* The activities of the Spectrum Recruitment Research segment were terminated effective February 1, 2002.

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

Forward Looking Statements

This report and other documents that we file with the Securities and Exchange Commission contain forward looking statements that are based upon our current expectations, beliefs, estimates, forecasts and projections about us, our business and our future performance. In addition, we, or others on our behalf, may make forward looking statements in press releases or written statements, or in our communications and discussions with investors and analysts in the normal course of business through meetings, webcasts, phone calls, and conference calls. Words such as “expect,” “anticipate,” “outlook,” “could,” “target,” “project,” “intend,” “plan,” “believe,” “seek,” “estimate,” “should,” “may,” “assume,” “continue,” or variations of such words and similar expressions are intended to identify such forward looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict, including without limitation those risks identified under “Risk Factors” set forth below. We have based our forward looking statements on our management’s beliefs and assumptions based on information available to our management at the time the statements are made. We caution you that actual outcomes and results may differ materially from what is expressed, implied, or forecast by our forward looking statements. Except as required under the federal securities laws and the rules and regulations of the Securities and Exchange Commission, we do not have any obligation and do not intend to update publicly any forward looking statements after the distribution of this report, whether as a result of new information, future events, changes in assumptions or otherwise.

Liquidity and Capital Resources

At September 30, 2003, we had cash, cash equivalents and short-term investments of $13,093,000 and net assets of $11,936,000 compared to $1,789,000 and $7,959,000, respectively, at December 31, 2002. Working capital totaled $12,798,000 at September 30, 2003, compared to $1,638,000 at December 31, 2002. We have committed approximately $7,667,000 of our cash and cash equivalents to the current and future operations of our obesity and type II diabetes subsidiary. Accordingly, these funds committed to that subsidiary are not available for other corporate purposes.

Although we recorded a net loss of $14,737,000 during the nine-month period ending September 30, 2003, as a result of non-cash charges, the amount of net cash used in our operations was only $3,033,000. The principal non-cash charges included an impairment charge of $5,869,000 relating to our investments in Blizzard Genomics and Psynomics, $1,822,000 of compensation paid for services through the issuance of our common stock, and $1,829,000 of licensing fees paid for services through the issuance of common stock.

In April 2003 and May 2003, we entered into exclusive license agreements with the University of Massachusetts Medical School (“UMass”) covering potential applications for UMass’s proprietary gene silencing technology in the treatment of specified diseases, including those within the areas of ALS (also know as Lou Gehrig’s disease), obesity and type II diabetes, covering a gene-based cancer therapy technology and covering a proprietary DNA-based vaccine technology. RNA interference (RNAi), referred to as gene silencing, has been shown to effectively silence a targeted disease-causing gene within a living cell. The technology essentially uses ribonucleic acid (RNA) to selectively turn off the harmful genes of infectious viruses or malignant tumor cells. In consideration of the licenses, we made aggregate cash payments to UMass of approximately $204,000 and issued it a total of 1,828,359 shares of our common stock, which were valued for financial statement purposes at $1,829,000. In September 2003, we agreed to make a further payment of $10,000 to UMass in connection with our receiving an exclusive license from UMass to additional technology under one of these licenses. As part of our strategic alliance with UMass, we also agreed to fund certain pre-clinical research at UMass relating to the use of its gene silencing technology for the development of therapeutic products within the fields of obesity and type II diabetes, ALS and human cytomegalovirus retinitis. Although we intend to internally fund the early stage development work for certain gene silencing product applications, we may seek as part of our corporate business strategy to secure strategic alliances or license agreements with larger pharmaceutical companies to fund subsequent development of these potential products.

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No license fee income has been recorded during 2003. License fee income was $0 and $1,001,000 during the three month and nine month periods ended September 30, 2002, respectively. License fees for 2002 consisted primarily of a milestone fee received in the first quarter of 2002 from Merck related to the commencement by Merck of a Phase I human clinical trial incorporating our TranzFect technology.

Interest income was $20,000 and $47,000 during the three month and nine month periods ended September 30, 2003, as compared to $21,000 and $83,000 for the same periods of 2002. The variance generally corresponds to fluctuating cash and investment balances and declining interest rates.

