UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10 - Q

(Mark One)

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

For the quarterly period ended September 30, 2005

or

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

Commission File Number 0-21937

CERUS CORPORATION

(Exact name of registrant as specified in its charter)

Delaware		68-0262011
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)

2411 Stanwell Dr. Concord, California 94520
(Address of principal executive offices, including zip code)

(925) 288-6000
(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 ý NO o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). YES ý NO o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO ý

As of October 24, 2005, there were 22,420,469 shares of the registrant’s common stock outstanding.

CERUS CORPORATION

TABLE OF CONTENTS

PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

		Condensed Balance Sheets - September 30, 2005, and December 31, 2004

		Condensed Statements of Operations - Three and nine months ended September 30, 2005, and 2004

		Condensed Statements of Cash Flows - Nine months ended September 30, 2005, and 2004

		Notes to Condensed Financial Statements

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

Item 3.	Quantitative and Qualitative Disclosures About Market Risk

Item 4.	Controls and Procedures

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings

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

Item 3.	Defaults upon Senior Securities

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

Item 5.	Other Information

Item 6.	Exhibits

SIGNATURES

PART I:	FINANCIAL INFORMATION

ITEM 1.	FINANCIAL STATEMENTS

CERUS CORPORATION

CONDENSED BALANCE SHEETS

UNAUDITED

(in thousands)

	September 30, 2005		December 31, 2004
			(see Note 1)
Assets
Current assets:
Cash and cash equivalents	$	5,405	$	39,493
Short-term investments	43,835		55,841
Accounts receivable and other current assets	5,237		4,537

Total current assets	54,477		99,871

Furniture and equipment, net of depreciation	1,065		947
Other assets	1,260		1,260

Total assets	$	56,802	$	102,078

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	1,700	$	1,476
Accounts payable to related party	311		—
Current loan and interest payable	—		34,500
Accrued expenses	4,657		4,807
Deferred revenue	6,630		13,217
Deferred gain on loan settlement	—		22,089

Total current liabilities	13,298		76,089

Long-term debt and accrued interest	4,736		4,500

Total stockholders’ equity	38,768		21,489

Total liabilities and stockholders’ equity	$	56,802	$	102,078

See notes to condensed financial statements.

CERUS CORPORATION

CONDENSED STATEMENTS OF OPERATIONS

UNAUDITED

(in thousands, except per share data)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004

Revenue:
Development funding	$	3,292		$	1,215		$	8,819		$	1,961
Government grants and cooperative agreements	3,519			2,324			9,547			8,991
Product sales	69			—			395			—

Total revenue	6,880			3,539			18,761			10,952

Operating expenses:
Research and development	6,626			5,190			17,556			22,578
General and administrative	2,161			1,989			7,198			7,951
Restructuring	—			396			—			2,861

Total operating expenses	8,787			7,575			24,754			33,390

Loss from operations	(1,907		)	(4,036		)	(5,993		)	(22,438		)

Gain on loan settlement	—			—			22,089			—
Interest income (expense), net	241			(1,024		)	862			(3,363		)

Net income (loss)	$	(1,666	)	$	(5,060	)	$	16,958		$	(25,801	)

Net income (loss) per share - basic	$	(0.07	)	$	(0.23	)	$	0.76		$	(1.17	)

Net income (loss) per share - diluted	$	(0.07	)	$	(0.23	)	$	0.72		$	(1.17	)

Shares used in computing net income (loss) per share - basic	22,373			22,166			22,317			22,121

Shares used in computing net income (loss) per share - diluted	22,373			22,166			23,694			22,121

See notes to condensed financial statements.

CERUS CORPORATION

CONDENSED STATEMENTS OF CASH FLOWS

UNAUDITED

(in thousands)

	Nine Months Ended September 30,
	2005			2004
Operating activities:
Net income (loss)	$	16,958		$	(25,801	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	504			1,952
Gain on loan settlement	(22,089		)	—
Stock-based compensation to employees	99			193
Stock-based compensation to consultants	1			8
Gain on sale of equipment	(4		)	40
Changes in operating assets and liabilities:
Accounts receivable and other current assets	(701		)	908
Other assets	1			132
Accounts payable and accrued expenses	295			(3,963		)
Accrued interest	236			4,493
Deferred revenue	(6,587		)	3,076

Net cash used in operating activities	(11,287		)	(18,962		)

Investing activities:
Purchases of furniture, equipment and leasehold improvements	(617		)	(276		)
Investment in BioOne Corporation common stock	—			(1,237		)
Purchases of short-term investments	(5,000		)	(76,835		)
Sales of short-term investments	8,000			69,700
Maturities of short-term investments	8,911			11,852

Net cash provided by (used in) investing activities	11,294			3,204

Financing activities:
Net proceeds from issuance of common stock	405			226
Repayment of loan	(34,500		)	—
Payments on capital lease obligations	—			(19		)

Net cash provided by (used in) financing activities	(34,095		)	207

Net decrease in cash and cash equivalents	(34,088		)	(15,551		)
Cash and cash equivalents, beginning of period	39,493			23,165

Cash and cash equivalents, end of period	$	5,405		$	7,614
Supplemental disclosures:
Accounts receivable from a related party applied to loan payable to a related party				$	218

See notes to condensed financial statements.

CERUS CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

UNAUDITED

Note 1 – Basis of Presentation

Our accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by United States generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accrual adjustments, considered necessary for a fair presentation have been included. Operating results for the three- and nine-month periods ended September 30, 2005, are not necessarily indicative of the results that may be expected for the year ending December 31, 2005, or for any future period. Cash, cash equivalents and short-term investments amounts as of December 31, 2004, have been reclassified from amounts reported in the balance sheet included in our 2004 Annual Report on Form 10-K/A.

These condensed financial statements and notes should be read in conjunction with our audited financial statements and notes thereto for the year ended December 31, 2004, included in our 2004 Annual Report on Form 10-K/A. The accompanying balance sheet as of December 31, 2004, has been derived from our audited financial statements as of that date, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

Note 2 – Stock-Based Compensation

We account for employee stock options in accordance with Accounting Principles Board Opinion No. 25, including Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation: An Interpretation of APB No. 25,” or APB 25, and have adopted the “disclosure only” alternative described in Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” as amended by Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” or FAS 123.

Pro forma information regarding net income (loss) and net income (loss) per share is required by FAS 123, and has been determined as if we had accounted for our employee stock options and employee stock purchase plan under the fair value method of FAS 123. The fair value for these options and shares was estimated at the date of grant using a Black-Scholes model with the following weighted-average assumptions for the three months ended September 30, 2005 and 2004, respectively: the expected volatility was 0.607 and 0.573 and the risk-free interest rate was 4.22% and 3.26%. The following weighted-average assumptions were used for the nine months ended September 30, 2005, and 2004, respectively: the expected volatility was 0.559 and 0.621 and the risk-free interest rate was 4.22% and 3.25%. The expected life of the option was five years for the stock option plans for both periods and six months for the employee stock purchase plan for both periods.

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because our employee stock options and purchased shares have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock awards.

The following table illustrates the effect on net loss and related net loss per share, had compensation expense for stock-based compensation plans been determined based on the fair value method prescribed under FAS 123 (in thousands, except per share data):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005		2004
Net income (loss):
As reported	$	(1,666	)	$	(5,060	)	$	16,958	$	(25,801	)
Add:
Stock-based employee compensation expense included in reported net loss, net of related tax effects	49			50			148		243
Less:
Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects	595			(339		)	1,789		1,044

Pro forma net income (loss)	$	(2,212	)	$	(4,671	)	$	15,317	$	(26,845	)
Net income (loss) per share - basic, as reported	$	(0.07	)	$	(0.23	)	$	0.76	$	(1.17	)
Net income (loss) per share - diluted, as reported	$	(0.07	)	$	(0.23	)	$	0.73	$	(1.17	)
Net income (loss) per share - basic, pro forma	$	(0.10	)	$	(0.21	)	$	0.69	$	(1.21	)
Net income (loss) per share - diluted, pro forma	$	(0.09	)	$	(0.21	)	$	0.66	$	(1.21	)

In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123R, “Share-Based Payment,” or FAS 123R. FAS 123R addresses the accounting for share-based payment transactions in which a company receives employee services in exchange for either equity instruments of the company or liabilities that are based on the fair value of a company’s equity instruments. Under FAS 123R, companies will no longer be able to account for share-based compensation transactions using the intrinsic value method in accordance with APB 25, as described above. Instead, companies will be required to account for such transactions using a fair value method and recognize expense in the statements of operations. We are required to adopt FAS 123R no later than the beginning of the first quarter of 2006. FAS 123R permits public companies to adopt its requirements using either the modified prospective method or the modified retrospective method. Under the modified prospective method, compensation cost is recognized for all share-based payments granted after the effective date, as well as for all share-based payments granted prior to the effective date that remain unvested on the effective date. Under the modified retrospective method, the same provisions would apply, but the company could also restate its earnings in certain prior periods based on the stock compensation amounts included in its previous pro forma disclosures. We have not yet determined which method we will elect beginning January 1, 2006. The effect of adoption of FAS 123R cannot be predicted at this time because it will depend on share-based payments granted in the future. Pro forma disclosures regarding the effect on our net income and net income per common share in the three and nine months ended September 30, 2005, and prior periods, had we applied the fair value method of accounting for share-based compensation as prescribed by FAS 123, are presented in the table above.

Note 3 – Disclosures About Segments of an Enterprise

We have two reportable segments: blood safety programs and immunotherapies. The blood safety segment primarily comprises research, development and commercialization of the INTERCEPT Blood Systems. The immunotherapies segment primarily comprises research and development of vaccines using our Listeria and KBMA platforms. The accounting policies of the reportable segments are the same as those under which our financial statements are prepared. There are no transactions between reportable segments.

Prior to October 8, 2004, we had one reportable segment, which was the development of biomedical systems using our proprietary technology for controlling biological replication. On June 30, 2004, we announced a restructuring of operations to increase resources for our program to develop therapeutic vaccines against cancer and infectious diseases and reduce expenditures for our blood safety programs and administrative expenses. On October 8, 2004, our Board of Directors approved a revised strategic plan, which resulted in the two reportable business segments. Our senior management does not view segment results below operating loss and, therefore, interest income, expense and other non-operating expenses are not allocated to reportable segments. Similarly, we do not allocate long-term assets to our reportable segments. Expenses related to our June 2004 restructuring were allocated to the blood safety segment. For the periods presented, revenue from Baxter Healthcare Corporation, or Baxter, a subsidiary of Baxter International Inc., or Baxter International, BioOne Corporation, or BioOne, and the United States Armed Forces are included in blood safety programs, and revenue from MedImmune, National Institutes of Health and the Armed Forces are included in immunotherapies. Segment information for the three and nine months ended September 30, 2005, and 2004, is presented below (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
Revenue:
Blood safety programs	$	3,542		$	2,239		$	10,075		$	9,208
Immunotherapies	3,339			1,300			8,686			1,743
Totals	$	6,881		$	3,539		$	18,761		$	10,952

	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
Operating income (loss):
Blood safety programs	$	(431	)	$	60		$	(155	)	$	(4,833	)
Immunotherapies	(1,476		)	(4,096		)	(5,838		)	(17,605		)
Totals	$	(1,907	)	$	(4,036	)	$	(5,993	)	$	(22,438	)

Note 4 – Comprehensive Income (Loss)

Comprehensive income (loss) comprises net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) for all periods presented comprises unrealized holding gains (losses) on our available-for-sale securities, which are excluded from net income (loss) and included as a component of stockholders’ equity. Comprehensive income (loss) and its components are as follows (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
Net income (loss):
As reported	$	(1,666	)	$	(5,060	)	$	16,958		$	(25,801	)
Other comprehensive income (loss):
Net unrealized gain (loss) on available-for-sale securities	0			(155		)	(95		)	(155		)

Comprehensive income (loss)	$	(1,.666	)	$	(5,215	)	$	16,863		$	(25,956	)

Note 5 – Basic and Diluted Net Income (Loss) Per Share

For all periods presented, basic net income (loss) per share is computed based on the weighted average number of shares of common stock outstanding during each period. For the nine months ended September 30, 2005, diluted net income per share includes the effect of 1,045,000 shares of common stock that may be issued upon exercise of outstanding stock options, calculated using the treasury stock method, and 332,700 shares of common stock that may be issued upon conversion of outstanding shares of Series B preferred stock. Stock options and Series B preferred stock outstanding during the three months ended September 30, 2005, and the three and nine months ended September 30, 2004, were not included in the computation of diluted net loss per share because their effect was antidilutive.

