UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x               Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2008

OR

o                  Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 0-19756

PDL BIOPHARMA, INC.

(Exact name of registrant as specified in its charter)

1400 Seaport Boulevard

Redwood City, CA 94063

(Address of principal executive offices and Zip Code)

(650) 454-1000

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

As of May 6, 2008, there were 119,308,001 shares of the Registrant’s Common Stock outstanding.

PDL BIOPHARMA, INC.

INDEX

We own or have rights to numerous trademarks, trade names, copyrights and other intellectual property used in our business, including PDL BioPharma and the PDL logo, each of which is considered a trademark, and Nuvion^®. All other company names and trademarks included in this Quarterly Report are trademarks, registered trademarks or trade names of their respective owners.

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PART I. FINANCIAL INFORMATION

ITEM                                           1. FINANCIAL STATEMENTS

PDL BIOPHARMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except per share data)

See accompanying notes.

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PDL BIOPHARMA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

See accompanying notes.

4

PDL BIOPHARMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

See accompanying notes.

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PDL BIOPHARMA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2008

(unaudited)

1. Summary of Significant Accounting Policies

Organization and Business

We are a biotechnology company focused on the discovery and development of novel antibodies in oncology and immunologic diseases. We receive royalties and other revenues through licensing agreements with biotechnology and pharmaceutical companies based on our proprietary antibody humanization technology platform. The technology subject to these licensing agreements has contributed to the development by our licensees of 10 marketed products. Our research platform is focused on the discovery of novel antibodies for the treatment of cancer and immunologic diseases. We currently have several investigational compounds in clinical development for oncology or immunologic diseases, two of which we are developing in collaboration with Biogen Idec MA, Inc. (Biogen Idec). We began marketing and selling acute-care products in the hospital setting in the United States, Canada and other international markets in March 2005 in connection with our acquisitions of ESP Pharma, Inc. and the rights to Retavase®. In March 2008, we sold the rights to our Cardene^®, Retavase and IV Busulfex^® commercial products and our ularitide development-stage cardiovascular product (together, the Commercial and Cardiovascular Assets). The results of the Commercial and Cardiovascular Operations segment, which operations are comprised of those related to the Commercial and Cardiovascular Assets, are presented as discontinued operations.   Discontinued operations are reported as a component within the Consolidated Statement of Operations separate from income from continuing operations.  For details of such amounts, see Note 5.

Basis of Presentation and Responsibility for Quarterly Financial Statements

The accompanying condensed consolidated financial statements are unaudited, but include all adjustments (consisting only of normal, recurring adjustments) that we consider necessary for a fair presentation of our financial position at such dates and the operating results and cash flows for those periods. Certain information normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) has been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for quarterly reporting.

The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2007 filed with the SEC. The Condensed Consolidated Balance Sheet as of December 31, 2007 is derived from our audited consolidated financial statements as of that date.

Our revenues, expenses, assets and liabilities vary during each quarter of the year. Therefore, the results and trends in these interim condensed consolidated financial statements may not be indicative of results for any other interim period or for the entire year. For example, we receive a substantial portion of our royalty revenues on sales of the product Synagis^®, marketed by MedImmune, Inc. (MedImmune). This product has significantly higher sales in the fall and winter, which to date have resulted in much higher royalties recognized by us with respect to this product in our first and second quarters than in other quarters since we generally recognize royalty revenue in the quarter subsequent to sales by our licensees.

Additionally, our master patent license agreement with Genentech, Inc. (Genentech) provides for a royalty fee structure that has four tiers, under which the royalty rate Genentech must pay on royalty-bearing products sold in the United States or manufactured in the United States and sold anywhere (U.S.-based Sales) in a given calendar year decreases during that year on incremental U.S.-based Sales above the net sales thresholds. As a result, Genentech’s average annual royalty rate during a year declines as Genentech’s cumulative U.S.-based Sales increase during that year. Because we receive royalties in arrears, the average royalty rate for payments we receive from Genentech in the second calendar quarter, which would be for Genentech’s sales from the first calendar quarter, is higher than the average royalty rate for following quarters.  The average royalty rate for payments we receive from Genentech is lowest in the first calendar quarter, which would be for Genentech’s sales from the fourth calendar quarter, when more of Genentech’s U.S.-based Sales bear royalties at lower royalty rates.  With respect to royalty-bearing products that are both manufactured and sold outside of the United States (ex-U.S.-based Sales), the royalty rate that we receive from Genentech is a fixed rate based on a percentage of the underlying ex-U.S.-based Sales.  The mix of U.S.-based Sales and ex-U.S.-based Sales and the manufacturing location are outside of our control and have fluctuated in the past and may continue to fluctuate in the future.

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Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries after elimination of inter-company accounts and transactions.

Management Estimates

The preparation of financial statements in conformity with GAAP requires the use of management’s estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Significant Customers and Revenues by Geographic Area

The following table summarizes revenues from our licensees which individually accounted for 10% or more of our total revenues from continuing operations for the three months ended March 31, 2008 and 2007 (as a percentage of total revenues):

Cash Equivalents, Restricted Cash, Marketable Securities and Concentration of Credit Risk

We consider all highly liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents. We place our cash, cash equivalents, marketable securities and restricted cash and investments with high-credit-quality financial institutions and in securities of the U.S. government, U.S. government agencies and U.S. corporations and, by policy, limit the amount of credit exposure in any one financial instrument.

2. Stock-Based Compensation

Stock-based compensation expense recognized under Statement of Financial Accounting Standards (SFAS) No. 123, “Share-Based Payment (Revised 2004)” (SFAS No. 123(R)) for employees and directors was as follows:

Stock-based compensation expense for the first quarter of 2008 included stock option modification charges totaling $3.8 million. These stock option modification charges related to accelerated vesting and extended exercise periods for certain stock options in connection with the termination of certain of our employees. The majority of the stock option modification charges related to the termination of certain employees as a result of the sale of the Commercial and Cardiovascular Assets, which is classified within discontinued operations. See Note 5 for further information.

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Stock Option Activity

A summary of our stock option activity for the period is presented below:

Total unrecognized compensation cost related to unvested stock options outstanding as of March 31, 2008, excluding potential forfeitures, was $44.7 million, which we expect to recognize over a weighted-average period of 2.8 years.

