SEC Filing | Cyclacel Pharmaceuticals, Inc.

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Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended June 30, 2005

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

Commission File Number 0-50626

XCYTE THERAPIES, INC.

(Exact name of registrant as specified in its charter)


Delaware		91-1707622
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

1124 Columbia Street, Suite 130

Seattle, Washington 98104

(Address of principal executive offices and zip code)

(206) 262-6200

(Registrant’s telephone number, including area code)

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

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

On August 8, 2005, the registrant had an aggregate of 19,672,393 shares of common stock issued and outstanding.

XCYTE THERAPIES, INC.

QUARTERLY REPORT ON FORM 10-Q

For the Quarter Ended June 30, 2005

Table of Contents


		Page
PART I.	FINANCIAL INFORMATION (UNAUDITED)

Item 1.	Financial Statements

	Condensed Balance Sheets as of June 30, 2005 and December 31, 2004	3

	Condensed Statements of Operations for the three-month and six-month periods ended June 30, 2005 and 2004 and from inception (January 5, 1996) to June 30, 2005	4

	Condensed Statements of Cash Flows for the six-month periods ended June 30, 2005 and 2004 and from inception (January 5, 1996) to June 30, 2005	5

	Notes to the Condensed Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25

Item 4.	Controls and Procedures	26

PART II.	OTHER INFORMATION

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27

Item 4.	Submission of Matters to a Vote of Security Holders	27

Item 5.	Other Information	27

Item 6.	Exhibits	28

SIGNATURES		30

INDEX OF EXHIBITS

PART I - FINANCIAL INFORMATION

Item 1.

Financial Statements

XCYTE THERAPIES, INC.

(a development stage company)

CONDENSED BALANCE SHEETS

(in thousands, except share and per share data)


	June 30, 2005			December 31, 2004
	(Unaudited)			(Note 1)
Assets
Current assets:
Cash and cash equivalents	$	10,953		$	13,897
Short-term investments		21,395			33,421
Prepaid expenses and other current assets		1,399			1,021

Total current assets		33,747			48,339
Property and equipment, net		6,420			6,208
Deposits and other assets		1,141			1,056

Total assets	$	41,308		$	55,603

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	633		$	1,707
Accrued compensation and related benefits		578			665
Other accrued liabilities		441			417
Derivative liability		2,483			3,020
Current portion of deferred revenue		47			47
Current portion of equipment financings		1,739			1,556

Total current liabilities		5,921			7,412
Deferred revenue, less current portion		739			762
Equipment financings, less current portion		2,729			2,678
Other liabilities		620			631
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.001 par value per share
Authorized—5,000,000 shares as of December 31, 2004 and June 30, 2005
Designated 6% convertible exchangeable—2,990,000 shares as of December 31, 2004 and June 30, 2005
Issued and outstanding—2,046,813 and 2,079,813 shares as of June 30, 2005 and December 31, 2004, respectively
Aggregate preference in liquidation—$20,673 at June 30, 2005		2			2
Common stock, par value $0.001 per share
Authorized—100,000,000 shares as of December 31, 2004 and June 30, 2005
Issued and outstanding—19,672,393 and 19,498,256 as of June 30, 2005 and December 31, 2004, respectively		19			19
Additional paid-in capital		171,386			171,708
Deferred stock compensation		(720	)		(1,417	)
Accumulated other comprehensive loss		(19	)		(9	)
Deficit accumulated during the development stage		(139,369	)		(126,183	)

Total stockholders’ equity	$	31,299		$	44,120

Total liabilities and stockholders’ equity	$	41,308		$	55,603

See the accompanying notes to these condensed financial statements.

XCYTE THERAPIES, INC.

(a development stage company)

CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except share and per share data)


	Three months ended June 30,						Six months ended June 30,						Period from inception (January 5, 1996) to June 30, 2005
	2005			2004			2005			2004			Period from inception (January 5, 1996) to June 30, 2005
Revenue:
License fee	$	12		$	12		$	24		$	12		$	159
Collaborative agreement		—			12			4			24			201
Government grant		—			—			—			—			144

Total revenue		12			24			28			36			504
Operating expenses:
Research and development		4,368			4,426			9,862			8,601			96,385
General and administrative		1,558			1,723			3,578			3,297			31,905

Total operating expenses		5,926			6,149			13,440			11,898			128,290

Loss from operations		(5,914	)		(6,125	)		(13,412	)		(11,862	)		(127,786	)
Other income (expense):
Interest income		253			106			511			148			4,404
Interest expense		(95	)		(67	)		(155	)		(12,656	)		(14,935	)
Change in valuation of derivative		(141	)		—			(133	)		—			(860	)
Gain (loss) on sale of equipment		3			—			3			—			(192	)

Other income (expense), net		20			39			226			(12,508	)		(11,583	)

Net loss		(5,894	)		(6,086	)		(13,186	)		(24,370	)		(139,369	)
Accretion of preferred stock		—			—			—			(8,973	)		(25,385	)

Net loss applicable to common stockholders	$	(5,894	)	$	(6,086	)	$	(13,186	)	$	(33,343	)	$	(164,754	)

Basic and diluted net loss per common share	$	(0.30	)	$	(0.41	)	$	(0.67	)	$	(3.66	)

Shares used in computation of basic and diluted net loss per common share		19,662,564			14,800,321			19,629,278			9,107,401

See the accompanying notes to these condensed financial statements.

XCYTE THERAPIES, INC.

(a development stage company)

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)


	Six months ended June 30,						Period from inception (January 5, 1996) to June 30, 2005
	2005			2004			Period from inception (January 5, 1996) to June 30, 2005
Cash flows from operating activities
Net loss	$	(13,186	)	$	(24,370	)	$	(139,369	)
Adjustments to reconcile net loss to net cash used in operating activities:
Non-cash research and development expense for technology licenses		—			—			1,716
Amortization of investment premiums, net		345			251			951
Non-cash stock compensation expense		306			1,217			10,299
Non-cash interest expense		23			12,536			13,085
Non-cash rent expense		17			17			153
Change in valuation of derivative		133			—			860
Depreciation and amortization		646			455			6,343
(Gain) loss on sale of property and equipment		(3	)		—			192
Changes in assets and liabilities:
Increase in prepaid expenses and other current assets		(378	)		(793	)		(1,585	)
(Increase) decrease in deposits and other assets		(102	)		707			(801	)
(Decrease) increase in accounts payable		(1,074	)		1,091			633
(Decrease) increase in accrued liabilities		(98	)		876			2,600

Net cash used in operating activities		(13,371	)		(8,013	)		(104,923	)

Cash flows from investing activities
Purchases of property and equipment		(855	)		(1,593	)		(12,219	)
Proceeds from sale of property and equipment		—			—			64
Net cash acquired in acquisition		—			—			437
Purchases of investments available-for-sale		(47,719	)		(43,497	)		(191,035	)
Purchases of investments held-to-maturity		—			—			(17,732	)
Proceeds from maturities of investments available-for-sale		59,391			29,563			181,257
Proceeds from maturities of investments held-to-maturity		—			—			5,145

Net cash provided by (used in) investing activities		10,817			(15,527	)		(34,083	)

Cash flows from financing activities
Net proceeds from issuances of preferred stock		—			—			103,042
Net proceeds from issuances of common stock		—			29,700			29,700
Net proceeds from issuances of convertible promissory notes		—			—			12,660
Common stock repurchased		—			—			(3	)
Proceeds from stock options and warrants exercised		—			68			591
Proceeds from issuances of common stock in connection with employee stock purchase plan		6			—			16
Payment of preferred stock dividends		(607	)		—			(607	)
Proceeds from equipment financings		1,129			867			10,810
Principal payments on equipment financings		(918	)		(534	)		(6,250	)

Net cash provided by (used in) financing activities		(390	)		30,101			149,959

Net increase (decrease) in cash and cash equivalents		(2,944	)		6,561			10,953
Cash and cash equivalents at beginning of period		13,897			2,241			—

Cash and cash equivalents at end of period	$	10,953		$	8,802		$	10,953

Non-cash investing and financing activities
Common stock issued for acquisition	$	—		$	—		$	330
Preferred stock issued for acquisition	$	—		$	—		$	579
Preferred stock warrants issued for acquisition	$	—		$	—		$	330
Preferred stock warrants issued in connection with equipment financing	$	—		$	—		$	298
Preferred stock warrants issued in connection with lease	$	—		$	—		$	340
Preferred stock warrants issued in preferred stock financing	$	—		$	—		$	48
Issuance of common stock warrants and beneficial conversion in preferred stock	$	—		$	—		$	25,385
Accretion of preferred stock	$	—		$	(8,973	)	$	(25,385	)
Conversion of redeemable convertible preferred stock and warrants into common stock and warrants	$	—		$	76,043		$	76,043
Conversion of promissory notes and accrued interest into common stock	$	—		$	13,065		$	13,065
Common stock issued in satisfaction of make-whole payments upon conversion of preferred stock	$	63		$	—		$	1,785
Property and equipment costs accrued	$	30		$	229		$	30

See the accompanying notes to these condensed financial statements.

XCYTE THERAPIES, INC.

(a development stage company)

Notes to the Condensed Financial Statements

(Unaudited)

1.	Organization and significant accounting policies

Organization

Xcyte Therapies, Inc. (the Company), a development stage enterprise, operates in one business segment, developing products based on T cell activation to treat infectious diseases and other medical conditions associated with compromised immune systems. As a development stage enterprise, substantially all efforts of the Company have been devoted to performing research and experimentation, conducting clinical trials, developing and acquiring intellectual properties, raising capital and recruiting and training personnel.

Basis of presentation

The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 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 of America for complete financial statements. The unaudited condensed interim financial statements have been prepared on the same basis as the annual financial statements. In the opinion of management, the accompanying balance sheets and related interim statements of operations and cash flows reflect all adjustments, consisting of normal recurring adjustments, necessary for the fair presentation of the financial statements in conformity with accounting principles generally accepted in the United States of America. The results of operations of any interim period are not necessarily indicative of the results of operations for the full year or any other interim period. Further, the preparation of financial statements requires management to make estimates and assumptions that affect the recorded amounts reported therein. A change in facts or circumstances surrounding the estimate could result in a change to estimates and impact future operating results.

The financial statements and related disclosures have been prepared with the assumption that users of the interim financial statements have read or have access to the audited financial statements for the preceding fiscal year. Accordingly, these financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2004, contained in the annual report on Form 10-K filed by the Company with the Securities and Exchange Commission on March 31, 2005. The condensed balance sheet at December 31, 2004 has been derived from the audited financial statements at that date.

The Company has incurred operating losses and negative cash flows from operations since inception. As of June 30, 2005, the Company had net working capital of $27.8 million and had an accumulated deficit of $139.4 million with total stockholders’ equity of $31.3 million. These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, assuming that the Company will continue as a going concern.

Our common stock and preferred stock trade on the Nasdaq National Market, which has certain compliance requirements for continued listing, including a requirement that our common stock and preferred stock each have a minimum bid price of $1.00 per share. On June 6, 2005, we received a notice from the Nasdaq Stock Market that for 30 consecutive trading days the bid price of our common stock had closed below the minimum $1.00 per share requirement and, as a result, our common stock no longer complied with Nasdaq’s continued listing criteria. The letter stated that the Company would be provided with 180 calendar days, or until December 5, 2005, to regain compliance. To regain compliance, anytime before December 5, 2005, the bid price of our common stock must close at $1.00 per share or more for a minimum of 10 consecutive business days. As of the date of this report, our common stock has not regained compliance with Nasdaq’s continued listing criteria.

In July 2005 the Company announced a plan to evaluate its strategic alternatives. In conjunction with this plan, the Company also announced its decision to discontinue the clinical development of its products. At this time, the Company cannot estimate the impact the decision to discontinue its clinical development would have on its results of operations or financial condition.

While management believes that current cash, cash equivalent, and short-term investment balances, as well as any net cash provided by operations, will provide adequate resources to fund operations at least until second quarter 2006, this may not be the case. This estimate does not include any costs that may be associated with completing any strategic alternatives currently being considered by the Company. The Company continues to explore various strategic alternatives, including, but not

limited to mergers, acquisitions, the sale or purchase of assets, in-licensing opportunities, and out-licensing opportunities. Pending the outcome of the Company’s review of strategic alternatives and any definitive decisions to close or liquidate the business, the Company will continue to prepare its financial statements on the assumption that it will continue as a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. As such, the financial statements do not include any adjustments to reflect possible future effects of the recoverability and classification of assets or the amounts and classification of liabilities that may result from any decisions made with respect to the Company’s assessment of its strategic alternatives.

Other comprehensive income (loss)

Other comprehensive income (loss) includes certain changes in equity that are excluded from net income (loss). The Company’s only other comprehensive income (loss) is their unrealized gain (loss) on investments. Total comprehensive loss was $5,874 and $6,144 for the three months ended June 30, 2005 and 2004, respectively. Comprehensive loss totaled $13,196 and $24,425 for the six months ended June 30, 2005 and 2004, respectively.