No grant income has been recorded during 2003. Grant income was $0 and $46,000 during the three month and nine month periods ended September 30, 2002. Costs related to grant income are included in research and development expense and generally approximate the amount of revenue recognized. Grant income recognized in 2002 primarily relates to SBIR (Small Business Innovative Research) grants we received from the National Institutes of Health in support of our research and development activities.

Other income was $13,000 and $40,000 during the three month and nine month periods ended September 30, 2003 as compared to $17,000 and $103,000 for the same periods in 2002. Other income primarily consists of subrental revenues for our former headquarters facility located in Atlanta, Georgia. The decrease represents the effect of vacancy in the building during the first half of 2003. During the fourth quarter of 2002, we accrued the estimated loss on the facility represented by the difference between the total remaining lease obligations and estimated operating costs through the remainder of the lease term, less estimated sublease income. This accrual is being written off against the actual expenses as they occur.

Research and development expenses were $1,459,000 and $3,732,000 during the three month and nine month periods ended September 30, 2003, as compared to $78,000 and $754,000 for the same periods in 2002. Subsequent to our merger with Global Genomics in July 2002, we modified our corporate business strategy so that we have not pursued additional internal research and development efforts for any of our then existing products or technologies, other than through partnering or out-licensing this research and development work to outside parties. In consideration of our license agreements with UMass (see discussion under “Liquidity and Capital Resources”), we made cash payments to UMass and another medical institution involved in developing the gene silencing technology of approximately $239,000. We also issued a total of 1,828,359 shares of our common stock to UMass which were valued for financial statement purposes at $1,829,000. The aggregate expense of $2,068,000 was recorded during the second quarter of 2003. Research and development expense during 2003 also includes a payment of $201,000 to UMass for sponsored research related to developing therapeutic products in one area that are based on the gene silencing technology that has been licensed to us by UMass. In connection with the establishment of our obesity and type II diabetes subsidiary during 2003, we recorded additional research and development expenses for the 5% minority interest of $350,000 held by Dr. Michael P. Czech and research and development expense for our future commitment to purchase that minority interest for 300,000 shares of our common stock in the amount of $723,000. We expect our research and development expense to continue in the future at levels at least equal to those for 2003, primarily as a result of our commitment to fund research and development activities conducted at UMass and Mass General and the activities of our obesity and type II diabetes subsidiary.

Depreciation and amortization expense was $183,000 and $549,000 during the three month and nine month periods ended September 30, 2003, as compared to $359,000 and $734,000 for the same periods in 2002. The amounts for 2003 consist almost entirely of amortization of intangible assets related to our acquisition of Global Genomics in July 2002. During the fourth quarter of 2002, we recorded an impairment loss equal to the net book value of most of our equipment and related leasehold improvements associated with FLOCOR. As a result of the recognition of this impairment charge, our property balances have been reduced to a nominal amount as of December 31, 2002, and therefore, our depreciation expense related to these assets will be nominal for the foreseeable future.

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From time to time, we issue shares of our common stock or warrants to purchase shares of our common stock to consultants and other service providers in exchange for services. For financial statement purposes, we value these shares or warrants at the fair market value of the stock or warrants granted, or the services received, whichever is more reliably measurable, and we recognize the expense in the period in which a performance commitment exists or the period in which the services are received, whichever is earlier. During each of the periods presented in the accompanying condensed consolidated statements of operations, certain vesting criteria of stock purchase warrants issued to consultants were achieved, resulting in aggregate non-cash charges of $165,000 and $991,000 during the three and nine month periods ended September 30, 2003, and $88,000 and $229,000 during the same periods in 2002. We also recognized non-cash charges of $19,000 and $831,000 during the three and nine month periods ended September 30, 2003 and $0 and $108,000 during the same periods in 2002 for shares of our common stock issued to consultants. These charges are combined and reported as a separate line item on the accompanying condensed consolidated statements of operations.

In connection with our merger with Global Genomics, we terminated the services of all of our then current officers on July 16, 2002, resulting in total expenses recognized for severance, stay bonuses, accrued vacation and other contractual payments of approximately $1,394,000.

