UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q/A

AMENDMENT NO. 1

CIPHERGEN BIOSYSTEMS, INC.

(Exact name of registrant as specified in its charter)

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 Rule 12b-2 of the Exchange Act.

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

Number of shares of common stock, $0.001 par value, outstanding as of November 30, 2005:  35,998,881

CIPHERGEN BIOSYSTEMS, INC.

INDEX FOR FORM 10-Q/A

FOR THE QUARTER ENDED JUNE 30, 2005

Ciphergen, ProteinChip and Biomarker Discovery Center are registered trademarks of Ciphergen Biosystems, Inc.

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INTRODUCTORY NOTE

The Audit Committee of our Board of Directors recently completed an investigation focused on our revenue recognition in connection with certain sales transactions. Upon completion of this investigation, we concluded that it was necessary to restate certain financial data for the three and six month periods ended June 30, 2005 in order to recognize revenue for these sales transactions on a basis consistent with our revenue recognition policies.

We are today filing an amended Form 10-Q to restate our financial results with respect to the quarterly period ended June 30, 2005. We are also filing our Quarterly Report on Form 10-Q for the quarter ended September 30, 2005, which was delayed during the investigation of the issues surrounding this financial restatement.

Generally, no attempt has been made in this Form 10-Q/A to modify or update other disclosures presented in the original report on Form 10-Q except as required to reflect the effects of the restatement. This Form 10-Q/A generally does not reflect events occurring after the filing of the original Form 10-Q or modify or update those disclosures affected by subsequent events. Information not affected by the restatement is unchanged and reflects the disclosures made at the time of the original filing of the Form 10-Q. Accordingly, this Form 10-Q/A should be read in conjunction with our filings made with the Securities and Exchange Commission subsequent to the filing of the original Form 10-Q, including any amendments to those filings. The following items have been amended as a result of the restatement:

•      Part I, Item 1, Financial Information, has been revised to reflect the restatement;

•      Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, has been revised to reflect the restatement; and

•      Part I, Item 4, Controls and Procedures.

Our Chief Executive Officer and Chief Financial Officer have also reissued their certifications required by Sections 302 and 906 of the Sarbanes-Oxley Act.

We are restating our financial results for the three and six month periods ended June 30, 2005 to conform to our revenue recognition policies.  As a result of the restatement, total revenues have decreased by $552,000 for the quarter ended June 30, 2005 and for the six months ended June 30, 2005; net loss has increased by $354,000 for the quarter ended June 30, 2005 and for the six months ended June 30, 2005; and basic and diluted net loss per share has increased $0.01 for the quarter ended June 30, 2005 and for the six months ended June 30, 2005.

None of the adjustments resulting from the restatement has any impact on cash balances for any period. However, our unaudited condensed consolidated statement of cash flows and balance sheet have been restated to reflect the restated net loss and revisions to certain balance sheet accounts. There were no other changes to the cash flows statement.

Additional detail regarding the restatement is discussed below in note 1 of our Unaudited Condensed Consolidated Financial Statements.  This amendment incorporates certain revisions to historical financial data and related commentary, but is not intended to update other information presented in this Quarterly Report as originally filed, except where specifically noted.

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ITEM 1.  FINANCIAL STATEMENTS

CIPHERGEN BIOSYSTEMS, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

See notes to unaudited condensed consolidated financial statements.

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CIPHERGEN BIOSYSTEMS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

See notes to unaudited condensed consolidated financial statements.

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CIPHERGEN BIOSYSTEMS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

See notes to unaudited condensed consolidated financial statements.

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CIPHERGEN BIOSYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2005

1.               ORGANIZATION AND BASIS OF PRESENTATION

The Company

Ciphergen Biosystems, Inc. (the “Company” or “Ciphergen”) develops, manufactures and sells ProteinChipâ Systems for life science researchers.  The core technology, which is patented, is Surface Enhanced Laser Desorption/Ionization (“SELDI”).  The systems consist of ProteinChip Readers, ProteinChip Software and related accessories, which are used in conjunction with consumable ProteinChip Arrays.  These products are sold primarily to biologists at pharmaceutical and biotechnology companies, and academic and government research laboratories.  The Company also provides research services primarily through its Biomarker Discovery Center® laboratories, and offers consulting services, customer support services and training classes to its customers and collaborators.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.  The unaudited interim financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement have been included.  Certain financial statement items have been reclassified to conform to the current year’s format.  The results of operations for the interim periods shown herein are not necessarily indicative of operating results for the entire year or any other future interim period.