Note 6 – Revenue and Research and Development Expenses

Development funding revenue includes amounts recognized under agreements with Baxter, MedImmune, Inc., or MedImmune, BioOne, the National Marrow Donor Program and Kirin Brewery Company, Ltd., or Kirin. Development funding revenue is recognized as the related project costs are incurred. Research and development expenses are recognized as incurred. Revenue related to at-risk milestones specified under development contracts is recognized as the milestones are achieved. Payments for achieved milestones are non-refundable and are not subject to future performance. Up-front payments from BioOne, MedImmune and Kirin were deferred and are being recognized ratably over the periods to which the payments relate.

We receive certain United States government grants in support of our research efforts in defined research projects. These grants generally provide for reimbursement of approved costs incurred as defined in the various grants. Revenue associated with these grants is recognized as costs under each grant are incurred.

Note 7 – Restructured Agreements with Baxter

Prior to February 2005, Baxter and we shared development expenses for the INTERCEPT Blood Systems for platelets and red blood cells under our existing development and commercialization agreements. The agreements provided for us to be solely responsible for funding development expenses for the INTERCEPT Blood System for plasma. Under the agreements, Baxter had been responsible for manufacturing and marketing the platelet system, which is approved for sale in some countries in Europe. The agreements provided for us to receive approximately 33.5% of revenue from sales of system disposables after each party is reimbursed for its cost of goods to the extent cost exceeds specific amounts. Recognition of product sales revenue was deferred from the fourth quarter of 2003 through December 31, 2004, as a result of revenue sharing payments being withheld by Baxter due to a dispute over the timing of repayment of a loan from Baxter Capital Corporation, or Baxter Capital, a subsidiary of Baxter International (see Note 8).

In February 2005, Baxter and we entered into agreements that reaffirmed the previous agreements in certain respects and modified them in other respects. Under the February 2005 agreements, Baxter retains the right and responsibility, or commercialization rights, to market and sell the platelet system worldwide. Baxter also retains commercialization rights for the plasma system in all parts of the world except the United States and Canada. Baxter retains these commercialization rights, in general, through 2006. Baxter has options to extend these commercialization rights for successive two-year periods after 2006. Baxter’s commercialization rights for the platelet and plasma system in Japan and certain other Asian countries are subject to the rights of BioOne under existing agreements.

Pursuant to the February 2005 agreements, we gained commercialization rights to the plasma system in the United States and Canada and commercialization rights to the red blood cell system worldwide. As to such regions, our license to Baxter terminated and Baxter granted us a license to any Baxter technology included in the plasma system and the red blood cell system, respectively.

In addition, if Baxter does not exercise its option to extend its commercialization rights after 2006, or any subsequent two-year period, we will gain the commercialization rights for the products and countries that Baxter then holds.

Under the February 2005 agreements, Baxter remains solely responsible for sales and marketing expenses for the products/countries as to which it maintains commercialization rights. For 2005 and 2006, Baxter has allotted $13.1 million to fund expenses associated with platelet and plasma system sales and marketing efforts and activities directed toward CE Mark approval of the plasma system. Baxter has also agreed to furnish specified levels of personnel to conduct sales and marketing of the platelet system and, upon approval, the plasma system in Europe. Our agreements with Baxter provide for sales and marketing strategy surrounding Baxter’s commercialization rights to be set by a joint Cerus/Baxter governance committee.

We will have responsibility for sales and marketing expenses for any products/countries for which we gained, or may in the future gain, commercialization rights. We have the sole discretion, however, to determine the extent of such expenditures.

So long as Baxter retains commercialization rights for the platelet system or plasma system in particular countries, our agreements provide that Baxter will continue to manufacture that system for sale in such countries. Baxter and we will continue to share revenues from such sales under terms generally consistent with the terms of the previous agreements. The agreements continue to provide for us to receive approximately 33.5% of revenue from sales of platelet system disposables after each party is reimbursed for its cost of goods to the extent cost exceeds specific amounts, and for us to receive 75% and Baxter to receive 25% of revenue from sales of plasma system disposables, in each case after each party is reimbursed for its cost of goods and a specified percentage, not to exceed 12% of revenue, is retained by Baxter for marketing and administrative expenses.

For those countries where we gained, or may in the future gain, commercialization rights under the February 2005 agreements, Baxter has agreed to manufacture systems and components, on a cost-plus basis, until 2009. If Baxter elects to extend its commercialization rights beyond December 31, 2008, the manufacturing period will be extended until approximately two years after the expiration of Baxter’s extended commercialization rights. Since the agreements do not require Baxter to manufacture in an FDA-approved facility, additional validation steps will be required before use of such items in the United States. Baxter has agreed to supply only very limited types of components for the prototype red blood cell system.

The February 2005 agreements require us to pay royalties to Baxter on INTERCEPT Blood System products sold by us, or our affiliates, pursuant to our commercialization rights. The royalties vary by product, and do not exceed 10% of net sales for any product.

Our arrangement with Baxter to equally fund development work for the platelet system and the red blood cell system also was terminated by the February 2005 agreements. Commencing January 1, 2005, each company bears its own expenses regarding discussions with the FDA to gain clarity on the remaining steps in the U.S. regulatory process for the platelet system. Following such discussions, Baxter may continue to retain its commercialization rights for the platelet system in the United States and Canada provided it funds 100% of future development expenses directed toward obtaining FDA approval and also commits to specified levels of sales and marketing expenditures for the product. Under the agreements, Baxter ceases to have any obligation to fund development of the red blood cell system.

We remain responsible for funding 100% of development expenses for the plasma system, except that $2.2 million of Baxter’s $13.1 million commitment (described above) may be applied to activities directed toward obtaining CE Mark approval of the plasma system. Baxter has agreed to cooperate with us to complete certain activities required for the CE Mark application. Such activities shall, except for the right to apply such $2.2 million, be at our expense. For the three and nine months ended September 30, 2005, we applied $624,000 and $1,200,000 respectively, of Baxter’s commitment to expenses incurred during those periods directed toward obtaining CE Mark approval for the plasma system. These amounts were recognized as development funding revenue for the periods.

For the year ended December 31, 2004, and prior periods, Baxter International and its subsidiaries were related parties to us. After the execution of the February 2005 restructured agreements, Baxter International and its subsidiaries are no longer related parties to us. For the three and nine months ended September 30, 2004, we recognized $420,000 and $ 913,000, respectively, of development funding from Baxter as a related party.

Note 8 – Loan Payable

In January 2003, we received proceeds from a $50.0 million loan from Baxter Capital. The interest rate on the loan was 12% per annum. Under the terms of the loan, no payment of principal or interest was due until 2008. The loan was secured by our current and future accounts receivable from sales of the platelet system under our existing agreement with Baxter.

In October 2003, Baxter Capital commenced legal proceedings against us seeking immediate repayment of amounts outstanding under the loan. Baxter Capital alleged that changes in our business constituted a default under the loan agreement. We did not agree that any default occurred and therefore believed that, under the terms of the loan, no principal or interest payments should be due until January 2008.

Concurrent with the February 2005 restructured agreements between Baxter and us, Baxter Capital and we entered into an agreement under which we immediately paid $34.5 million to Baxter Capital and entered into a promissory note for $4.5 million, payable with 8% interest in December 2006. Baxter Capital agreed to accept these payments in full satisfaction of the loan obligation, and the parties dismissed all related legal actions.

Because the settlement of litigation and the restructured agreements with Baxter and Baxter Capital related to conditions that required estimates and existed as of December 31, 2004, we adjusted the balance sheet as of that date, to reflect the terms of the February 2005 loan settlement agreement. The December 31, 2004, balance sheet includes a current payable of $34.5 million, which was paid in February 2005 to Baxter Capital, a $770,000 accrual included within other accrued expenses for other estimated expenses in connection with the restructured commercialization agreements with Baxter, a deferred gain of $22.1 million on the loan settlement and long-term debt of $4.5 million, representing the note due to Baxter Capital in December 2006, which accrues interest at 8%. The gain on the loan settlement was recognized in the first quarter of 2005, when the settlement occurred.

As a result of the loan settlement, we received a payment of $209,000 from Baxter representing withheld revenue share from product sales through December 31, 2004. This amount was recognized as product sales revenue during the three months ended March 31, 2005, in addition to revenue related to product sales during the period.

Note 9 – Preferred Stock

Baxter holds 3,327 shares of our Series B preferred stock, which represents 100% of the total outstanding shares of Series B preferred stock. The holder of Series B preferred stock has no voting rights, except with respect to the authorization of any class or series of stock having preference or priority over the Series B preferred stock as to voting, liquidation or conversion or with respect to the determination of fair market value of non-publicly traded shares received by the holder of Series B preferred stock in the event of a liquidation, or except as required by Delaware law. At any time, the holder may convert each share of Series B preferred stock into 100 common shares. If all shares of Series B preferred stock were converted to common stock, 332,700 common shares would be issued, which represents 1.48% of our outstanding common shares as of September 30, 2005. We have the right to redeem the Series B preferred stock prior to conversion for a payment of $9.5 million.

Note 10 – Litigation

On December 8, 2003, a class action complaint was filed in the United States District Court for the Northern District of California against us, and certain of our present and former directors and officers. On December 10, 2003, a second action was filed in the same court against the same defendants. Both actions were brought on behalf of a purported class of persons who purchased our publicly traded securities between October 25, 2000 and September 3, 2003. The complaints alleged that the defendants violated the federal securities laws by making certain allegedly false and misleading statements regarding the compound used in our red blood cell system. As is typical in this type of litigation, several other purported securities class action lawsuits containing substantially similar allegations have since been filed against the defendants. On May 24, 2004, the plaintiffs filed a consolidated complaint. The consolidated complaint abandons the allegations raised in the original complaints. Instead, the plaintiffs claim that the defendants issued false and misleading predictions regarding the initiation and completion of clinical trials, submission of regulatory filings, receipt of regulatory approval and other milestones in the development of the INTERCEPT Blood Systems for platelets, plasma and red blood cells. The consolidated complaint retains the same class period alleged in the original complaints. On June 17, 2004, the plaintiffs filed an amended consolidated complaint substantially similar to the previous consolidated complaint with additional allegations attributed to a confidential witness. On July 20, 2004, the defendants moved to dismiss the amended consolidated complaint. On January 20, 2005, the Court dismissed the complaint with leave to amend within 60 days. On March 21, 2005, the plaintiffs filed a second amended consolidated complaint, and on May 24, 2005, the plaintiffs filed a third amended consolidated complaint. The allegations of both the second and third amended consolidated complaints were similar to those contained in the previous amended consolidated complaint. On July 8, 2005, the defendants moved to dismiss this third amended consolidated complaint. We believe that this matter will not have a material effect on our results of operations or financial position; however, we cannot predict the outcome of this litigation.

In addition, certain of our present and former directors and officers have been named as defendants in two virtually identical derivative lawsuits in the Superior Court for the County of Contra Costa, California, which name us as a nominal defendant. The plaintiffs in these actions are certain of our stockholders who seek to bring derivative claims on behalf of Cerus against the defendants. The complaints allege breach of fiduciary duty and related claims. Plaintiffs filed a consolidated complaint on June 1, 2004. The consolidated complaint repeats the allegations made in the original complaints, asserts the same claims as those complaints and seeks an unspecified amount of damages. On August 5, 2004, the Court approved a stipulation and proposed order staying the action for so long as the discovery stay in the securities action remains in place. The order further provides that plaintiffs may file an amended consolidated complaint within thirty days following the resolution of the pleadings in the securities action. We believe that this matter will not have a material effect on our results of operations or financial position; however, we cannot predict the outcome of this litigation.

Note 11 – Transactions with BioOne Corporation

In April 2004, we made a $93,000 investment in the common stock of BioOne, a privately-held Japanese corporation. BioOne was formed in 2004 to develop technologies to improve the safety of blood products in Asia, and is funded by equity investments from Japanese venture capital firms and other corporations. Because our investment initially represented greater than 20% of BioOne’s common stock, we accounted for this investment under the equity method for the three months ended June 30, 2004. During this period, we recorded a loss of $62,000 representing our share of BioOne’s net losses for that period.

In June 2004, Baxter and we entered into an agreement with BioOne for commercialization of the INTERCEPT Blood System for platelets in parts of Asia. Under the terms of the agreement, BioOne is responsible, at its expense, for seeking regulatory approvals and will have exclusive rights to market and distribute the INTERCEPT Blood System for platelets in Japan, China, Taiwan, South Korea, Thailand, Vietnam and Singapore, following their receipt of regulatory approval in each of those countries. In July 2004 and October 2004, Baxter and we each received up-front payments of $10.0 million. The up-front payment was recorded as deferred revenue and is being recognized ratably as development funding over the period to which the payment relates. The agreement also provides for contingent milestone payments and royalties on future product sales, which would be shared equally by Baxter and us.