Selling, general and administrative expenditures were $1,030,000 and $2,610,000 during the three month and nine month periods ended September 30, 2003, as compared to $481,000 and $1,496,000 for the same periods in 2002. Our new corporate business strategy contributed to the increase for 2003 resulting in (a) a greater use of consultants for technical, financial and business development advisory services and (b) a higher legal and accounting costs.

For the three month and nine month periods ended September 30, 2003, we recorded $2,000 as the minority interest share in the losses of our obesity and type II diabetes subsidiary. This amount is reported as a separate line item in the accompanying condensed consolidated statements of operations.

We record our portion of the losses of Blizzard Genomics on the equity method. For the three month and nine month periods ended September 30, 2003, we recorded $87,000 and $245,000 as our share in the loss of Blizzard Genomics. For the three month and nine month periods ended September 30, 2002, we recorded $128,000 as our share in the loss of Blizzard Genomics. In the third quarter of 2003, we recorded an impairment charge of $5,869,000 related to our investments in Blizzard Genomics acquired developed technology and Psynomics, based upon our analysis of the recoverability of the carrying amount of these assets in accordance with the Accounting Principles Board Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock (APB 18). This impairment charge represented the total net book value of these assets at the time of the write-off. See Note 6 to our financial statement. This amount is reported as a separate line item in the accompanying condensed consolidated statements of operations.

Related Party Transactions

In July 2002, the Company entered into a services and facilities agreement with The Kriegsman Group (“TKG”) and Kriegsman Capital Group (“KCG”), which was subsequently amended in January 2003 and July 2003, whereby TKG and KCG agreed to provide us with office space and certain administrative services and TKG agreed to reimburse us for its use of certain of our administrative personnel. TKG and KCG are owned by Steven A. Kriegsman, our President and CEO. During the three month and nine month periods ended September 30, 2003, we paid approximately $11,000 and $76,000 to TKG under this agreement. The charges are determined based upon actual space used and estimated percentages of employee time used. We believe that such charges approximate the fair value of the space and services provided. In October 2003, the services and facilities agreement with TKG and KCG was terminated as substantially all of the on-going operations of TKG and KCG have ceased.

Risk Factors

You should carefully consider the following risks before deciding to purchase shares of our common stock. If any of the following risks actually occur, our business or prospects could be materially adversely affected and the trading price of our common stock could decline, and investors in our securities could lose all or part of their investment. You should also refer to the other information in this Quarterly Report, including our financial statements and the related notes.

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We Have Operated at a Loss and Will Likely Continue to Operate at a Loss For the Foreseeable Future

We have incurred significant losses over the past five years, including net losses of approximately $8,868,000 for the nine months ended September 30, 2003 (on an unaudited basis), and $6,176,000, $931,000 and $348,000 for 2002, 2001 and 2000, respectively, and we had an accumulated deficit of approximately $80,825,000 (on an unaudited basis) as of September 30, 2003. Our operating losses have been due primarily to our expenditures for research and development on our products and for general and administrative expenses and our lack of significant revenues. We are likely to continue to incur operating losses until such time, if ever, that we generate significant recurring revenues. Unless we are able to acquire products from third parties that are already being marketed and that can be profitably marketed by us, it will take a minimum of three years (and possibly longer) for us to generate recurring revenues, since we anticipate that it will take at least several years before the development of any of our licensed or other current potential products is completed, FDA marketing approvals are obtained and commercial sales of any of these products can begin.

We Have No Source of Significant Recurring Revenues, Which May Make Us Dependent on Financing to Sustain Our Operations

Although we generated $3,751,000 in revenues from milestone payments and license fees from our licensees during 2001 and $1,051,000 from these sources during 2002, we do not have any significant sources of recurring operating revenues. We will not have significant recurring operating revenues until at least one of the following occurs:

• one or more of our currently licensed products is commercialized by our licensees that generates royalty income for us
   

• we are able to enter into license or other arrangements with third parties who are then able to complete the development and commercialize one or more of our other products that are currently under development
   
• we are able to acquire products from third parties that are already being marketed or are approved for marketing