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries.  All intercompany transactions have been eliminated in consolidation.  BioSepra S.A. was a wholly-owned subsidiary and was consolidated through November 30, 2004, at which time the Company sold BioSepra S.A., along with other assets related to its process chromatography business.  All comparative periods shown in the statements of operations have been restated to reflect the BioSepra business as a discontinued operation.

This unaudited financial data should be read in conjunction with the audited consolidated financial statements and footnotes contained in the Company’s 2004 Form 10-K.

Restatement

On November 7, 2005, the Company announced that the Audit Committee (the “Committee”) of the Board of Directors was, with the assistance of independent investigators, conducting an investigation primarily regarding the recognition of revenue in connection with certain sales transactions.  On November 16, 2005, the Company announced its intent to restate its financial results for the three and six month periods ended June 30, 2005, after determining that certain transactions during the second quarter of 2005 involved undisclosed provisions in violation of the Company's revenue recognition policies.  Specifically;

(a) Two transactions involving customer orders for ProteinChip Systems, one for $44,000 and another for $248,000, were contingent upon the occurrence of a future event outside the control of the Company.  For these two transactions, the earnings process was completed in the third and fourth quarters of 2005, respectively.

(b) One customer order for a ProteinChip System in the amount of $204,000 should not have been recorded as revenue due to collection not being reasonably assured.  Revenue on this transaction will not be recognized.  The Company has reached an agreement to take back the ProteinChip System from the customer.

(c) Two separate customer orders involved undisclosed credits for other goods and services totalling $15,000.  Recognition of the revenue attributable to these items will be deferred until the delivery of the goods and services to the customer.

(d) One sale involving $38,000 of ProteinChip Arrays included an undisclosed right of exchange.  Recognition of the revenue will be deferred until the right of exchange no longer exists.

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(e) Lastly, it was discovered that one accessory with a price of $3,150 was shipped to a customer separately from the rest of the order shortly after the end of the quarter and thus the portion of the revenue attributable to this accessory should have been recorded in the third quarter rather than the second quarter.  

Consequently, for the three and six month periods ended June 30, 2005, total revenue decreased $552,000, net loss increased by $354,000, and basic and diluted net loss per share increased $0.01, each as compared to the amounts previously reported by the Company on its Form 10-Q filed on August 9, 2005.  The principal effects of these adjustments on the accompanying condensed consolidated financial statements are as follows (in thousands except per share amounts):

Unaudited Condensed Consolidated Balance Sheet:

Unaudited Condensed Consolidated Statements of Operations:

The restatement had no effect on the Company’s net cash used in operating activities.

Liquidity

From its inception through June 30, 2005, the Company has financed its operations principally with $197.4 million (as restated) from the sales of products and services to customers and net proceeds from equity financings totaling approximately $145.8 million. Ciphergen received $28.1 million of net proceeds from the sale of 4.5% convertible senior notes on August 22, 2003. These notes are due September 1, 2008.  The Company also received $27.0 million from the sale of its BioSepra business in November 2004.  The Company has incurred significant net losses and negative cash flows from operations since inception. At June 30, 2005, the Company had an accumulated deficit of $179.1 million (as restated).

Management believes that currently available resources, including funds received in July 2005 from Quest Diagnostics (see note 12, Subsequent Events – Strategic Alliance Agreement), will provide sufficient funds to enable the Company to meet its obligations for at least the next 18 months.  Ciphergen currently expects to fund liquidity needs as well as expenditures for capital requirements from a combination of available cash, proceeds from the alliance with Quest Diagnostics including forgiveness of loan obligations to Quest Diagnostics, sales of equity and/or debt, and the receipt of approximately $1.0 million plus accrued interest from the sale of the BioSepra business to Pall Corporation which is being held in an interest-bearing escrow account. If anticipated operating results are not achieved, however, management believes that planned expenditures may need to be reduced in order to extend the time period over which the currently available resources will be adequate to fund the Company’s operations. At such time

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as the Company requires additional funding, the Company will seek to raise such additional funding from various possible sources, including the public equity market, private financings, sales of assets, collaborative arrangements and debt. If additional capital is raised through the issuance of equity or securities convertible into equity, stockholders may experience dilution, and such securities may have rights, preferences or privileges senior to those of the holders of its common stock or convertible senior notes. If the Company obtains additional funds through arrangements with collaborators or strategic partners, it may be required to relinquish its rights to certain technologies or products that it might otherwise seek to retain. There can be no assurance that the Company will be able to obtain such financing, or obtain it on acceptable terms.  If Ciphergen is unable to obtain financing on acceptable terms, it may be unable to execute its business plan and it could be required to delay or reduce the scope of its operations, and it may not be able to pay off the convertible senior notes if and when they come due.