Stock-based compensation

The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123), as amended by SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, and applies Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and related interpretations in accounting for stock options. Accordingly, employee stock-based compensation expense is recognized based on the intrinsic value of the option at the date of grant.

As required under SFAS No. 123, the pro forma effects of stock-based compensation on net loss are estimated at the date of grant using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, the existing models do not, in management’s opinion, necessarily provide a reliable single measure of the fair value of the Company’s employee stock options.

All of the options granted during the three-month and six-month periods ended June 30, 2005 and 2004 expire after ten years. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions and results for options granted during the periods presented:


	Three months ended June 30,						Six months ended June 30,
	2005			2004			2005			2004
Weighted average risk free interest rate		4.00	%		5.00	%		4.00	%		5.00	%
Expected dividend yield		0	%		0	%		0	%		0	%
Expected volatility		82	%		80	%		82	%		80	%
Expected life (in years)		4.0			4.0			4.0			4.0
Weighted average fair value	$	0.29		$	3.98		$	0.78		$	6.56

For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the vesting period of the related options. The Company’s pro forma information follows (in thousands, other than per share information):


	Three months ended June 30,						Six months ended June 30,
	2005			2004			2005			2004
Net loss applicable to common stockholders, as reported	$	(5,894	)	$	(6,086	)	$	(13,186	)	$	(33,343	)
Add: Employee stock-based compensation, as reported		18			595			296			1,178
Deduct: Stock-based compensation determined under the fair value method		(148	)		(819	)		(700	)		(1,520	)

Pro forma net loss	$	(6,024	)	$	(6,310	)	$	(13,590	)	$	(33,685	)

Basic and diluted pro forma net loss per share	$	(0.31	)	$	(0.43	)	$	(0.69	)	$	(3.70	)

Stock options granted to non-employees are recorded using the fair value approach in accordance with SFAS 123 and Emerging Issues Task Force Consensus (EITF) Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services (EITF 96-18). The options to non-employees are subject to periodic revaluation over their vesting terms.

Deferred stock-based compensation includes amounts recorded when the exercise price of an option is lower than the fair value of the underlying common stock on the date of grant. Deferred stock-based compensation is amortized over the vesting period of the underlying option using the graded-vesting method.

Net loss per share

Basic net loss per share is computed by dividing net loss applicable to common stockholders by the weighted average number of common shares outstanding for the period. Common stock equivalents, including convertible exchangeable preferred stock, redeemable convertible preferred stock, redeemable convertible preferred stock warrants, convertible promissory notes, common stock warrants and outstanding stock options are excluded from the calculation of diluted net loss per share because all securities are antidilutive for the periods presented. As of June 30, 2005 and 2004, the total number of shares excluded from the calculations of diluted net loss per common share was 10,608,834 and 979,649, respectively.

Recent accounting pronouncements

In December 2004, the FASB issued SFAS 123R, Share-Based Payment. SFAS 123R establishes standards for the accounting for transactions in which an entity receives employee services in exchange for the entity’s equity instruments or liabilities that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. SFAS 123R eliminates the ability to account for share-based compensation using APB 25 and generally requires that such transactions be accounted for using a fair value method. The provisions of this statement are effective in the first fiscal year beginning after June 15, 2005 and will become effective for the Company beginning with the first quarter of 2006. The impact that the adoption of this statement will have on the Company’s financial position and results of operations may be material. The impact will be determined by share-based payments granted in future periods, as well as the fair value model and assumptions the Company will choose, which have not been finalized yet.

2.	Redeemable convertible preferred stock

Accretion of preferred stock

In connection with the conversion of the Company’s Series E and Series F redeemable convertible preferred stock into common stock upon the closing of the initial public offering in March 2004, the Company recognized $9.0 million of preferred stock accretion associated with the remaining discount on the preferred stock which had not previously been recognized.

3.	Convertible exchangeable preferred stock

In January 2005, the Company’s Board of Directors declared a quarterly dividend in the amount of $0.1467 per share of preferred stock, which was paid on February 1, 2005, to the holders of record as of the close of business on January 21, 2005. This quarterly dividend distribution totaled $300,000. In April 2005, the Company’s Board of Directors declared a quarterly dividend in the amount of $0.15 per share of preferred stock, which was paid on May 2, 2005, to the holders of record as of the close of business on April 22, 2005. This quarterly dividend distribution totaled $307,000. In July 2005, the Company’s Board of Directors declared a quarterly dividend in the amount of $0.15 per share of preferred stock, which was paid on August 1, 2005, to the holders of record as of the close of business on July 22, 2005. This quarterly dividend distribution totaled $307,000.

In the first quarter of 2005, holders voluntarily converted 33,000 shares of preferred stock into 140,425 shares of common stock. In connection with these conversions, the Company issued 26,216 shares of common stock to converting holders in satisfaction of the required dividend make-whole payments.

In accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments (SFAS 133), the Company is required to separate and account for, as an embedded derivative, the dividend make-whole payment

feature of the preferred stock offering. As an embedded derivative instrument, the dividend make-whole payment feature must be measured at fair value and reflected as a liability. Changes in the fair value of the derivative are recognized in earnings as a component of other income (expense). The Company determined the fair value of the dividend make-whole payment feature to be $3.0 million at December 31, 2004. The carrying value of this derivative was reduced by $670,000 during the first half of 2005, based on cash dividends paid and the fair value of common stock issued as dividend make-whole payments pursuant to voluntary holder conversions during this period. At June 30, 2005, the derivative liability was valued at $2.5 million, resulting in the recognition of $141,000 and $133,000 as other expense for the three and six months ended June 30, 2005, respectively.

4.	Common stock

Initial public offering

On March 19, 2004, the Company completed an initial public offering which, after deducting underwriting discounts and offering-related expenses, resulted in net proceeds to the Company of approximately $29.7 million and issuance by the Company of 4,200,000 shares of common stock. In connection with the initial public offering, all of the outstanding shares of the Company’s redeemable convertible preferred stock and all of its outstanding convertible promissory notes, including interest accrued thereon through the closing date of the offering, were converted into 6,781,814 and 1,357,357 shares of common stock, respectively. Concurrent with the initial public offering, certain warrants were converted into common stock through payment of cash and exercises, resulting in the issuance of 896,235 shares of common stock. In addition, the Company filed an Amended and Restated Certificate of Incorporation to amend the number of authorized shares of common stock to 100,000,000 and the authorized shares of preferred stock to 5,000,000.

5.	Stock Plans

2003 Stock Plan

In January 2005, the Board of Directors approved an amendment of the 2003 Stock Plan (the 2003 Plan), which became effective in June 2005 after stockholder approval, to increase the number of shares of common stock authorized for issuance under the 2003 Plan by 400,000 shares, to a total of 1,145,453 shares. In March 2005, the Board of Directors approved another amendment of the 2003 Plan, which became effective in June 2005 after stockholder approval, to increase the number of shares of common stock authorized for issuance under the 2003 Plan by an additional 200,000 shares, to a total of 1,345,453 shares. As of June 30, 2005, options covering an aggregate of 862,603 shares of common stock had been granted under the 2003 Plan, and 91,188 shares of common stock remained available for future grant under the 2003 Plan.

In the first quarter of 2005, the Board of Directors approved option grants totaling 262,500 shares of common stock to the Company’s executive officers, which vest upon the meeting of certain Company milestones, or 100% of such options vest upon the four-year anniversary of the date of grant if such milestones are not met earlier. This milestones-based vesting provides that 50% of the shares vest based on certain clinical trial-related goals, 25% of the shares vest based on the consummation of certain corporate transactions, and 25% of the shares vest based on the achievement of FDA-related goals. For purposes of pro forma disclosure, the estimated fair value of the options will initially be amortized to expense over the four-year vesting period using the straight-line method. This amortization to expense will be accelerated, as necessary, based on the achievement of the milestones. As of June 30, 2005, none of the specified milestones had been achieved.

6.	Restructuring

First quarter, 2005 restructuring

On March 22, 2005, the Company reduced its workforce by approximately 24%, to 81 employees, as a result of the Company’s decision to limit clinical development to a planned Phase II/III clinical trial in chronic lymphocytic leukemia (CLL) and a planned Phase I/II trial in HIV. The Company recorded a charge in the first quarter of 2005 of $303,000, consisting of severance, benefits and outplacement services. This amount is included in operating expenses for the six months ended June 30, 2005, with $243,000 classified as research and development and $60,000 classified as general and administrative.

Second quarter, 2005 restructuring

On May 17, 2005, the Company announced a further reduction in its workforce by approximately 14% from 83 to 71 employees. The Company recorded a charge in the second quarter of 2005 of approximately $339,200, consisting of severance, benefits and outplacement services. This amount is included in operating expenses for the three and six months

ended June 30, 2005 with $ 321,900 classified as research and development and $17,300 classified as general and administrative.

The Company has recorded restructuring expenses totaling $642,200 on a cumulative basis for the six months ended June 30, 2005. As of June 30, 2005, approximately $39,000 remains to be paid and is recorded as an accrued liability.

Third quarter, 2005 restructuring

On July 5, 2005, the Company announced its decision to implement a plan to identify and evaluate its strategic alternatives. In connection with such evaluation, on July 8, 2005, Xcyte’s Board of Directors approved a further workforce reduction plan that resulted in the reduction of the Company’s workforce by approximately 49%, to 34 employees. Such reduction in force was completed by July 15, 2005. Additionally, on August 12, 2005, a further workforce reduction was completed that resulted in the reduction of our workforce of 31 employees by approximately an additional 32%, to 21 employees. Xcyte will record a charge in the third quarter of 2005 of approximately $554,000 for the July 2005 reduction in force and $242,800 for the August 12, 2005 reduction in force, in each case consisting of severance, benefits and outplacement services. Such charges do not include any contract termination or other exit costs that may result from future restructuring activities and plans. In addition, the Company is evaluating its strategic alternatives, and future actions may result in impairment charges relating to our long-lived assets. Such actions and any resulting impairment charges could have an adverse impact on our business, financial condition and results of operations.

We are evaluating whether further reductions in our workforce are appropriate based on our decision to evaluate our strategic alternatives. At this time, the Company cannot estimate the impact, if any, that any such reductions would have on its results of operations or financial condition.

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the financial statements and notes thereto.

In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements, including statements regarding product plans and investing activities, our reduction in force, our clinical development and decision to discontinue clinical development, and our evaluation of strategic alternatives, in each case, that involve risks and uncertainties that could cause actual results to differ materially. Factors that might cause or contribute to such differences include, but are not limited to those discussed in the section entitled “Important Factors That May Affect Our Business, Results of Operations and Stock Price.” You should carefully review the risks described herein and in other documents we file from time to time with the Securities and Exchange Commission, including the Annual Report on Form 10-K filed by us in March 2005. When used in this report, the words “expects,” “could,” “would,” “may,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “targets,” “estimates,” “looks for,” “looks to,” and similar expressions, as well as statements regarding our focus for the future, are generally intended to identify forward-looking statements. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document. We caution our investors that our business and financial performance are subject to substantial risks and uncertainties.

Overview

From our inception in 1996 until early July 2005, we devoted substantially all of our efforts to the research and development of therapeutic products designed to enhance the body’s natural immune responses to treat infectious diseases and other medical conditions associated with weakened immune systems. We derived our therapeutic products from a patient’s own T cells, which are cells of the immune system that orchestrate immune responses and can detect and eliminate cancer cells and infected cells in the body. We used our patented and proprietary Xcellerate Technology to generate activated T cells, which we call Xcellerated T Cells, from blood that was collected from the patient. Activated T cells are T cells that have been stimulated to carry out immune functions. Our Xcellerate Technology was designed to rapidly activate and expand the patient’s T cells outside of the body in a process that employs magnetic beads densely covered with two monoclonal antibodies. These Xcellerated T Cells were then administered to the patient.

We have incurred significant losses since our inception. As of June 30, 2005, our deficit accumulated during the development stage was $139.4 million. Our operating expenses consist of research and development expenses and general and administrative expenses.

We have recognized revenues from inception through June 30, 2005 of approximately $504,000 from license fees, payments under a collaborative agreement and income from a National Institutes of Health Phase I Small Business Innovation Research, or SBIR, grant in chronic lymphocytic leukemia. We currently do not market any products and we do not expect to have any product sales or royalty revenue in the foreseeable future. Our net losses are a result of research and development and general and administrative expenses incurred to support our operations.

On July 5, 2005, we announced that we were exploring various strategic alternatives and that we had retained SG Cowen & Co. as our financial advisor to assist the Company during this process. In connection with our ongoing evaluation of our strategic alternatives, on July 8, 2005, our Board of Directors approved a workforce reduction plan that resulted in a reduction of our workforce by approximately 49%, to 34 employees. Such reduction in force was completed by July 15, 2005. Additionally, on August 12, 2005, a further workforce reduction was completed that resulted in the reduction of our workforce of 31 employees by approximately an additional 32%, to 21 employees. In connection with its workforce reduction and the Company’s plan to evaluate its strategic alternatives, the Company also announced its decision to discontinue the clinical development of its products. The Company has taken a number of actions to reduce its operating expenses and conserve its cash, including the discontinuation of all clinical trial activity. The Company continues to explore strategic alternatives, including, but not limited to mergers, acquisitions, the sale or purchase of assets, in-licensing opportunities, and out-licensing opportunities. Pending the outcome of the Company’s review of strategic alternatives and any definitive decisions to close or liquidate the business, the Company will continue to prepare its financial statements on the assumption that it will continue as a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. As such, the financial statements do not include any adjustments to reflect possible future effects of the recoverability and classification of assets or the amounts and classification of liabilities that may result from any decisions made with respect to the Company’s assessment of its strategic alternatives.