Restricted Stock Activity

A summary of our restricted stock activity for the period is presented below:

Total unrecognized compensation cost related to unvested restricted stock outstanding as of March 31, 2008, excluding potential forfeitures, was $3.5 million, which we expect to recognize over a weighted-average period of 1.9 years.

Employee Stock Purchase Plan (ESPP)

The stock-based compensation expense in connection with our ESPP was $0.3 million and $0.4 million for the three-month periods ended March 31, 2008 and 2007, respectively.

3. Net Loss per Share

In accordance with SFAS No. 128, “Earnings per Share” (SFAS 128), we compute basic net income (loss) per share using the weighted-average number of shares of common stock outstanding during the periods presented, less the weighted-average number of shares of restricted stock that are subject to repurchase. We compute diluted net income (loss) per share for our continuing operations using the sum of the weighted-average number of common and common equivalent shares outstanding. Common equivalent shares used in the computation of diluted net income per share result from the assumed exercise of stock options, the issuance of restricted stock, the assumed issuance of common shares under our ESPP using the treasury stock method, and the assumed conversion of our 2.00%, $250.0 million Convertible Senior Notes (the 2005 Notes) and our 2.75%, $250.0 million Convertible Subordinated Notes (the 2003 Notes), including both the effect on interest expense and the inclusion of the underlying shares using the if-converted method.

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The following is a reconciliation of the numerators and denominators of the basic and diluted income from continuing operations per share computations for the three months ended March 31, 2008 and 2007:

We have excluded 12.5 and 8.9 million of outstanding stock options and restricted stock from our diluted earnings per share calculations for the three months ended March 31, 2008 and 2007, respectively, as such amounts would have been antidilutive. In addition, during the three months ended March 31, 2007, we excluded 23.0 million shares underlying our convertible debt securities as such amounts would have been antidilutive.

4. Comprehensive Loss

Comprehensive loss is comprised of net loss and other comprehensive income (loss).  Specifically, we include in other comprehensive loss the changes in unrealized gains and losses on our holdings of available-for-sale securities, which are excluded from our net loss. In addition, other comprehensive loss includes the liability that has not yet been recognized as net periodic benefit cost for our postretirement benefit plan. The following table presents the calculation of our comprehensive loss:

5. Discontinued Operations and Assets Held for Sale

We classified the Commercial and Cardiovascular Assets, excluding goodwill, as ‘held for sale’ in our Consolidated Balance Sheet as of December 31, 2007.  As we will not have significant or direct involvement in the future operations related to the Commercial and Cardiovascular Assets, we have presented the results of the Commercial and Cardiovascular Operations as discontinued operations in the Consolidated Statement of Operations for the current and comparative periods in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets” (SFAS No. 144). As of December 31, 2007, goodwill related entirely to the Commercial and Cardiovascular Operations.

In March 2008, we closed the sales of the Commercial and Cardiovascular Assets. We sold the rights to IV Busulfex, including trademarks, patents, intellectual property and related assets, to Otsuka Pharmaceutical Co., Ltd. (Otsuka) for $200 million in cash and an additional $1.4 million for the IV Busulfex inventories.  We also sold the rights to Cardene, Retavase and ularitide, including all trademarks, patents, intellectual property, inventories and related assets (together, our Cardiovascular Assets), to EKR Therapeutics, Inc. (EKR). In consideration for the Cardiovascular Assets sold to EKR, we received upfront proceeds of $85 million, $6 million of which was placed in an escrow account for a period of approximately one year to cover certain product return related costs under the purchase agreement. In addition, the purchase agreement includes contingent consideration of up to $85 million in potential future milestone payments as well as potential future royalties on certain Cardene and ularitide product sales.

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We recognized a pre-tax loss of $64.6 million in connection with the sale of the Commercial and Cardiovascular Assets. This loss was comprised of the total upfront consideration from the sales of the Commercial and Cardiovascular Assets of $280.4 million plus the write-off of $10.6 million in net liabilities, less the book values of intangible assets and inventories of $268.2 million, the write-off of goodwill of $81.7 million and transaction fees of $5.7 million.

The results of our discontinued operations for the three months ended March 31, 2008 and 2007 were as follows:

(1)          Included within total costs and expenses is a loss of $64.6 million that we recognized in connection with the sale of the Commercial and Cardiovascular Operations.

(2)          Income tax expense attributable to our discontinued operations during the three months ended March 31, 2008 was primarily related to the tax gain on the sale of the Commercial and Cardiovascular Assets.  Although we recognized a loss on the sale of these assets for financial reporting purposes, for tax purposes, we included the fair value of the contingent consideration from EKR in our proceeds, which included potential future milestone payments as well as potential future royalties on certain Cardene and ularitide product sales.  In addition, the tax basis in the Commercial and Cardiovascular Assets was less than the book value recorded for financial reporting purposes.  Therefore, we recognized a taxable gain and incurred alternative minimum tax on the sale of the Commercial and Cardiovascular Assets. The income tax payable attributable to our discontinued operations for the first quarter of 2008 was $6.5 million. The $21.5 million difference between the income tax payable and the income tax expense represents the tax benefit of certain tax deductions in connection with stock-based compensation, and such difference has been credited to additional paid-in capital.

In connection with the sale of the Commercial and Cardiovascular Assets, we entered into agreements with both Otsuka and EKR to provide certain transitional services.  We expect to provide these transitional services over a period of approximately 12 months.  Any fees or cost reimbursements received for transitional services will be classified within discontinued operations.

Commercial Restructuring and Retention Plan

In connection with the divesture of the Commercial and Cardiovascular Assets, we committed to provide certain severance benefits to those employees whose employment positions we would eliminate in connection with the transactions.  Under SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (SFAS No. 146), we recognized expenses for these severance benefits of $1.8 million during the first quarter of 2008, which was included within discontinued operations.  Of this $1.8 million, $1.7 million was included in other accrued liabilities as of March 31, 2008.

During the fourth quarter of 2007, the Compensation Committee of our Board of Directors approved a modification to the existing terms of outstanding stock options held by our Commercial Employees to accelerate the vesting of up to 25% of the original grant amount upon termination of the Commercial Employees, if the sale of the Commercial and Cardiovascular Assets occurred prior to a change in control of the Company.  During the first quarter of 2008, we recognized $2.3 million of stock-based compensation expense related to the Commercial Employees, which was included within discontinued operations.