2.                                      RECENT ACCOUNTING PRONOUNCEMENTS

In November 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 151, “Inventory Costs, an amendment of ARB 43, Chapter 4”. SFAS 151 requires certain inventory costs to be recognized as current period expenses. This standard also provides guidance for the allocation of fixed production overhead costs. This standard is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company will adopt this standard in fiscal 2006. The Company has not yet determined the impact, if any, this standard will have on its financial statements and related disclosures, but does not expect it to have a material impact.

In December 2004, the FASB issued SFAS No. 123 (Revised), “Share-Based Payment.” This standard revises SFAS 123, APB 25 and related accounting interpretations, and eliminates the use of the intrinsic value method. As noted previously, the Company currently uses the intrinsic value method of APB 25 to value stock options and, accordingly, no compensation expense has been recognized for stock options. This new standard requires the expensing of all stock-based compensation, including stock options, using the fair value method.  The FASB’s transition provisions require implementation of SFAS 123(R) for quarters beginning after June 15, 2005. However, in April 2005, the Securities and Exchange Commission announced a deferral of the required implementation date to fiscal years beginning after June 15, 2005 or, in Ciphergen’s case, its 2006 fiscal year. SFAS 123(R) will apply to all awards granted after the implementation date and to previously-granted awards unvested as of the implementation date. The impact of SFAS 123(R) on the Company’s financial statements and related disclosures is still being evaluated by management but is expected to be material. The Company’s actual share-based compensation expense in 2006 will be dependent on a number of factors, including the amount of awards granted and the fair value of those awards at the time of grant.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets—An Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions”. SFAS 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, “Accounting for Nonmonetary Transactions,” and replaces it with an exception for exchanges that do not have commercial substance. SFAS 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 is effective for fiscal periods beginning after June 15, 2005 and is required to be adopted by Ciphergen in the third quarter of 2005. The Company does not expect this standard to have a material impact on its financial statements and related disclosures.

In December 2004, the FASB issued FASB Staff Position No. 109-2 (“FSP 109-2”), “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004 (“AJCA”)”. FSP 109-2 allows the Company up until October 31, 2005 to evaluate the effect of the AJCA on its plans for reinvestment or repatriation of foreign earnings for purposes of applying SFAS 109 “Accounting for Income Taxes.” On May 10, 2005, the Treasury Department and the IRS issued Notice 2005-38, the second in a series of notices, which is intended to provide additional guidance for U.S. companies evaluating the effect of the AJCA on plans for reinvestment or repatriation of foreign earnings. Management currently believes all foreign earnings will be reinvested and is not considering repatriation of any significant amounts under this provision.

In March 2005, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 107, “Share-Based Payment”. SAB 107 provides guidance on the initial implementation of SFAS 123(R). In particular, the statement includes guidance related to share-based payment awards for non-employees, valuation methods and selecting underlying assumptions such as expected volatility and expected term. It also gives guidance on the classification of compensation expense associated with such awards and accounting for the income tax effects of those awards upon the adoption of SFAS 123(R). The Company is currently assessing the guidance provided in SAB 107 in connection with the implementation of SFAS 123(R).

In March 2005, the FASB issued Interpretation No. 47 (“FIN 47”) to clarify the guidance included in SFAS No. 143, “Accounting for Asset Retirement Obligations”. FIN 47 requires companies to recognize a liability for the fair value of a legal obligation to perform asset retirement activities that are conditional on a future event if the amount can be reasonably estimated. If

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amounts cannot be reasonably estimated, certain disclosures will be required about the unrecognized asset retirement obligations. The interpretation is required to be adopted in the first quarter of 2006. The Company has not yet determined the impact, if any, this standard will have on its financial statements and related disclosures, but does not expect it to have a material impact.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”. SFAS 154 is a replacement of Accounting Principles Board Opinion (“APB”) No. 20 and SFAS 3. SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application as the required method for reporting a change in accounting principle. SFAS 154 provides guidance for determining whether retrospective application of a change in accounting principle is impracticable and for reporting a change when retrospective application is impracticable. The reporting of a correction of an error by restating previously issued financial statements is also addressed by SFAS 154. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company will be adopting this pronouncement beginning in its fiscal year 2006.