We are likely to incur negative cash from operations until such time, if ever, as we can generate significant recurring revenues. Although we believe that we have adequate financial resources to support our currently planned level of operations at least through early 2005, should we thereafter be unable to generate recurring revenues, it is likely that we will become dependent on obtaining financing from third parties to continue to meet our obligations to the University of Massachusetts Medical School and maintain our operations, including our planned levels of operations for our new obesity and type II diabetes subsidiary. We have no commitments from third parties to provide us with any debt or equity financing. Accordingly, financing may be unavailable to us or only available on terms that substantially dilute our existing shareholders. A lack of needed financing could force us to reduce the scope of or terminate our operations or to seek a merger with or be acquired by another company. There can be no assurance that we would be able to identify an appropriate company to merge with or be acquired by or that we could consummate such a transaction on terms that would be attractive to our shareholders or at all.

License fees paid to us with respect to our TranzFect technology have represented 78%, 85% and 60% of our total revenues for 2002, 2001 and 2000, respectively. We have already licensed most of the potential applications for this technology, and there can be no assurance that we will be able to generate additional license fee revenues from any new licensees for this technology. Our current licensees for TranzFect (Merck and Vical) may be required to make further milestone payments to us under their licenses based on their future development of products using TranzFect. However, Merck is at an early stage of clinical trials of a product utilizing TranzFect, and Vical has not yet commenced any clinical trials of a product utilizing TranzFect. Accordingly, there is likely to be a substantial period of time, if ever, before we receive any further significant payments from Merck or Vical under their TranzFect licenses.

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We Have Changed Our Business Strategy, Which Will Require Us in Certain Cases to Find and Rely Upon Third Parties for the Development of Our Products and to Provide Us With Products

We have modified our prior business strategy of internally developing FLOCOR and our other potential products not yet licensed to third parties that we held prior to our merger with Global Genomics. We will now seek to enter into strategic alliances, license agreements or other collaborative arrangements with other pharmaceutical companies that will provide for those companies to be responsible for the development and marketing of those products. In October 2003, we licensed FLOCOR and our other co-polymer technologies, which were our principal technologies that we held prior to our merger with Global Genomics that we had not already licensed to a third party, to SynthRx, Inc. and entered into a strategic alliance with that company. Although we intend to internally fund or carry out through our new obesity and type II diabetes subsidiary the early stage development work for certain product applications based on the gene silencing and other technologies that we have licensed from the University of Massachusetts Medical School. We may seek to fund all of the later stage development work for our potential ALS product that is based on our gene silencing technology.  The completion of the development and the manufacture and marketing of these products will require substantial expenditures and other resources that we currently do not possess and are likely to require in many cases that we enter into strategic alliances, license agreements or other collaborative arrangements with larger pharmaceutical companies for this purpose.

There can be no assurance that our products will have sufficient potential commercial value to enable us to secure strategic alliances, license agreements or other collaborative arrangements with suitable companies on attractive terms or at all. If we enter into these arrangements, we will be dependent upon the timeliness and effectiveness of the development and marketing efforts of our contractual partners. If these companies do not allocate sufficient personnel and resources to these efforts or encounter difficulties in complying with applicable FDA requirements, the timing of receipt or amount of revenues from these arrangements may be materially and adversely affected. By entering into these arrangements rather than completing the development and then marketing these products on our own, we may suffer a reduction in the ultimate overall profitability for us of these products. If we are unable to enter into these arrangements for a particular product, we may be required to either sell the product to a third party or abandon it unless we are able to raise sufficient capital to fund the substantial expenditures necessary for development and marketing of the product.

We will also seek to acquire products from third parties that already are being marketed or have previously been marketed. We have not yet identified any of these products. It may be difficult for us to acquire these types of products with our limited financial resources, and we may incur substantial shareholder dilution if we acquire these products with our securities. We do not have any prior experience in acquiring or marketing products and may need to find third parties to market these products for us. We may also seek to acquire products through a merger with one or more privately held companies that own such products. Although we anticipate that we would be the surviving company in any such merger, the owners of the private company could be issued a substantial or even controlling amount of stock in our company.