We recognized $1.4 million and $4.2 million of revenue under this agreement during the three and nine months ended September 30, 2005, respectively.

In July 2004, we made an additional $1.1 million investment in BioOne equity securities. As a result of dilution from additional concurrent third party investments in BioOne, we now hold less than 20% of the outstanding voting securities of BioOne and account for this investment under the cost method. We have determined that there is no impairment of this investment as of September 30, 2005.

In December 2004, Baxter and we signed a letter of intent with BioOne to enter into a definitive agreement for commercialization of the INTERCEPT Blood System for plasma in parts of Asia. Under the letter of intent, we received a payment of $3.0 million from BioOne. Our right to retain the up-front payment was not contingent upon completion of the definitive agreement. The payment was recorded as deferred revenue and is being recognized ratably as development funding over the period to which it relates. In June 2005 we entered into a definitive agreement. Under the terms of the definitive agreement, BioOne is responsible, at its expense, for seeking regulatory approvals and will have exclusive rights to market and distribute the INTERCEPT Blood System for plasma in Japan, China, Taiwan, South Korea, Thailand, Vietnam and Singapore, following their receipt of regulatory approval in each of those countries. The agreement also provides for contingent milestone payments to Cerus and royalties to Cerus and Baxter on future product sales. We recognized $375,000 and $1,125,000 of revenue under this agreement during the three and nine months ended September 30, 2005, respectively.

Note 12 – Restructuring

On June 30, 2004, we announced a restructuring of operations to increase resources for our program to develop immunotherapies to treat cancer and infectious diseases and reduce expenditures for our blood safety programs and administrative expenses. As a result of the restructuring, we reduced our workforce by approximately 35% and also have reduced other operating expenses. During the year ended December 31, 2004, we recorded aggregate charges of $2,816,000 associated with this restructuring. There were no restructuring expenses recorded during the three and nine months ended September 30, 2005.

As of December 31, 2004, the accrual for restructuring was $692,000. During the nine months ended September 30, 2005, we paid $389,000 related to restructuring costs previously accrued. As of September 30, 2005, the accrual for restructuring was $304,000 related to severance benefits payable in installments until May 2006. We do not expect further costs related to this restructuring.

Note 13 – Subsequent Event

We have entered into two capital lease agreements that will become effective upon the delivery and acceptance of leased computer equipment, which is expected to occur during the last quarter of 2005. The two leases obligate us to make total cash payments of $143,000 over twenty-four months from the delivery and acceptance date.

ITEM 2.

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

This discussion and analysis should be read in conjunction with our financial statements and accompanying notes included in this report and our 2004 audited financial statements and accompanying notes included in our 2004 Annual Report on Form 10-K/A. Operating results for the periods presented are not necessarily indicative of results for the year ending December 31, 2005, or any future period.

The following discussion includes forward-looking statements that involve risks and uncertainties. When used herein, the words “anticipate,” “believe,” “estimate,” “expect,” “plan” and similar expressions are intended to identify such forward-looking statements. There can be no assurance that these statements will prove to be correct. Certain important factors could cause actual results to differ materially from those discussed in such statements, including whether our pre-clinical and clinical data will be considered sufficient by regulatory authorities to grant marketing approval, development and testing of additional configurations of our products, market acceptance of our products, regulation by domestic and foreign regulatory authorities, our reliance on our relationship with Baxter, the availability of governmental or third party reimbursement for the use of our products, the size of the markets for our products, our reliance on third parties to manufacture, market and sell our products, our successful completion of our product components’ commercial design, our reliance on our relationship with BioOne, the early stage of development of our vaccine programs, our ability to attract and retain partners and collaborators for our immunotherapy programs, product offerings by our competitors, product liability, business interruption due to earthquake, our limited operating history, additional financing activities, protection of our intellectual property rights, our use of hazardous materials in the development of our products, volatility in our stock price, legal proceedings, on-going compliance with the requirements of the Sarbanes-Oxley Act of 2002 and other factors discussed below and under the caption “Risk Factors,” and in our other documents filed with the Securities and Exchange Commission. We undertake no obligation to update any of the forward-looking statements contained herein to reflect any future events or developments.

The condensed balance sheet at December 31, 2004 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

Cerus and Helinx are United States registered trademarks of Cerus Corporation. Baxter, INTERCEPT, INTERCEPT Blood and INTERCEPT Blood System are trademarks of Baxter International Inc.

Overview

We are developing novel technologies to provide safer and more effective options to patients in areas with substantial unmet medical needs, particularly within the fields of cancer, infectious disease and blood safety. We are employing our proprietary attenuated Listeria immunotherapy platform, often with public domain and proprietary antigens, to develop new therapies for cancer and infectious disease. We have three immunotherapeutic cancer vaccine products in development using our Listeria vaccine platform: one, MEDI-543 (EphA2), in collaboration with MedImmune, Inc., or MedImmune, and two, CRS-100 and CRS-207, in collaboration with The Johns Hopkins University. We have two prophylactic infectious disease vaccine products in early stages of development: one for Anthrax and the other for Tularemia, using our Killed But Metabolically Active (or KBMA) technology platform, both funded through grants from divisions of the National Institutes of Health. We are also collaborating with subsidiaries of Baxter International Inc., or Baxter, and with BioOne Corporation, or BioOne, on the INTERCEPT Blood System, which is designed to enhance the safety of donated blood components by inactivating viruses, bacteria, other pathogens and white blood cells. The INTERCEPT Blood System is based on our Helinx technology for controlling biological replication. The INTERCEPT Blood System for platelets, or platelet system, is currently being marketed by Baxter in Europe.

On June 30, 2004, we announced the realignment of our operations to increase resources for our programs to develop therapeutic vaccines against cancer and infectious diseases and reduce expenditures for our blood safety programs and administrative expenses. As a result of the realignment, we reduced our workforce by approximately 35% and also reduced our operating expenses.

On February 3, 2005, we announced an agreement to restructure our collaboration with Baxter related to the INTERCEPT Blood System. Under the terms of the agreement, Baxter has agreed to continue to invest in commercialization activities in Europe in 2005 and 2006 for the platelet system and INTERCEPT Blood System for plasma, or plasma system. Baxter also has agreed to work collaboratively with us on the preparation of a CE Mark application for the plasma system. Baxter has an option beyond 2006 to continue as our exclusive European marketing partner for the platelet and plasma systems. We continue to collaborate with Baxter on the development and commercialization of the platelet system in the United States. We also continue to collaborate on commercialization activities for the platelet and plasma systems in regions outside the United States and Canada that are not covered by existing agreements with BioOne. Under the terms of the restructured agreement, we gained worldwide rights for the INTERCEPT Blood System for red blood cells, or red blood cell system, and also U.S. and Canadian rights for the plasma system, previously held by Baxter. As a result, we are solely responsible for development and commercialization of the red blood cell system worldwide and the plasma system in the United States and Canada. Baxter continues certain manufacturing responsibilities in support of our development and commercialization activities. Under a separate agreement, we paid $34.5 million to Baxter Capital Corporation on February 3, 2005, and executed a promissory note for $4.5 million, payable with interest in December 2006. Baxter Capital agreed to accept these payments in full satisfaction of the loan obligation of $50.0 million plus accrued interest that had been outstanding, and both parties dismissed the related legal actions. Accordingly, we recognized a gain of $22.1 million upon the execution of the February 2005 restructuring agreement in the three-month period ended March 31, 2005.

The restructuring of our collaboration with Baxter does not change the relationship with our Asian partner, BioOne. In June 2004, we announced an agreement under which BioOne would market and distribute the platelet system in Japan, China, Taiwan, South Korea, Thailand, Vietnam and Singapore, following receipt of regulatory approval in each of those countries. In June 2005, we also entered into an agreement with BioOne for commercialization of the plasma system in the same countries.

Presently, it is our objective that our spending over the next year in support of research, development and commercialization of the INTERCEPT platelet and plasma systems be balanced with development funding for such programs from Baxter, BioOne, the United States Armed Forces, or Armed Forces, and others. We plan to continue technical support of Baxter’s commercialization efforts for the platelet system in Europe. Together with Baxter, we continue communications with the United States Food and Drug Administration, or FDA, regarding the regulatory pathway for the platelet system in the United States. We expect to continue our support of Baxter’s submission of an application for CE Mark approval for the plasma system in Europe, which we have prioritized above further regulatory activities on our part in the United States relating to the platelet and plasma systems. We have elected to re-enter Phase I human clinical trials for the red blood cell system, which we plan to initiate in 2006. Spending requirements to support clinical trials and device development for the red blood cell system are expected to be in excess of currently available funding from the Armed Forces. Finally, we expect to invest in the pre-clinical and early stage clinical development of our immunotherapy programs in both cancer and infectious disease at spending levels in excess of funding received from partners and government agencies.

Since our inception in 1991, we have devoted substantially all of our efforts and resources to the research, development and clinical testing of blood safety systems and, more recently, immunotherapies for cancer and infectious disease. We have recorded operating losses since inception and, as of September 30, 2005, had an accumulated deficit of approximately $302.7 million. Except for the INTERCEPT Blood System for platelets, for which the European Union approved issuance of a CE Mark, all of our product candidates are in the research and development stage. We must conduct significant research, development, pre-clinical and clinical evaluation, commercialization and regulatory compliance activities on these product candidates that, together with anticipated general and administrative expenses, are expected to result in substantial losses at least until after commercialization of additional products. Our ability to achieve a profitable level of operations in the future will depend on our ability to successfully complete development and obtain additional regulatory approvals of, and on the abilities of our partners and us to commercialize and achieve market acceptance of, blood safety and immunotherapy product candidates. We may never achieve a profitable level of operations.

Agreement with MedImmune, Inc. In April 2004, we entered into an agreement with MedImmune to co-develop a novel therapeutic vaccine designed to target antigens expressed in breast, prostate and colon cancer, as well as metastatic melanoma. A vaccine, MEDI-543 (EphA2), is being developed in this collaboration using our Listeria vaccine platform and MedImmune’s EphA2 cancer antigen. Under the terms of the agreement, MedImmune is responsible for clinical testing, manufacturing and commercialization of any product resulting from this collaboration. We are responsible for pre-clinical development of a therapeutic vaccine candidate. We are receiving development funding and may receive contingent milestone payments and royalties on future product sales. In May 2004, we received an up-front payment of $1.0 million from MedImmune. The up-front payment was recorded as deferred revenue and is being recognized ratably as development funding over the pre-clinical development period. We received $500,000 from MedImmune in September 2005 upon achieving a milestone relating to the selection of a lead candidate strain. This payment was recognized as revenue in the three months ended September 30, 2005. We recognized $374,000 and $1,604,000 of development funding under this agreement during the three and nine months ended September 30, 2005, respectively.

Restructured Agreements with Baxter for Commercialization of the INTERCEPT Blood System. Prior to February 2005, we shared development expenses with Baxter for the platelets and red blood cell systems under our development and commercialization agreements. The agreements provided for us to be solely responsible for funding development expenses for the plasma system. We recognized $300,000 and $492,000 of development funding under these agreements during the three and six months ended June 30, 2004. Under the agreements, Baxter has been responsible for manufacturing and marketing the platelet system, which is approved for sale in some countries in Europe. The agreements provided for us to receive approximately 33.5% of revenue from sales of platelet system disposables after each party is reimbursed for its cost of goods to the extent cost exceeds specific amounts. We did not recognize revenue from product sales during the three and six months ended June 30, 2004, because revenue sharing payments were being withheld by Baxter due to a dispute over the timing of repayment of a loan to us from Baxter Capital.

We entered into agreements with Baxter in February 2005 that reaffirmed our previous agreements in certain respects and modified them in other respects. Under the February 2005 agreements, Baxter retained the right and responsibility to market and sell, sometimes referred to as commercialization rights for, the platelet system worldwide. Baxter also retains commercialization rights for the plasma system in all parts of the world except the United States and Canada. Baxter retains these commercialization rights, in general, through 2006. Baxter has options to extend these commercialization rights for successive two-year periods after 2006. Baxter’s commercialization rights for the platelet and plasma systems in Japan and certain other Asian countries are subject to the rights of BioOne under existing agreements.