3.               INVENTORIES

Inventories consisted of the following (in thousands):

4.               GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and other intangible assets consisted of the following (in thousands):

During the first six months of 2005, the acquired license related to the Company’s litigation settlement in 2003 increased $325,000 as a result of cash payments made by the Company for license fees.

Amortization expense for these intangible assets was (in thousands):

Annual amortization expense for these intangible assets is expected to be approximately $1,209,000 in both 2005 and 2006, $342,000 in 2007 and zero thereafter.

5.               WARRANTIES AND MAINTENANCE CONTRACTS

Ciphergen has a direct field service organization that provides service for its products.  The Company generally includes a

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standard 12 month warranty on its ProteinChip Systems, ProteinChip Tandem MS Interfaces and accessories in the form of a maintenance contract upon initial sale, after which maintenance and support may be provided under a separately priced contract or on an individual call basis.  Ciphergen makes no distinction between a standard warranty and a maintenance (extended warranty) contract.  The Company substitutes a maintenance contract in place of a standard 12-month warranty on its instruments and accessories upon initial sale.  Ciphergen also sells separately priced maintenance (extended warranty) contracts, which are generally for 12 or 24 months, upon expiration of the initial warranty.  Coverage under both the standard and extended warranty maintenance contracts is identical.  Because the Company does not offer traditional warranties but enhances them such that they are identical to its separately priced maintenance contracts, management believes it is appropriate to account for them in the same way.  Revenue for both the standard and extended warranty maintenance contracts is deferred and recognized on a straight line basis over the period of the applicable maintenance contract.  Related costs are recognized as incurred.

Changes in product warranty obligations, including separately priced maintenance obligations, were as follows (in thousands):

6.               FOREIGN CURRENCY TRANSACTIONS

During the three and six month periods ended June 30, 2005, there were no transactions related to forward contracts. Net realized foreign currency gains and losses related to foreign currency forward contracts and a related intercompany loan were not material for the three and six month periods ended June 30, 2004.

7.               STOCK-BASED COMPENSATION

The Company accounts for its stock-based employee compensation arrangements using the intrinsic value method of accounting.  Unearned compensation expense is based on the difference, if any, on the date of the grant between the fair value of the Company’s stock and the exercise price.  Unearned compensation is amortized and expensed using an accelerated method.  The Company accounts for stock issued to non-employees using the fair value method of accounting.

Had compensation expense for options granted to employees, officers and directors been determined based on fair value at the grant date, the Company’s net loss per share would have increased to the pro forma amounts indicated below (in thousands, except per share amounts):

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8.               INCOME TAXES

Based on the available objective evidence, management believes it is more likely than not that the net deferred tax assets related to the Company’s operations will not be fully realizable.  Accordingly, the Company has provided a full valuation allowance against the net deferred tax assets related to its operations at June 30, 2005.  The Company incurs income tax liabilities primarily in Japan, as well as in most of the other countries outside the U.S. in which it operates.

9.               COMPREHENSIVE LOSS

Comprehensive loss consisted of the following (in thousands):

10.         NET LOSS PER SHARE

Basic net loss per share is calculated using the weighted average number of common shares outstanding during the period.  Because the Company is in a net loss position, diluted earnings per share is calculated using the weighted average number of common shares outstanding and excludes the effects of 9.1 million and 8.7 million potential common shares as of June 30, 2005 and 2004, respectively, that are antidilutive.  Potential common shares include shares that could be issued if all convertible senior notes were converted into common stock, common stock subject to repurchase, common stock issuable under the Company’s 2000 Employee Stock Purchase Plan, and incremental shares of common stock issuable upon the exercise of outstanding stock options.  The following table sets forth the computation of basic and diluted net loss per share for the periods indicated (in thousands, except per share amounts):

11.         SEGMENT INFORMATION AND GEOGRAPHIC DATA

Ciphergen’s revenue is derived from the sales of related products and services on a worldwide basis.  Although discrete components that earn revenues and incur expenses exist, significant expenses such as sales and marketing and corporate administration are not incurred by nor allocated to these operating units but rather are employed by the entire enterprise.  Additionally, the chief operating decision maker evaluates resource allocation not on a product or geographic basis, but rather on an enterprise-wide basis.  Therefore, management has determined that Ciphergen operates in only one reportable segment, which is the protein research tools and collaborative services business.