There can be no assurance that any transaction or other corporate action will result from our exploration of strategic alternatives. Further, there can be no assurance concerning the type, form, structure, nature, results, timing or terms and conditions of any such potential action, even if such an action does result from this exploration.

Research and Development

To date, our research and development expenses have consisted primarily of costs incurred for drug discovery and research, preclinical development, clinical trials and regulatory activities. Research and development activity-related costs include:

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payroll and personnel-related expenses;

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clinical trial and regulatory-related costs;

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laboratory supplies;

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contractual costs associated with developing antibodies and beads;

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technology license costs;

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rent and facility expenses for our laboratory and cGMP-grade manufacturing facilities; and

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scientific consulting fees.

Our research and development efforts to date have primarily focused on the development of our proprietary Xcellerate Technology and Xcellerated T Cells. From inception through June 30, 2005, we incurred research and development expenses of approximately $96.4 million, substantially all of which relate to the research and development of this technology.

We reduced our workforce in March 2005 and May 2005 as a result of our previous decisions to limit clinical development to a planned Phase I/II trial in HIV and discontinue clinical development of a planned Phase II/III clinical trial in CLL, respectively, due primarily to delays and uncertainties regarding our ability to reach agreement with the FDA on a CLL clinical trial protocol that would be feasible and affordable for us to pursue. On July 8, 2005, our Board of Directors approved a further workforce reduction plan that resulted in the reduction of our workforce by approximately 49%, to 34 employees. Such reduction in force was completed by July 15, 2005. Additionally, on August 12, 2005, a further workforce reduction was completed that resulted in the reduction of our workforce of 31 employees by approximately an additional 32%, to 21 employees. The Company has also taken a number of actions to reduce its operating expenses and conserve its cash, including the discontinuation of all clinical trial activity.

The actions to discontinue our plans for further clinical development are expected to reduce our research and development expenses while we evaluate our strategic alternatives; however, there can be no assurances that we will not incur additional research and development expenses as a result of any transaction or other corporate action that may result from our exploration of strategic alternatives.

General and Administrative Expenses

Our general and administrative expenses are costs associated with supporting our operations, including payroll and personnel-related expenses and professional fees. In addition, rent and facility expenses for our administrative office area and other general office support activities are also included in our general and administrative expenses.

Results of Operations

Three Months Ended June 30, 2005 and 2004

Revenue

Revenue was approximately $12,000 and $24,000 for the three months ended June 30, 2005 and 2004, respectively. This consisted of revenue recognized related to the amortization of license fees received and reimbursements of our costs incurred under a collaboration agreement.

Research and Development

Research and development expenses represented approximately 74% and 72% of our operating expenses for the three-month periods ended June 30, 2005 and 2004, respectively. Research and development expenses remained flat at $4.4 million during the three months ended June 30, 2005 and 2004. Research and development expenses are comprised of increases in salary and other personnel-related expenses, in addition to increases in facility expenses, depreciation and antibody production offset by decreases in laboratory supplies and consulting costs. As of June 30, 2005 we had 55 employees in research and development and clinical development operations compared to 71 employees in research and development and clinical development operations as of June 30, 2004. However, the average number of employees was higher for the second quarter of 2005 prior to our reduction in force in May 2005. This reduction in force was a result of our decision to focus our efforts on advancing our product in a planned Phase I trial in HIV and discontinue the planned Phase II/II clinical trial in CLL primarily due to delays and uncertainties regarding the Company’s ability to reach agreement with the United States Food and Drug Administration on a clinical trial protocol that would be feasible and affordable for the Company to pursue. The vast majority of this reduction affected employees in research and development and clinical development operations. The overall increase in salary and other personnel-related expenses for the three months ended June 30, 2005 as compared to the three months ended June 30, 2004 totaled approximately $555,000, including approximately $321,900 in termination benefits associated with the restructuring. In addition, our non-cash stock compensation expense decreased $403,000 during the three months ended June 30, 2005 as compared to the three months ended June 30, 2004.

We anticipate that research and development expenses will decrease in the foreseeable future as our research, development and clinical trial activities have been discontinued.

General and Administrative

General and administrative expenses represented approximately 26% and 28% of our operating expenses for the three-month periods ended June 30, 2005 and 2004, respectively. General and administrative expenses decreased 10% from $1.7 million for the three months ended June 30, 2004 to $1.6 million for the three months ended June 30, 2005. The slight decrease was due primarily to a decrease in non-cash stock compensation expense, which decreased from $319,000 for the three months ended June 30, 2004 to $135,000 for the three months ended June 30, 2005. This decrease in general and administrative costs was partially offset by an increase in salary and other personnel related expenses totaling $113,000.

We anticipate that general and administrative expenses will decrease slightly in the foreseeable future.

Other Income (Expense)

Other income (expense), comprised primarily of interest income, interest expense and the change in valuation of the derivative, totaled $20,000 for the three months ended June 30, 2005, compared to $39,000 for the three months ended June 30, 2004. Interest income increased 139%, from $106,000 for the three months ended June 30, 2004 to $253,000 for the three months ended June 30, 2005, due to increased cash and investment balances upon which interest is earned. Interest expense

increased from $67,000 for the three months ended June 30, 2004 to $95,000 for the three months ended June 30, 2005 primarily due to the increased equipment financing balance.

Also included in other income in the second quarter of 2005 is the change in the derivative value associated with the make-whole payment on our outstanding convertible exchangeable preferred stock of $141,000. The valuation of the derivative is dependent upon many factors, including estimated market volatility, and may fluctuate significantly, which may have a significant impact on our statement of operations.

Six Months Ended June 30, 2005 and 2004

Revenue

Revenue was approximately $28,000 and $36,000 for the six months ended June 30, 2005 and 2004, respectively. This consisted of revenue recognized related to the amortization of license fees received and reimbursements of our costs incurred under a collaboration agreement.

Research and Development

Research and development expenses represented approximately 73% and 72% of our operating expenses for the six months ended June 30, 2005 and 2004, respectively. Research and development expenses increased 15% from $8.6 million for the six months ended June 30, 2004 to $9.9 million for the six months ended June 30, 2005. The increase was primarily the result of amounts charged to expense for salary and other personnel-related expenses including severance, antibody production, facility expenses, and depreciation offset by a decrease in non-cash stock compensation expense, our contractual obligations relating to developing our bead technology, as well as a decrease in lab supplies. As of June 30, 2005, we had 55 employees in research and development and clinical development operations compared to 71 employees in research and development and clinical development operations as of June 30, 2004. The decrease in the number of employees is a result of the Company’s workforce reductions related to plans to discontinue and limit the clinical development to planned CLL and HIV trials announced in March and May 2005. However, these employee numbers were significantly higher for the first quarter of 2005 prior to the initial reduction in force in late March 2005. The overall increase in salary and other personnel related expenses totaled approximately $1.7 million, including approximately $564,900 in termination benefits associated with the restructuring. Facilities expense, antibody production expenses, and depreciation have increased related to continued advances in clinical development and plans to expand operations at our manufacturing plant in Bothell, Washington during the first half of the year with increases of approximately $254,000, $211,000, and $204,000, respectively. Prior to our July 2005 announcement to discontinue clinical development, we were preparing our Bothell, Washington facility for the next phase of trials resulting in certain of our expenses continuing to increase for the six months ended June 30, 2005 as compared to the same period in the prior year. Our non-cash stock compensation expense decreased approximately $607,000 for the six months ended June 30, 2005 as compared to the six months ended June 30, 2004. In addition, the increases in research and development were partially offset by a reduction of amounts charged to expense for contractual obligations relating to developing our bead technology. Expenses associated with developing our bead technology totaled $500,000 for the six months ended June 30, 2004, with no such costs incurred for the six months ended June 20, 2005.

General and Administrative

General and administrative expenses represented approximately 27% and 28% of our operating expenses for the six months ended June 30, 2005 and 2004, respectively. General and administrative expenses increased 9% from $3.3 million for the six months ended June 30, 2004 to $3.6 million for the six months ended June 30, 2005. The rise was due primarily to costs associated with being a public company, including increases in professional fees, insurance costs, salary and other personnel-related expenses offset by a decrease in non-cash stock compensation expense. Operating expenses, consulting expenses, insurance costs and salary and other personnel-related expenses increased $220,000, $208,000, $127,000, $152,000, respectively for the six month period ended June 30, 2005 as compared to the six month period ended June 30, 2004. Non-cash stock compensation expense decreased from $614,000 for the six months ended June 30, 2004 to $311,000 for the six months ended June 30, 2005. Although the Company’s development activities have been discontinued, we will continue to incur costs related to our ongoing operations.

We anticipate that general and administrative expenses will decrease slightly in the foreseeable future.

Other Income (Expense)

Other income (expense), net comprised primarily of interest expense and interest income, totaled $226,000 other income for the six months ended June 30, 2005, compared to $12.5 million other expense for the six months ended June 30, 2004.

Interest income increased 245%, from $148,000 for the six months ended June 30, 2004 to $511,000 for the six months ended June 30, 2005, due to increased average cash and investment balances upon which interest is earned. Interest expense decreased from $12.7 million for the six months ended June 30, 2004 to $155,000 for the six months ended June 30, 2005, due to interest expense associated with the convertible promissory notes issued in October 2003. Upon consummation of our initial public offering and conversion of the notes to common stock, we recognized $11.3 million in interest expense during the six months ended June 30, 2004, which represented the beneficial conversion feature of the notes. We also recognized an additional $1.1 million in interest expense associated with the discount on the notes, representing the value of the proceeds allocated to the warrants received by the note holders.

Accretion of Preferred Stock

For the six months ended June 30, 2004, we recognized $9.0 million in accretion of preferred stock to arrive at our net loss applicable to common stockholders. No such accretion was recognized for the six months ended June 30, 2005. This accretion represented the remaining discount associated with our Series E and F preferred stock, which was recognized when the preferred stock was converted into common stock upon the closing of our initial public offering.

Liquidity and Capital Resources

As of June 30, 2005, we had cash, cash equivalents and short-term investments of $32.3 million, with cash equivalents being held in commercial paper and highly liquid money market accounts with financial institutions. Cash, cash equivalents and short-term investments were $47.3 million as of December 31, 2004.

Net cash used in operating activities was $13.4 million and $8.0 million for the six months ended June 30, 2005 and 2004, respectively. Expenditures in these periods were generally the result of research and development expenses and general and administrative expenses in support of our operations.

Our investing activities, other than purchases and maturities of investments, have consisted primarily of purchases of property and equipment. Purchases of property and equipment totaled $855,000 and $1,593,000 for the six months ended June 30, 2005 and 2004, respectively. Property and equipment additions in the first half of 2005 are primarily associated with the renovation of our manufacturing facility in Bothell, Washington.

Net cash used in financing activities totaled $390,000 for the six months ended June 30, 2005, compared to net cash provided by financing activities of $30.1 million for the six months ended June 30, 2004. In March 2004, we raised net proceeds of approximately $29.7 million from the sale of 4,200,000 shares of common stock in our initial public offering.

We expect to continue to incur operating losses and do not anticipate that we will receive any product revenues in the foreseeable future, if ever.

On July 5, 2005, we announced that we were exploring various strategic alternatives and that we had retained SG Cowen & Co. as our financial advisor to assist the Company during this process. Our efforts are focused on reducing operating expenses to a minimum appropriate level, conducting our affairs in the most financially efficient manner practical for a public company and pursuing strategic alternatives. In connection with our ongoing evaluation of our strategic alternatives, on July 8, 2005, our Board of Directors approved a workforce reduction plan that resulted in a reduction of our workforce by approximately 49%, to 34 employees. Such reduction in force was completed by July 15, 2005. Additionally, on August 12, 2005, a further workforce reduction was completed that resulted in the reduction of our workforce of 31 employees by approximately an additional 32%, to 21 employees. The Company has also taken a number of actions to reduce its operating expenses and conserve its cash, including the discontinuation of all clinical trial activity.