6. Sale of Manufacturing Assets

In March 2008, we sold our Minnesota manufacturing facility and related operations to an affiliate of Genmab A/S (Genmab), for total cash proceeds of $240 million. Under the terms of the purchase agreement, Genmab acquired our manufacturing and related administrative facilities in Brooklyn Park, Minnesota, and related assets therein, and assumed certain of our lease obligations related to our facilities in Plymouth, Minnesota (together, the Manufacturing Assets). In connection with the sale of the Manufacturing Assets, we entered into an agreement with Genmab under which we and Genmab will each provide transitional services to the other over a maximum period of 12 months.

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We recognized a pre-tax gain of $49.7 million upon the close of the sale in March 2008. Such gain represents the $240 million in gross proceeds, less the net book value of the underlying assets transferred of $185.4 million and $4.9 million in transaction costs and other charges.

In addition, to fulfill our clinical manufacturing needs in the near-term, we entered into a clinical supply agreement with Genmab that became effective upon the close of the transaction.  Under the terms of the clinical supply agreement, Genmab agreed to produce clinical trial material for certain of our pipeline products until March 2010.

7. Restructuring and Other Charges

Overall Company Restructuring

In an effort to reduce our operating costs to a level more consistent with a biotechnology company focused on antibody discovery and development, in March 2008 we commenced a restructuring plan pursuant to which we eliminated approximately 120 employment positions.  We intend to eliminate approximately 130 additional employment positions over the next 12 months.  All impacted employees were notified in March 2008. Subsequent to the completion of the restructuring, we expect to have approximately 300 employees.

Employees terminated in connection with the restructuring are eligible for a package consisting of severance payments of generally 12 weeks of salary and medical benefits along with up to three months of outplacement services.  During the first quarter of 2008, we recognized restructuring charges of $5.6 million consisting of post-termination severance costs as well as salary accruals relating to the portion of the 60-day notice period over which the terminated employees would not be providing services to the Company.

Facilities Related Restructuring

During the third quarter of 2007, we initiated our move from Fremont, California to our current location in Redwood City, California. In connection with this move, we ceased use of a portion of the leased property in Fremont, California and, as a result, we recognized idle facilities charges during 2007. The leases on these facilities terminated at the end of first quarter of 2008, and nearly all related obligations were fully paid by March 31, 2008.

In addition, during 2007, we ceased use of two of our leased facilities in Plymouth, Minnesota. In connection with the sale of our Manufacturing Assets, Genmab assumed our obligations for one of these two facilities. We expect to pay all obligations accrued relating to the remaining lease by the end of the first quarter of 2009.

The following table summarizes the restructuring activity discussed above, as well as the remaining reserve balance at March 31, 2008:

* Excludes restructuring charges for employees terminated in connection with the sale of the Commercial and Cardiovascular Assets.  See Note 5 for further information.

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Other Charges

In connection with our restructuring efforts, we offered retention bonuses and other incentives to two employee groups: (1) ongoing employees that we hope to retain after the restructuring, and (2) transition employees that we hope to retain through a transition period.  This is in addition to the retention programs that we implemented during the fourth quarter of 2007, under which we recognized $1.1 million in expenses in 2007. We intend to recognize the expense for these retention programs over the period from the respective dates the programs were approved through the estimated service period for transition employees or until the expected pay-out date for ongoing employees.  We recognized $2.6 million in expenses under these retention programs during the first quarter of 2008. As of March 31, 2008, the total related liability accrued was $3.6 million. Such amounts have been classified as research and development expenses and general and administrative expenses in the financial statements.  The total retention benefit under the plan is estimated to be $16.8 million. We expect to recognize $13.1 million of additional expense and to pay out the retention bonuses over the next seven quarters.

8. Asset Impairment Charges

Total asset impairment charges recognized in continuing operations for the three months ended March 31, 2008 and 2007 were $3.5 million and none, respectively. During the first quarter of 2008, such charges primarily represented the costs of certain research equipment that is expected to have no future useful life, and certain information technology projects that were terminated and have no future benefit to us as a result of our restructuring activities.

9. Non-Monetary Transaction

In January 2008, we and Biogen Idec entered into an exclusive worldwide licensing agreement with Ophthotech Corp. (Ophthotech), a privately held company, for an anti-angiogenesis antibody to treat Age-Related Macular Degeneration (AMD). Under the terms of the agreement, we and Biogen Idec have granted Ophthotech worldwide development and commercial rights to all ophthalmic uses of volociximab (M200). In addition, we and Biogen Idec have an obligation to supply both clinical and commercial M200 product to Ophthotech.  In connection with this agreement, we received an equity position in Ophthotech, and we may receive a combination of development and commercial milestone payments and royalties on future product sales.

We have estimated the fair value of the nonmarketable equity instruments received based predominately upon the price of similar Ophthotech equity instruments that Ophthotech had recently sold to independent parties for cash consideration.  Based on this approach, we have estimated the fair value of our equity position to be $1.8 million, which we recorded in other assets on the Consolidated Balance Sheet as of March 31, 2008.

For the purposes of revenue recognition, we are treating the grant of the license and the manufacturing obligation as a single unit of accounting.  Because we are currently unable to estimate the time period over which we are obligated to supply the M200 product for clinical and commercial purposes, we have not recognized any revenue under the agreement.  We have recorded the fair value of the consideration received as long-term deferred revenue as of March 31, 2008. We do not intend to recognize any revenue related to this agreement until such point that we are able to reasonably estimate the date at which our obligation will end.

10. Restricted Cash

As of March 31, 2008 and December 31, 2007, we had a total of $18.3 million and $28.3 million of restricted cash, respectively. As of March 31, 2008 and December 31, 2007, $15.0 and $25.0 million of the restricted cash, respectively, supported letters of credit on which our landlord and construction contractor can draw if we do not fulfill our obligations with respect to the construction of certain leasehold improvements to our Redwood City, California, facility. The remaining $3.3 million of long-term restricted cash supports letters of credit serving as a security deposit for our Redwood City, California leases.