Our New Obesity and Type II Diabetes Subsidiary May Not Be Able to Develop Products

In order to develop new obesity and type II diabetes products, our new subsidiary will first need to identify appropriate drug targets and pathways. We will be using novel RNAi-based techniques to accelerate this process, but there is no assurance that these techniques will accelerate our work or that we will be able to identify highly promising targets or pathways using these techniques or otherwise. Even if we are successful in identifying these targets or pathways, we will need to then develop proprietary molecules that are safe and efficacious against these targets. This development process and the clinical testing of our potential products will take a lengthy period of time and involve expenditures substantially in excess of our current financial resources. We currently plan to seek a strategic alliance with a major pharmaceutical company at a relatively early stage in our development work to complete the development, clinical testing and manufacturing and marketing of our obesity and type II diabetes products, but we may not be able to secure such a strategic partner on attractive terms or at all. We do not have prior experience in operating a genomic and proteomic-based drug discovery company. Accordingly, we will be heavily dependent on the prior experience and current efforts of Dr. Michael P. Czech, the Chairman of the Scientific Advisory Board of our subsidiary, in establishing the scientific goals and strategies of our subsidiary, and Dr. Mark A. Tepper, the President of our subsidiary, in managing the operations of this subsidiary.

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We Will Be Reliant Upon SynthRx to Develop and Commercialize FLOCOR

In October 2003, we licensed  FLOCOR and our other co-polymer technologies to SynthRx and acquired a 19.9% equity interest in that newly formed biopharmaceutical company. SynthRx has only limited financial resources and will have to either raise significant additional capital or secure a licensee or strategic partner to complete the development and commercialization of FLOCOR and these other technologies. SynthRx does not have any commitments from third parties to provide the capital that it will require and there can be no assurance that it will be able to obtain this capital or a licensee or strategic partner on satisfactory terms or at all.

Our prior Phase III clinical trial of FLOCOR for the treatment of sickle cell disease patients experiencing an acute vaso-occlusive crisis did not achieve its primary objective. However, in this study, for patients 15 year of age or younger, the number of patients achieving a resolution of crisis was higher for FLOCOR-treated patients at all time periods than for placebo-treated patients, which may indicate that future clinical trials should focus on juvenile patients. To generate sufficient data to seek FDA approval for FLOCOR will require additional clinical studies, which will entail substantial time and expense for SynthRx. The manufacture of FLOCOR involves obtaining new raw drug substance and a supply of the purified drug from the raw drug substance, which requires specialized equipment. Should SynthRx encounter difficulty in obtaining the purified drug substance in sufficient amounts and at acceptable prices, SynthRx may be unable to complete the development or commercialization of FLOCOR on a timely basis or at all.

Our Current Financial Resources May Limit Our Ability to Execute Certain Strategic Initiatives

On September 30, 2003 we had approximately $13,093,000 in cash and cash equivalents and approximately $12,815,000 in working capital. Our cash and working capital position have significantly improved, primarily as the result of our completing a $8,695,000 private equity financing in September 2003, although we have used approximately $7,000,000 of the net proceeds of the financing for the initial capital of our new obesity and type II diabetes subsidiary and the balance of such proceeds are expected to be available for the future operating needs of that subsidiary. Our recently modified product development strategy calls for seeking strategic alliances and our other potential products that we had prior to our merger with Global Genomics. Although we are not doing any further development work on TranzFect, our two licensees for this technology (Merck & Co. and Vical Incorporated) are continuing to do development work on product applications for this technology that could entitle us to future milestone payments should they continue with this work and it successfully meets the defined milestones, as well as future royalty payments should either of these licensees commercialize products based on our technology. However, there can be no assurance that our licensees will continue to develop or ever commercialize any products that are based on our TranzFect technology.

Our strategic alliance with the University of Massachusetts Medical School may require us to make significant expenditures to fund research at that medical institution relating to developing therapeutic products based on that institution’s proprietary technology that has been licensed to us. We estimate that the aggregate amount of these sponsored research expenditures under certain circumstances could range from approximately $1,400,000 to $1,600,000 annually over the next three years. We have also agreed to fund approximately $557,000 of sponsored research at Massachusetts General Hospital over the next two years. Our license agreements with the University of Massachusetts Medical School also provide in certain cases for milestone payments based on the progress made by us in the clinical development of products utilizing the technologies licensed from the University of Massachusetts Medical School and the marketing of these products. These milestone payments could aggregate over time up to $12,255,000 if we successfully complete the development of six separate products.

