008/2007
Royalty Revenue           $    2,007       $ 2,103      $      (96 )    $   4,085      $ 4,084      $           1
XERECEPT Sale                  1,375         1,375               -          2,750        2,750                  -
Collaboration Services           109           185             (76 )          221          729               (508 )


Total                     $    3,491       $ 3,663      $     (172 )    $   7,056      $ 7,563      $        (507 )

Total revenues of $3,491,000 for the three months ended December 31, 2008 decreased by $172,000 from revenues of $3,663,000 in the same period of fiscal 2008. Our second quarter fiscal 2009 revenues consisted of $2,007,000 from royalties on the commercial sales of memantine by Merz and its marketing partners in the United States, $1,375,000 from the sale of our rights and interests in XERECEPT to Celtic and $109,000 from the reimbursement of the direct expenses incurred for services provided to Celtic for development of XERECEPT. Royalties were lower for the three months ended December 31, 2008 than the three months ended December 31, 2007 because of the elimination of royalties on sales in Europe following the amendment of our agreement with Merz in February 2008. Revenues from the sale of XERECEPT were the same for the three months ended December 31, 2008 and for the three months ended December 31, 2007 because we are recognizing the up-front payment of $33 million we received in November 2005 on a straight-line basis over the estimated term of our obligations, which extends to November 2011. Revenues from collaboration services declined by $76,000, or 41%, to $109,000 for the three months ended December 31, 2008 compared to the three months ended December 31, 2007 because we have transitioned most of the XERECEPT drug development work to Celtic.

Revenues of $7,056,000 for the six months ended December 31, 2008 decreased $507,000 from revenues of $7,563,000 in the same period of fiscal 2008. Reasons for the changes in the six-month period were the same as for the three-month period ended December 31, 2008, with lower reimbursements of our costs for development of XERECEPT accounting for the decrease after the transition of most of the development work to Celtic.
RESEARCH AND DEVELOPMENT EXPENSES
Because we have historically engaged in the business of drug development and our current drug candidates have not been approved for sale, the majority of our costs have been related to the research and development of these drug candidates and the costs are expensed as incurred. Research and development costs include clinical trial costs, drug supply and manufacturing costs, salaries and related personnel costs for employees involved in the development of our products, and other costs related to developing investigational drugs, including outside consultants. The following table shows our research and development expenses by product under development (in thousands):

                                                         Variance
                                                           From                                       Variance
                                                        Period in                                    From Period
                             Three months Ended           Prior            Six Months Ended           in Prior
                                December 31,               Year              December 31,               Year
                             2008           2007        2008/2007         2008          2007          2008/2007
Viprinex                  $     9,925      $ 6,893      $    3,032      $ 14,834      $ 11,794      $       3,040
XERECEPT                          130          204             (74 )         206           764               (558 )
Preclinical programs
(Alzheimer's and
Huntington's diseases)            337          319              18           804           319                485


Total                     $    10,392      $ 7,416      $    2,976      $ 15,844      $ 12,877      $       2,967

Total research and development expenses were $10,392,000 for the three months ended December 31, 2008, which represented an increase of $2,976,000 compared to the three months ended December 31, 2007. For the six months ended December 31, 2008, research and development expenses were $15,844,000, an increase of $2,967,000 from the six months ended December 31, 2007.
For the periods covered by this Quarterly Report on Form 10-Q, the majority of our research and development efforts and expenses were focused on Viprinex, to which we acquired rights in July 2004 and which was a phase 3 investigational drug for the treatment of acute ischemic stroke. Subsequent to acquiring these rights we established good manufacturing practices, or GMP, manufacturing capability and initiated a large phase 3 program designed to determine whether Viprinex was a safe and effective treatment for stroke when given within six hours of onset. On December 16, 2008, our independent DSMB met to review the efficacy of Viprinex for the first time since we initiated our clinical trials. The DSMB determined that it was futile for us to continue the clinical trials, as there was little difference between Viprinex and placebo in the 90 day measure of stroke-related disability which was the primary endpoint of the clinical trial. As a result of the DSMB recommendation, we halted enrollment in the clinical trial and we have instructed our vendors to terminate all activity associated with the development of Viprinex.
For the three months ended December 31, 2008, our expenses related to Viprinex aggregated $9,925,000, an increase of $3,032,000, or 44%, from expenses of $6,893,000 for the three months ended December 31, 2007. Increases in expenses for the three months ended December 31, 2008 were primarily due to higher drug manufacturing costs as follows:
• A charge of approximately $3.7 million related to our estimated obligations upon the termination of our contract with Nordmark, the operator of the facility used to house the Malayan pit viper snakes whose venom was used as a starting material for the active ingredient in Viprinex.

• A charge of approximately $0.4 million for our estimated obligations to Nordmark for the operation of the snake facility as long as the snakes are expected to remain at the facility. Under the contractual terms, we own the snakes and are obligated to pay the maintenance costs of the snakes.

• Other manufacturing-related costs incurred as we prepared additional drug material prior to the interim analysis.