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11. Other Accrued Liabilities

Other accrued liabilities consisted of the following:

12. Income Taxes

Income tax expense attributable to our continuing operations during the three months ended March 31, 2008 was $1.0 million, which was related primarily to federal and state alternative minimum taxes and foreign taxes on income earned by our foreign operations.  As a result of the sale of our Commercial and Cardiovascular Assets in March 2008, we no longer have deferred tax liabilities, and due to our lack of earnings history, the gross deferred tax assets have been fully offset by a valuation allowance and no longer appear on our Consolidated Balance Sheet as of March 31, 2008.

The income tax expense for our continuing operations during the three months ended March 31, 2007 was $30,000, which was related primarily to state taxes and foreign taxes on income earned by our foreign operations.

13. Fair Value Measurements

As of January 1, 2008, we adopted FASB Statement No. 157, “Fair Value Measurements” (FAS 157). FAS 157 established a framework for measuring fair value in GAAP and clarified the definition of fair value within that framework. FAS 157 does not require any new fair value measurements in GAAP. FAS 157 introduced, or reiterated, a number of key concepts which form the foundation of the fair value measurement approach to be utilized for financial reporting purposes. The fair value of our financial instruments reflect the amounts that would be received if we were to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). FAS 157 also established a fair value hierarchy that prioritizes the use of inputs used in valuation techniques into the following three levels:

·                  Level 1—quoted prices in active markets for identical assets and liabilities

·                  Level 2—observable inputs other than quoted prices in active markets for identical assets and liabilities

·                  Level 3—unobservable inputs

At March 31, 2008, we determined the fair values of our financial assets using Level 1 and Level 2 inputs, as reflected in the table below:

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The following table presents the classification of our financial assets on our Consolidated Balance Sheet as of March 31, 2008:

We have excluded from the tables above $1.6 million of accrued interest, which has been recorded as part of marketable securities, and $31.2 million of cash, which is included in the cash and cash equivalents caption, in the Consolidated Balance Sheet.

14. Subsequent Events

In April 2008, we declared a special cash dividend of $4.25 per share of common stock (the Dividend), which, based on the number of stockholders as of the May 5, 2008 record date, was $507.0 million. We paid the Dividend in May 2008 using proceeds from the sales of the Commercial and Cardiovascular Assets and the Manufacturing Assets.  In connection with the Dividend, the conversion rate for the Company’s outstanding 2.00% Convertible Senior Notes due February 15, 2012 (the 2012 notes) and 2.75% Convertible Subordinated Notes due 2023 (the 2023 notes) was adjusted based on the amount of the Dividend and the trading price of our stock in certain periods pursuant to the terms of the applicable indenture.  For the 2023 notes, the conversion rate increased effective on May 6, 2008 from 49.6618 shares of common stock per $1,000 principal amount of notes to 72.586 shares of common stock per $1,000 principal amount of notes.  For the 2012 notes, the conversion rate increased effective on May 6, 2008 from 42.219 shares of common stock per $1,000 principal amount of notes to 61.426 shares of common stock per $1,000 principal amount of notes.

This report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended. All statements other than statements of historical facts are “forward looking statements” for purposes of these provisions, including any projections of earnings, revenues or other financial items, any statements of the plans and objectives of management for future operations, any statements concerning proposed new products or licensing or collaborative arrangements, any statements regarding future economic conditions or performance, and any statement of assumptions underlying any of the foregoing. In some cases, forward-looking statements can be identified by the use of terminology such as “believes,” “may,” “will,” “expects,” “plans,” “anticipates,” “estimates,” “potential,” or “continue” or the negative thereof or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained in this report are reasonable, there can be no assurance that such expectations or any of the forward-looking statements will prove to be correct, and actual results could differ materially from those projected or assumed in the forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to inherent risks and uncertainties, including the risk factors set forth below, and for the reasons described elsewhere in this report. All forward-looking statements and reasons why results may differ included in this report are made as of the date hereof, and we assume no obligation to update these forward-looking statements or reasons why actual results might differ.

OVERVIEW

We are a biotechnology company focused on the discovery and development of novel antibodies in oncology and immunologic diseases. We receive royalties and other revenues through licensing agreements with biotechnology and pharmaceutical companies based on our proprietary antibody humanization technology platform. The technology subject to these licensing agreements has contributed to the development by our licensees of 10 marketed products. We currently have several investigational compounds in clinical development for oncology and immunologic diseases, two of which we are developing in collaboration with Biogen Idec MA, Inc. (Biogen Idec). Our research platform is focused on the discovery of novel antibodies for the treatment of cancer and immunologic diseases.

During the period from March 2005 through early March 2008, we marketed and sold acute-care products in the hospital setting in the United States and Canada. We acquired the rights to three of these products, Cardene IV®, IV Busulfex® and Retavase®, which are non-antibody-based products, in connection with our acquisitions of ESP Pharma, Inc. as well as the rights to Retavase in March 2005. We subsequently acquired the rights to Cardene SR® in September 2006. These commercial products (together, the Commercial and Cardiovascular Assets) and the related operations (the Commercial and Cardiovascular Operations) were fully divested during the first quarter of 2008. We recognized a pre-tax loss of $64.6 million in connection with the sale of the Commercial and Cardiovascular Assets, which is presented within discontinued operations, during the first quarter of 2008.

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In March 2008, we sold our Minnesota manufacturing facility and related operations to an affiliate of Genmab A/S (Genmab), for total cash proceeds of $240 million. Under the terms of this agreement, Genmab acquired our manufacturing and related administrative facilities in Brooklyn Park, Minnesota, and related assets therein, and assumed certain of our lease obligations related to our facilities in Plymouth, Minnesota (together, the Manufacturing Assets). In connection with this transaction, under the terms of a clinical supply agreement, Genmab agreed to produce clinical material for certain of our pipeline products until March 2010.

Also during March 2008, in an effort to reduce our operating costs to a level more consistent with a biotechnology company focused on antibody discovery and development, we commenced a restructuring plan pursuant to which we eliminated approximately 120 employment positions. We intend to eliminate approximately 130 additional employment positions over the next 12 months.  Many of these positions support our provision of transition services to the acquirers of the Commercial and Cardiovascular Assets and Manufacturing Assets in connection with our sale of these assets. We offered these 130 transitional employees and the approximately 300 employees that we expect to retain after the restructuring retention bonuses and other incentives to encourage these employees to stay with the Company until the Spin-off of our biotechnology assets (see below) or with the Spin-off company after the separation transaction.  In connection with this overall restructuring effort, we expect to incur significant transition-related expenses over the next 12-month period, a portion of which will be recognized as restructuring charges.