The following summarizes our most significant long-term contractual obligations as of June 30, 2005


Total obligation through its remaining life (in thousands)
Operating leases for our Seattle and Bothell facilities	$	6,667
Equipment financing	$	4,468

Based on the current status of our product development and collaboration plans, and the reductions in force effected in March 2005, May 2005, July 2005, and August 12, 2005, we believe that our current cash, cash equivalents and investments will be adequate to satisfy our capital needs through at least the end of the second quarter of fiscal year 2006. This estimate does not include any costs that may be associated with completing any strategic alternative. We are currently evaluating whether further reductions in our workforce or other expenditures are appropriate based on our decision to evaluate our strategic alternatives. At this time, we cannot estimate the impact that any such reductions would have on our results of operations or

financial condition. Our ability to achieve or execute an identified strategic alternative, including mergers, acquisitions, sale or purchase of assets, in-licensing opportunities and out-licensing opportunities is subject to a variety of factors, including: (i) the perceived value of our technology; (ii) the volatility and demand of the markets, conditions in the economy generally and the biotechnology industry specifically; and (iii) other factors we cannot presently predict with certainty. There can be no assurance that strategic alternatives will be available to us or if such options will be available on acceptable terms, if at all.

Recent Accounting Pronouncements

In December 2004, the FASB issued SFAS 123R, Share-Based Payment. SFAS 123R establishes standards for the accounting for transactions in which an entity receives employee services in exchange for the entity’s equity instruments or liabilities that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. SFAS 123R eliminates the ability to account for share-based compensation using APB 25 and generally requires that such transactions be accounted for using a fair value method. The provisions of this statement are effective in the first fiscal year beginning after June 15, 2005 and will become effective for us beginning with the first quarter of 2006. The impact that the adoption of this statement will have on our financial position and results of operations may be material. The impact will be determined by share-based payments granted in future periods, as well as the fair value model and assumptions we will choose, which have not been finalized yet.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Our critical accounting policies and estimates have not changed from those reported in our Annual Report on Form 10-K for the year ended December 31, 2004. The critical accounting policies that involve significant judgments and estimates used in the preparation of our consolidated financial statements are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2004.

Important Factors That May Affect Our Business, Results of Operations and Stock Price

You should carefully consider the risks described below, together with all of the other information included in this Quarterly Report on Form 10-Q and the information incorporated by reference herein. If we do not effectively address the risks we face, our business will suffer and we may never achieve or sustain profitability. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” above.

This Quarterly Report on Form 10-Q also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of factors that are described below and elsewhere in this Quarterly Report on Form 10-Q.

Our evaluation of strategic alternatives may be unsuccessful and may have an adverse effect on our business and stock price.

On July 5, 2005, we announced that we had implemented a plan to identify and evaluate our strategic alternatives, including pursuant to mergers, acquisitions, the sale or purchase of assets, in-licensing opportunities, and out-licensing opportunities. In connection therewith, we have engaged SG Cowen & Co. as our financial advisor to assist the Company during this process. We are uncertain as to what strategic alternatives may be available to us or what impact any particular strategic alternative that is announced or consummated will have on our stock price. Uncertainties and risks relating to our exploration of strategic alternatives include the following:

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exploration of strategic alternatives will disrupt our operations, which could have a material adverse effect on our business and the market prices of our common stock and preferred stock;

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the process of exploring strategic alternatives may be more time-consuming and expensive than we anticipate;

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we may not be able to identify any strategic alternatives that the Company believes are in the best interest of the Company and its stockholders; and

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we may not be able to successfully execute or achieve the benefits of a strategic alternative recommended to us by our financial advisor.

In addition, the Company is evaluating strategic alternatives, and future actions may result in additional restructuring costs or impairment charges relating to our long-lived assets in future periods which could have an adverse impact on our business, financial condition and results of operations.

Even if third parties are willing to explore strategic alternatives with us, we may not be successful in executing and consummating any transactions because of the risks and uncertainties associated with our business.

A number of factors related to our business may prevent the consummation of a strategic transaction, including but not limited to:

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our convertible exchangeable preferred stock contains certain provisions that may make us less attractive to a potential strategic partner, including liquidation preference, conversion, dividend and make-whole payment provisions;

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the effects of the current economic environment on us and on any potential acquirer;

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the dilutive effect of our business to a potential acquirer; and

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the value, if any, that may be attributed to our intellectual property.

These and other risks and uncertainties, including risks and uncertainties that we cannot presently predict, may prevent us and interested third parties from exploring and consummating mutually acceptable strategic alternatives.

We may not be able to complete the strategic alternative we initially elect to pursue, resulting in increased expenses and a delay in finally completing a strategic alternative.

We may select a strategic alternative that we may not be able to complete for various reasons, including a decision of our principal stockholders not to approve such alternative, our inability to obtain regulatory approval, actions of other companies or litigation involving the selected alternative or other matters. Such inability to complete any selected strategic alternative will result in increased expenses and delay the completion of any strategic alternative which could be harmful to our business.

The attempted development of products using our Xcellerate Technology was our only potential product line, and the availability of strategic alternatives may depend on the perceived value of the Xcellerate Technology in the biotechnology industry.

We have not successfully developed any product line with our Xcellerate Technology and we have no plans to pursue any other product line. If the biotechnology industry does not value our intellectual property, our strategic alternatives will be adversely impacted.

If we are unable to consummate a strategic alternative, we may cease operations and liquidate and our common stock will have little, if any, value, and, even if we are able to consummate a strategic transaction, our common stock may have little, if any value.

If we are unsuccessful in completing a strategic transaction, we may decide to cease operations and liquidate and dissolve the Company if our Board of Directors determines that doing so is in the best interest of our stockholders. Liquidation and dissolution may not create value to our stockholders or result in any remaining capital for distribution to our stockholders. Additionally, pursuant to the terms of our convertible exchangeable preferred stock, upon a liquidation of the Company, the Company will be obligated to pay the holders of our outstanding shares of convertible exchangeable preferred stock $10.00 per share plus accrued and unpaid dividends prior to any distribution to the holders of our common stock, if any. As a result, upon liquidation, our common stock would likely have little, if any, value. In addition, there is a risk that, even if we are

successful in completing a strategic transaction, our common stock may have little, if any, value. The precise nature, amount and timing of any distribution to our stockholders would depend on and could be delayed by, among other things, sales of our non-cash assets and claim settlements with creditors.

We may issue additional shares of our stock, resulting in dilution for existing stockholders.

Some events could result in the issuance of additional shares of our stock, which would result in dilution for existing stockholders. We may issue additional shares of common stock or preferred stock:

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in connection with any strategic transaction that the Company may elect to pursue;

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upon the exercise or conversion of outstanding options, warrants and shares of convertible exchangeable preferred stock; and/or

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in lieu of any cash payment of make-whole dividends payable upon the conversion of our convertible exchangeable preferred stock.

We may not be able to retain existing personnel.

From March 2005 through August 12, 2005 we reduced our staff by approximately 85 employees. Our remaining staff, as of August 12, 2005 consisted of 20 full-time employees and 1 part-time employee. We are currently evaluating whether further reductions in our workforce are appropriate given our recent decision to discontinue our clinical trials and review our strategic alternatives. The uncertainty of the outcome of our review of strategic alternatives, workforce reductions and the volatility in our stock price may create anxiety and uncertainty, which may adversely affect employee morale and cause us to lose employees whom we would prefer to retain. To the extent that we are unable to retain our existing personnel, our business and ability to pursue strategic alternatives may suffer. In addition, this workforce reduction may subject us to the risk of litigation, which could result in substantial costs to us and could divert management’s time and attention away from business operations.

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

We are a development stage company with limited operating history. We have incurred significant operating losses since we began operations in 1996, including net losses of approximately $39.6 million for the year ended December 31, 2004 and $13.2 million for the six months ended June 30, 2005, and we may never become profitable. As of June 30, 2005, we had an accumulated deficit since inception of approximately $139.4 million. These losses have resulted principally from costs incurred in our research and development programs and from our general and administrative expenses. To date, we have derived no revenues from product sales or royalties. We do not expect to have any product sales or royalty revenue in the foreseeable future. Our operating losses have been increasing during the past several years and may increase significantly in the future. We also may be required to recognize additional losses based upon changes in the fair value of our derivative liability, which resulted from the dividend make-whole payment feature of our convertible exchangeable preferred stock. These losses, among other things, have had and will continue to have an adverse effect on our stockholders’ equity and working capital. We are unable to predict when we may become profitable, if at all. If we are unable to achieve and then maintain profitability, the market value of our common stock and convertible exchangeable preferred stock will likely decline.

We may be unable to maintain our listing on Nasdaq, which could cause our stock price to fall and decrease the liquidity of our stock.

If our shares are delisted and any appeal we might file receives an unfavorable determination by Nasdaq, our common stock would be removed from listing on the Nasdaq National Market, and we may seek to have the applicable shares listed for

trading on the Nasdaq SmallCap Market. We cannot assure you that we would be able to obtain listing for our shares on the Nasdaq SmallCap Market or that we will be able on an ongoing basis to meet the maintenance requirements thereof. If our common stock is delisted, our preferred stock would also be delisted unless the preferred stock meets the minimum listing requirements applicable to our common stock.

If our shares were to be delisted from trading on the Nasdaq National Market, in order to obtain relisting on the Nasdaq National Market, we would need to satisfy certain quantitative designation criteria which we may not meet.

If our shares were to be delisted from trading on the Nasdaq National Market and were neither relisted thereon nor listed for trading on the Nasdaq SmallCap Market, trading, if any, in our shares may continue to be conducted on the OTC Bulletin Board or in a non-Nasdaq over-the-counter market, such as the “pink sheets.” Delisting of our shares would result in limited release of the market price of those shares and limited analyst coverage and could restrict investors’ interest in our securities. Also, a delisting could materially adversely affect the trading market and prices for our shares and our ability to issue additional securities or to secure additional financing. In addition, if our shares were not listed and the trading price of our shares was less than $5 per share, our shares could be subject to Rule 15g-9 under the Securities Exchange Act of 1934 which, among other things, requires that broker/dealers satisfy special sales practice requirements, including making individualized written suitability determinations and receiving a purchaser’s written consent prior to any transaction. In such case, our securities could also be deemed to be a “penny stock” under the Securities Enforcement and Penny Stock Reform Act of 1990, which would require additional disclosure in connection with trades in those shares, including the delivery of a disclosure schedule explaining the nature and risks of the penny stock market. Such requirements could severely limit the liquidity of our securities.

We may have limited ability to pay cash dividends on the convertible exchangeable preferred stock.

Delaware law may limit our ability to pay cash dividends on the convertible exchangeable preferred stock. Under Delaware law, cash dividends on our capital stock may only be paid from “surplus” or, if there is no “surplus,” from the corporation’s net profits for the current or preceding fiscal year. Delaware law defines “surplus” as the amount by which the total assets of a corporation, after subtracting its total liabilities, exceed the corporation’s capital, as determined by its board of directors. Since we are not profitable, our ability to pay cash dividends will require the availability of adequate surplus. Even if adequate surplus is available to pay cash dividends on the convertible exchangeable preferred stock, we may not have sufficient cash to pay dividends on the convertible exchangeable preferred stock.

If we are unable to protect our proprietary rights, the value of our business may be adversely affected.

Our business, and our ability to enter into and consummate a strategic alternative, depends in part on obtaining, maintaining and enforcing our patents and in-licensed and proprietary rights throughout the world. We believe we own, or have rights under licenses to, issued patents and pending patent applications that are necessary to commercialize Xcellerated T Cells. 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 developing competing products. We also face the risk that others may independently develop similar or alternative technologies or may design around our proprietary and patented technologies.

The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. No consistent policy regarding the breadth of claims allowed in biotechnology patents has emerged to date in the United States. Furthermore, the application and enforcement of patent laws and regulations in foreign countries is even more uncertain, particularly where, as here, patent rights are co-owned with others, thus requiring their consent to ensure exclusivity in the marketplace. Accordingly, we cannot assure you that we will be able to effectively file, protect or defend our proprietary rights in the United States or in foreign jurisdictions on a consistent basis.

Third parties may successfully challenge the validity of our patents. We will only be able to protect our technologies from unauthorized use by third parties to the extent that valid and enforceable patents or other proprietary rights cover them. Because the issuance of a patent is not conclusive of its validity or enforceability, we cannot assure you how much protection, if any, will be given to our patents if we attempt to enforce them or if others challenge their validity in court. It is possible that a competitor may successfully challenge our patents or that a challenge will result in limiting the coverage of our patents. If the outcome of litigation is adverse to us, third parties may be able to use our technologies without payment to us.

In addition, it is possible that others may infringe upon our patents or successfully avoid them through design innovation. We may initiate litigation to police unauthorized use of any of our proprietary rights, whether or not related to our Xcellerated T Cells. However, the cost of litigation to uphold the validity of our patents and to prevent infringement could be substantial, particularly where patent rights are co-owned with others, thus requiring their participation in the litigation, and the litigation will consume time and other resources. Some of our competitors may be better able to sustain the costs of complex patent litigation because they have substantially greater resources. Moreover, if a court decides that our patents are not valid, we will not have the right to stop others from using our inventions. There is also the risk that, even if the validity of our patents were upheld, a court may refuse to stop others on the ground that their activities do not infringe upon our patents. Because protecting our intellectual property is difficult and expensive, we may be unable to prevent misappropriation of our proprietary rights.

