1036968--8/30/2007--VAXGEN

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We do not have current financial statements, and therefore you are not able to evaluate our current financial condition or operating history and results. Our business to date has been largely dependent on the success of rPA 102, which was the subject the SNS Contract that was terminated in December 2006. Although we ceased active development of rPA102 and have reduced our workforce, we may be unable to successfully manage our remaining resources, including available cash, while we seek to identify and complete a strategic transaction. If we fail to cause a registration statement to be declared effective in accordance with the timetable set forth in the Notes, or in accordance with agreements we have made in connection with private placements of our common stock, we will be subject to liquidated damages or liability for breach of contract. We are not currently listed on a national exchange and cannot assure you we will ever be listed. If we fail to manage successfully any company or product acquisitions, joint ventures or in-licensed product candidates, we may be limited in our ability to develop our product candidates and to rebuild our product candidate pipeline. We are currently ineligible to register securities with the SEC, and we may never regain compliance. Our internal controls may be insufficient to ensure timely and reliable financial information. We may need to raise additional capital to support our operations if we successfully complete a strategic transaction in order to continue as a going concern. As a result of the reduction in our workforce that we announced in January and May 2007, we may not be successful in retaining key employees and in attracting qualified new employees as required in the future. If we are unable to retain our management, scientific staff and scientific advisors or to attract additional qualified personnel, our ability to rebuild our business will be seriously jeopardized. If we fail to meet our obligations under the Notes, our payment obligations may be accelerated. Our indebtedness could adversely affect our financial health, limit our cash flow available to invest in the ongoing requirements of our business and adversely affect the price of our common stock. We have only a limited operating history and we expect to continue to generate operating losses. Biopharmaceutical product development is a long, expensive and uncertain process and the approval requirements for many products, including vaccines used to fight bioterrorism, are still evolving. If we are unable to successfully develop and test product candidates in accordance with such requirements, our business will suffer. Delays in successfully completing our clinical trials could jeopardize our ability to obtain regulatory approval or market our product candidates on a timely basis. The independent clinical investigators that we rely upon to conduct our clinical trials may not be diligent, careful or timely, and may make mistakes in the conduct of our clinical trials. If we fail to comply with extensive regulations enforced by domestic and foreign regulatory authorities both before and after we obtain approval of our product candidates, the commercialization of our product candidates could be prevented, delayed or suspended. We are subject to ongoing regulatory review and periodic inspection and approval of manufacturing procedures and operations, including compliance with cGMP regulations. Our product development efforts may not yield marketable products due to results of studies or trials, failure to achieve regulatory approvals or market acceptance, proprietary rights of others or manufacturing issues. We may fail to protect our intellectual property or may infringe on the intellectual property rights of others, either of which could harm our business. We face competition from several companies with greater financial, personnel and research and development resources than ours. Natural disasters, including earthquakes, may damage our facilities. Our use of hazardous materials and chemicals require us to comply with regulatory requirements and exposes us to potential liabilities. We may become subject to product liability claims, which could result in damages that exceed our insurance coverage. We may be subject to claims that our employees or we have wrongfully used or disclosed alleged trade secrets of their former employers. Our stockholders could experience substantial dilution as a result of the issuance of additional shares of common or preferred stock. Shares of our common stock eligible for future sale may adversely affect the market for our common stock. Our stock price is likely to be volatile. We have no history of paying dividends on our common stock. Our charter documents and Delaware law may discourage an acquisition of VaxGen. We are not compliant with Section 404 under the Sarbanes-Oxley Act of 2002. Our operating results may be adversely impacted by recently adopted changes in accounting for stock options.

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1036968--8/30/2007--VAXGEN_INC