In April 2008, we announced our intent to spin off our biotechnology assets into a separate publicly traded entity apart from our antibody humanization royalty assets (the Spin-off).  We expect to retain the rights to antibody humanization royalty revenues from all current and future licensed products and plan to distribute this income to our stockholders, net of any operating expenses, debt service and income taxes.  Subsequent to the Spin-off, we plan to have only a nominal number of employees to support our intellectual properties and provide for certain essential reporting and management functions of a public company.  We expect to capitalize the new biotechnology Spin-off company with approximately $375 million in cash at the completion of the Spin-off transaction.  This initial capitalization, along with potential milestone payments, non-humanization royalties and other payments under collaboration and other agreements, including the contingent consideration related to the sale of the Commercial and Cardiovascular Assets, is expected to fund the Spin-off company for approximately three years based on current operating plans.  We expect to complete the Spin-off by the end of 2008.  While we plan for the Spin-off, we continue to evaluate opportunities to sell or securitize all or part of our antibody humanization royalties; however, we can not assure that we will be able to consummate a sale or securitization of our antibody humanization patent royalty stream on terms acceptable to us, or at all.

In conjunction with our announcement of our intent to spin off our biotechnology assets, in April 2008 we declared a special cash dividend of $4.25 per share of common stock (the Dividend), which was paid in May 2008 using proceeds from the sale of the Commercial and Cardiovascular Assets and the Manufacturing Assets. Based on the number of stockholders as of the May 5, 2008 record date, the Dividend was $507.0 million.

We were organized as a Delaware corporation in 1986 under the name Protein Design Labs, Inc. In 2006, we changed our name to PDL BioPharma, Inc.

Research and Development Programs

We have several investigational antibody-based compounds in clinical development for cancer and immunologic diseases, some of which we are developing in collaboration with another biotechnology company.  The table below lists various investigational compounds for which we are pursuing clinical development activities either on our own or in collaboration. Not all clinical trials for each product candidate are listed below. As part of our transition services agreement with EKR Therapeutics, Inc. (EKR), which purchased the rights to Cardene, Retavase and ularitide, including all trademarks, patents, intellectual property, inventories and related assets in March 2008, we continue to provide research and development services for certain life cycle management activities for Cardene.  Under this agreement, EKR will reimburse us for all costs and expenses incurred in connection with these activities, all of which have been reflected as discontinued operations.  As this is no longer an on-going PDL-sponsored program, we have excluded Cardene from the table below. The development and commercialization of our product candidates are subject to numerous risks and uncertainties, as noted in our “Risk Factors” of this Quarterly Report.

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Daclizumab.  Daclizumab is a humanized monoclonal antibody that binds to the alpha chain (CD25) of the interleukin-2 (IL-2) receptor on activated T cells, which are white blood cells that play a role in inflammatory and immune-mediated processes in the body. Daclizumab is the active component of the approved drug marketed worldwide by Hoffmann La-Roche (Roche) as Zenapax, which is indicated for the prevention of acute organ transplant rejection following transplant surgery. We and our collaborator, Biogen Idec, are currently testing daclizumab in a phase 2 study in patients with multiple sclerosis. In March 2007, we and Biogen Idec announced that the CHOICE trial, a phase 2, randomized, double-blind, placebo-controlled trial of daclizumab, met its primary endpoint in relapsing MS patients being treated with interferon beta. In October 2007, we presented the phase 2 CHOICE data that demonstrated daclizumab 2 mg/kg administered every two weeks as a subcutaneous injection added to interferon beta therapy significantly reduced new or enlarged gadolinium-enhancing lesions at week 24 compared to interferon beta therapy alone, in patients with active relapsing multiple sclerosis. Patients from this trial were followed for an additional 48 weeks after the treatment period to further assess safety and efficacy. We, together with Biogen Idec, initiated in the first quarter of 2008 a phase 2 monotherapy trial of daclizumab, the SELECT trial, to advance the overall clinical development program in relapsing MS.

In addition, we are independently pursuing development of daclizumab for treatment of moderate to severe asthma. We also continue to evaluate daclizumab for transplant maintenance, including potential collaboration opportunities.

Volociximab (M200).  Volociximab is a chimeric monoclonal antibody that inhibits the functional activity of a5ß1 integrin, a protein found on activated endothelial cells. Blocking the activity of a5ß1 integrin has been found in various animal models to prevent angiogenesis, which is the formation of new blood vessels that feed tumors and allow them to grow and metastasize.

We and our collaborator, Biogen Idec, are currently investigating volociximab in various phase 2, open-label clinical trials in patients with advanced solid tumors. This investigation includes two exploratory clinical trials in ovarian cancer, initiated in August 2007, and two phase 1 trials in non-small cell lung cancer (NSCLC), which were initiated during the last quarter of 2007 and the first quarter of 2008. In April 2008, we and Biogen Idec terminated one of the two exploratory clinical trials in ovarian cancer, leaving a total of three ongoing phase 2 clinical trials.

HuLuc63.  HuLuc63 is a humanized monoclonal antibody that binds to CS1, a cell surface glycoprotein that is highly expressed on myeloma cells but minimally expressed on normal cells. HuLuc63 may induce anti-tumor effects through antibody-dependent cellular cytotoxicity activity on myeloma cells. The phase 1 trial of HuLuc63 in patients with advanced multiple myeloma is ongoing. We anticipate initiating phase 1 combination trials of HuLuc63 in the second half of 2008.

PDL192.  PDL192 is a novel humanized monoclonal antibody. In April 2008, after completion of preclinical studies, we filed an IND for PDL 192 in solid tumor applications.

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Technology Outlicense Agreements

We have licensed and will continue to offer to license our humanization patents in return for license fees, annual maintenance payments and royalties on product sales. The 10 humanized antibody products listed below are currently approved for use by the U.S. Food and Drug Administration (FDA) and are licensed under our patents.