We also rely on certain proprietary trade secrets and know-how, especially where we believe patent protection is not appropriate or obtainable. Trade secrets and know-how, however, are difficult to protect. We have taken measures to protect our unpatented trade secrets and know-how, including the use of confidentiality and invention assignment agreements with our employees, consultants and some of our contractors. It is possible, however, that these persons may unintentionally or willingly breach the agreements or that our competitors may independently develop or otherwise discover our trade secrets and know-how.

There are risks inherent in our business that may subject us to potential product liability suits and other claims, which may require us to engage in expensive and time-consuming litigation or pay substantial damages and may adversely affect our business.

Our business exposes us to product liability risks, which are inherent in the testing, manufacturing, marketing and sale of biopharmaceutical products. Even if we do not decide to resume the clinical development of our products, we face a risk of clinical trial liability claims in the event that the prior use, or misuse, of our product candidates during clinical trials resulted in personal injury or death. An individual may bring a product liability claim against us if Xcellerated T Cells cause, or merely appear to have caused, an injury. In addition, we are licensing our Xcellerate Technology in the field of HIV retroviral gene therapy to our collaborative partner, Fresenius. We may incur liability and be exposed to claims for products manufactured by Fresenius.

The discovery of unforeseen side effects of Xcellerated T Cells could also lead to lawsuits against us. Regardless of merit or eventual outcome, product liability or other claims may, among other things, result in:

•

injury to our reputation;

•

costs of related litigation; and

•

substantial monetary awards to plaintiffs.

We currently have clinical trial insurance that covers our clinical trials up to $5.0 million per occurrence with a $5.0 million aggregate limit. However, due to factors outside of our control, including the risks discussed above as well as conditions in the relevant insurance markets, we may not be able to renew such coverage on acceptable terms, if at all. Furthermore, even if we secure coverage, we may not be able to obtain policy limits adequate to satisfy any liability that may arise. If a successful product liability or other claim or series of claims is brought against us for uninsured liabilities or in excess of insured liabilities, our assets may not be sufficient to cover these claims and our business operations could suffer.

If Xcellerated T Cells or components of our Xcellerate Technology alone or in combination with complementary treatments cause unforeseen harmful side effects, we may incur significant product liability.

Xcellerated T Cells or components of our Xcellerate Technology may cause unforeseen harmful side effects. For example, a patient receiving Xcellerated T Cells could have a severe allergic reaction or could develop an autoimmune condition. While we employ procedures to substantially remove the antibodies and beads used to generate Xcellerated T Cells, it is possible that residual antibodies or beads may be infused into patients and cause harmful effects.

In addition, we have not conducted studies on the long-term effects associated with the different types of media that we use to grow and freeze cells as part of our Xcellerate Technology. These media contain substances that have proved harmful if used in certain quantities. While we believe that we use sufficiently small quantities of these substances, harmful effects may still arise from our use of these media.

We believe Xcellerated T Cells may be used in combination with complementary treatments, including anti-viral drugs, and one or more of these other therapies could cause harmful side effects that could be attributed to Xcellerated T Cells. If people believe Xcellerated T Cells or any component of our Xcellerate Technology alone or in combination with complementary treatments causes harmful side effects, we may incur significant damages from product liability claims, which will adversely affect our ability to operate our business.

If our principal stockholders, executive officers and directors choose to act together, they may be able to control our management and operations, acting in their best interests and not necessarily those of other stockholders.

Our executive officers, directors and principal stockholders, and entities affiliated with them, beneficially own a significant percentage of our common stock and convertible exchangeable preferred stock. This significant concentration of share ownership may adversely affect the trading price of our common stock because investors often perceive disadvantages in owning stock in companies with controlling stockholders. These stockholders, acting together, 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 could 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 of us or impeding a merger, consolidation, takeover or other business combination that could be favorable to you. Since our convertible exchangeable preferred stock has limited voting rights prior to conversion, holders of our convertible exchangeable preferred stock will have little or no ability to control the outcome of a stockholder vote, except under certain circumstances where a class vote of our convertible exchangeable preferred stock will be required, including, among others, upon certain amendments to the Company’s certificate of incorporation or bylaws or upon a share exchange, merger or consolidation of the Company unless our shares of convertible exchangeable preferred stock remain outstanding and unaffected by such transaction or convert into convertible exchangeable preferred stock of the surviving entity pursuant to such transaction.

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

Our research and development and manufacturing processes have involved the controlled storage, use and disposal of hazardous materials, including biological hazardous materials. We are subject to federal, state and local regulations governing the use, manufacture, storage, handling and disposal of materials and waste products. Although we believe that our safety procedures for handling and disposing of these hazardous materials comply with the standards prescribed by law and regulation, we cannot completely eliminate the risk of accidental contamination or injury from hazardous materials. In the event of an accident, we could be held liable for any damages that result, and any liability could exceed the limits or fall outside the coverage of our insurance. We may not be able to obtain insurance on acceptable terms, if at all. We could incur significant costs to comply with current or future environmental laws and regulations.

Our current commercial property insurance provides coverage up to $25,000 for pollution clean-up or removal and up to $25,000 for biological agency clean-up or removal. Additionally our business income coverage provides for up to $250,000 for extra expenses for pollution clean-up or removal to enable us to re-establish operations after a hazardous event.

Changes in the value of the British pound and Euro relative to the US dollar may adversely affect us.

We do not engage in foreign currency hedging; however, we have entered into certain contracts denominated in foreign currencies and therefore we are exposed to currency exchange risks.

Under our agreements with Lonza to purchase antibodies, we must make payments denominated in British pounds. As a result, from time to time, we are exposed to currency exchange risks related to the British pound. Accordingly, if the British pound strengthens against the U.S. dollar, our payments to Lonza will increase in U.S. dollar terms. We have paid a total of $5.6 million to Lonza under our agreements with them as of June 30, 2005. Assuming development and supply services are completed as scheduled under our agreements with Lonza, our remaining payments will be approximately $1.0 million through the end of 2005.

The terms of our license agreement with Fresenius include potential royalties on net sales as well as potential milestone payments to us denominated in Euro. As a result, we are exposed to currency exchange risks related to the Euro. If the Euro weakens against the U.S. dollar, payments received from Fresenius will decrease in U.S. dollar terms.

If the use of our technologies conflicts with the rights of others, we could be subject to expensive litigation or be required to obtain licenses from others to develop or market Xcellerated T Cells.

Our competitors or others may have or acquire patent rights that they could enforce against us. If they do so, we may be required to alter our Xcellerate Technology, or pay licensing fees to use our Xcellerate Technology. If our Xcellerate Technology conflicts with patent rights of others, third parties could bring legal action against us or our licensees, suppliers, or potential collaborators, claiming damages and seeking to enjoin manufacturing and marketing of the affected products. If these legal actions are successful, in addition to any potential liability for damages, we might have to obtain a license in order to continue to manufacture or market the affected products. A required license under the related patent may not be available on acceptable terms, if at all. Additionally, if a competitor or third party has or acquires patent rights that can be enforced against us, the Company may be less attractive to a potential strategic partner and our ability to enter into and consummate a strategic transaction may be hindered.

We may be unaware that the use of our technology conflicts with pending or issued patents. Because patent applications can take many years to issue, there may be currently pending applications, unknown to us, that may later result in issued patents upon which our Xcellerate Technology or Xcellerated T Cells may infringe. There could also be existing patents of which we are unaware upon which our Xcellerate Technology or Xcellerated T Cells may infringe. In addition, if third parties file patent applications or obtain patents claiming technology also claimed by us in pending applications, we may have to participate in interference proceedings in the U.S. Patent and Trademark Office to determine priority of invention. If third parties file oppositions in foreign countries, we may also have to participate in opposition proceedings in foreign tribunals to defend the patentability of the filed foreign patent applications. We may have to participate in interference proceedings involving our issued patents or our pending applications.

If a third party claims that we infringe upon its proprietary rights, any of the following may occur:

•

we may become involved in time-consuming and expensive litigation, even if the claim is without merit;

•

we may become liable for substantial damages for past infringement if a court decides that our technology infringes upon a competitor’s patent;

•

a court may prohibit us from selling or licensing our product without a license from the patent holder, which may not be available on commercially acceptable terms, if at all, or which may require us to pay substantial royalties or grant cross licenses to our patents; and

•

in order to use our technology, it would have to be redesigned so that it does not infringe upon others’ patent rights, which may not be possible or could require substantial funds or time.

If any of these events occurs, our business will suffer and the market price of our common stock will likely decline.

Our rights to use antibodies and technologies licensed to us by third parties are not within our control, and we may not be able to implement our Xcellerate Technology without these antibodies and technologies.

We have licensed patents and other rights which are necessary to our Xcellerate Technology and Xcellerated T Cells. The value of our business, and our ability to enter into and consummate a strategic alternative, will significantly suffer if these licenses terminate, if the licensors fail to abide by the terms of the license or fail to prevent infringement by third parties or if the licensed patents or other rights are found to be invalid.

Our Xcellerate Technology uses two monoclonal antibodies that we license from third parties. We rely on our non-exclusive license from the Fred Hutchinson Cancer Research Center in Seattle, Washington to use the monoclonal antibody that binds to the CD3 molecule and our exclusive license from Diaclone S.A., or Diaclone, in Besancon, France to use the monoclonal antibody that binds to the CD28 molecule. These antibodies are necessary components of our Xcellerate Technology. Our

rights to use these antibodies depend on the licensors abiding by the terms of those licenses and not terminating them. Our license agreement with the Fred Hutchinson Research Center is effective for 15 years following the first commercial sale of a product based on the license and may be terminated earlier by either party for material breach. Our license agreement with Diaclone is effective for 15 years from the date of the first FDA approval, or its foreign equivalent, of a therapeutic product containing a bead coated with the licensed antibody and may be terminated earlier by either party for material breach. With regard to our agreement with Diaclone, at the end of the relevant 15-year period, we will have a perpetual, irrevocable, fully-paid royalty-free, exclusive license. Except for certain circumstances which would permit us to obtain the monoclonal antibody from third parties or manufacture it ourselves, our agreement with Diaclone obligates us to purchase the monoclonal antibody from them until we begin preparing for Phase III clinical trials of a product covered by this license.

In addition, we have in-licensed several T cell activation patents and patent applications from the Genetics Institute, a subsidiary of Wyeth, Inc. The technology underlying these patents is a critical part of our Xcellerate Technology. Under our agreement, we have the right to enforce the licensed patents. The license from Genetics Institute terminates upon the end of the enforceable term of the last licensed patent or the license agreements under which Genetics Institute has sublicensed rights to Xcyte, and may also be terminated earlier by either party for material breach. Of the five in-licensed U.S. patents presently issued related to this technology, two patents expire in 2016, two others expire in 2019, and the remaining patent expires in 2020.

If we violate the terms of our licenses, or otherwise lose our rights to these antibodies, patents or patent applications, we, and any potential strategic partner, may be unable to continue development of our Xcellerate Technology. Our licensors or others may dispute the scope of our rights under any of these licenses. Additionally, the licensors under these licenses might breach the terms of their respective agreements or fail to assist in the prevention of infringement of the licensed patents by third parties. Loss of any of these licenses for any reason could materially harm our financial condition and operating results, and our ability to enter into and consummate a strategic transaction.

We will soon be required to comply with Section 404 of the Sarbanes-Oxley Act of 2002 regarding internal control attestation and any inability to do so may negatively impact the report on our financial statements.

We are in the process of implementing the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 which requires our management to assess the effectiveness of our internal controls over financial reporting and include an assertion in our annual report as to the effectiveness of our controls beginning on December 31, 2006. Subsequently, our independent auditors will be required to attest to whether our assessment of the effectiveness of our internal control over financial reporting is fairly stated in all material respects and separately report on whether it believes we maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006. Due to the recent departure of our Associate Director of SEC Reporting and our Controller, as well as any difficulties we may have in retaining our current personnel, we cannot assure you that we will be able to identify deficiencies in our internal controls, remediate such deficiencies in a timely manner or comply with the Section 404 disclosure requirements for the year ending December 31, 2006. If we identify deficiencies in our existing internal controls and are not able to remediate such deficiencies in a timely fashion or otherwise comply with the Section 404 disclosure requirements for the year ending December 31, 2006, we will not be able to give assurance regarding the effectiveness of our internal controls and the report on our financial statements provided by our independent auditors may be negatively impacted.

Legislative actions, potential new accounting pronouncements and higher insurance costs are likely to impact our future financial position and results of operations.

Future changes in financial accounting standards may cause adverse, unexpected revenue fluctuations and affect our financial position or results of operations. New pronouncements and varying interpretations of pronouncements have occurred with frequency in the past and may occur again in the future and as a result we may be required to make changes in our accounting policies. Compliance with new regulations regarding corporate governance and public disclosure may result in additional expenses. Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and Nasdaq National Market rules, are creating uncertainty for companies such as ours and insurance costs are increasing as a result of this uncertainty and other factors. As a result, we intend to invest all reasonably necessary resources to comply with evolving standards, and this investment may result in increased general and administrative expenses and a diversion of management time and attention from science and business activities to compliance activities. For example, we will incur substantial costs and expend significant resources to comply with the new regulations promulgated under Section 404 of the Sarbanes-Oxley Act of 2002.