The Company sells most of its products and services directly to customers in North America, Western Europe and Japan, and through distributors in other parts of Europe and Asia.  Revenue for geographic regions reported below is based upon the customers’

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locations and excludes revenue from discontinued operations.  Following is a summary of the geographic information related to revenue from continuing operations for the three and six month periods ended June 30, 2005 and 2004 (in thousands):

During the three and six month periods ended June 30, 2005, sales to customers in Japan represented 30% and 26%, respectively, of revenue from continuing operations.  During both the three and six month periods ended June 30, 2004, sales to customers in Japan represented 28% of revenue from continuing operations.  No other country outside the U.S. accounted for 10% or more of total revenue from continuing operations during these periods.

Long-lived assets, primarily machinery and equipment, are reported based on the location of the assets.  Long-lived asset information by geographic area as of June 30, 2005 and December 31, 2004 is presented in the following table (in thousands):

12.         SUBSEQUENT EVENTS

Strategic Alliance Agreement

On July 22, 2005, the Company entered into a strategic alliance agreement with Quest Diagnostics Incorporated covering a three year period during which the parties will strive to develop and commercialize up to three diagnostic tests based on Ciphergen’s proprietary SELDI ProteinChip technology. Pursuant to the agreement, Quest Diagnostics will have the non-exclusive right to commercialize these tests on a worldwide basis, with exclusive commercialization rights in territories where Quest Diagnostics has a significant presence for up to five years post-launch.  Pursuant to the agreement, there is a supply agreement between the two parties and a royalty arrangement.  In addition, for an aggregate purchase price of $15 million, Quest Diagnostics has purchased 6.225 million shares of Ciphergen common stock, or approximately 17.4% of shares outstanding after the transaction, and a five-year warrant to purchase an additional 2.2 million shares for $3.50 per share.  Quest Diagnostics has also agreed to loan Ciphergen up to $10 million to fund certain development activities. This loan will be forgiven should Ciphergen achieve certain milestones, including the commercialization and FDA clearance of certain diagnostic tests.

Component Part Retrofit Initiated by a Supplier

In July 2005, the Company was notified by a supplier about a potential safety hazard in certain pumps used in some older model ProteinChip Systems.  This does not affect the Company’s current Series 4000 line.  The supplier is recommending a capacitor retrofit, but at this time it is not clear how much, if any, of the cost of such retrofits will be borne by the supplier.  The Company’s management is currently evaluating the situation with the supplier and with legal counsel, but does not have a sufficient basis upon which to estimate its potential cost, if any, for retrofitting the affected instruments.  When the Company is able to determine its potential cost for the retrofits, it will record an appropriate reserve.

Reduction in Force

In July 2005, the Company took actions, consisting principally of headcount reductions, to reduce our operating expenses.  These cost control measures involved most areas of the company and in particular our sales and marketing organization, but left our resources devoted to developing diagnostic products largely unaffected.  As a result, Ciphergen’s headcount is expected to decrease by approximately 20% by the end of the third quarter of 2005.  Substantially all related severance payments will be made before the end of the third quarter of 2005.