Collaborative and Strategic Agreement

We have a collaboration agreement with Biogen Idec for the joint development, manufacture and commercialization of daclizumab in MS and indications other than transplant and respiratory diseases, and for shared development and commercialization of volociximab (M200) in all indications. Under our collaboration agreement with Biogen Idec, we share equally the costs of all development activities. This agreement requires each party to undertake extensive efforts in support of the collaboration and require the performance of both parties to be successful. We anticipate recognizing an increasing amount of revenue and expenses as we progress with this collaboration.

We continue to evaluate potential opportunities to collaborate on certain other programs, or on our drug development capabilities, with other pharmaceutical or biotechnology companies to maximize the value of these programs, mitigate risks and reduce costs, and may enter into other collaboration agreements in the future.

Summary of the First Quarter of 2008

In the first quarter of 2008, our total revenues from continuing operations were $57.3 million, a 3% decrease from $58.9 million in the comparable period in 2007. This revenue decline was driven primarily by a decrease in license, collaboration and other revenues.

Our total expenses from continuing operations in the first quarter of 2008 were $27.6 million, a significant decrease from $60.1 million in the first quarter of 2007 primarily as a result of a $49.7 million gain realized on the sale of our Manufacturing Assets in the 2008 period. Total costs and expenses in the first quarter of 2008 also included restructuring charges of $5.6 million and asset impairment charges of $3.5 million.  We did not recognize any such charges or gains in the comparable period in 2007. Our income from continuing operations for the first quarter of 2008 was $29.6 million, compared to $0.2 million in the prior-year comparable period. In the first three months of 2008, net cash used in operating activities was $29.3 million, a decrease from $9.1 million used in operating activities in the comparable period in 2007. At March 31, 2008, we had cash, cash equivalents, marketable securities and restricted cash of $946.9 million, compared to $440.8 million at December 31, 2007, an increase primarily attributable to the proceeds realized from the sales of the Commercial and Cardiovascular Assets and the Manufacturing Assets.  As of March 31, 2008, we had $526.7 million in total debt outstanding, which included $500.0 million in convertible notes, $250.0 million of which are callable in each of 2008 and 2010 and due in 2023 and 2012, respectively.

We expect that in the foreseeable future, our revenue growth will be generated primarily by royalties. We expect that our operating expenses in the near-term will decrease significantly relative to recent historical expense levels due to the sales of the Commercial and Cardiovascular Assets and the Manufacturing Assets in March 2008, and the restructuring that is in process and that will continue over the next several quarters.  However, we expect to incur additional charges and expenses during 2008 and into 2009 related to the restructuring, including severance payments to terminated employees, and related to retention incentives we have offered to transitional and ongoing employees.  Subsequent to the completion of our restructuring activities, we expect that our expenses could increase in future years as we increase the number of our pipeline programs, advance our clinical programs into more expensive late-stage clinical trials and as a result of the extensive resource commitments required to achieve regulatory approval of potential products.

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Economic and Industry-wide Factors

Various economic and industry-wide factors are relevant to us and could affect our business, including the factors set forth below.

·      Our business will depend in significant part on our ability to develop innovative new drugs. Drug development, however, is highly uncertain and very expensive, typically requiring tens to hundreds of millions of dollars invested in research, development and manufacturing elements. Identifying drug candidates to study in clinical trials requires significant investment and may take several years. In addition, the clinical trial process for drug candidates is usually lengthy, expensive and subject to high rates of failure throughout the development process. As a result, a majority of the clinical trial programs for drug candidates are terminated prior to applying for regulatory approval. Even if a drug receives FDA or other regulatory approval, such approval could be conditioned on the need to conduct additional trials, or we or our licensees could be required to or voluntarily decide to suspend marketing of a drug as a result of safety or other events.

·      Our industry is subject to extensive government regulation, and we must make significant expenditures to comply with these regulations. For example, the FDA regulates, among other things, the development, testing, research, manufacture, safety, efficacy, record-keeping, labeling, storage, approval, quality control, adverse event reporting, advertising, promotions, sale and distribution of our products. The development and marketing of our products outside of the United States is subject to similar extensive regulation by foreign governments, which regulations are not harmonized with the regulations of the United States.

·      The manufacture of drugs and antibodies for use as therapeutics in compliance with regulatory requirements is complex, time-consuming and expensive. If our contract manufacturers are unable to manufacture product or product candidates in accordance with FDA and European good manufacturing practices, we may not be able to obtain or retain regulatory approval for our products. We are currently reliant on third-party manufacturers for all of our products.

·      Our business success is dependent in significant part on our success in establishing intellectual property rights, either internally or through in-license of third-party intellectual property rights, and protecting our intellectual property rights. If we are unable to protect our intellectual property, we may not be able to compete successfully and our sales and royalty revenues and operating results would be adversely affected. Our pending patent applications may not result in the issuance of valid patents or our issued patents may not provide competitive advantages or may be reduced in scope. Proceedings to assert and defend our intellectual property rights are expensive, can, and have, continued over many years and could result in a significant reduction in the scope or invalidation of our patents, which could adversely affect our results of operations.

·      To be successful, we must retain qualified clinical, scientific, marketing, administrative and management personnel. We face significant competition for experienced personnel and have experienced significant attrition in late 2007 and early 2008 as a result of the uncertainty created by the strategic initiatives we undertook during this period. We also implemented a restructuring in March 2008, which includes a significant reduction in force, and we expect to continue to face challenges in retaining qualified personnel as we transition to a more streamlined organization.

See also the “Risk Factors” section of this quarterly report for additional information on these economic and industry-wide and other factors and the impact they could have on our business and results of operations.