Our potentially required expenditures under our agreements with the University of Massachusetts Medical School, together with the operating capital requirements of our new obesity and type II diabetes subsidiary and our planned sponsored research funding for Massachusetts General Hospital, could substantially exceed our current financial resources and require us to raise additional capital or secure a licensee or strategic partner to fulfill our obligations to the University of Massachusetts Medical School and to develop any products based on the technologies that we have licensed from that medical institution or to continue the operations of our new subsidiary at their currently contemplated level. If we are unable to meet our various financial obligations under our license agreements with the University of Massachusetts Medical School, we could lose all of our rights under these agreements. We could also be forced to reduce the level of operations of our new subsidiary or discontinue those operations if we had inadequate financial resources at that time.

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Each of our products is in the development stage and must be approved by the FDA or similar foreign governmental agencies before they can be marketed. The process for obtaining FDA approval is both time-consuming and costly, with no certainty of a successful outcome. This process typically includes the conduct of extensive pre-clinical and clinical testing, which may take longer or cost more than we or our licensees currently anticipate due to numerous factors such as:

• difficulty in securing centers to conduct trials
   
• difficulty in enrolling patients in conformity with required protocols or projected timelines
   
• unexpected adverse reactions by patients in trials
   
• difficulty in obtaining clinical supplies of the product
   
• changes in the FDA s requirements for our testing during the course of that testing
   
• inability to generate statistically significant data confirming the efficacy of the product being tested

The gene silencing and other technologies that we have acquired from the University of Massachusetts Medical School have not yet been clinically tested by us, nor are we aware of any clinical trials having been conducted by third parties involving similar gene silencing technologies. Our TranzFect technology is currently in Phase I clinical trials that are being conducted by our licensee, Merck & Co., as a component of a vaccine to prevent AIDS. Since TranzFect is to be used as a component in vaccines, we do not need to seek FDA approval, but the vaccine manufacturer will need to seek FDA approval for the final vaccine formulation containing TranzFect. Our licensee, Merck & Co., has completed a multi-center, blinded, placebo controlled Phase I trial of an HIV vaccine utilizing TranzFect as a component. Although the formulation of this tested vaccine was generally safe and well-tolerated and generated an immune response, the addition of TranzFect to the vaccine did not increase this immune response. Moreover, the DNA single-modality vaccine regimen with TranzFect when tested in humans yielded immune responses that were inferior to those obtained with the DNA vaccines in macaque monkeys.

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We Are Subject to Intense Competition That Could Materially Impact Our Operating Results

We and our strategic partners or licensees may be unable to compete successfully against our current or future competitors. The pharmaceutical, biopharmaceutical and biotechnology industry is characterized by intense competition and rapid and significant technological advancements. Many companies, research institutions and universities are working in a number of areas similar to our primary fields of interest to develop new products. There also is intense competition among companies seeking to acquire products that already are being marketed. Many of the companies with which we compete have or are likely to have substantially greater research and product development capabilities and financial, technical, scientific, manufacturing, marketing, distribution and other resources than at least some of our present or future strategic partners or licensees.

As a result, these competitors may:

• Succeed in developing competitive products earlier than we or our strategic partners or licensees      
   
• Obtain approvals for such products from the FDA or other regulatory agencies more rapidly than we or our strategic partners or licensees do
   
• Obtain patents that block or otherwise inhibit the development and commercialization of our product candidates
   
• Develop treatments or cures that are safer or more effective than those we propose for our products
   
• Devote greater resources to marketing or selling their products
   
• Introduce or adapt more quickly to new technologies or scientific advances
   
• Introduce products that make the continued development of our product candidates uneconomical
   
• Withstand price competition more successfully than our strategic partners or licensees can
   
• More effectively negotiate third-party strategic alliances or licensing arrangements
   
• Take advantage of other opportunities more readily than we can

A number of medical institutions and pharmaceutical companies are seeking to develop products based on gene silencing technologies. Companies working in this area include Sirna Therapeutics, Inc., Alnylam, Inc., Benitec, Nucleonics, Inc. and a number of the multinational pharmaceutical companies. A number of products currently are being marketed by a variety of the multinational or other pharmaceutical companies for treating type II diabetes, including among others the diabetes drugs Avandia by Glaxo SmithKline PLC, Actos by Eli Lilly & Co., Glucophage by Bristol Myers Squibb Co., and Starlix by Novartis and the obesity drugs Xenical by F. Hoffman-La Roche Ltd.

and Meridia by Abbott Laboratories. Many major pharmaceutical companies are also seeking to develop new therapies for these disease indications. At least one company, Alnylam, is seeking to develop a therapeutic product for obesity and type II diabetes based on an RNAi technology. Companies developing HIV vaccines that could compete with our HIV vaccine technology include Merck, VaxGen, Inc., Epimmune, Inc., AlphaVax, Inc. and Immunitor Corporation.

Although we do not expect FLOCOR to have direct competition from other products currently available or that we are aware of that are being developed related to FLOCOR’s ability to reduce blood viscosity in the cardiovascular area, there are a number of anticoagulant products that FLOCOR would have to compete against, such as tissue plasminogen activator (t-PA) and streptokinase (blood clot dissolving enzymes) as well as blood thinners such as heparin and coumatin, even though FLOCOR acts by a different mechanism to prevent damage due to blood coagulation. In the sickle cell disease area, FLOCOR would compete against companies that are developing or marketing other products to treat sickle cell disease, such as Droxia (hydroxyurea) marketed by Bristol-Myers Squibb Co. and Decitabine, which is being developed by SuperGen, Inc.

Our TranzFect technology will compete against a number of companies that have developed adjuvant products, such as the adjuvant QS-21 marketed by Aquila Biopharmaceuticals, Inc. and adjuvants marketed by Corixa Corp. Blizzard Genomics’ products will compete with a number of currently marketed products, including those offered by Axon Instruments, Inc., Affymetrix, Inc., Applied Precision, LLC, Perkin Elmer, Inc. and Agilent Technologies, Inc.

We May Be Unable to Protect Our Intellectual Property Rights, Which Could Adversely Affect the Value of Our Assets

Obtaining and maintaining patent and other intellectual property rights for our technologies and potential products is critical to establishing and maintaining the value of our assets and our business. Although we believe that we have significant patent coverage for our TranzFect technologies, there can be no assurance that this coverage will be broad enough to prevent third parties from developing or commercializing similar or identical technologies, that the validity of our patents will be upheld if challenged by third parties or that our technologies will not be deemed to infringe the intellectual property rights of third parties. We have a non-exclusive license to a patent owned by the University of Massachusetts Medical School and another institution that covers the general field of gene silencing. The specific medical applications of the gene silencing technology and the other technologies that we have licensed from the University of Massachusetts Medical School are covered by a number of pending patent applications. However, other researchers have been active in the field of gene silencing, and these researchers may hold or seek to obtain patents that could make it more difficult or impossible for us to develop products based on the gene silencing technology that we have licensed. Any litigation brought by us to protect our intellectual property rights or by third parties asserting intellectual property rights against us could be costly and have a material adverse effect on our operating results or financial condition and make it more difficult for us to enter into strategic alliances with third parties to develop our products or discourage our existing licensees from continuing their development work on our potential products. If our patent coverage is insufficient to prevent third parties from developing or commercializing similar or identical technologies, the value of our assets is likely to be materially and adversely affected.

We May Incur Substantial Costs from Future Clinical Testing or Product Liability Claims

If any of our products are alleged to be defective, they may expose us to claims for personal injury by patients in clinical trials of our products or by patients using our commercially marketed products. Even if the commercialization of one or more of our products is approved by the FDA, users may claim that such products caused unintended adverse effects. We currently do not carry product liability insurance covering the use of our products in human clinical trials or the commercial marketing of these products but anticipate that our licensees who are developing our products will carry liability insurance covering the clinical testing and marketing of those products. However, if someone asserts a claim against us and the insurance coverage of our licensees or their other financial resources are inadequate to cover a successful claim, such successful claim may exceed our financial resources and cause us to discontinue operations. Even if claims asserted against us are unsuccessful, they may divert management’s attention from our operations and we may have to incur substantial costs to defend such claims.