Under the February 2005 agreements, Baxter remains solely responsible for sales and marketing expenses for the products/countries as to which it maintains commercialization rights. For 2005 and 2006, Baxter has allotted $13.1 million to fund expenses associated with INTERCEPT Blood System sales and marketing efforts and activities directed toward CE Mark approval of the plasma system. Baxter also agreed to furnish specified levels of personnel to conduct sales and marketing of the platelet system and, upon approval, the plasma system in Europe. Our agreements with Baxter provide for sales and marketing strategy surrounding Baxter’s commercialization rights to be set by a joint Cerus/Baxter governance committee.

We will have responsibility for sales and marketing expenses for any products/countries for which we gain commercialization rights. We have the sole discretion, however, to determine the extent of such expenditures.

For those countries where we gained, or may in the future gain, commercialization rights under the February 2005 agreements, Baxter has agreed to manufacture systems and components, on a cost-plus basis, until 2009. If Baxter elects to extend its commercialization rights beyond December 31, 2008, the manufacturing period will be extended until approximately two years after the expiration of Baxter’s extended commercialization rights. Since the agreements do not require Baxter to manufacture in an FDA-approved facility, additional validation steps will be required of us before use of such items in the United States. Baxter has agreed to supply only very limited types of components for the prototype red blood cell system.

Our arrangement with Baxter to equally fund development work for the platelet system and the red blood cell system also was terminated by the February 2005 agreements. Commencing January 1, 2005, each company bears its own expenses regarding our discussions with the FDA to gain clarity on the remaining steps in the U.S. regulatory process for the platelet system. Baxter may continue to retain its commercialization rights for the platelet system in the United States and Canada, provided that prior to December 31,2005, it commits to fund all future development expenses directed toward obtaining FDA approval and also commits to specified levels of sales and marketing expenditures for the product. Under the agreements, Baxter ceases to have any obligation to fund development of the red blood cell system.

We remain responsible for funding 100% of development expenses for the plasma system, except that $2.2 million of Baxter’s $13.1 million commitment (described above) may be applied to activities directed toward obtaining CE Mark approval of the plasma system. Baxter has agreed to cooperate with us to complete certain activities required for the CE Mark application. Such activities shall, except for the right to apply such $2.2 million, be at our expense. For the three and six months ended June 30, 2005, we applied $323,000 and $577,000, respectively, of Baxter’s commitment to expenses incurred during the period directed toward obtaining CE Mark approval of the plasma system. These amounts were recognized as development funding revenue for the periods.

Under a separate agreement with Baxter Capital relating to the $50.0 million loan and accrued interest, we paid $34.5 million to Baxter Capital in February 2005 and entered into a promissory note for $4.5 million, payable with 8% interest in December 2006. Baxter Capital agreed to accept these payments in full satisfaction of the loan obligation, and Baxter Capital and we have dismissed the related legal actions. As a result of the loan settlement, we received a payment of $209,000 from Baxter representing withheld revenue share from product sales through December 31, 2004. This amount was recognized as product sales revenue during the three months ended March 31, 2005, in addition to revenue related to product sales during the period.

Agreements with BioOne. In June 2004, Baxter and we entered into an agreement with BioOne for commercialization of the platelet system in parts of Asia. Under the terms of the agreement, BioOne is responsible, at its expense, for seeking regulatory approvals and will have exclusive rights to market and distribute the platelet system in Japan, China, Taiwan, South Korea, Thailand, Vietnam and Singapore, following BioOne’s receipt of regulatory approval in each of those countries. In July 2004 and October 2004, Baxter and we each received up-front payments of $10.0 million. We recorded the up-front payments as deferred revenue and amounts are being recognized ratably as development funding over the expected period to regulatory approval. The agreement also provides for contingent milestone payments and royalties on future product sales, which would be shared equally by Baxter and us. We recognized $1.4 million and $4.2 million of revenue under this agreement during the three and nine months ended September 30, 2005, respectively.

In December 2004, Baxter and we signed a letter of intent with BioOne to enter into a definitive agreement for commercialization of the INTERCEPT Blood System for plasma in parts of Asia. Under the letter of intent, we received a payment of $3.0 million from BioOne. Our right to retain the up-front payment was not contingent upon completion of the definitive agreement. The payment was recorded as deferred revenue and is being recognized ratably as development funding over the period to which it relates. In June 2005 we entered into a definitive agreement. Under the terms of the definitive agreement, BioOne is responsible, at its expense, for seeking regulatory approvals and will have exclusive rights to market and distribute the INTERCEPT Blood System for plasma in Japan, China, Taiwan, South Korea, Thailand, Vietnam and Singapore, following their receipt of regulatory approval in each of those countries. The agreement also provides for contingent milestone payments to Cerus and royalties to Cerus and Baxter on future product sales. We recognized $0.4 million and $1.1 million of revenue under this agreement during the three and nine months ended September 30, 2005, respectively.

Cooperative Agreements with the Armed Forces. In February 2001, we were awarded a $3.5 million cooperative agreement by the Army Medical Research Acquisition Activity division of the Department of Defense. In September 2002, May 2003, January 2004 and July 2004, we were awarded additional funding of $6.5 million, $6.2 million, $5.5 million and $3.7 million, respectively, all of which was awarded to continue funding of projects to develop our pathogen inactivation technologies to improve the safety and availability of blood for medical transfusions. Under the conditions of the agreements, we are conducting research on the inactivation of infectious pathogens in blood, including unusual viruses, bacteria and parasites, which are of particular concern to the Armed Forces. This funding also supports advanced development of our blood safety technologies. We recognized $1.1 million and $3.0 million of revenue under these awards during the three and nine months ended September 30, 2005, respectively.

In October 2004, we received a $6.2 million award from the Army Medical Research Acquisition Activity division of the Department of Defense for the research and development of vaccines for biodefense and cancer. The award funds work to be performed through November 2006. We recognized $2.1 million and $5.6 million of revenue under this award during the three and nine months ended September 30, 2005, respectively.

Agreement with Kirin. In January 2001, we entered into a collaborative agreement with the Pharmaceutical Division of Kirin Brewery Co. Ltd., or Kirin, to develop and market products for stem cell transplantation based on our Helinx technology. Under the terms of the agreement, we will jointly develop the products with Kirin. We received an initial license fee of $1.0 million. The license fee was recorded as deferred revenue and is being recognized ratably as development funding over the period to which it relates. We do not expect to receive additional funding from Kirin. Although the agreement calls for Kirin to fund all development expenses for the Asia-Pacific region and a portion of our development activities toward obtaining product approval in the United States, no such development activities co-funded by Kirin are currently ongoing. Upon product approval, Kirin has exclusive rights to market the products in the Asia-Pacific region, including Japan, China, Korea and Australia, and we would receive a specified share of product revenue, including a royalty and reimbursement of our cost of goods. We retain all marketing rights for the rest of the world, including the United States and Europe.

Critical Accounting Policies

Critical accounting policies are those that require significant judgment and/or estimates by management at the time that the financial statements are prepared such that materially different results might have been reported if other assumptions had been made. We consider certain accounting policies related to revenue and research and development expenses, investments and accrued liabilities to be critical policies. There have been no changes to our critical accounting policies since we filed our 2004 Annual Report on Form 10-K/A with the SEC on May 3, 2005. For a description of our critical accounting policies, please refer to our 2004 Annual Report on Form 10-K/A.

Results of Operations

Three- and Nine- Month Periods Ended September 30, 2005 and 2004

Revenue. Development funding, which includes amounts received from MedImmune, Baxter, BioOne, Kirin and the National Marrow Donor Program, or NMDP, increased to $3.3 million for the three months ended September 30, 2005, from $1.2 million for the comparable period in 2004, and increased to $8.8 million for the nine months ended September 30, 2005, from $2.0 million for the comparable period in 2004. The increases for both periods were primarily due to revenue recognized from up-front payments received from BioOne and MedImmune that were deferred in 2004, which are being recognized ratably over the development term, and increased development funding and a milestone payment under the April 2004 MedImmune agreement. Development funding from BioOne was 53% and 60% of total revenue for the three and nine months ended September 30, 2005, respectively. Development funding from Baxter was 19% and 15% of total revenue for the three months and nine months ended September 30, 2005, respectively. Development funding from MedImmune and Kirin was 27% and 1%, respectively, of total revenue for the three months ended September 30, 2005, and 24% and 1% for the nine months ended September 30, 2005, respectively.

Revenue from government grants and cooperative agreements increased 51% to $3.5 million for the three months ended September 30, 2005, from $2.3 million for the comparable period in 2004, and increased 6% to $9.5 million for the nine months ended September 30, 2005, from $9.0 million for the comparable period in 2004. The increase for both periods was primarily due to increased government funding for both the blood safety and vaccines programs.

In the three and nine months ended September 30, 2005, we recognized $69,000 and $395,000, respectively, of product sales revenue from sales of the INTERCEPT Blood System for platelets in Europe. As a result of the loan dispute with Baxter Capital, recognition of product sales revenue in 2004 was deferred until payment of such revenue became reasonably assured. After the loan settlement with Baxter Capital, in the first quarter of 2005 we recognized $209,000 of product sales revenue that related to our share of product sales prior to December 31, 2004, and had previously been deferred. This product sales revenue was recognized in addition to product sales revenue related to sales that occurred during the period. The INTERCEPT Blood System for platelets is currently undergoing validation studies and regulatory reimbursement review in many European countries. We do not expect sales of the system in Europe to be significant at least until the system is approved for sale and reimbursement levels are established in the larger-market European countries.

Research and Development Expenses. Research and development expenses include salaries and related expenses for scientific personnel, payments to consultants, payments for licensed technologies, supplies and chemicals used in in-house laboratories, costs of research and development facilities, depreciation of equipment and external contract research expenses, including clinical trials, pre-clinical safety studies, compound manufacturing and other laboratory studies. Research and development expenses increased 28% to $6.6 million for the three months ended September 30, 2005, from $5.2 million for the comparable period in 2004, due to increased spending in support of our immunotherapy, plasma and red blood cell programs, partially offset by decreased spending on our platelet program. Research and development expenses decreased 22% to $17.6 million for the nine months ended September 30, 2005, from $22.6 million for the comparable period in 2004, due primarily to reduced development spending for our blood safety programs as a result of our June 2004 restructuring.

Our total research and development costs included $4.0 million for our blood safety programs and $4.8 million for our immunotherapy programs for the three months ended September 30, 2005, and $2.5 million for our blood safety programs and $2.7 million for our immunotherapy programs for the comparable period in 2004. Our total research and development costs included $10.2 million for our blood safety programs and $14.5 million for our immunotherapy programs for the nine months ended September 30, 2005, and $16.1 million for our blood safety programs and $6.5 million for our immunotherapy programs for the comparable period in 2004. Due to the inherent uncertainties and risks associated with developing biomedical products, including, but not limited to, intense and changing government regulation, uncertainty of future pre-clinical and clinical study results and uncertainty associated with manufacturing, it is not possible to reasonably estimate the costs to complete these research and development projects. We face numerous risks and uncertainties associated with the successful completion of our research and development projects. See “Risk Factors” below.

General and Administrative Expenses. General and administrative expenses increased 9% to $2.2 million for the three months ended September 30, 2005, from $2.0 million for the comparable period in 2004 due to increases in headcount, and decreased 9% to $7.2 million for the nine months ended September 30, 2005, from $8.0 million for the comparable period in 2004 due principally to the effects of our June 2004 restructuring.

Restructuring. On June 30, 2004, we announced that we realigned our operations to increase resources for our program to develop therapeutic vaccines against cancer and infectious diseases and to reduce expenditures for our blood safety programs and administrative expenses. As a result of the realignment, we reduced our workforce by approximately 35% and reduced our operating expenses. We recorded a charge of $2.5 million related to this restructuring in June 2004. Restructuring costs included primarily severance benefits to employees terminated as part of the restructuring. We do not expect to record further costs related to this restructuring, nor has there been an adjustment to the original estimate of restructuring expense.

Gain on Loan Settlement. Concurrent with the February 2005 restructured agreements between Baxter and us, Baxter Capital and we entered into an agreement under which we immediately paid $34.5 million to Baxter Capital and entered into a promissory note for $4.5 million, payable with 8% interest in December 2006. Baxter Capital agreed to accept these payments in full satisfaction of the loan obligation, and the parties dismissed all related legal actions. As a result, we recorded a non-operating gain of $22.1 million that reflected the difference between loan principal and accrued interest balances recorded through 2004, less amounts paid in February 2005 and remaining accrued liabilities as a result of the settlement, including a $770,000 accrual included within other accrued expenses for other estimated expenses in connection with the restructured commercialization agreements with Baxter and long-term debt of $4.5 million, representing the note due to Baxter Capital in December 2006, which accrues interest at 8%. The gain on the loan settlement was recognized in the first quarter of 2005, when the settlement occurred.