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

We have made statements under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Factors That May Affect Our Results” and in other sections of this Form 10-Q that are forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995.  We claim the protection of such safe harbor, and disclaim any intent or obligation to update any forward-looking statement.  You can identify these statements by forward-looking words such as “may”, “will”, “expect”, “intend”, “anticipate”, “believe”, “estimate”, “plan”, “could”, “should” and “continue” or similar words.  These forward-looking statements may also use different phrases.  We have based these forward-looking statements on our current expectations and projections about future events.  Examples of forward-looking statements include statements about expected timing of the recognition of revenue, projections of our future revenue, gross margin, expenses, results of operations and financial condition; anticipated deployment, capabilities and uses of our products and our product development activities and product innovations; the importance of proteomics as a major focus of biology research; the ability of our products to enable proteomics research; competition and consolidation in the markets in which we compete; existing and future collaborations and partnerships; our ability to operate and expand our Biomarker Discovery Center® laboratories and secure the commercial rights to biomarkers discovered at our Biomarker Discovery Center laboratories; the utility of biomarker discoveries and the effectiveness of our Biomarker Discovery Center laboratories; our plans to develop and commercialize diagnostic tests through our strategic alliance with Quest Diagnostics; our ability to comply with applicable government regulations; our ability to expand and protect our intellectual property portfolio; increasing the future sales volumes of consumables; increasing general and administrative costs; decreasing sales and marketing and research and development costs; anticipated future losses; potential expenses associated with a product retrofit; expected levels of capital expenditures; forgiveness of loan obligations to Quest Diagnostics; the rating of our convertible notes and the value of the related put options; the period of time for which our existing financial resources and interest income will be sufficient to enable us to maintain current and planned operations; foreign currency exchange rate fluctuations and our plans for mitigating foreign currency exchange risks; and the market risk of our investments.  These statements are subject to risks and uncertainties that could cause actual results to differ materially, including the risks set forth under the caption “Factors That May Affect Our Results” in this Form 10-Q and the similar factors and risks outlined in our other filings with the Securities and Exchange Commission (“SEC”).

OVERVIEW

We develop, manufacture and sell our ProteinChipâ Systems, which use patented Surface Enhanced Laser Desorption/Ionization (“SELDI”) technology.  These systems consist of a ProteinChip Reader, ProteinChip Software and related accessories which are used in conjunction with our consumable ProteinChip Arrays.  We also offer consulting services, customer support services and training classes to further our customers’ success in using SELDI technology.  We market and sell our products primarily to research biologists in pharmaceutical and biotechnology companies, and academic and government research laboratories.  In 1997, we acquired IllumeSys Pacific, Inc., which holds specific rights to the SELDI technology for the life science research market.  Our first designed and manufactured system, the ProteinChip System, Series PBS I, was available for shipment in the third quarter of 1997.  In 1997, we also established a subsidiary in the U.K. and began direct selling in Europe.  During 1999, we initiated an expanded marketing program and in May began shipping the ProteinChip System, Series PBS II, which is now referred to as the ProteinChip Biology System.  In 1999, we also established a joint venture with Sumitomo Corporation to distribute our products in Japan.  During 2000, we began offering research services and established Biomarker Discovery Center laboratories in Fremont, California; Copenhagen, Denmark; and Malvern, Pennsylvania.

In 2001, we introduced the ProteinChip Biomarker System, which utilizes sophisticated third-party software to automate pattern recognition-based statistical analysis methods and correlate protein expression patterns from clinical samples with disease phenotypes.  We also began selling the Biomek® 2000 Workstation, later superceded by the Biomek 3000 workstation, a robotic accessory which is manufactured by Beckman Coulter and which has been optimized for use with our ProteinChip Biomarker System to increase sample throughput and reproducibility.  In addition, we expanded our product offering with a SELDI ProteinChip interface to high-end tandem mass spectrometers, which we developed and which is manufactured for us by a third party manufacturing company.  On July 31, 2001, Ciphergen acquired the BioSepraâ process chromatography business from Invitrogen Corporation; this business was subsequently sold to Pall Corporation on November 30, 2004.

On August 31, 2002, we increased our ownership interest in Ciphergen Biosystems KK, the Japanese joint venture we formed with Sumitomo Corporation in 1999, from 30% to 70%.  Shortly thereafter, we opened a Biomarker Discovery Center laboratory at the Yokohama facility of Ciphergen Biosystems KK.  In October 2002, we launched the ProteinChip AutoBiomarker System, an automated version of our ProteinChip Biomarker System, which incorporates an autoloader and a Biomek robot to increase sample throughput and automate the reading of ProteinChip Arrays.  On March 23, 2004, we purchased the remaining 30% ownership interest in Ciphergen Biosystems KK.  In July 2004, we launched the ProteinChip System, Series 4000, our next generation ProteinChip System.