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Our Anti-Takeover Provisions May Make It More Difficult to Change Our Management or May Discourage Others From Acquiring Us and Thereby Adversely Affect Shareholder Value

We have a shareholder rights plan and provisions in our bylaws that may discourage or prevent a person or group from acquiring us without our board of directors approval. The intent of the shareholder rights plan and our bylaw provisions is to protect our shareholders interests by encouraging anyone seeking control of our company to negotiate with our board of directors.

We have a classified board of directors, which requires that at least two stockholder meetings, instead of one, will be required to effect a change in the majority control of our board of directors. This provision applies to every election of directors, not just an election occurring after a change in control. The classification of our board increases the amount of time it takes to change majority control of our board of directors and may cause our potential purchasers to lose interest in the potential purchase of us, regardless of whether our purchase would be beneficial to us or our stockholders. The additional time and cost to change a majority of the members of our board of directors makes it more difficult and may discourage our existing shareholders from seeking to change our existing management in order to change the strategic direction or operational performance of our company.

Our bylaws provide that directors may only be removed for cause by the affirmative vote of the holders of at least a majority of the outstanding shares of our capital stock then entitled to vote at an election of directors. This provision prevents stockholders from removing any incumbent director without cause. Our bylaws also provide that a stockholder must give us at least 120 days notice of a proposal or director nomination that such stockholder desires to present at any annual meeting or special meeting of stockholders. Such provision prevents a stockholder from making a proposal or director nomination at a stockholder meeting without us having advance notice of that proposal or director nomination. This could make a change in control more difficult by providing our directors with more time to prepare an opposition to a proposed change in control. By making it more difficult to remove or install new directors, the foregoing bylaw provisions may also make our existing management less responsive to the views of our shareholders with respect to our operations and other issues such as management selection and management compensation.

As of November 10, 2003, there were outstanding stock options and warrants to purchase 9,229,619 shares of our common stock at exercise prices ranging from $0.01 to $7.75 per share. Our outstanding options and warrants could adversely affect our ability to obtain future financing or engage in certain mergers or other transactions, since the holders of options and warrants can be expected to exercise them at a time when we may be able to obtain additional capital through a new offering of securities on terms more favorable to us than the terms of outstanding options and warrants. For the life of the options and warrants, the holders have the opportunity to profit from a rise in the market price of our common stock without assuming the risk of ownership. To the extent the trading price of our common stock at the time of exercise of any such options or warrants exceeds the exercise price, such exercise will also have a dilutive effect to our stockholders.

In August 2003, we registered a total of 14,408,252 shares of our outstanding common stock and an additional 3,848,870 shares of our common stock issuable upon exercise of outstanding options and warrants, which shares and options and warrants were issued primarily in connection with our merger with Global Genomics and the private equity financing that we completed in May 2003. We are in the process of registering a total of 6,113,448 shares of our common stock, consisting of the 5,175,611 shares we issued or that are issuable upon exercise of the warrants that we issued to the investors in connection with our $8,695,000 private equity financing in September 2003, and an additional 937,837 shares of our common stock that we issued or that are issuable upon the exercise of warrants having exercise prices ranging from $2.00 to $3.05 per share that we issued to certain other third parties. Both the availability for public resale of these various shares and the actual resale of these shares could adversely affect the trading price of our common stock.

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We May Experience Volatility in Our Stock Price, Which May Adversely Affect the Trading Price of Our Common Stock

The market price of our common stock has experienced significant volatility in the past and may continue to experience significant volatility from time to time. Our stock price has ranged from $0.21 to $3.74 over the past three years. Factors such as the following may affect such volatility:

• our quarterly operating results
   
• announcements of regulatory developments or technological innovations by us or our competitors
   
• government regulation of drug pricing
   
• developments in patent or other technology ownership rights
   
• public concern regarding the safety of our products

Other factors which may affect our stock price are general changes in the economy, financial markets or the pharmaceutical or biotechnology industries.

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SIGNATURES

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

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