Net Interest Income (Expense). Net interest income was $0.2 million for the three months ended September 30, 2005, compared to net interest expense of $1.0 million for the comparable period in 2004. Net interest income was $0.8 million for the nine months ended September 30, 2005, compared to net interest expense of $3.4 million for the comparable period in 2004. In 2005, interest was accrued at 8% on the $4.5 million note payable to Baxter Capital. In 2004, interest was accrued at 12.0% on the $50.0 million loan from Baxter Capital. Interest income was $0.3 million and $0.4 million for the three months ended September 30, 2005, and 2004, respectively, and $1.1 million and $1.1 million for the nine months ended September 30, 2005, and 2004, respectively. We expect to earn interest income at market rates in proportion to the marketable securities balances we maintain.

Liquidity and Capital Resources

Our sources of capital to date have primarily consisted of public offerings and private placements of equity securities, the loan from Baxter Capital, payments received under our agreements with Baxter, BioOne, MedImmune and others, United States government grants and cooperative agreements and interest income. To date, we have not received a significant amount of capital from product

sales revenue, and we will not derive significant capital from product sales unless and until one or more products receive regulatory approval and achieve market acceptance.

At September 30, 2005, we had cash, cash equivalents and short-term investments of $49.2 million. Net cash used in operating activities was $11.3 million for the nine months ended September 30, 2005, compared to $19.0 million for the same period in 2004. The reduction in net cash used in operating activities was primarily due to the smaller operating loss during the period net of changes in other operating balances including decreases in accrued expenses and deferred revenue. Net cash provided by investing activities during the nine months ended September 30, 2005, of $11.3 million resulted principally from sales and maturities of short-term investments being greater than the combination of purchases of short-term investments and equipment and leasehold improvements during the period. Working capital increased to $41.2 million at September 30, 2005, from $24.9 million at December 31, 2004, primarily due to the gain on the loan settlement recognized during the period.

We believe that our available cash balances, together with anticipated cash flows from existing development and grant arrangements, will be sufficient to meet our capital requirements for the next two years. These near-term capital requirements are dependent on various factors, including the development progress and costs of the INTERCEPT Blood System and our immunotherapy programs, payments from our development and commercialization partners, including MedImmune and BioOne, and from the United States government, and costs related to creating, maintaining and defending our intellectual property. If Baxter elects not to continue its support of the platelet system in the United States and Canada by December 31, 2005, or commercialization of the platelet and plasma systems in Europe beyond December 31, 2006, and we do not enter into new, compensating collaborative arrangements, our rate of spending may accelerate and our capital resources might not be sufficient to meet requirements over the next two years. Our long-term capital requirements will be dependent on these factors and on the outcome of ongoing securities class action and derivative lawsuits against us, our ability to raise capital through public or private equity or debt financings or through additional collaborative arrangements or government grants, development progress in our immunotherapy programs, regulatory approval and successful commercialization of the INTERCEPT Blood System and other product candidates, competitive developments and regulatory factors. Future capital funding transactions may result in dilution to our investors, and may not be available on favorable terms or at all.

Commitments

Our commitments, as of September 30, 2005, are as follows (in thousands):

	Payments Due by Period
	Total		2005		2006-2007		2008-2009		After 2009
Contractual obligations:
Loan and interest payable	$	5,216	$	—	$	5,216	$	—	$	—
Minimum purchase requirements	150		50		100		—		—
License fees and sponsored research	614		136		458		20		—
Operating leases	2,219		281		1,483		455		—

Total contractual cash obligations	$	8,199	$	467	$	7,257	$	475	$	—

Financial Instruments

We maintain an investment portfolio of various issuers, types and maturities. These securities are generally classified as available-for-sale and, consequently, are recorded on the balance sheet at fair value with unrealized gains or losses reported as a separate component of stockholders’ equity, if material. Our investment policy is to manage our marketable securities portfolio to preserve principal and liquidity while maximizing the return on the investment portfolio to assist us in funding our research and development activities. Unrealized losses at September 30, 2005, and December 31, 2004, totaled $419,000 and $324,000, respectively. Our investments primarily consist of short-term money market mutual funds, United States government obligations and commercial paper. Of our investments balance of $46.0 million at September 30, 2005, approximately 4% have original maturity dates of less than 90 days, and the remaining investments have original maturity dates of two to three years. We do not believe our exposure to interest rate risk to be material given the short-term nature of our investment portfolio and our ability to hold the securities until maturity.

Risk Factors

Our business faces significant risks. If any of the events or circumstances described in the following risks actually occur, our business may suffer, the trading price of our common stock could decline and our financial condition or results of operations could be harmed. These risks should be read in conjunction with the other information set forth in this report. There may be additional risks faced by our business.

If our pre-clinical and clinical data are not considered sufficient by regulatory authorities to grant marketing approval, we will be unable to commercialize our INTERCEPT products and generate revenue.

Except for the INTERCEPT Blood System for platelets, which has received CE Mark approval and regulatory approval in certain countries in Europe, we have no products that have received regulatory approval for commercial sale and are being marketed. Our product candidates are in various stages of development, and we face the risks of failure inherent in developing medical devices and biotechnology products based on new technologies. Our products must satisfy rigorous standards of safety and efficacy before the FDA and international regulatory authorities can approve them for commercial use. We must provide the FDA and foreign regulatory authorities with pre-clinical, clinical and manufacturing data that demonstrate our products are safe, effective and in compliance with government regulations before the products can be approved for commercial sale.

In 2002, the INTERCEPT Blood System for platelets received CE Mark approval in Europe. We will need to complete validation studies and obtain reimbursement approvals in some individual European countries to market our products in those countries. Further randomized clinical trials funded by third parties will be conducted in some European countries, such as the Netherlands. We expect to conduct many smaller scale experience trials with prospective customers in a number of European countries paid for from funds allotted by Baxter. We expect that decisions to purchase substantial quantities of product may be deferred until completion of the additional trials and experience studies in Europe. In certain countries, including the United Kingdom, France and Germany, the system must be approved for purchase, reimbursement or use by a specific governmental or non-governmental entity or entities (such as the Paul Ehrlich Institute in Germany) in order for it to be adopted by a specific customer. The level of additional product testing varies by country, but could take a long time to complete.

We completed our Phase III clinical trial of the INTERCEPT Blood System for platelets in the United States in March 2001 and have submitted data from this trial, along with several other modules of our pre-market approval application, to the FDA. Based on discussions with the FDA, we performed an additional analysis of the clinical trial data, under the direction of an independent panel of experts, to determine if apparent differences between treatment groups in the category of respiratory adverse events reported in the study were attributable to inconsistent event reporting. The assessments of primary patient records showed no statistically significant differences between groups. These assessments differed from adverse events that were based on clinical trial case report forms, which showed statistically significant differences in specific respiratory events. We submitted a report of the analysis to the FDA for review. The report included conclusions from an independent panel of experts. If the results of this analysis are satisfactory to the FDA, we expect the FDA to require a supplemental clinical trial to evaluate the hemostatic efficacy and safety of INTERCEPT platelets, prepared using our final commercial product design, compared to conventional platelets. The supplemental clinical trial would need to be completed and data from the trial submitted to the FDA before we could complete our regulatory submission. The FDA may not find the results of our analysis or data from any additional clinical trials to be acceptable for approval. Before we begin a supplemental clinical trial, we will need to gain concurrence with the FDA on our trial design. We may not be able to reach concurrence on the size, scope or design of the study.

We have completed Phase IIIa, Phase IIIb and Phase IIIc clinical trials of the INTERCEPT Blood System for plasma in the United States. We are preparing a CE Mark application for regulatory approval in Europe. We have not submitted any applications for regulatory approval of the INTERCEPT Blood System for plasma in the United States or any other regions. In some countries, we may be required to perform an additional clinical study using the commercial configuration of the system in order to obtain regulatory approval.

As a result of the termination of Phase III clinical trials of our red blood cell system due to the detection of antibodies in two patients, we have been conducting additional research activities on our red blood cell system to determine if the system can be reconfigured to reduce antibody formation and potentially undergo clinical testing. Based upon an internal evaluation of the results to date from these additional research activities, we have elected to initiate new clinical studies in Phase I trials in 2006 using a modified red blood cell system before potentially progressing to later-stage clinical trials. A number of process and product design issues that could impact efficacy and market acceptance will need to be resolved during clinical trials. If we are unsuccessful in advancing a modified red blood cell system through clinical trials or in obtaining subsequent regulatory approvals, then we may never realize a return on our development expenses incurred to date in this program.

Clinical trials in particular are expensive and have a high risk of failure. Any of our product candidates may fail in the testing phase or may not achieve results sufficient to attain market acceptance, which could prevent us from achieving profitability.

It may take us several years to complete our clinical testing, and failure can occur at any stage of testing. We cannot rely on interim results of trials to predict their final results, and acceptable results in early trials might not be repeated in later trials. Any trial may fail to produce results satisfactory to the FDA or foreign regulatory authorities. In addition, pre-clinical and clinical data can be interpreted

in different ways, which could delay, limit or prevent regulatory approval. Negative or inconclusive results from a pre-clinical study or clinical trial or adverse medical events during a clinical trial could cause a pre-clinical study or clinical trial to be repeated, require other studies to be performed or cause a program to be terminated, even if other studies or trials relating to a program are successful.

Our INTERCEPT products may not achieve broad market acceptance.

In Europe, the Baxter sales and marketing organization has made only modest progress in commercializing the INTERCEPT Blood System for platelets in countries where it has been fully approved for sale. Despite CE Mark approval, Baxter has encountered governmental and blood banking community resistance to commercial adoption, including concerns from some national transfusion services, governmental agencies and healthcare policy groups regarding efficacy, cost and risk-benefit profile. Some potential customers have indicated that further safety information or additional studies would be required before adopting our products. There is some volume loss in the yield of blood products as a result of our pathogen inactivation process. In addition, our platelet system process today is not fully compatible with the common practice of collecting two units of platelets from a single apheresis donor. If the volumetric reduction of blood product leads to increased costs, or our process requires changes in blood center or clinical regimens, customers may not adopt our platelet system product. Our products do not inactivate all known pathogens, and the inability of our systems to inactivate certain pathogens may inhibit their acceptance.

For logistical and financial reasons, the transfusion industry has not always integrated new technologies into their processes, even those with the potential to improve the safety of the blood supply. Our products may require significant changes to our potential customers’ space and staffing requirements and require significant capital investment. Even if our product candidates receive regulatory approval for commercial sale, physicians, patients and healthcare payors may not believe that the benefits of using our systems justify their additional cost. If customers experience operational or technical problems with the use of INTERCEPT Blood System products, market acceptance may be reduced. For example, if adverse events arise from incomplete inactivation of pathogens, improper processing or user error, or if testing of INTERCEPT-treated blood samples fails to reliably confirm pathogen inactivation, whether or not directly attributable to a shortcoming of the INTERCEPT Blood System, customers may refrain from purchasing the products.

Market acceptance our products may also be affected by the availability of reimbursement from governments or other third parties, such as insurance companies. It is difficult to predict the reimbursement status of newly approved, novel medical device or biopharmaceutical products. In certain foreign markets, governments have issued regulations relating to the pricing and profitability of medical products and medical products companies. There also have been proposals in the United States, at both the federal and state government level, to implement such controls. The growth of managed care in the United States has also placed pressure on the

pricing of medical products. These pressures can be expected to continue and may limit the prices we can obtain for our products.

Baxter or we may be required to reduce the sales price for our products. This may reduce our revenue share from Baxter and, for regions in which we are solely responsible for marketing our products, may reduce or eliminate our gross profit on sales. We believe that future product sales in Europe and other regions may be negatively affected because we do not have FDA approval for any of our products. If our INTERCEPT products fail to achieve market acceptance, we may never become profitable.

The market for our INTERCEPT Blood System is highly concentrated with few customers, including often dominant regional or national blood collection entities. Even if our products receive regulatory approval and reimbursement is available, failure to properly market, price or sell our products to any of these large customers could significantly diminish potential product revenue in those geographies. The market for our pathogen inactivation systems in the United States is dominated by a small number of blood collection organizations. In many countries in Western Europe and in Japan, various national blood transfusion services or Red Cross organizations collect, store and distribute virtually all of their respective nations’ blood and blood components supply. In Europe, the largest markets for our products are in Germany, the United Kingdom and France. Decisions on product adoption are centralized in the United Kingdom. In Germany, decisions on product adoption are expected to be on a blood center-by-blood center basis. We have not received in-country approvals to market our platelet system in Germany or the United Kingdom, nor has reimbursement been established in France. The National Blood Service has not yet indicated an interest in implementing our platelet system in England. The Japanese Red Cross controls a significant majority of blood transfusions in Japan. If we do not receive approvals to market our products in these countries, or if the products are not adopted in these countries, our potential product revenue will be significantly decreased.