CRITICAL ACCOUNTING POLICIES AND THE USE OF ESTIMATES

The preparation of our financial statements in conformity with accounting principles generally accepted in the United States (GAAP) requires management to make estimates and assumptions that affect the amounts reported in our financial statements and

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accompanying notes. Actual results could differ materially from those estimates.   The items in our financial statements requiring significant estimates and judgments are as follows:

Revenue Recognition

We enter into patent license, collaboration and humanization agreements that may contain multiple elements, such as upfront license fees, reimbursement of research and development expenses, milestones related to the achievement of particular stages in product development and royalties. Under our collaboration arrangements, we may receive nonrefundable upfront fees, time-based licensing fees and reimbursement for all or a portion of certain predefined research and development or post-commercialization expenses, and our licensees may make milestone payments to us when they or we achieve certain levels of development with respect to the licensed technology. Generally, when there is more than one deliverable under the agreement, we account for the revenue as a single unit of accounting under Emerging Issues Task Force (EITF) Issue No. 00-21, “Revenue Arrangement with Multiple Deliverables,” for revenue recognition purposes. As a combined unit of accounting, the up-front payments are recognized ratably as the underlying services are provided under the arrangement. We recognize “at-risk” milestone payments upon achievement of the underlying milestone event and when they are due and payable under the arrangement. Milestones are deemed to be “at risk” when, at the onset of an arrangement, management believes that they will require a reasonable amount of effort to be achieved and are not simply reached by the lapse of time or perfunctory effort. We currently determine attribution methods for each payment stream based on the specific facts and circumstances of the arrangement. The EITF may provide additional guidance on the topic of “Revenue Recognition for a Single Deliverable for a Single Unit of Accounting (with Multiple Deliverables) That Have Multiple Payment Streams,” which could change our method of revenue recognition in future periods.

In addition, we occasionally enter into non-monetary transactions in connection with our patent licensing arrangements. Management must use estimates and judgments when considering the fair value of the technology rights acquired and the patent licenses granted under these arrangements. When available, the fair value of the non-monetary transaction is based on vendor-specific objective evidence of fair value of each significant element of the patent license agreement. Otherwise, management uses other methods of estimating fair value, such as current pricing information available to us. Therefore, the fair value of the technology right(s) acquired from the licensee is typically based on the fair value of the patent license and other consideration we exchange with the licensee.

Clinical Trial Expenses

We base our cost accruals for clinical trials on estimates of the services received and efforts expended pursuant to contracts with numerous clinical trial centers and clinical research organizations (CROs). In the normal course of business, we contract with third parties to perform various clinical trial activities in the ongoing development of potential drugs. The financial terms of these agreements vary from contract to contract, are subject to negotiation and may result in uneven payment flows. Payments under the contracts depend on factors such as the achievement of certain events, the successful accrual of patients or the completion of portions of the clinical trial or similar conditions. The objective of our accrual policy is to match the recording of expenses in our financial statements to the actual services received and efforts expended. As such, we recognize direct expenses related to each patient enrolled in a clinical trial on an estimated cost-per-patient basis as services are performed. In addition to considering information from our clinical operations group regarding the status of our clinical trials, we rely on information from CROs, such as estimated costs per patient, to calculate our accrual for direct clinical expenses at the end of each reporting period. For indirect expenses, which relate to site and other administrative costs to manage our clinical trials, we rely on information provided by the CRO, including costs incurred by the CRO as of a particular reporting date, to calculate our indirect clinical expenses. In the event of early termination of a clinical trial, we accrue and recognize expenses in an amount based on our estimate of the remaining non-cancelable obligations associated with the winding down of the clinical trial, which we confirm directly with the CRO.

If our CROs were to either under or over report the costs that they have incurred or if there is a change in the estimated per patient costs, it could have an impact on our clinical trial expenses during the period in which they report a change in estimated costs to us. Adjustments to our clinical trial accruals primarily relate to indirect costs, for which we place significant reliance on our CROs for accurate information at the end of each reporting period. Based upon the magnitude of our historical adjustments, we believe that it is reasonably possible that a change in estimate related to our clinical accruals could be approximately 1% of our annual research and development expenses.

Employee Stock-Based Compensation

Under the provisions of SFAS No. 123(R), “Stock-Based Compensation” (SFAS No. 123(R)), we estimate the fair value of our employee stock awards at the date of grant using the Black-Scholes option-pricing model, which requires the use of certain subjective assumptions. The most significant of these assumptions are our estimates of the expected volatility of the market price of our stock and the expected term of the award. When establishing an estimate of the expected term of an award, we consider the vesting period for the award, our recent historical experience of employee stock option exercises (including forfeitures), the expected volatility, and a comparison to relevant peer group data. As required under the accounting rules, we review our valuation assumptions at each grant date and, as a result, our valuation assumptions used to value employee stock-based awards granted in future periods may change.

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Further, SFAS No. 123(R) requires that employee stock-based compensation costs be recognized over the requisite service period, or the vesting period, in a manner similar to all other forms of compensation paid to employees. The allocation of employee stock-based compensation costs to each operating expense line are estimated based on specific employee headcount information at each grant date and estimated stock option forfeiture rates and revised, if necessary, in future periods if actual employee headcount information or forfeitures differ materially from those estimates. As a result, the amount of employee stock-based compensation costs we recognize in each operating expense category in future periods may differ significantly from what we have recorded in the current period. For the first quarter of 2008, we estimated our future forfeiture rate to be approximately 10%, which is based on historical forfeiture rates adjusted for certain one-time events and the impact of more recent trends on our future forfeitures. A five percentage point change in the rate of estimated stock option forfeitures could result in an increase or decrease to stock-based compensation expense of approximately $1.0 million.

Valuation and Impairment of Long-Lived Assets

In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we periodically evaluate whether current facts or circumstances indicate that the carrying value of our depreciable assets held and to be used may not be recoverable. If such circumstances are determined to exist, an estimate of undiscounted future cash flows produced by the long-lived asset, or the appropriate grouping of assets, is compared to the carrying value to determine whether impairment exists. If an asset is determined to be impaired, the loss is measured based on the difference between the asset’s fair value and its carrying value. We report an asset to be disposed of at the lower of its carrying value or its estimated net realizable value.

RESULTS OF OPERATIONS

Three Months Ended March 31, 2008 and 2007

Revenues

Our total revenues decreased by $1.5 million, or 3%, in the three months ended March 31, 2008 from the comparable period in 2007 for reasons discussed below.

Royalties

Royalty revenues increased by $1.4 million, or 3.0%, in the three months ended March 31, 2008, from the comparable period in 2007. This increase primarily was due to higher royalties received from the sales of Tysabri and Synagis, which are marketed by Elan Corporation, Plc and MedImmune (AstraZeneca), respectively, which was partially offset by a decrease in royalties received from sales of products marketed by Genentech. Although Genentech reported higher product sales from its royalty-bearing products for its fourth quarter of 2007 as compared to its fourth quarter of 2006 (in each case impacting our royalty revenues for the following quarter), the average effective royalty rate applied to Genentech’s product sales during the first quarter of 2008 was lower than the rate applied in the comparable 2007 period primarily due to a significant decline in the amount and percentage of Herceptin product manufactured and sold outside the United States.  This resulted in a greater percentage of Herceptin product sales in the first quarter of 2008 being subject to the tiered fee structure as opposed to the higher, fixed royalty rate that applies to Genentech products that are both manufactured and sold outside the U.S.  In addition, of Genentech product sales subject to the tiered fee structure, royalties were received on sales in both the third and fourth tiers in the first quarter of 2007, while in the first quarter of 2008, all royalties were based on product sales at the fourth and lowest tier (see details of Genentech royalty structure discussed below).