The increased drug manufacturing costs recorded in research and development were offset by decreases of approximately $1.2 million related to lower clinical trial expenses following initiatives implemented to increase enrollment into the clinical trials in the period ended December 31, 2007. Salary and benefit costs were also lower in the period ended December 31, 2008, as we no longer provided for incentive bonuses to be paid following the failure of the Viprinex clinical trial.
For the six months ended December 31, 2008, our spending on Viprinex aggregated $14,834,000, an increase of $3,040,000, or 26%, compared to $11,794,000 for the six months ended December 31, 2007. For both the three and six months ended December 31, 2008, the increase in costs for the development of Viprinex was approximately $3.0 million, and reasons for the increase in the six month period were the same as for the three month period noted above.
For the three and six months ended December 31, 2008, our spending on XERECEPT decreased to $130,000 and $206,000, respectively, from $204,000 and $764,000 for the comparable periods in fiscal 2008. During the first two quarters of fiscal 2008 we transitioned substantially all drug development activities to Celtic and are no longer incurring these costs. The decrease in our research and development costs for XERECEPT is comparable to the decrease in revenue for reimbursement of these costs by Celtic.
We entered into collaboration and license agreements with Buck for the development of proteins in preclinical development for the treatment of Huntington's and Alzheimer's diseases, in November 2007 and February 2008, respectively. Under the agreements, we fund specified preclinical research work as performed by Buck in return for the development rights to the proteins that are the subject of their research. For the three months ended December 31, 2008, we incurred expenses only for the Alzheimer's program, following our determination not to renew the program for Huntington's disease. Expenses for the three months ended December 31, 2007 were related to the Huntington's program. For the six months ended December 31, 2008 we incurred greater total development expenses because two programs were in place compared to only one program for the six months ended December 31, 2007.
For the third quarter of our fiscal year ending June 30, 2009, we expect research and development costs to decrease significantly from the levels in the second quarter of our 2009 fiscal year. Other than any additional costs that we may need to incur related to the snakes held at Nordmark, we expect total Viprinex costs to aggregate to less than $1 million. Thereafter we do not expect any costs related to the Viprinex program.

GENERAL AND ADMINISTRATIVE EXPENSES
The following table shows our general and administrative expenses (in
thousands):

                                  Increase From                                 Increase From
       Three months Ended            Period            Six Months Ended            Period
          December 31,            in Prior Year          December 31,           in Prior Year

General and administrative expenses were $1,201,000 for the three months ended December 31, 2008, a 37% decrease from expenses of $1,912,000 for the three months ended December 31, 2007. The decrease of $711,000 for the three months ended December 31, 2008 was primarily due to cost savings measures implemented in the fourth quarter of fiscal 2008, which included a reduction in use of various consulting services. In addition, for the three months ended December 31, 2008, we significantly reduced the provision for employee bonuses following the failure of the Viprinex clinical trial program. Legal expenses were also lower in the 2008 period, as were costs for compliance with sections of the Sarbanes-Oxley Act.
General and administrative expenses were $2,532,000 for the six months ended December 31, 2008, a 29% decrease from expenses of $3,571,000 for the six months ended December 31, 2007. The reasons for the decrease of $1,039,000 in the six-month period were generally the same as for the three-month period ended December 31, 2008.
We expect general and administrative expenses for future periods to be less than they were for the three months ended December 31, 2008 due to termination of employees and curtailment of a substantial portion of the Company's operations. The decrease in general and administrative expenses is expected to be lower in the third quarter of fiscal 2009 than in the fourth quarter of fiscal 2009 due to severance costs that will be recorded in the third quarter of 2009.
INTEREST INCOME
Interest income for the three and six month periods ended December 31, 2008 was $264,000 and $513,000, respectively, compared to $452,000 and $479,000, respectively, for the same periods in the prior fiscal year. The decrease for the three month period of fiscal 2009 compared to the same period in fiscal 2008 was due to a reduction in the average cash and investments balances held and a decrease in the average interest rates earned. The increase for the six months ended December 31, 2008 compared to the six months ended December 31, 2007 was due to the Company having a higher average cash and investments balance, partially offset by lower interest rates earned on the cash and investments balances.
INTEREST EXPENSE
Interest expense for the three and six months ended December 31, 2007 was related to short-term notes issued in September 2007 and repaid in November 2007. There was no comparable expense for the three and six months ended December 31, 2008.
NON-CASH GAIN ON DECREASE IN FAIR VALUE OF WARRANTS In April 2007, we issued warrants to purchase 435,000 shares of common stock in connection with a concurrent sale of common stock. The warrants are exercisable through April 2012 at a price of $16.80 per share. Although the terms of the warrants do not provide for net-cash settlement, in certain circumstances, physical or net-share settlement of the warrants is deemed not to be within our control and, accordingly, we are required to account for these warrants as a derivative financial instrument liability. The warrant liability is re-valued on each reporting date with changes in the fair value from prior periods reported as non-cash charges or credits to earnings. For warrant-based derivative financial instruments, the Black-Scholes option valuation model is used to value the warrant liability. The classification of derivative instruments, including whether these instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. The non-cash gain on the decrease in fair value of warrants in the condensed consolidated statement of operations represents changes in the Black-Scholes value of the warrants we issued, which has occurred primarily as a result of the decrease in the price of our common stock. Because the dollar-value decreases in our stock price were greater in the reporting periods that ended on December 31, 2007, the non-cash gains were greater than during the reporting periods that ended on December 31, 2008. Because the value of our stock has declined so significantly since the warrants were issued, the value at which they are carried on our balance sheet is now immaterial.