We will need to develop and test additional configurations of our blood safety products to address the entire market.

Our efforts to develop our platelet system for use in the United States have focused almost entirely on apheresis platelets collected on Baxter’s automated collection platform. Apheresis platelets are platelets that are collected from a single donor using an automated collection machine. Currently, we estimate that the majority of platelets used in the United States are collected by apheresis, though a significant minority is prepared from pooled random donor platelets. Blood centers in the United States preparing random donor platelets may be reluctant to switch to apheresis collection, and the FDA may require us to make our systems compatible with random donor platelets. In order to develop a platelet pathogen inactivation system compatible with random donor platelets, we will need to perform additional product development and testing, including clinical trials. These development activities would increase our costs significantly, and may not be successful. In addition, FDA regulations limit to four hours the time from pooling to transfusion to minimize the proliferation of bacterial contamination in the pooled product. As a result, most pooling occurs in hospitals. Our platelet system is designed for use in blood centers, not hospitals, and is intended to permit storage and transfusion of treated platelets for up to five days after pooling. The FDA’s time limit between pooling and transfusion currently precludes the use of our system with pooled random donor platelets. Although our system is designed to reduce the risk of bacterial contamination, we cannot predict whether the FDA would remove this process time constraint to allow our system to be used with pooled random donor platelets, and we have not yet made a formal request for the FDA to do so.

Our products and we are subject to extensive regulation by domestic and foreign authorities.

Our products under development, and anticipated future products, are subject to extensive and rigorous regulation by United States local, state and federal regulatory authorities and by foreign regulatory bodies. These regulations are wide-ranging and govern, among other things:

• development;

• testing;

• manufacturing;

• labeling;

• storage;

• pre-market clearance or approval;

• sales and distribution;

• use standards and documentation;

• advertising and promotion; and

• reimbursement.

The FDA and other agencies in the United States and in foreign countries impose substantial requirements upon the manufacturing and marketing of products such as those we are developing. The process of obtaining FDA and other required regulatory approvals is long, expensive and uncertain, and typically takes a number of years, depending on the type, complexity and novelty of the product. We may encounter significant delays or excessive costs in our efforts to secure necessary approvals or licenses, or we may not be successful at all.

Before the FDA determines whether to approve our INTERCEPT products, we expect our approval applications to be reviewed by the Blood Products Advisory Committee, or BPAC, an advisory committee convened by and reporting to the FDA. BPAC will make a recommendation to the FDA for, or against, approval. If BPAC were to recommend approval of one or more of our products, the FDA would not necessarily be required to approve those products. If BPAC were to recommend against approval of one or more of our products, it is likely that the FDA would not approve those products. Product candidates in our immunotherapy programs may be subject to review by the Recombinant DNA Advisory Committee of the National Institutes of Health, which could delay initiation of clinical trials.

Even if our product candidates receive approval for commercial sale, their marketing and manufacturing will be subject to continuing FDA and other regulatory requirements, such as requirements to comply with Good Manufacturing Practice. The failure to comply with these requirements could result in delaying or precluding commercialization efforts in certain geographies, including the United States, and could result in enforcement action, which could harm our business. Regulatory authorities may also require post-marketing testing, which can involve significant expense. Because of the limited duration and number of patients receiving blood components treated with our INTERCEPT products in clinical trials, it is possible that harmful effects of our products not observed in clinical and pre-clinical testing could be discovered in later stage clinical trials or after a marketing approval has been received. Later discovery of problems with a product, manufacturer or facility may result in additional restrictions on the product or manufacturer, including withdrawal of the product from the market. Governments or regulatory authorities may impose new regulations or other changes that could further delay or preclude regulatory approval of our potential products. We cannot predict the impact of adverse governmental regulation that might arise from future legislative or administrative action.

Distribution of our products outside the United States also is subject to extensive government regulation. These regulations vary by country, including the requirements for approvals or clearance to market, the time required for regulatory review and the sanctions imposed for violations. In addition to European Union-level approval, we will need to obtain regulatory and reimbursement approvals in some individual European countries, including France, Germany and the United Kingdom, to market our products. The level of additional product testing varies by country, but could take a long time to complete. Failure to obtain necessary regulatory approvals or any other failure to comply with regulatory requirements could result in reduced revenue and earnings.

To support our requests for regulatory approval to market our product candidates, we have conducted and intend to conduct various types of studies including:

• toxicology studies to evaluate product safety;

• laboratory and animal studies to evaluate product effectiveness;

• human clinical trials to evaluate the safety, tolerability and effectiveness of treated blood components or immunotherapies; and

• manufacturing and stability studies.

We have conducted many toxicology studies to demonstrate our INTERCEPT product candidates’ safety, and we plan to conduct toxicology studies for our vaccine candidates and red blood cell system throughout the product development process. At any time, the FDA and other regulatory authorities may require further toxicology or other studies to further demonstrate our products’ safety, which could delay commercialization. We believe the FDA and other regulatory authorities are likely to weigh the potential risks of using our pathogen inactivation products against the incremental benefits, which may be less compelling in light of improved safety in the blood supply. In addition, our clinical development plan assumes that we will not be required to perform human clinical studies to

demonstrate our INTERCEPT product candidates’ ability to inactivate pathogens. Although we have discussed this plan with the FDA and other regulatory authorities, they may find it unacceptable at any time and may require human clinical trials to demonstrate efficacy in inactivating pathogens. Trials of this type may be too large and expensive to be practical.

Preclinical testing and clinical trials involving our immunotherapy product candidates are long, expensive and uncertain processes. Neither our Listeria nor our KBMA platform technologies have been tested in man. Consequently, preclinical results in animals and in vitro testing may not translate to demonstration of safety and efficacy in human clinical trials. A number of companies in the pharmaceutical industry, including biotechnology companies, have suffered significant setbacks in advancing stages of clinical trials, even after promising results in earlier preclinical and clinical trials. In addition, regulators and investigators may impose more stringent, time consuming and expensive clinical trial requirements than we might otherwise choose to pursue as a precondition to proceeding with clinical testing. It may take us or our collaborators several years to complete this testing, and failure can occur at any stage of the process.

We do not know whether we or our collaborators will begin planned clinical trials on time, if at all. Significant delays in clinical testing could materially impact our clinical trials. We also do not know whether planned clinical trials will need to be revamped or will be completed on schedule, if at all. Criteria for regulatory approval in cancer and infectious disease indications are evolving with competitive advances in the standard of care against which new product candidates are judged, as well as with changing market needs and reimbursement levels. Clinical trial design, including enrollment criteria, endpoints, and anticipated label claims are thus subject to change, even if original objectives are being met. In addition to the reasons stated above, clinical trials can be delayed for a variety of reasons, including delays in obtaining regulatory approval to commence a study, delays in reaching agreement on acceptable

clinical study agreement terms with prospective clinical sites, delays in obtaining institutional review board approval to conduct a study at a prospective clinical site and delays in recruiting subjects to participate in a study. We do not know whether any clinical trials will result in marketable products. Typically, there is a high rate of failure for product candidates in preclinical and clinical trials. We do not anticipate that any of our product candidates will reach the market for several years.

Delays can also materially impact our product development costs. If we experience delays in testing or approvals, our product development costs will increase. For example, we may need to repeat clinical trials to address regulatory or clinical questions. We may also need to make additional payments to third-party investigators and organizations to retain their services or we may need to pay recruitment incentives. If the delays are significant, our financial results and the commercial prospects for our product candidates will be harmed, and our ability to become profitable will be delayed.

Regulatory agencies may limit the uses, or indications, for which any of our products are approved. For example, we believe that our INTERCEPT products will be able to claim the inactivation of particular pathogens only to the extent we have laboratory or animal data to support such claims. After regulatory approval for the initial indications, further clinical trials may be necessary to gain approval for the use of the product for additional indications.

In addition to the regulatory requirements applicable to us and to our products, there are regulatory requirements applicable to our prospective customers of INTERCEPT products, the blood centers that process and distribute blood and blood products. Blood centers and others will likely be required to obtain approved license supplements from the FDA or European regulatory authorities before using products processed with our pathogen inactivation systems. This requirement or regulators’ delays in approving these supplements may deter some blood centers from using our products. Blood centers that do submit supplements may face disapproval or delays in approval that could provide further delay or deter them from using our products. The regulatory impact on potential customers could slow or limit the potential sales of our products.

We rely on Baxter for regulatory support, manufacturing, marketing and sales of our INTERCEPT products.

The success of our INTERCEPT Blood Systems currently depends on Baxter’s performance under our agreements.

• We rely on Baxter for regulatory support for certain products and regions. Under our February 2005 agreements, Baxter has responsibility for regulatory activities regarding the INTERCEPT products and regions for which it retains commercialization rights. If Baxter fails to perform satisfactorily in this function, our CE Mark filing for our plasma system and our efforts to seek FDA approval of our platelet system will be significantly delayed. We have or will have the sole responsibility to support regulatory activities for the INTERCEPT products and regions for which we have gained or will gain commercialization rights. We may not currently have the appropriate resources to support these products. To the extent that we are required to support regulatory activities of additional INTERCEPT products, we will need to increase our regulatory resources or contract with independent regulatory consultants, which may result in increased costs and may potentially delay regulatory filings. Delays or inabilities to complete regulatory filings and obtain approvals will also delay or prevent us from earning milestone payments from BioOne, and from being able to recognize sales of our products and attaining profitability. Under our agreements with Baxter, commercialization rights for the platelet system in the United States and Canada will transfer to us if Baxter does not commit to additional development and marketing obligations by December 31, 2005. Baxter may not decide to make such commitments. In such event, we would become fully responsible for regulatory activities for the platelet system in the United States, and our efforts to seek regulatory approval of the platelet system may be further delayed and will demand greater resources from us.

• We currently rely on Baxter for manufacturing and supplying components of our systems. Under the terms of our agreements, Baxter is currently responsible for manufacturing and supplying certain components and devices for development and commercial use for a limited period of time. If Baxter fails to design or deliver an adequate supply of components or devices, or if we gain additional commercialization rights, we will be required to identify other third-party component manufacturers. We cannot assure you that we would be able to identify such manufacturers on a timely basis or enter into contracts with such manufacturers on reasonable terms, if at all. Any delay in the availability of devices or components from Baxter could delay further regulatory approvals, market introduction and subsequent sales of the systems. Moreover, the inclusion of components manufactured by others could require us to seek new approvals from regulatory authorities, which could result in delays in product delivery. We may not receive any such required regulatory approvals. Baxter manufactures our platelet and plasma systems and components for our red blood cell system in facilities that are not FDA-approved. Our agreements do not require Baxter to validate these manufacturing facilities with the FDA. In order to be sold in the United States, our systems would be required to be manufactured in an FDA-approved facility. FDA validation of a manufacturing facility, whether owned by Baxter or by another third-party, will be costly and time-consuming. Because of low sales volumes and other reasons, Baxter’s costs to manufacture commercial components for the INTERCEPT Blood System for platelets are greater than we previously anticipated and may continue to rise. This will reduce our potential revenue from European platelet system sales.

The equipment and materials used to collect platelets vary from manufacturer to manufacturer. Our system for platelets collected by apheresis is designed to work with platelets collected using proprietary additive solutions and thus far is fully compatible only with Baxter’s apheresis platelets collection system. We have conducted our pre-clinical and clinical studies for the platelet system using only Baxter’s equipment and materials. Baxter may not make its apheresis collection system available for sale in certain countries and has elected to discontinue sales efforts for its apheresis collection system in Japan. Under an agreement with Haemonetics Corporation, or Haemonetics, Baxter has agreed to provide Haemonetics with a platelet storage solution proprietary to Cerus and Baxter, with the objective that platelets collected on certain future Haemonetics apheresis collection equipment may be directly treated using our platelet system. Making the Haemonetics apheresis collection system readily compatible with our platelet system will require certain changes in the Haemonetics device, and there can be no assurance that Haemonetics will undertake this effort on a timely basis or be commercially successful. Attaining compatibility with collection platforms manufactured by others would require adaptations to either our platelet system or to the collection platforms, which may be difficult to engineer, expensive to implement and test, require additional clinical trials, cause delays in regulatory approval and/or be commercially unattractive to pursue. These development activities will increase our costs significantly, and may not be successful. Market acceptance of the platelet system in the United States and other countries may be delayed until the system receives regulatory approval for use on such other equipment.