Under most of the agreements for the license of rights under our humanization patents, we receive a flat-rate royalty based upon our licensees’ net sales of covered products. Royalty payments are generally due one quarter in arrears; that is, generally in the second month of the quarter after the licensee has sold the royalty-bearing product. As noted above, however, our master patent license agreement with Genentech provides for a royalty fee structure that has four tiers, under which the royalty rate Genentech must pay on royalty-bearing products sold in the United States or manufactured in the United States and sold anywhere (U.S.-based Sales) in a given calendar year decreases during that year on incremental U.S.-based Sales above the net sales thresholds. As a result, Genentech’s average annual royalty rate during a year declines as Genentech’s cumulative U.S.-based Sales increase during that year. Because we receive royalties in arrears, the average royalty rate for the payments we receive from Genentech in the second calendar quarter, which would be for Genentech’s sales from the first calendar quarter, is higher than the average royalty rate for following quarters. The average royalty rate for payments we receive from Genentech is lowest in the first calendar

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quarter, which would be for Genentech’s sales from the fourth calendar quarter, when more of Genentech’s U.S.-based Sales bear royalties at lower royalty rates. With respect to royalties that fall under the tiered fee structure, we allocate the royalty revenues among the different products based on the relative underlying net product sales reported to us by Genentech. With respect to royalty-bearing products that are both manufactured and sold outside of the United States (ex-U.S.-based Sales), the royalty rate that we receive from Genentech is a fixed rate based on a percentage of the underlying ex-U.S.-based Sales. The mix of U.S.-based Sales and ex-U.S.-based Sales and the manufacturing location are outside of our control and have fluctuated in the past and may continue to fluctuate in future periods.

Royalties from licensed product sales exceeding more than 10% of our total royalty revenues are set forth below (by licensee and product, as a percentage of total royalty revenue):

License, Collaboration and Other

License, collaboration and other revenues consist of upfront licensing and patent rights fees, milestone payments related to licensed technology, license maintenance fees and revenue recognized under our collaboration agreements. License, collaboration and other revenues decreased by $2.9 million, or 28%, in the three months ended March 31, 2008 from the comparable period in 2007 primarily due to the absence in the 2008 period of certain revenues recognized in the first quarter of 2007 related to the termination of our agreement with Roche to co-develop daclizumab for transplant indications, which termination was effective in April 2007, and a decrease in revenues recognized under our collaboration agreement with Biogen Idec.  These decreases were partially offset by $2.0 million in milestone payments, reflected as license and other, that we received in the first quarter of 2008 from certain of our licensees.

We continue to evaluate potential opportunities to collaborate with respect to certain development stage programs or our drug development capabilities with other pharmaceutical or biotechnology companies, and if we enter into other collaboration agreements in the future, our license, collaboration and other revenues likely would increase.

Costs and Expenses

*  Not presented as calculation is not meaningful.

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Certain expenses related to the Commercial and Cardiovascular Operations, which were previously presented as cost of product sales, research and development expenses and general and administrative expenses in prior periods, have been presented as discontinued operations for all periods presented in the current financial statements.

We expect that our operating expenses in the near-term will decrease significantly relative to recent historical expense levels due to the sale of the Manufacturing Assets in March 2008 and the restructuring activities that are in process and that will continue over the next several quarters.  However, we expect to incur additional charges and expenses during 2008 and into 2009 related to the restructuring, including severance payments to terminated employees, and related to retention incentives we have offered to transition and ongoing employees. In addition, we are actively seeking to sublease excess capacity in our Redwood City facilities.  If we are able to sublease any of this excess capacity, our lease expenses would decline.  The process of subleasing office space can be a lengthy and uncertain process and we cannot assure if and when we may sublease any of our excess capacity or the amount of excess capacity that we may sublease.

Subsequent to the completion of our restructuring activities, we expect that our expenses could increase in future years as we increase the number of our pipeline programs, advance our clinical programs into more expensive late-stage clinical trials and as a result of the extensive resource commitments required to achieve regulatory approval of potential products.

Research and Development Expenses

Our research and development activities include research, process development, pre-clinical development, manufacturing and clinical development, which activities generally include regulatory, safety, medical writing, biometry, U.S. and European clinical operations, compliance, quality and program management. Research and development expenses consist primarily of costs of personnel to support these research and development activities, as well as outbound milestone payments and technology licensing fees, costs of preclinical studies, costs of conducting our clinical trials, such as fees to CROs and clinical investigators, monitoring costs, data management and drug supply costs, research and development funding provided to third parties and an allocation of facility and overhead costs, principally information technology.  Research and development costs also include stock-based compensation expense accounted for under SFAS No. 123(R) as a component of personnel-related costs. Total stock-based compensation expenses recognized as research and development expenses were $1.6 million and $2.6 million during the quarters ended March 31, 2008 and 2007, respectively.

The decrease in our research and development expenses during the first quarter of 2008 in comparison to the first quarter of 2007 is attributable to decreases in our Nuvion® and PDL 192 program costs, partially offset by increases in development costs for HuLuc63 and daclizumab.  The $7.3 million decrease in Nuvion costs is due to the decision to terminate the Nuvion phase 3 development program during the third quarter of 2007, and the $2.4 reduction in development expenses for PDL 192 was primarily driven by a decrease in PDL 192 manufacturing activity in the first quarter of 2008 in comparison to 2007. The $7.7 million and $2.0 million increases in program costs for HuLuc63 and daclizumab, respectively, were due to manufacturing campaigns that occurred in the first quarter of 2008, whereas there were no such manufacturing campaigns in the first quarter of 2007 for these products.

The table below reflects the stage of development for each of our products in clinical development and the research and development expenses recognized in connection with each product.

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