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

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

•

the course of action that we take with respect to the review of our strategic alternatives;

•

additions to or departures of our key personnel;

•

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

•

media reports and publications about immunotherapy;

•

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;

•

variations in our quarterly results;

•

announcements about our collaborators or licensors; and

•

changes in accounting principles.

The market prices of the securities of biotechnology companies, particularly companies like ours without consistent product revenues and earnings, 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, companies that experience volatility in the market price of their securities have often faced securities class action litigation. Moreover, market prices for stocks of biotechnology-related and technology companies frequently reach levels that bear no relationship to the operating performance of these companies. These market prices generally are not sustainable and are highly volatile. Whether or not meritorious, litigation brought against us could result in substantial costs, divert our management’s attention and resources and harm our financial condition and results of operations.

Our amended and restated certificate of incorporation and bylaws and certain provisions of Delaware law may delay or prevent a change in our management and make it more difficult for a third party to acquire us.

Our amended and restated certificate of incorporation and bylaws contain provisions that could delay or prevent a change in our board of directors and management teams. 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 our common stock;

•

provide for a classified board of directors; and

•

require that stockholder actions must be effected at a duly called stockholder meeting and prohibit stockholder action by written consent.

In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which may prohibit large stockholders from consummating a merger with, or acquisition of us.

These provisions may prevent a merger or acquisition that would be attractive to stockholders and could limit the price that investors would be willing to pay in the future for our stock.

These provisions could make it more difficult for our stockholders to replace members of our board of directors. 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. Additionally, these provisions may prevent a merger or acquisition that would be attractive to stockholders and could limit the price that investors would be willing to pay in the future for our common stock.

The future sale of our common and convertible exchangeable preferred stock, and future issuances of our common stock upon conversion of our convertible exchangeable preferred stock and upon the payment of make-whole dividends, if any, could negatively affect our stock price.

If our common or convertible exchangeable preferred stockholders sell substantial amounts of our stock in the public market, or the market perceives that such sales may occur, the market price of our common and convertible exchangeable preferred stock could fall.

In addition, if we exercise our right to pay make-whole dividends in common stock rather than in cash upon conversion of our convertible exchangeable preferred stock to common stock, then the sale of such shares of common stock or the perception that such sales may occur could cause the market price of our stock to fall. Additionally, after our convertible exchangeable preferred stock offering, the holders of our convertible exchangeable preferred stock had the right to convert each share of convertible exchangeable preferred stock into approximately 4.2553 shares of our common stock. Such conversion rate is subject to certain antidilution adjustments that, upon the occurrence of certain events, will increase the number of shares of common stock that each holder of convertible exchangeable preferred stock will receive upon conversion into common stock. Such antidilution price adjustments may apply in the case of any strategic alternative that we pursue which may result in further dilution to the holders of outstanding common stock. The conversion of our convertible exchangeable preferred stock into common stock and the payment of any make-whole dividends in shares of common stock in lieu of cash, may result in substantial dilution to the interests of our holders of common stock.

After our convertible exchangeable preferred stock offering, according to the terms of our investors rights agreement, the holders of approximately 9.0 million shares of our common stock and warrants had rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. Furthermore, if we were to include in a company-initiated registration statement shares held by those holders pursuant to the exercise of their registration rights, those sales could impair our ability to raise needed capital by depressing the price at which we could sell our common stock.

Anti-takeover provisions could make it more difficult for a third party to acquire us.

Our Board of Directors has the authority to issue up to 2,010,000 shares of preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the stockholders. The rights of the holders of common stock may be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock may have the effect of delaying, deferring or preventing a change of control of Xcyte Therapies without further action by the stockholders and may adversely affect the voting and other rights of the holders of common stock. Further, certain provisions of our charter documents, including provisions eliminating the ability of stockholders to take action by written consent and limiting the ability of stockholders to raise matters at a meeting of stockholders without giving advance notice, may have the effect of delaying or preventing changes in control or management of Xcyte Therapies, which could have an adverse effect on the market price of our stock. In addition, our charter documents provide for a classified board, which may make it more difficult for a third party to gain control of our Board of Directors. Similarly, state anti-takeover laws related to corporate takeovers may prevent or delay a change of control of Xcyte Therapies.

If we exchange the convertible exchangeable preferred stock for debentures, the exchange will be taxable but we will not provide any cash to pay any tax liability that any convertible exchangeable preferred stockholder may incur.

An exchange of convertible exchangeable preferred stock for debentures, as well as any dividend make-whole or interest make-whole payments paid in our common stock, will be taxable events for U.S. federal income tax purposes, which may

result in tax liability for the holder of convertible exchangeable preferred stock without any corresponding receipt of cash by the holder. In addition, the debentures may be treated as having original issue discount, a portion of which would generally be required to be included in the holder’s gross income even though the cash to which such income is attributable would not be received until maturity or redemption of the debenture. We will not distribute any cash to you to pay these potential tax liabilities.

If we automatically convert the convertible exchangeable preferred stock, there is a substantial risk of fluctuation in the price of our common stock from the date we elect to automatically convert to the conversion date.

We may elect to automatically convert the convertible exchangeable preferred stock on or prior to maturity if our common stock price has exceeded 150% of the conversion price for at least 20 trading days during a 30-day trading period ending within five trading days prior to the notice of automatic conversion. You should be aware that there is a risk of fluctuation in the price of our common stock between the time when we may first elect to automatically convert the preferred and the automatic conversion date.

We do not intend to pay cash dividends on our common stock in the foreseeable future.

We do not anticipate paying cash dividends on our common stock in the foreseeable future. Any payment of cash dividends will depend on our financial condition, results of operations, capital requirements, the outcome of the review of our strategic alternatives and other factors and will be at the discretion of our board of directors. Accordingly, investors will have to rely on capital appreciation, if any, to earn a return on their investment in our common stock. Furthermore, we may in the future become subject to contractual restrictions on, or prohibitions against, the payment of dividends.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

Our short-term investments as of June 30, 2005 consisted of $14.5 million in corporate bonds, $6.7 million in federal agency obligations, and $250,000 in municipal bonds with contractual maturities of one year or less. Due to the short-term nature of our investments, we believe that our exposure to market interest rate fluctuations is minimal. The corporate bonds in which we invest are rated “A” or better by both Moody’s and Standard and Poor’s. Our cash and cash equivalents are held primarily in commercial paper and highly liquid money market accounts. A hypothetical 10% change in short-term interest rates from those in effect at June 30, 2005 would not have a significant impact on our financial position or our expected results of operations. We do not currently hold any derivative financial instruments.

Because interest rates on our equipment financing obligations are fixed at the beginning of the repayment term, exposure to changes in interest rates is limited to new financings.

Foreign Currency Risk

We do not engage in foreign currency hedging; however, we have entered into certain contracts denominated in foreign currencies and therefore, we are subject to currency exchange risks.

For antibody development and supply services provided by Lonza, we must make payments denominated in British pounds. As a result, from time to time, we are exposed to currency exchange risks related to the British pound. If the British pound strengthens against the U.S. dollar, our payments to Lonza will increase in U.S. dollar terms. Assuming development and supply services are completed as scheduled under our agreements with Lonza, our remaining payments will be approximately $1.0 million through the end of 2005. A hypothetical 10% change in the British pound from the rate in effect at June 30, 2005 would not have a significant impact on our financial position or our expected results of operations.

The terms of our license agreement with Fresenius include the receipt of potential royalties on net sales as well as potential milestone payments to us denominated in Euro. As a result, we are exposed to currency exchange risks related to the Euro. If the Euro weakens against the U.S. dollar, payments received from Fresenius will decrease in U.S. dollar terms. A hypothetical 10% change in the Euro from the rate in effect at June 30, 2005 would not have a significant impact on our financial position or our expected results of operations.

Derivatives Valuation Risk

The terms of our November 2004 convertible preferred stock offering include a dividend make-whole payment feature. This feature is considered to be an embedded derivative and was valued on the balance sheet at $3.0 million at December 31, 2004. The carrying value of this derivative was reduced by $670,000 during the first half of 2005, based on cash dividends paid and the fair value of common stock issued as dividend make-whole payments pursuant to voluntary holder conversions during first quarter 2005. At June 30, 2005, the estimated fair value of the derivative liability was valued at $2.5 million, resulting in the recognition of $141,000 and $133,000 as other expense for the three and six months ended June 30, 2005. As the fair value of this derivative may fluctuate significantly from period to period, the resulting change in valuation may have a significant impact on our results of operations.

Item 4.

Controls and Procedures

As part of our quarterly review, we evaluated, under the supervision and with the participation of the Company’s management, including our Principal Executive Officer and Principal Financial and Accounting Officer, the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the quarterly period covered by this report. Based upon that evaluation, the Principal Executive Officer and the Principal Financial and Accounting Officer concluded that our disclosure controls and procedures, as of the end of the quarterly period covered by this report, were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. During the fiscal quarter ended June 30, 2005, there were not any changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II. Other Information

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

(a)

Unregistered Sales of Equity Securities. None.

(b)

Use of Proceeds. Our Registration Statement under the Securities Act of 1933 (File No. 333-109635) was declared effective by the SEC on March 16, 2004. All 4,200,000 shares of common stock offered in the final prospectus were sold at a price per share of $8.00. The aggregate gross proceeds of the shares offered and sold were $33.6 million, which resulted in net proceeds to us of approximately $29.7 million after deducting underwriting discounts and commissions and other offering expenses of $3.9 million. From the effective date of our initial public offering through June 30, 2005, we have used all $29.7 million of these proceeds to fund clinical trial activities, manufacturing activities, preclinical research and development activities, and capital expenditures, and for other general corporate purposes.

(c)

Repurchases. None.

Item 4.

Submission of Matters to a Vote of Security Holders

At our annual meeting of stockholders, held on June 17, 2005, the following proposals were adopted by the margins indicated:

1. To elect the following Class I directors to serve for the ensuing class term and until their successors are duly elected.


Name of Nominee	Votes in Favor	Votes Withheld	Abstain
Peter Langecker, M.D., Ph.D.	16,174,557	312,784	—
Robert M. Williams, Ph.D.	16,429,561	57,780	—

2. To amend the Company’s 2003 Stock Plan to (i) increase the number of shares of common stock reserved for issuance under such plan by 600,000 to an aggregate of 1,345,453 shares, (ii) approve the amendments for purposes of Section 162(m) of the Internal Revenue Code of 1986, as amended and (iii) expand the types of awards that the Company may grant to eligible service providers under the 2003 Stock Plan to include restricted stock grants, restricted stock units, stock appreciation rights and other similar types of awards under which recipients are not required to pay any purchase or exercise price.


Votes in Favor	Votes Opposed	Abstain
6,928,508	1,846,230	12,185

3. To amend the Company’s 2003 Directors’ Stock Option Plan to (i) increase the number of shares of common stock reserved for issuance under such plan by 350,000 shares to an aggregate of 440,909 shares and (ii) increase the number of option shares issued to non-employee directors for services rendered.


Votes in Favor	Votes Opposed	Abstain
7,324,071	1,444,367	18,485

4. To ratify the appointment of Ernst & Young LLP as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2005.


Votes in Favor	Votes Opposed	Abstain
16,467,325	6,363	19,462

Item 5.

Other Information

In connection with the Company’s ongoing evaluation of its strategic alternatives, on August 12, 2005 a workforce reduction was completed which resulted in the reduction of our workforce of 31 employees by approximately 32% to 21 employees. As a result of such workforce reduction, the Company currently estimates that it will record a charge in the third quarter of 2005 of approximately $242,800, consisting of severance, benefits and outplacement services. Such charge does not include any

contract termination or other exit costs, or any asset impairment charge that may result from future restructuring activities or other actions as a result of our strategic alternatives.

On August 12, 2005, the Company and Robert L. Kirkman, the Company’s Acting President and Chief Executive Officer, entered into an amendment to the Employment Agreement, dated January 15, 2004, between the Company and Dr. Kirkman. On July 5, 2005, Dr. Kirkman was appointed as the Company’s acting President and Chief Executive Officer. Pursuant to the terms of the Employment Agreement amendment, Dr. Kirkman’s annual salary will be increased, effective as of July 5, 2005, from $249,600 to $300,000. The amendment is filed with this report as Exhibit 10.6.

Item 6.

Exhibits


Exhibit Number

3.1(1)		Amended and Restated Certificate of Incorporation of Xcyte Therapies, Inc.

3.2(1)		Amended and Restated Bylaws of Xcyte Therapies, Inc.

3.3(3)		Certificate of the Powers, Designations, Preferences and Rights of the 6% Convertible Exchangeable Preferred Stock Of Xcyte Therapies, Inc.

3.4		Certificate of Correction to Certificate of the Powers, Designations, Preferences and Rights of the 6% Convertible Exchangeable Preferred Stock Of Xcyte Therapies, Inc.

4.1(1)		Form of Common Stock Certificate

4.2(3)		Certificate of the Powers, Designations, Preferences and Rights of the 6% Convertible Exchangeable Preferred Stock Of Xcyte Therapies, Inc.