• We rely on Baxter for marketing, sales and distribution for certain products and regions. We currently have a small scientific affairs group that helps support Baxter’s marketing organization; however, we do not have our own independent marketing and sales organization and expect to continue to rely on Baxter to market and sell the INTERCEPT Blood System for platelets and plasma in certain countries. If Baxter fails to perform in regions where it maintains commercialization rights, or if we gain additional commercialization rights, we will be required to find another marketing, sales and distribution partner or develop these capabilities ourselves. We may not be able to find a suitable partner on favorable terms or on a timely basis, if at all. Developing marketing, sales and distribution capabilities ourselves would increase our costs and would delay commercialization of our pathogen inactivation systems. Under our agreements with Baxter, commercialization rights for the platelet system in the United States and Canada will transfer to us if Baxter does not commit by December 31, 2005, to additional development and marketing obligations. Baxter may decide not to make such additional commitments. In such event, we would become fully responsible for marketing, sales and distribution of the platelet system in the United States and Canada, and our efforts to commercialize our platelet system may be further delayed.

We will be required to identify and enter into agreements with third parties to manufacture, market and sell our INTERCEPT Blood System products.

Baxter’s current marketing and sales responsibilities for our platelet and plasma systems in Europe ends on December 31, 2006, unless extended, and may be terminated earlier by mutual consent, after which we will assume commercialization responsibilities. Baxter is no longer obligated to provide marketing and sales for our plasma system in the United States and Canada or manufacturing, marketing and sales for our red blood cell system at all. Baxter must give us notice by December 31, 2005, if Baxter intends to extend its commercialization rights for the platelet system in the United States and Canada. For the products and regions for which we have gained or will gain development and commercialization rights, we will need to identify third parties to provide those services for capabilities that we do not have or can reasonably develop ourselves, which may include manufacturing, regulatory support, regional distribution, sales and marketing capabilities. It may be difficult to enter into these types of agreements with third parties on reasonable terms. In particular, it will be time-consuming for other manufacturers to develop the capability to manufacture our INTERCEPT products economically and to gain regulatory approval to do so for commercial use. We may be unable to identify and contract with manufacturers that can make our products cost-effectively. We expect that our need for manufacturers other than Baxter for certain products and regions will delay our efforts to commercialize our products in those regions.

Because our INTERCEPT product candidates have not been manufactured on more than a limited commercial scale, we face manufacturing uncertainties that could limit their commercialization. If our third-party manufacturers fail to produce our compounds satisfactorily and in sufficient quantities, we may incur delays, shortfalls and additional expenses.

Our INTERCEPT product candidates, including many of the components, have never been manufactured on a commercial scale. We intend to use third-party manufacturers to produce commercial quantities of the chemical compounds to be used in our products. These compounds have not yet been produced in quantities sufficient to support commercialization for all regions in which we may market our products. We have an agreement with a manufacturer to produce commercial quantities of amotosalen, which is the compound used in our platelet and plasma systems. We currently do not have any other third-party manufacturing agreements in place for

commercial production of other compounds used in our red blood cell system. Any additional commercial manufacturer will need to develop new methods and processes to manufacture these compounds on a commercial scale and demonstrate to us, the FDA and foreign regulatory authorities that its commercial scale manufacturing processes comply with government regulations. It may be difficult or impossible to economically manufacture our products on a commercial scale.

Baxter is responsible for manufacturing and assembling our platelet systems and plasma systems in certain regions. Baxter intends to rely on third parties to manufacture and assemble some of the system components, many of which are customized and have not been manufactured on a commercial scale. Baxter has produced some pathogen inactivation systems in modest commercial quantities, but may not be able to manufacture and assemble other systems or in larger quantities, or do so economically. In the United States, studies related to the platelet system disposable and compound manufacturing need to be completed and included in FDA submissions before the FDA would consider the applications for approval.

Baxter has advised us that it intends to purchase certain key components of the pathogen inactivation systems from a limited number of suppliers. Contracts for the long-term supply of certain components have not yet been signed. While we believe there are alternative suppliers for these components, it would be expensive and time-consuming to establish additional or replacement suppliers for these components. If Baxter were unable to find adequate suppliers for these components, we may be required to redesign the systems, which could lead to additional testing and clinical trials. If we were required to redesign the products, our development costs would increase, and our programs could be delayed significantly.

We have used prototype components in our pre-clinical studies and clinical trials and have not completed the components’ commercial design.

If we fail to develop commercial versions of our INTERCEPT Blood System on schedule, our potential revenue would be delayed or diminished and our competitors may be able to bring products to market before we do. The system disposables and instruments we used in many of our pre-clinical studies and clinical trials were prototypes of those to be used in the final products. As a result, we plan to perform studies, both pre-clinical and clinical, to demonstrate the acceptability of the commercial configuration and the equivalence of the prototype and the commercial design. However, regulatory authorities may require us to perform additional studies, both pre-clinical and clinical, using the commercial versions of the systems, which may increase our expenses and delay the commercialization of our products.

In addition, the design and engineering effort required to complete the final commercial product is substantial and time-consuming. As with any complex development effort, we expect to encounter design, engineering and manufacturing issues. Such issues have previously arisen, sometimes unexpectedly, and solutions to these issues have not always been readily forthcoming. Additional unforeseen design, engineering and manufacturing issues may arise in the future, which could increase the development cost and delay commercialization of our products.

We rely on BioOne for commercialization of our platelet and plasma systems in many Asian countries.

Baxter and we have licensed rights to commercialization of the INTERCEPT Blood System for platelets and the INTERCEPT Blood System for plasma in Japan, China, Taiwan, South Korea, Vietnam, Thailand, and Singapore to BioOne. BioOne is solely responsible for obtaining regulatory approvals, marketing and selling the products in those countries. Because we have a minority investment interest in BioOne, we lack the ability to significantly influence BioOne, and are dependent on BioOne’s performance to realize revenue from our platelet and plasma systems in those countries. In Japan, regulatory authorities may require a product to be approved by the FDA before it is considered for approval in Japan, which would delay or prevent BioOne from achieving significant product sales. If BioOne is not successful, we will not receive revenue from platelet or plasma system sales in those countries and the value of our equity in BioOne will decline. Under our agreements, BioOne has the right to terminate its obligation to commercialize the plasma system if it is unable to raise sufficient additional capital by a specified date. BioOne will need to raise additional capital to be successful in commercializing our products.

Our vaccine programs are in an early stage of development.

Our vaccine programs are in an early stage of development and there is a high risk of failure. We will be required to perform extensive pre-clinical and clinical testing before any product candidate can be submitted for regulatory approval prior to commercialization. Clinical testing is very expensive, takes many years, and the outcome is uncertain. Failure to demonstrate the safety or efficacy of a product candidate in pre-clinical studies or clinical trials would delay or prevent regulatory approval of that product candidate. Our potential vaccine products must meet rigorous testing standards in order to advance to clinical testing. No product candidates employing either our Listeria or our KBMA platform technologies have been tested in humans, and preclinical data in animal studies and from in vitro experiments may not be predictive of clinical safety and efficacy once product candidates are tested in man.

Naturally-occurring Listeria is a bacterium that is a human pathogen that can cause serious illness. Our immunotherapy product candidates for cancer indications use proprietary, modified strains of Listeria that are designed to be substantially less able to cause illness in humans; however, before our vaccine candidates can be accepted for clinical testing, we must successfully complete a number of pre-clinical safety studies. We may not be able to identify a dose range in which our product candidates are therapeutically effective and maintain adequate safety margins. We have not yet formally requested, or obtained, concurrence from the FDA or foreign regulators regarding our pre-clinical development and clinical trial plans. Because our vaccine candidates use novel platforms, the FDA or foreign regulators may require studies that we have not anticipated. In addition, we intend to contract with third-party manufacturers to produce our vaccines for research, pre-clinical and clinical testing. We have manufactured only preliminary toxicology lots of our vaccines for pre-clinical studies, but have not manufactured sufficient quantities for clinical testing, and may not be successful in doing so. We rely on third parties to conduct aspects of pre-clinical development on our behalf, including contract manufacturing and research services. These third parties may encounter delays, over which we have significantly less control than research and development activities performed in-house, or experience unexpected results. We may experience numerous unforeseen events during, or as a result of, the pre-clinical research and development process that could delay or prevent clinical testing, regulatory approval and commercialization of our potential products.

Our ability to successfully develop cancer and infectious disease products is dependent in part on being able to attract and retain partners and collaborators, as well as governmental funding sources.

The development and commercialization of product candidates employing our Listeria and KBMA platform technologies will be expensive, lengthy and uncertain. To date, we have relied not only upon internal scientific, development and financial resources, but also upon third parties. We have licensed our Listeria platform to MedImmune for use in developing a product candidate for certain cancers. We are collaborating with investigators at The Johns Hopkins University on other cancer and infectious disease programs. We also rely on advice and insights from our scientific advisory board, a group of independent clinicians, professors and investigators, regarding our research and development activities. These relationships provide us with external perspectives and independent validation that may be critical to our future success. Loss of these relationships or failure to attract others may result in additional expense, delays in development and regulatory approval and failure to commercialize products. We have also received significant funding from U.S. government agencies for research and development in both cancer and infectious disease, as well as funding from MedImmune under our license agreement relating to development of a candidate strain. Funding from the Federal government, particularly funding from the Department of Defense and National Institutes of Health, is expected to be reduced from prior years and is subject to political and economic changes beyond our control. Federal funding in support of our programs to develop prophylactic vaccines for Anthrax and Tularemia is not expected to lead to substantial commercial opportunities beyond potential biodefense applications, and we cannot be certain that the research conducted into those two infectious diseases will readily translate into applications with greater commercial potential. Loss of funding from government sources and third parties would require us to reduce the scope of our research and development efforts, narrowing the number of programs to those we could support through internal resources.

If our competitors develop and market products that are more effective than our product candidates or fail in human clinical trials, our commercial opportunity will be reduced or eliminated.

We expect our products to encounter significant competition. Our INTERCEPT products may compete with other approaches to blood safety currently in use, as well as with future products developed by others. Our success will depend in part on our ability to respond quickly to medical and technological changes through the development and introduction of new products. Product development is risky and uncertain, and we cannot assure you that we will develop our products successfully. Competitors’ products or technologies may make our products obsolete or non-competitive before we are able to generate any significant revenue. Competitors or potential competitors may have substantially greater financial and other resources than we have. They may also have greater experience in pre-clinical testing, human clinical trials and other regulatory approval procedures.

Several companies are developing technologies that are, or in the future may be, the basis for products that will directly compete with or reduce the market for our pathogen inactivation systems. A number of companies are specifically focusing on alternative strategies for pathogen inactivation in platelets and plasma. In Europe, several companies, including Grifols, Octapharma AG and Maco Pharma International GmbH, are developing or have developed commercial systems to treat fresh frozen plasma. Navigant, a wholly owned subsidiary of Gambro, Inc., is developing a pathogen inactivation system for platelets.

New methods of testing blood for specific pathogens have been approved by the FDA and in Europe, as have tests for bacteria in platelets. Continued delays in commercialization of the INTERCEPT Blood System for platelets in France and Germany may impact our ability to compete with bacterial testing for platelets. Tests have now been approved to detect West Nile Virus in blood products. Other groups are developing synthetic blood product substitutes and products to stimulate the growth of platelets. Development of any of these technologies could impair the potential market for our products.

There are many companies pursuing programs for the treatment of cancer and treatment and prevention of infectious disease. Some are large pharmaceutical companies, such as Sanofi-Aventis, Bristol-Myers Squibb, Genentech and Gilead, which have greater experience and resources in product development, pre-clinical testing, human clinical trials, obtaining FDA and other regulatory approvals and in manufacturing and marketing new therapies. We are also competing with other biotechnology companies, such as Dendreon Corporation, Antigenics, Inc., Cell Genesys, Inc. and CancerVax, Inc., that have cancer vaccine programs that are in more advanced stages of development than ours. In addition, some companies are pursuing early-stage research and development of Listeria-based immunotherapies. If these companies’ products are shown to be more efficacious than ours, our Listeria-based products may fail to gain regulatory approval or commercial acceptance. If these companies’ products fail in human clinical trials, we may be required to overcome more significant regulatory barriers prior to gaining approval, face more challenging impediments to market acceptance and may be unable to raise capital to fund development of our Listeria programs.

We may be liable if our products harm people.

We are exposed to potential liability risks inherent in the testing and marketing of medical devices and products. We may be liable if any of our products cause injury, illness or death. Although we will have completed rigorous pre-clinical and clinical safety testing prior to marketing our products, there may be harmful effects caused by our products that we are unable to identify in pre-clinical or clinical testing. We maintain product liability insurance, but do not know whether the insurance will provide adequate coverage against potential liabilities. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our products.