LIQUIDITY AND CAPITAL RESOURCES
We assess liquidity primarily by the cash and investments available to fund our operations, which have been significantly curtailed since the Viprinex program for acute ischemic stroke was terminated in December 2008. Our expenses for the next two quarters are expected to be focused on the following areas:
• Completion of our regulatory contractual obligations associated with the terminated Viprinex program, including close-down of the clinical trial and filing required reports in the United States and various foreign countries;

• Close-down of the manufacturing facility that was built to house the Malayan pit viper snakes, whose venom was used as the starting material for the active ingredient in Viprinex, the removal of the approximately 1,000 snakes residing in the facility, and disposition of drug inventory at various locations;

• Continuation of our obligations to provide services to Celtic in connection with the clinical development of XERECEPT;

• Continuation of the preclinical research program for Alzheimer's disease in collaboration with the Buck Institute for Age Research; and

• Administrative expenses associated with the above activities, negotiating other contractual obligations and sustaining operations as a public company.

In addition to cash and investments, we also assess liquidity by our working capital (modified to exclude deferred revenue and the warrant liability) available to fund operations. We exclude deferred revenue and the warrant liability from our working capital as we do not believe these items will ever require cash payments from us. The following table shows our cash and short-term investments and working capital (in thousands).

                                                         December 31,        June 30,
                                                             2008              2008

Cash, cash equivalents, and short-term investments      $       23,314      $   29,980

Cash, cash equivalents, short-term and long-term
investments                                                     32,190          41,830

Working capital (excluding deferred revenue and the
warrant liability)                                              15,262          27,357

Since our inception in 1987, we have applied the majority of our resources to our research and development programs and have generated only limited operating revenue. We have experienced operating losses in nearly every year since inception as we have funded the development and clinical testing of our drug candidates. We expect to continue to incur losses at least through the quarter ending March 31, 2009 and for the fiscal year ending June 30, 2009 As of December 31, 2008, our combined balance of cash, cash equivalents and short-term investments decreased by $6.7 million from the balance at the end of our most recent fiscal year, June 30, 2008. The decrease was a result of the operating activities of conducting our clinical trials and other operations of the Company, which used approximately $8.0 million in cash. For the quarter ending on March 31, 2009, we expect use of cash to be greater than our operating loss as we settle liabilities related to the accrual of costs associated with the termination of the Viprinex program.
We believe that our cash and investments (long and short-term combined) as of December 31, 2008 will be sufficient to fund our planned operations through at least the next twelve months.

Our future capital requirements and net resources will depend on a number of factors, including:
• the time and cost involved in closing the recently terminated Viprinex trial and all other activities related to the Viprinex program;

• the value we are able to receive upon our disposition of the ARS we hold as long-term investments;

• the royalties received from Merz on future sales of memantine;

• the cost of our research collaboration with the Buck Institute for Age Research;

• the receipt of milestone, royalty and profit-sharing payments pursuant to our agreements with Celtic; and

• the strategic alternatives that we choose to pursue.

Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our consolidated financial condition, changes in our consolidated financial condition, revenues or expenses, consolidated results of operations, liquidity, capital expenditures or capital resources. Contractual Obligations
Our noncancelable contractual obligations are not materially changed from the table of contractual obligations included in our Annual Report on Form 10-K. An update of the status of key contractual obligations due in less than a year is included below.
• Active ingredient production/purification and operation of a snake farm. Raw venom of the Malayan pit viper was the starting material for the active ingredient in Viprinex, and was produced by Nordmark in Germany where Nordmark maintained a colony of snakes in a manufacturing facility. We agreed to make monthly payments to Nordmark for our supply of the active ingredient and for the fully burdened costs of operating the snake farm until such time as either 1) the agreement is terminated pursuant to specified terms or 2) commercial production commences. If the agreement is terminated by us prior to commercialization, we are required to make a termination payment of up to €2.8 million (or approximately $3.7 million at the December 31, 2008 exchange rate) to Nordmark. We have notified Nordmark of our intent to terminate the agreement and remove the snakes located at the facility. Under the terms of the agreement, we are responsible for specified operating costs of the facility as long as the snakes are at the facility. We have identified several reptile zoos willing to take snakes, and are in process of completing the arrangements for the transfer of the snakes. We cannot estimate the costs for this process, but we currently expect it to be completed by March 31, 2009.
• Clinical Research Organizations. We had agreements in place with several Clinical Research Organizations for work needed on the clinical trials in various foreign countries. We generally paid the CROs on a monthly or quarterly basis for work as it was performed, and the terms of most of the agreements allow them to be cancelled with no obligations beyond the costs incurred by the CROs to the time of termination. Our CROs have closed down the clinical trial and are in the process of reconciling pass-through costs for the clinical trial and amounts we have paid compared to actual costs incurred. We have accrued . . .