4.3(4)		Indenture

4.4(2)		Form of Preferred Stock Certificate

4.5(5)		Certificate of Correction to Certificate of the Powers, Designations, Preferences and Rights of the 6% Convertible Exchangeable Preferred Stock Of Xcyte Therapies, Inc.

10.1(6)		Separation Agreement and Mutual Release, dated May 17, 2005, between Xcyte Therapies, Inc. and Stewart Craig, Ph.D.

10.2(7)		Xcyte Therapies, Inc. 2003 Stock Plan, as amended

10.3(7)		Xcyte Therapies, Inc. Amended and Restated 2003 Directors’ Stock Option Plan, as amended

10.4		Severance Agreement and Release, effective July 26, 2005, between Xcyte Therapies, Inc. and Mark Frohlich.

10.5		Retention and Separation Agreement, dated July 26, 2005, between Xcyte Therapies, Inc. and Kathi Cordova.

10.6		Amendment to Employment Agreement, dated August 12, 2005, between Xcyte Therapies, Inc. and Robert L. Kirkman.

31.1		Certification of Principal Executive Officer pursuant to Rule 13a-14(a).

31.2		Certification of Principal Financial and Accounting Officer pursuant to Rule 13a-14(a).

32.1		Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350.

32.2		Certification of Principal Financial and Accounting Officer pursuant to 18 U.S.C. Section 1350.

(1)	Previously filed as an exhibit to registrant’s registration statement on Form S-1, File No. 333-109653, originally filed with the Commission on October 10, 2003, as subsequently amended, and incorporated herein by reference.

(2)	Previously filed as an exhibit to registrant’s registration statement on Form S-1, File No. 333-119585, originally filed with the Commission on October 7, 2004, as subsequently amended, and incorporated herein by reference.

(3)	Previously filed as an exhibit to registrant’s current report on Form 8-K filed with the Commission on November 5, 2004, and are incorporated herein by reference.

(4)	Previously filed as an exhibit to registrant’s quarterly report on Form 10-Q filed with the Commission on November 15, 2004, and are incorporated herein by reference.

(5)	Filed herewith as Exhibit 3.4.

(6)	Previously filed as an exhibit to registrant’s current report on Form 8-K filed with the Commission on May 18, 2005, and are incorporated herein by reference.

(7)	Previously filed as an exhibit to registrant’s current report on Form 8-K filed with the Commission on June 21, 2005, and are incorporated herein by reference.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.


XCYTE THERAPIES, INC.

By:		/s/ Kathi L. Cordova
		Kathi L. Cordova
		Duly Authorized Officer of Registrant and Principal Financial and Accounting Officer
		Senior Vice President of Finance and Treasurer

Date: August 15, 2005

Certificate of Correction

Exhibit 3.4

CERTIFICATE OF CORRECTION

TO THE

CERTIFICATE OF THE POWERS, DESIGNATIONS,

PREFERENCES AND RIGHTS OF THE

6% CONVERTIBLE EXCHANGEABLE PREFERRED STOCK

($0.001 PAR VALUE)

(CUMULATIVE DIVIDEND, LIQUIDATION PREFERENCE $10 PER SHARE)

OF XCYTE THERAPIES, INC.

(Pursuant to Section 103(f) of the General

Corporation Law of the State of Delaware)

Xcyte Therapies, Inc. (the “Company”), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY:

1. The name of the corporation is Xcyte Therapies, Inc.

2. The Certificate of the Powers, Designations, Preferences and Rights of the 6% Convertible Exchangeable Preferred Stock of Xcyte Therapies, Inc., (the “Certificate of Designations”) was filed with the Secretary of State of the State of Delaware on November 1, 2004 and said Certificate of Designations requires correction as permitted by subsection (f) of Section 103 of the General Corporation Law of the State of Delaware.

3. The inaccuracy or defect in the Certificate of Designations to be corrected is that the words “greater of” set forth immediately preceding clause (1)(A) in the fifth sentence of Section 7(k) of the Certificate of Designations should have read “lesser of”.

4. Section 7(k) of the Certificate of Designations is corrected to read in its entirety as follows:

“(k) Upon any conversion of the Preferred Stock (whether pursuant to Section 7(a) or 7(j)) prior to November 3, 2007, the Company shall make a payment (the “Make-Whole Dividend Payment”) with respect to the shares of Preferred Stock so converted in an amount equal to full amount of dividends that would have accrued and become payable through and including November 3, 2007 pursuant to Section 3(a) on such shares of Preferred Stock, less any dividends actually accrued and paid with respect to such shares of Preferred Stock prior to the date upon which such conversion becomes effective. The Company shall calculate the amount of the Make-Whole Dividend Payment. The Company may elect to pay the Make-Whole Dividend Payment or any portion thereof (i) in cash or, (ii) by delivering shares of Common Stock. In the event of an Automatic Conversion pursuant to Section 7(j) or a voluntary conversion pursuant to Section 7(a) on or following the date of an Automatic Conversion Notice (unless and until such Automatic Conversion Notice shall be deemed to have no effect), the number of shares to be delivered in the event the Company shall elect to make the Make-Whole Dividend

Payment (or any portion thereof) in shares of Common Stock shall be equal to (x) the Make-Whole Dividend Payment (or any portion thereof that the Company elects to pay in shares of Common Stock) divided by (y) 150% of the Conversion Price (as adjusted pursuant to this Section 7) in effect on the effective date of such conversion. In all other circumstances in which the Company is required to make the Make-Whole Dividend Payment and elects to make the Make-Whole Dividend Payment (or any portion thereof) in shares of Common Stock, the number of shares of Common Stock to be delivered shall be equal to the lesser of (1) (A) the Make-Whole Dividend Payment (or any portion thereof that the Company elects to pay in shares of Common Stock) divided by (B) 95% of the average of the Closing Price per share of Common Stock for the two consecutive Trading Days immediately preceding and including the last Trading Day prior to the effective date of such conversion; or (2) (A) the Make-Whole Dividend Payment (or any portion thereof that the Company elects to pay in shares of Common Stock) divided by (B) $2.00. All shares of Common Stock which may be issued upon payment of the Make-Whole Dividend Payment (or any portion thereof) will be issued out of the Company’s authorized but unissued Common Stock and will, upon issue, be duly and validly issued and fully paid and nonassessable and free of any preemptive or similar rights.”

IN WITNESS WHEREOF, the Company has caused this certificate to be executed by Robert L. Kirkman on this 29th day of July, 2005.



By:		/s/ Robert L. Kirkman
Name:		Robert L. Kirkman
Title:		Acting President and Chief Executive Officer

Severance Agreement and Release

Exhibit 10.4

SEPARATION AGREEMENT AND RELEASE

This Separation Agreement and Release (“Agreement”) is entered into as of this fifteenth day of July, 2005 (hereinafter “Execution Date”) by and between Mark Frohlich (hereinafter “Employee”), and Xcyte Therapies, Inc., its affiliates, successors and assigns (hereinafter the “Company”). Employee and the Company are sometimes collectively referred to as the “Parties.”

Employee’s employment with the Company terminates effective July 15, 2005 (hereinafter “Termination Date”). The parties have agreed to avoid and resolve any alleged existing or potential disagreements between them arising out of or connected with Employee’s employment with the Company. The Company expressly disclaims any wrongdoing or any liability to Employee.

The Company agrees to provide Employee the following severance benefits, after the expiration of the seven-day revocation period described in Paragraph 9 below upon which the Agreement becomes effective (hereinafter “Effective Date”), provided Employee has not revoked this Agreement as described in that Paragraph:

(a)

A lump sum payment in the gross amount of $55,966 which equals three (3) months base salary at Employee’s current rate. Standard employee withholding taxes and any amounts owed by Employee to the Company will be deducted from this lump sum payment, in accordance with the Company’s regular payroll practices. Employee agrees that said payment will be mailed to Employee’s home on the next regular payroll date that is at least five (5) calendar days after the Effective Date;

(b)

Upon Employee’s timely election of COBRA continuation coverage under the Company’s health plan, the Company will pay one hundred percent (100%) of the COBRA premium for coverage through October 31, 2005;

(c)

If applicable, the Company will continue to administer Employee’s personal account within the Company’s existing 401(k) Plan, provided you meet the minimum balance requirement;

(d)

Payment for any vacation time accrued above the current 120 hour vacation accrual payout limit (but below the 180 hour maximum), if applicable; and

(e)

Vesting of Employee’s option(s) to purchase shares of Common Stock granted to Employee under the Company’s Amended and Restated 1996 Stock Option Plan and/or 2003 Stock Plan will terminate July 12, 2005, (resulting in a total of 47,928 vested

option shares). No additional option shares shall vest after such date. In accordance with the terms of the Stock Option Agreement, the vested options will be exercisable until October 12, 2005 (3 months following the Termination Date). Employee acknowledges and agrees that Employee has no other right, title or interest in or any Common Stock, stock options or any other capital stock of the Company as of the Termination Date, except as provided for in this Agreement.

(f)

Final payment of home loan on or about September 15, 2005

Employee specifically acknowledges and agrees that this consideration exceeds the amount Employee would otherwise be entitled to receive upon termination of Employee’s employment, and that this lump sum payment and other benefits are in exchange for entering into this Agreement. Employee agrees that Employee will not at any time seek consideration from the Company other than what is set forth in this Agreement. Employee specifically acknowledges and agrees that the Company has made no representations to Employee regarding the tax consequences of any amounts received by Employee or for Employee’s benefit pursuant to this Agreement.

Employee represents that Employee has not filed, and will not file, any complaints, lawsuits, administrative complaints or charges arising from or relating to Employee’s recruitment by, employment with, or termination from, the Company. Notwithstanding any provision of law which provides that a general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing a release, Employee agrees to release the Company, its Board of Directors, officers, employees, agents and assigns, from any and all claims, charges, complaints, causes of action or demands of whatever kind or nature that Employee now has or has ever had against the Company, whether known or unknown, arising from or relating to Employee’s recruitment by, employment with or discharge from the Company, including but not limited to: wrongful or tortious termination, specifically including actual or constructive termination in violation of public policy; implied or express employment contracts and/or estoppel; discrimination and/or retaliation under any federal, state or local statute or regulation, specifically including any claims Employee may have under the Fair Labor Standards Act, Age Discrimination in Employment Act, the Older Workers Benefit Protection Act, the Americans with Disabilities Act, Title VII of the Civil Rights Act of 1964 as amended, and the Family and Medical Leave Act; the Washington Minimum Wage Act and the Washington Law Against Discrimination; any and all claims brought under any applicable federal, state or local employment discrimination or other statutes; any claims brought under any federal or state statute or regulation for non-payment of wages, USERRA (Military Leave) or other compensation (including expense reimbursements and/or bonuses due after the Termination Date), including stock and stock options; and libel,

slander, fraud, misrepresentation or breach of contract other than the breach of this Agreement. This release specifically excludes claims, charges, complaints, causes of action or demands of whatever kind or nature that post-date the Termination Date or the Effective Date, whichever is later, and that are based on factual allegations that do not arise from or relate to Employee’s present employment with or discharge from the Company.

Employee acknowledges and affirms that Employee has previously executed a Proprietary Information and Inventions Agreement and that the terms and conditions of said agreement that survive the employment relationship are not affected by this Separation Agreement and Release. Employee represents that Employee has returned all property belonging to the Company. Employee will direct all employment verification inquiries to the Director of Human Resources. In response to inquiries regarding Employee’s employment with the Company, the Company, by and through its speaking agent(s) agrees to provide only the following information: Employee’s date of hire, the date Employee’s employment ended and rates of pay.

Employee warrants that no promise or inducement has been offered for this Agreement other than as set forth herein and that this Agreement is executed without reliance upon any other promises or representations, oral or written. Any modification of this Agreement must be made in writing and be signed by Employee and the Company. This Agreement supersedes all prior understandings between the Parties and represents the entire Agreement between the Parties with respect to all matters involving Employee’s employment with or termination from the Company.

If any provision of this Agreement or compliance by Employee or the Company with any provision of this Agreement constitutes a violation of any law, or is or becomes unenforceable or void, then such provision, to the extent only that it is in violation of law, unenforceable or void, will be deemed modified to the extent necessary so that it is no longer in violation of law, unenforceable or void, and such provision will be enforced to the fullest extent permitted by law. If such modification is not possible, said provision, to the extent that it is in violation of law, unenforceable or void, will be deemed severable from the remaining provisions of this Agreement, which provisions will remain binding on both Employee and the Company. This Agreement is governed by the laws of the State of Washington.