We operate from a single site that is subject to lengthy business interruption in the event of a severe earthquake.

Our facilities are all based in Concord, California and are within an active earthquake fault zone. Should a severe earthquake occur, we might be unable to occupy our facilities or conduct research and development activities in support of our products until such time as our facilities could be repaired and made operational. Our property and casualty and business interruption insurance in general does not cover losses caused by earthquakes. While we have taken certain measures to protect our scientific, technological and commercial assets, a lengthy or costly disruption due to earthquake would have a material adverse effect on us.

We have only a limited operating history, and we expect to continue to generate losses.

We may never achieve a profitable level of operations. To date, we have engaged primarily in research and development. Our development and general and administrative expenses have resulted in substantial losses each year since our inception, including net losses of $57.2 million in 2002, $58.3 million in 2003 and $31.2 million in 2004. As of September 30, 2005, we had an accumulated deficit of approximately $302.7 million. Except for the INTERCEPT Blood System for platelets, which has received European CE Mark approval, all of our products are in the research and development stage, and we have not received significant revenue from product sales. We have received substantially all of our revenue from our agreements with our development partners and from federal research grants and cooperative agreements. We will be required to conduct significant research, development, clinical testing and regulatory compliance activities for each of these products. We expect our losses to continue at least until our product candidates are commercialized and achieve significant market acceptance.

If we fail to obtain the capital necessary to fund our future operations, we will not be able to develop product candidates in our pipeline.

Our product development programs are capital-intensive. Additionally, we may need to reduce or stop further investment in specific research and development activities if we are unable to obtain additional capital or if any of our development programs are determined by us to be uneconomical. A product or program may be determined to be uneconomical if the commercial opportunity is insufficient to justify the investment required to develop and market the products or for other reasons. It is our objective that our spending in support of research, development and commercialization of the INTERCEPT platelet and plasma programs be balanced over the next year with development funding for such programs from third parties. We have recently elected to re-enter clinical trials for the red blood cell system with only partial funding from governmental sources. Baxter may elect to discontinue support of the platelet system in the United States and Canada prior to December 31, 2005, and support of the platelet and plasma systems in Europe by December 31, 2006. As a result of these factors, further product development and commercialization of the INTERCEPT Blood System will take longer than we previously anticipated and our objective of balancing spending with outside funding on the platelet and plasma systems will reduce our ability to accelerate development in the future. We expect to continue to spend substantial funds for our operations for the foreseeable future. Our cash, liquidity and capital requirements will depend on many factors, including the development progress and costs of our programs, payments by MedImmune, BioOne and others, funding from agencies of the United States government, costs related to creating, maintaining and defending our intellectual property position, regulatory approval and successful commercialization of our product candidates, competitive developments and regulatory factors.

To date, we have been awarded $33.6 million in funding under cooperative agreements with the Department of Defense, and also have received funding under grants from the National Institutes of Health. Further funding awarded under federal grants and cooperative agreements is subject to the authorization of funds and approval of our research plans by various organizations within the federal government, including the U.S. Congress. If we are unable to obtain federal grant and cooperative agreement funding for future activities at similar or greater levels, we may need to further reduce our operating expenses, which would delay progress in some of our development programs.

We may not be able to protect our intellectual property or operate our business without infringing intellectual property rights of others.

Our commercial success will depend, in part, on obtaining and maintaining patent protection on our products and successfully defending our products against third-party challenges. Our technology will be protected from unauthorized use only to the extent that it is covered by valid and enforceable patents or effectively maintained as trade secrets. As a result, our success depends in part on our ability to:

• obtain patents;

• protect trade secrets;

• operate without infringing upon the proprietary rights of others; and

• prevent others from infringing on our proprietary rights.

We cannot be certain that our patents or patents that we license from others will be enforceable and afford protection against competitors. Our patents or patent applications, if issued, may be challenged, invalidated or circumvented. Our patent rights may not provide us with proprietary protection or competitive advantages against competitors with similar technologies. Others may independently develop technologies similar to ours or independently duplicate our technologies. For example, a United States patent issued to a third-party covers methods to remove psoralen compounds from blood products. We have reviewed the patent and believe our work predates the invention disclosed in that patent. We are continuing to review that patent and will make a determination as to whether any action is necessary. In addition, others hold patents, and have pending patent applications, concerning Listeria-based immunotherapies. Those patents and new patents that may be issued upon the pending applications, if valid, would restrict us from bringing to market particular descriptions of Listeria-based immunotherapy products. While we believe that such restrictions do not preclude us from developing and commercializing our Listeria-based immunotherapy products, they may preclude us from pursuing certain product approaches that might otherwise be promising. Our patents expire at various dates between 2009 and 2022. Recent patent applications, principally related to our immunotherapy programs, will, if granted, result in patents with later expiration dates. Due to the extensive time required for development, testing and regulatory review of our potential products, our patents may expire or remain in existence for only a short period following commercialization. This would reduce or eliminate any advantage of the patents.

We cannot be certain that we were the first to make the inventions covered by each of our issued patents or pending patent applications or that we were the first to file patent applications for such inventions. We may need to license the right to use third-party patents and intellectual property to continue development and commercialization of our products. We may not be able to acquire such required licenses on acceptable terms, if at all. If we do not obtain such licenses, we may need to design around other parties’ patents, or we may not be able to proceed with the development, manufacture or sale of our products.

We may face litigation to defend against claims of infringement, assert claims of infringement, enforce our patents, protect our trade secrets or know-how or determine the scope and validity of others’ proprietary rights. Patent litigation is costly. In addition, we may require interference proceedings before the United States Patent and Trademark Office to determine the priority of inventions relating to our patent applications. Litigation or interference proceedings could be expensive and time consuming, and we could be unsuccessful in our efforts to enforce our intellectual property rights.

We may rely, in certain circumstances, on trade secrets to protect our technology. However, trade secrets are difficult to protect. We protect our proprietary technology and processes, in part, by confidentiality agreements with employees and certain contractors. These agreements may be breached and we may not have adequate remedies for any breach or our trade secrets may otherwise become known or be independently discovered by competitors. To the extent that our employees, consultants or contractors use intellectual property owned by others, disputes also may arise as to the rights in related or resulting know-how and inventions.

We may be liable if hazardous materials used in the development of our products harm the environment, our employees or other people.

Our research and development activities involve the controlled use of hazardous materials, including certain hazardous chemicals, radioactive materials and infectious pathogens, such as HIV and hepatitis viruses. Although we believe that our safety procedures for handling and disposing of hazardous materials comply with regulatory requirements, we cannot eliminate the risk of accidental contamination or injury. If an accident occurs, we could be held liable for any damages that result.

The market price of our stock may be highly volatile.

The market prices for our securities and those of other emerging medical device and biotechnology companies have been, and may continue to be, volatile. For example, during the period from January 1, 2003 to September 30, 2005, the closing sale price of our common stock as quoted on the Nasdaq National Market fluctuated from a low of $1.85 to a high of $21.72. Announcements may have a significant impact on the market price of our common stock. Such announcements may include:

• biological or medical discoveries;

• technological innovations or new commercial services by us or our competitors;

• developments concerning proprietary rights, including patents and litigation matters;

• regulatory developments in both the United States and foreign countries;

• status of development partnerships;

• public concern as to the safety of new technologies;

• general market conditions;

• comments made by analysts, including changes in analysts’ estimates of our financial performance; and

• quarterly fluctuations in our revenue and financial results.

The stock market has from time to time experienced extreme price and volume fluctuations, which have particularly affected the market prices for emerging biotechnology and medical device companies, and which have often been unrelated to the operating performance of such companies. These broad market fluctuations may adversely affect the market price of our common stock.

If there is an adverse outcome in the securities class action litigation that has been filed against us, our business may be harmed.

We, and certain of our current and former officers and directors, are named as defendants in a purported securities class action lawsuit filed in the United States District Court for the Northern District of California. The lawsuit is brought on behalf of a purported class of purchasers of our securities, and seeks unspecified damages. In addition, our directors and certain of our current and former officers have been named as defendants in a derivative lawsuit in the Superior Court for the County of Contra Costa, California, which names Cerus as a nominal defendant. The plaintiff in this action is a Cerus stockholder who seeks to bring derivative claims on behalf of Cerus against the defendants. The lawsuit alleges breaches of fiduciary duty and related claims.

As with any litigation proceeding, we cannot predict with certainty the eventual outcome of pending litigation. Furthermore, we may have to incur substantial expenses in connection with these lawsuits. In the event of an adverse outcome, our business could be harmed.

We may fail to comply fully with elements of the Sarbanes-Oxley Act of 2002. Our failure to maintain effective internal controls in accordance with Section 404 of this Act could have a material adverse effect on our stock price.

Section 404 of the Sarbanes-Oxley Act of 2002 requires annual management assessments of the effectiveness of our internal control over financial reporting and a report by our independent registered public accountants attesting to and reporting on these assessments. If we fail to maintain the adequacy of our internal control over financial reporting, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude in future periods that we have effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002. If we cannot favorably assess, or our independent registered public accountants are unable to provide an unqualified attestation report on our assessment of, the effectiveness of our internal control over financial reporting, investor confidence in the reliability of our financial reports may be adversely affected, which could have a material adverse effect on our stock price.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information called for by this item is provided under the caption “Financial Instruments” under Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures. Our chief executive officer and chief financial officer are responsible for establishing and maintaining “disclosure controls and procedures” (as defined in the rules promulgated under the Securities Exchange Act of 1934, as amended), for our company. Based on their evaluation of disclosure controls and procedures as of September 30, 2005, our chief executive officer and our chief financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2005.

Changes in Internal Control Over Financial Reporting. There were no changes in our internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and the chief executive officer and the chief financial officer have concluded that these controls and procedures are effective at the “reasonable assurance” level.

PART II:	OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS

plaintiffs filed an amended consolidated complaint substantially similar to the previous consolidated complaint with additional allegations attributable to a confidential witness. On July 20, 2004, the defendants moved to dismiss the amended consolidated complaint. On January 20, 2005, the Court dismissed the complaint with leave to amend within 60 days. On March 21, 2005, the plaintiffs filed a second amended consolidated complaint, and on May 24, 2005, the plaintiffs filed a third amended consolidated complaint. The allegations of both the second and third amended consolidated complaints were similar to those contained in the previous amended consolidated complaint. On July 8, 2005, the defendants moved to dismiss this third amended consolidated complaint. We believe that this matter will not have a material effect on our results of operations or financial position; however, we cannot predict the outcome of this litigation.

In addition, certain of our present and former directors and officers were named as defendants in two virtually identical derivative lawsuits in the Superior Court for the County of Contra Costa, California, which named us as a nominal defendant. The plaintiffs in these actions are certain of our stockholders who seek to bring derivative claims on behalf of Cerus against the defendants. The complaints alleged breach of fiduciary duty and related claims. Plaintiffs filed a consolidated complaint on June 1, 2004. The consolidated complaint repeats the allegations made in the original complaints, asserts the same claims as those complaints and seeks an unspecified amount of damages. On August 5, 2004, the Court approved a stipulation and proposed order staying the action for so long as the discovery stay in the securities action remains in place. The order further provides that plaintiffs may file an amended consolidated complaint within thirty days following the resolution of the pleadings in the securities action. We believe that this matter will not have a material effect on our results of operations or financial position; however, we cannot predict the outcome of this litigation.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

(a)	Exhibits

	31.1	Certification of the Chief Executive Officer of Cerus pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	31.2	Certification of the Chief Financial Officer of Cerus pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	32.1*	Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* This Certification attached as Exhibit 32.1 accompanies the Quarterly Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed “filed” by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

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.

		CERUS CORPORATION


Date:	November 3, 2005		/s/ William J. Dawson
			William J. Dawson
			Chief Financial Officer
			(Principal Financial and Accounting Officer)

Exhibit Index

31.1		Certification of the Chief Executive Officer of Cerus pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of the Chief Financial Officer of Cerus pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. freshman Avg

Cerus (CERS) 10-Q2005 Q3 Quarterly report

Content analysis

Commission File Number 0-21937

PART I

FINANCIAL INFORMATION

Condensed Balance Sheets - September 30, 2005, and December 31, 2004

Condensed Statements of Operations - Three and nine months ended September 30, 2005, and 2004

Condensed Statements of Cash Flows - Nine months ended September 30, 2005, and 2004

Notes to Condensed Financial Statements

PART II

OTHER INFORMATION

Overview

Exhibit Index