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CONVERTIBLE SENIOR NOTES

6 Months Ended

Jun. 30, 2011

7. CONVERTIBLE SENIOR NOTES

The Company has two series of convertible senior notes outstanding. The terms of the convertible senior notes are as follows:

· $20,782,000 principal amount of 3.125% Convertible Senior Notes due May 1, 2013 (the “2013 Notes”), convertible at the option of the holder into an aggregate of 5,586,559 shares of the Company’s common stock at a conversion price of $3.72 per share. Under certain circumstances, the Company has the right to redeem the 2013 Notes for cash as a whole or in part after May 1, 2011. The Company may be obligated to repurchase the 2013 Notes prior to their stated maturity if there is an occurrence of a fundamental event, as described in the indentures.

· $1,234,000 principal amount of 3.125% Convertible Senior Notes due November 1, 2011 (the “2011 Notes” and collectively with the 2013 Notes, the “Notes”), convertible at the option of the holder into an aggregate of 24,789 shares of the Company’s common stock at a conversion price of $49.78 per share. Under certain circumstances, the Company has the right to redeem the 2011 Notes for cash as a whole or in part. The Company may be obligated to repurchase the 2011 Notes prior to their stated maturity if there is an occurrence of a fundamental event, as described in the indentures.

Interest on both series of Notes is payable on May 1 and November 1 each year through maturity. Under certain circumstances, the Company may redeem some or all of the Notes on or after specified dates at a redemption price equal to 100 percent of the principal amount of the Notes plus accrued and unpaid interest. Holders of the Notes may require the Company to purchase some or all of their Notes at a repurchase price equal to 100 percent of the principal amount of the Notes plus accrued and unpaid interest if certain changes in control occur or upon termination of trading of the Company’s common stock.

The Company has elected to record the Notes at fair value in order to simplify the accounting for the convertible debt, inclusive of the redemption, repurchase and conversion adjustment features which would otherwise require specialized valuation, bifurcation and recognition. Accordingly, the Company has adjusted the carrying value of the Notes to their fair value as of June 30, 2011, with changes in the fair value of the Notes occurring since December 31, 2010 reflected in convertible note fair value adjustment in the unaudited condensed statements of operations. The fair value of the Notes is based on Level 2 inputs. The aggregate recorded fair value of the Notes of $20.9 million as of June 30, 2011 differs from their total stated principal amount of $22.0 million by $1.1 million. The aggregate recorded fair value of the Notes of $18.5 million as of December 31, 2010 differs from their total stated principal amount of $22.0 million by $3.5 million. The Company recorded a fair value adjustment of $1.8 million and $2.4 million related to the Notes for the three and six months ended June 30, 2011 to increase its recorded liability and corresponding expense.

The Company establishes the value of the Notes based upon contractual terms of the Notes, as well as certain key assumptions.

The assumptions as of December 31, 2010 were:

	2013 Notes		2011 Notes
Average risk-free rate	0.82	%	0.29	%
Volatility of BioSante common stock	78.7	%	61.0	%
Discount rate for principal payments in cash	17.0	%	17.0	%

The assumptions as of June 30, 2011 were:

	2013 Notes		2011 Notes
Average risk-free rate	0.45	%	0.19	%
Volatility of BioSante common stock	58.3	%	51.8	%
Discount rate for principal payments in cash	15.4	%	15.4	%

The discount rate is based on observed yields as of the measurement date for debt securities of entities having a C and Ca rating for long-term corporate obligations as assigned by Moody’s Investors Service. Volatility is based on the historical fluctuations in the Company’s stock price for a period of time equal to the remaining time until the debt maturity. The risk-free rate is based on observed yields as of the measurement date of one-year, two-year and three-year U.S. Treasury Bonds.

- Definition

The entire disclosure for information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants.

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