The King County Superior Court, Seattle, Washington shall have exclusive jurisdiction of any lawsuit arising from or relating to Employee’s employment with, or termination from, the Company, or arising from or relating to this Agreement. Employee consents to such venue and personal jurisdiction. The prevailing party in any such lawsuit

will be entitled to an award of attorneys’ fees and reasonable litigation costs. Employee agrees that Employee will indemnify and hold the Company harmless from any breach of this Agreement by Employee. Employee further agrees that if Employee challenges this Agreement or files any claims against the Company arising from or relating to Employee’s employment with, or termination from, the Company, excluding any claim challenging the validity of Employee’s waiver of rights under the Age Discrimination in Employment Act, Employee will return all monies and benefits received by Employee from the Company pursuant to this Agreement. In the event Employee challenges the validity of Employee’s waiver of rights under the Age Discrimination in Employment Act, Employee agrees that the Company may recover money and benefits paid under this Agreement if Employee’s challenge and subsequent Age Discrimination in Employment Act claim are successful and Employee obtains a monetary award.

Employee specifically agrees and acknowledges: (A) that Employee’s waiver of rights under this Agreement is knowing and voluntary as required under the Older Workers Benefit Protection Act; (B) that Employee understands the terms of this Agreement; (C) that Employee has been advised in writing by the Company to consult with an attorney prior to executing this Agreement; (D) that the Company has given Employee a period of up to forty-five (45) days within which to consider this Agreement; (E) that, following Employee’s execution of this Agreement Employee has seven (7) days in which to revoke Employee’s agreement to this Agreement and that, if Employee chooses not to so revoke, the Agreement shall then become effective and enforceable and the payment and extension of benefits listed above shall then be made to Employee in accordance with the terms of this Agreement; and (F) nothing in this Agreement shall be construed to prohibit Employee from filing a charge or complaint, including a challenge to the validity of the waiver provision of this Agreement, with the Equal Employment Opportunity Commission or participating in any investigation conducted by the Equal Employment Opportunity Commission. However, Employee has waived any right to monetary relief. To cancel this Agreement, Employee understands that Employee must give a written revocation to Erin Shackelford, Director of Human Resources at 1124 Columbia Street, Suite 130, Seattle, Washington, 98104, either by hand delivery or certified mail within the seven-day period. If Employee revokes the Agreement, it will not become effective or enforceable and Employee will not be entitled to any of the benefits set forth above.

Employee further specifically agrees that modifications to this Agreement, whether material or immaterial, do not restart the running of the forty-five (45) day period referenced in Paragraph 9.

11. Exhibit A, attached hereto and incorporated herein, contains the eligibility criteria for inclusion in the employment termination and severance package program, and Employee hereby acknowledges receipt of same. Exhibit B, entitled Employer Disclosure Regarding Ages of Individuals Selected and Not Selected for Severance Package, attached hereto and incorporated herein, describes the ages and job titles of all persons selected for the layoff and eligible for the severance package, and the ages and job titles of all persons in the relevant job classification or department who will not be laid off and Employee hereby acknowledges receipt of same. These attachments are provided to meet applicable legal requirements for group layoffs.

12. EMPLOYEE ACKNOWLEDGES AND AGREES THAT EMPLOYEE HAS CAREFULLY READ AND VOLUNTARILY SIGNED THIS AGREEMENT, THAT EMPLOYEE HAS HAD AN OPPORTUNITY TO CONSULT WITH AN ATTORNEY OF EMPLOYEE’S CHOICE, AND THAT EMPLOYEE SIGNS THIS AGREEMENT WITH THE INTENT OF RELEASING THE COMPANY AND ITS OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS FROM ANY AND ALL CLAIMS.

ACCEPTED AND AGREED TO:




/s/ Robert Kirkman				/s/ Mark Frohlich
Robert Kirkman, M.D. Acting Chief Executive Officer & President Xcyte Therapies, Inc.				Mark Frohlich


Dated:		July 13, 2005		Dated:		July 26, 2005

Retention and Separation Agreement

Exhibit 10.5

XCYTE THERAPIES, INC.

RETENTION AND SEPARATION AGREEMENT

This Retention and Separation Agreement (the “Agreement”) is dated as of July 26, 2005 (the “Effective Date”), by and between Kathi Lynn Cordova (“Employee”) and Xcyte Therapies, Inc., a Delaware corporation (the “Company”), and sets forth the terms and conditions with respect to Employee’s employment with the Company as of and after the date of this Agreement.

Retention Benefits

On July 5, 2005, the Company issued a press release announcing its decision to implement a plan to identify and evaluate its strategic options. In connection with such evaluation, on July 8, 2005, the Company’s Board of Directors approved a work force reduction plan that would result in the reduction of its work force by approximately 49%. The Company does not anticipate that any of the remaining employees will be employed by the Company on a long-term basis and would like to retain Employee’s current position through a Retention Date. For purposes of this Agreement, the Retention Date shall be defined as the earlier of 1) the Involuntary Termination of Employee’s current position with the Company without Cause or 2) the completion of a merger, acquisition, or other change of control or 3) immediately prior to the consummation of a proposed dissolution or liquidation of the Company.

As an incentive for Employee to remain employed from the date of this Agreement through the Retention Date, in addition to Employee’s regular salary, the Company will pay Employee the equivalent of two weeks base salary, less withholdings, for every full month from the July 1, 2005 through the Retention Date, and the payment shall be prorated for any partial months of employment. The retention benefit amount accrued will be paid within two weeks upon the Employee’s execution of a general release of claims, provided that Employee remains employed through the Retention Date. If the Company terminates Employee’s employment for Cause (defined to be 1. conviction of any felony or a misdemeanor involving moral turpitude; 2. repeated failure to fulfill duties of job position; 3. material violations of any Company work-related rule; 4. loss or withdrawal of a professional license otherwise required to fulfill Employee’s job duties), then Employee will not be entitled to receive any retention benefits.

Separation Benefits

If at any time from the date of this agreement the Employee’s employment with the Company is terminated under circumstances that constitute an Involuntary Termination without Cause, the Employee shall be entitled to receive separation benefits as set forth below, in addition to the retention benefits noted above, provided Employee signs a general release of claims.

The separation benefit shall be equivalent to the severance benefit that Employee would have been entitled to under the standard severance package offered to all employees in the July 12, 2005 reduction-in-force. In accordance with the standard

severance package, Employee will receive a separation benefit to be calculated as follows. The benefit will be equal to a base of 4 weeks of base pay plus 3 weeks additional pay for every year of service on a prorated basis, with full monthly credit given for hire month and termination month. By way of example, as of July 12, 2005, the applicable benefit for Employee would have been equal to $ 116,011. The separation benefit will be paid within two weeks following Employee’s execution of a general release of claims.

Additionally, the Employee shall be entitled to reimbursement for her expenses incurred in continuing her medical insurance for herself and her dependents under the Consolidated Omnibus Budget Reconciliation Act of 1984, as amended (“COBRA”), as applicable, for a period of three (3) months following the commencement of such COBRA continuation coverage, provided Employee makes a timely election for and continues to be eligible for such continued coverage. Any such reimbursement may be subject to withholding taxes as required by applicable law.

Definition of “Involuntary Termination”

For purposes of this Agreement, Employee shall be considered to have been terminated under circumstances that constitute Involuntary Termination if she is terminated by the Company or any successor without Cause (as previously defined), including but not limited to, 1) any merger, acquisition, dissolution or liquidation of the Company whereby the Company known as Xcyte Therapies, Inc. ceases to exist and 2) any other circumstance where the Company is unable to retain Employee in her current position as the Principal Financial and Accounting Officer of the Company.

Voluntary Resignation

If Employee voluntarily elects to terminate Employee’s employment with the Company, Employee shall not be entitled to any separation benefits.

Successors and Assigns

The rights and obligations under this Agreement shall benefit and be binding on any successor and/or assign of the Company, and the Company shall cause such successor and/or assign to agree expressly to perform the obligations under this Agreement in the same manner and to the same extent as the Company would be required to perform such obligations in the absence of a succession. The terms of this Agreement and all of Employee’s rights hereunder shall inure to the benefit of, and be enforceable by, Employee’s personal or legal representatives, executors, administrators, successors, heirs, distributes, devisees and legatees. Employee’s obligations under this Agreement may not be assigned.

Entire Agreement.

This Agreement is the entire agreement between the parties with respect to the matters herein and supersedes all prior discussions and negotiations, except that, unless expressly modified herein, all of the employee’s existing terms and conditions of employment remain in effect, including the at-will employment relationship. This agreement may only be modified expressly in a writing signed by both parties.

The parties have executed this Agreement the date first written above.


XCYTE THERAPIES, INC.

By:		/s/ Robert L. Kirkman

Title:		Acting President and Chief Executive Officer



Address:		1124 Columbia Street, Suite 130 Seattle, Washington 98104

KATHI LYNN CORDOVA

Signature:		/s/ Kathi Cordova

Address:

1215 18^th Avenue East Seattle,

Washington 98112

Amendment to Employment Agreement

Exhibit 10.6

AMENDMENT TO

EMPLOYMENT AGREEMENT

This Amendment to Employment Agreement (this “Amendment”) by and between Xcyte Therapies, Inc., a Delaware corporation (the “Company”) and Robert Lawrence Kirkman, M.D. (the “Employee”) is dated as of August 12, 2005 and amends the Employment Agreement, dated as of January 15, 2004 (the “Employment Agreement”) by and between the Company and the Employee. All capitalized terms used but not defined in this Amendment shall have the meanings assigned to such terms in the Employment Agreement.

RECITALS

A. Section 9(b) of the Employment Agreement provides that any term thereof may be amended with the written consent of the Company and the Employee.

B. In recognition of the Employee’s continuing contributions to the Company, his increased responsibilities as Acting President and Chief Executive Officer of the Company and his increased workload in light of the Company’s exploration of strategic alternatives, the Company and the Employee wish to amend Section 1(a) and Section 3(a) of the Employment Agreement as set forth herein.

NOW THEREFORE, in consideration of the foregoing considerations and certain other good and valuable consideration set forth herein, the receipt and sufficiency of which are hereby acknowledged, the Company and the Employee agree as follows:

AGREEMENT

1. Amendment of Position Responsibilities. Section 1(a) of the Employment Agreement is hereby amended and restated in its entirety to read as follows:

“(a) Position Responsibilities. Employee shall be employed as Acting President and Chief Executive Officer of the Company effective as of July 5, 2005. The duties and responsibilities of Employee shall include the duties and responsibilities reasonably assigned to Employee from time to time by the Company’s Board of Directors, in all cases to be consistent with Employee’s corporate office and position.”

2. Amendment of Compensation. Section 3(a) of the Employment Agreement is hereby amended and restated in its entirety to read as follows:

“(a) Salary. Effective as of July 5, 2005, Employee shall receive a monthly salary of $25,000 (subject to applicable withholding taxes), which is equivalent to $300,000 on an annualized basis (the “Base Salary”). Employee’s monthly salary will be payable pursuant to the Company’s normal payroll practices.”

3. Effect of Amendment. Except as set forth in this Amendment, the provisions of the Employment Agreement shall remain unchanged and shall continue in full force and effect.

[Signature Pages Follow]

This Amendment to Employment Agreement may be executed in counterparts, each of which shall constitute an original and all of which together shall constitute one instrument. Facsimile copies of signed signature pages shall be binding originals.


COMPANY:

XCYTE THERAPIES, INC. a Delaware corporation

By:		/s/ Kathi Cordova
		Kathi Cordova Senior Vice President Finance and Treasurer

Signature Page to Amendment to Employment Agreement


ROBERT L. KIRKMAN

By:		/s/ Robert L. Kirkman
		Robert L. Kirkman

Certification of Principal Executive Officer

EXHIBIT 31.1

CERTIFICATION PURSUANT TO SECTION 302

CERTIFICATION

I, Dr. Robert L. Kirkman, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Xcyte Therapies, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a)

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

[Paragraph omitted pursuant to SEC Release 33-8238.];

(c)

evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

(a)

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 15, 2005

/s/ Dr. Robert L. Kirkman

Dr. Robert L. Kirkman

Acting President and Chief Executive Officer (Principal Executive Officer)

Certification of Principal Financial and Accounting Officer

EXHIBIT 31.2

CERTIFICATION PURSUANT TO SECTION 302

CERTIFICATION

I, Kathi L. Cordova, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Xcyte Therapies, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

(a)

(b)

[Paragraph omitted pursuant to SEC Release 33-8238.];

(c)

(d)

5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

(a)

(b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 15, 2005

/s/ Kathi L. Cordova

Kathi L. Cordova

Senior Vice President of Finance and Treasurer (Principal Financial and Accounting Officer)

Certification of Principal Executive Officer

EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Xcyte Therapies, Inc. (the “Company”) on Form 10-Q for the quarter ended June 30, 2005, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Dr. Robert L. Kirkman, Principal Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Signature:

/s/ Dr. Robert L. Kirkman

Dr. Robert L. Kirkman

Acting President and Chief Executive Officer (Principal Executive Officer)

Dated: August 15, 2005

Certification of Principal Financial and Accounting Officer

EXHIBIT 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Xcyte Therapies, Inc. (the “Company”) on Form 10-Q for the quarter ended June 30, 2005, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Kathi L. Cordova, Principal Financial and Accounting Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Signature:

/s/ Kathi L. Cordova

Kathi L. Cordova

Senior Vice President of Finance and Treasurer (Principal Financial and Accounting Officer)

Dated: August 15, 2005