We have used our resources primarily to develop and expand our proprietary ProteinChip Systems and related consumables and to establish a marketing and sales organization for commercialization of our products.  We also used our funds to establish a joint venture to distribute our products in Japan and to increase our ownership in the joint venture to 100%.  In addition, we acquired the

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BioSepra process chromatography business in 2001, which we sold for a gain in 2004.  We have also used our resources to establish Biomarker Discovery Center laboratories to provide research services to our clients, to foster further adoption of our products and technology, and to discover biomarkers that we seek to patent for diagnostic and other purposes.  In early 2004, we increased our efforts to discover protein biomarkers and panels of biomarkers that can be developed into protein molecular diagnostic tests that improve patient care; to date, these efforts have not generated any revenue from diagnostic tests. Since our inception we have incurred significant losses and as of June 30, 2005, we had an accumulated deficit of $179.1 million.

Our sales are currently driven by the need for new and better tools to perform protein discovery, characterization, purification, identification and assay development.  In addition, many of our customers later enhance their ProteinChip Systems to add automation accessories and advanced software.  Most of the ProteinChip Systems sold to our customers also generate a recurring revenue stream from the sale of consumables and maintenance contracts.

Our expenses have consisted primarily of materials, contracted manufacturing services, labor and overhead costs to manufacture our ProteinChip Systems and ProteinChip Arrays and to provide customer services; marketing and sales activities; research and development programs; litigation; and general and administrative costs associated with our operations.  We expect our research and development expenses to decrease in 2005 relative to 2004 due to the transition of the ProteinChip System, Series 4000 into manufacturing and scaling back selected other projects, which has led to reduced research and development headcount as well as reduced use of outside contractors and services.  We anticipate that these decreases will be partly offset by increased efforts at our Biomarker Discovery Center laboratories to discover, validate and patent biomarkers that may have diagnostic and/or therapeutic utility.  We expect our selling expenses to decrease in 2005 relative to 2004 as a result of a smaller sales force and reduced marketing programs.  We expect our general and administrative expenses to increase slightly in 2005 relative to 2004 due to normal salary increases and additional legal fees related to the strategic alliance with Quest Diagnostics, partly offset by a decline in stock-based compensation expense associated with our initial public offering.  As a result, we expect to incur losses for at least the next year.  Our current level of revenue is insufficient for us to become profitable.  To become profitable, we will need to increase unit sales of our ProteinChip Systems and Arrays into the research and development market as well as begin achieving revenue from diagnostic tests.

We anticipate that our quarterly results of operations will fluctuate for the foreseeable future due to several factors, including market acceptance of current and new products, the length of the sales cycle and timing of significant orders, the timing and results of our research and development efforts, the introduction of new products by our competitors and possible patent or license issues.  Our limited operating history makes accurate prediction of future results of operations difficult.

RESTATEMENT

On November 7, 2005, we announced that the Audit Committee (the “Committee”) of the Board of Directors was, with the assistance of independent investigators, conducting an investigation primarily regarding the recognition of revenue in connection with certain sales transactions.  On November 16, 2005, we announced our intent to restate our financial results for the three and six month periods ended June 30, 2005, after determining that certain transactions during the second quarter of 2005 involved undisclosed provisions in violation of our revenue recognition policies.  Specifically;

(a) Two transactions involving customer orders for ProteinChip Systems, one for $44,000 and another for $248,000, were contingent upon the occurrence of a future event outside of our control.  For these two transactions, the earnings process was completed in the third and fourth quarters of 2005, respectively.

(b) One customer order for a ProteinChip System in the amount of $204,000 should not have been recorded as revenue due to collection not being reasonably assured.  Revenue on this transaction will not be recognized.  We have reached an agreement to take back the ProteinChip System from the customer.

(c) Two separate customer orders involved undisclosed credits for other goods and services totalling $15,000.  Recognition of the revenue attributable to these items will be deferred until the delivery of the goods and services to the customer.

(d) One sale involving $38,000 of ProteinChip Arrays included an undisclosed right of exchange.  Recognition of the revenue will be deferred until the right of exchange no longer exists.

(e) Lastly, it was discovered that one accessory with a price of $3,150 was shipped to a customer separately from the rest of the order shortly after the end of the quarter and thus the portion of the revenue attributable to this accessory should have been recorded in the third quarter rather than the second quarter.  

Consequently, for the three and six month periods ended June 30, 2005, total revenue decreased $552,000, net loss increased by $354,000, and basic and diluted net loss per share increased $0.01, each as compared to the amounts previously reported by us

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on our Form 10-Q filed on August 9, 2005.  The principal effects of these adjustments on the accompanying condensed consolidated financial statements are as follows (in thousands except per share amounts):

Unaudited Condensed Consolidated Balance Sheet: