2nd Quarterly Report for Diamyd Medical AB (publ), Fiscal Year 2006/2007 (SWEDEN OMX: DIAM B; USA OTCQX: DMYDY) December 1, 2006 - February 28, 2007 • In December a patent license was executed with Centre National de la Recherche Scientifique (CNRS) in Paris, giving the Company exclusive rights to CNRS's GAD gene therapeutic technology. • At the Annual Shareholders' Meeting held on December 11, 2006: - Joseph Janes was elected Chairman of the Board and Hans Wigzell, Professor, joined the Board. - The Board was authorized to issue up to 600,000 new shares for cash or other consideration until the next Annual Shareholders' Meeting. - A plan to issue up to 250,000 options to employees and close collaborators of the Diamyd Group was approved. • In December SEK 10.2 million (US$ 1.49 million) was raised at market price from a Swedish institutional investor. • At the end of December the US$ 3 million convertible investment in Protein Sciences Corporation was converted into a fully diluted equity position of approximately 6.7 percent of the capital and votes. • A “Pre-IND/End of Phase II” meeting was held at the end of January with the U.S. Food and Drug Administration (FDA) to discuss a Phase III clinical program using Diamyd® to treat type 1 diabetes. • Details of the plans for U.S. and European Phase III clinical programs for type 1 diabetes were announced after the reporting period. • In June 2007, results from a 160-patient Phase II/III 18 month study in autoimmune type 2 diabetes (LADA) are planned to be publicly announced. • Net sales were SEK 115,000 (US$ 16,400) compared to SEK 377,000 (US$ 53,900) for the same period of the prior fiscal year. • Loss before Taxes was SEK 13.8 million (US$ 2.0 million) compared to SEK 6.0 million (US$ 0.9 million) for the same period of the prior fiscal year. • Liquid assets were SEK 95.9 million (US$ 13.4 million) as of February 28, 2007. This is compared with SEK 79.7 million (US$ 11 million) as of February 28, 2006. • Loss per share was SEK 1.4 (US$ 0.2) compared to SEK 0.7 (US$ 0.1) for the same period of the prior fiscal year. CEO OVERVIEW AND COMPANY HIGHLIGHTS During the past quarter, Diamyd Medical continued to advance its development of Diamyd® into a first-in-class therapy for type 1 and autoimmune type 2 (LADA) diabetes. A dialogue was initiated in January with the FDA at a “pre-IND/end of Phase II” meeting. The outcome of the meeting was positive and constructive and we anticipate starting Phase III registration trials in the US and Europe later this year. These trials would each comprise approximately 300 type 1 diabetes patients. Enrollment time is estimated to be approximately 9 months. The main study period would be 15 months. The primary endpoint will be the measured levels of meal-stimulated C-peptide as a direct marker of endogenous insulin production. Trends in blood glucose levels and insulin dose will be evaluated. The main study period of our Phase II/III clinical trial in 160 autoimmune type 2 diabetes (LADA) patients is close to completion. The 18 months results from this study are planned to be publicly announced in June 2007. To complement our GAD patent portfolio, an exclusive license agreement was concluded in December 2006 with Centre National de la Recherche Scientifique in Paris for rights to the patent portfolio covering therapeutic use of GAD via viral vectors. We believe this technology can become important in applications where GAD delivery to nervous tissue is required. Partnership discussions with pharmaceutical companies regarding commercialization of Diamyd® are ongoing. Concurrently, the Company continues its preparations to take Diamyd® into Phase III studies necessary for market approval. Several options are thereby kept open. Anders Essen-Möller, CEO and President of Diamyd Medical. BUSINESS OVERVIEW The Company's vision is that there is a cure to be found for autoimmune diabetes and the Company's mission is to contribute in the global effort to find this cure and to eliminate complications from the disease. Accordingly, the Company currently develops therapeutics from two independent platform technologies. One of these platforms relies on the GAD65 molecule and the other on a viral delivery system for proteins, in particular, to nervous tissue. Therapeutics for diseases other than diabetes are also being developed. Business Model Diamyd Medical's business model includes identifying candidate therapies and developing them through clinical trials before commercialization through partnerships. Development and marketing of related diagnostic products may be undertaken to prepare the market for subsequent drug launches. Diamyd Medical's business model leverages a focused in-house team with highly qualified skills and expert outsourcing partners, e.g. CROs and CMOs, to facilitate drug development. This model efficiently manages costs through resource flexibility while ensuring delivery of quality results as the Company's projects move forward. Diabetes The International Diabetes Federation has estimated that the number of diagnosed and undiagnosed individuals with diabetes is about 230 million persons world-wide. The number of individuals with diabetes increased by 6 million in 2006. Diabetes increased by 11% in the US. About 3-10% of the individuals diagnosed with diabetes have type 1 diabetes with incidence rates varying by country and ethnicity. About the same amount of patients have autoimmune type 2 diabetes, the LADA form of the disease. The costs associated with diabetes in the western world are about 7% of total health care budgets, or more than US$ 100 billion in the United States alone. DIAMYD® CLINICAL TRIALS: TYPE 1 DIABETES In August, 2006, the Company announced positive results from a 15 months Phase II trial in 70 children and adolescents with type 1 diabetes. Significant efficacy was demonstrated in preserving beta cell function. On average, the 35 patients that received Diamyd® experienced only half the decline in meal-stimulated insulin secretion, as measured by C-peptide levels, compared to placebo. In patients treated within 3 months of diagnosis, the Diamyd®-treated patients actually showed an improvement in endogenous insulin secretion. In addition, the results strongly support the safety of the drug. The treatment consists of only two injections of Diamyd® and was well received by patients, their doctors and family members. The trial is now in a 15 month follow-up phase with results due in about 10 months. DIAMYD® CLINICAL TRIALS: AUTOIMMUNE TYPE 2 DIABETES (LADA) An ongoing phase II/III study in 160 patients with autoimmune type 2 diabetes (LADA) is being conducted at 17 clinical sites in Sweden. Results from this 18 month trial are planned for June 2007. In the previously reported dose-finding trial in LADA patients the 20µg dose of Diamyd® was found to be the most effective and was selected for further development. This dose was found to significantly improve both C-peptide levels and A1C at two years after treatment. Five year follow up results are due mid-2008. Chronic Pain In the US, nearly one third of the population experiences severe chronic pain at some point in life, and, according to the American Pain Society, only one in four patients with chronic pain receive adequate treatment. Approximately 1.7 million people in the US and as many as 38 million worldwide suffer from moderate to severe neuropathic pain associated with diabetes, back pain, HIV/AIDS neuropathy, spinal cord injury, postherpetic neuralgia or other diseases. The neuropathic pain market in the United States is expected to be worth more than US$ 2 billion by 2009. NTDDS Diamyd Inc. in Pittsburgh is developing a replication deficient viral delivery system for proteins, in particular, to nervous tissues. This Nerve Targeted Drug Delivery System (NTDDS) has several advantages over other gene delivery strategies as the DNA that encodes the delivered gene does not integrate into the chromosome and, therefore reduces the risk of side effects. NTDDS has the capacity to deliver multiple genes and is well suited for development of a multitude of projects. Diamyd Inc. is discussing joint development of various projects with third party biotechnology companies. The NTDDS lead projects are therapeutics for pain using Enkephalin and GAD. These projects are both in a preclinical stage. GAD and other neurological diseases Apart from being a major autoantigen in autoimmune diabetes, GAD65 is also an enzyme that converts the excitatory neurotransmitter glutamate into the inhibitory neurotransmitter GABA. Several neurological and movement related disorders may be due to disturbances in the Glutamate-GABA balance, and GAD65 may come to play an important role as a component in future medications for treatment of such diseases. Diamyd Medical has sublicensed rights to the GAD65 gene to Neurologix, Inc. for the development of a GAD-based therapy to treat Parkinson's disease. A Phase I trial with patients having Parkinson's disease has been completed. Primary objectives of the study regarding safety and tolerability were successfully met. Additionally, indications of efficacy were shown. FINANCIAL PERFORMANCE At the Annual Shareholders' Meeting of Diamyd Medical AB (publ) that was held in Stockholm, Sweden, on December 11, 2006, Joseph Janes, U.S.A, was elected Chairman of the Board. Peter Rothschild, Björn O. Nilsson and Anders Essen-Möller were all re-elected and Hans Wigzell was newly elected. Additionally, the Board of Directors was authorized to decide, at one or more occasions until the next Annual Shareholders' Meeting, to issue new shares with consideration by set-off, in cash or with other conditions and without regard to pre-emption rights. The total number of shares that can be issued based on this authorization should not exceed 600,000. At full execution of all of the above the dilution is calculated to approximately 6 percent. The Meeting also approved the Board of Directors' proposal to implement an option scheme including the issuance of 250,000 purchase options to employees and close collaborators of the Diamyd Group. Each purchase option shall entitle the holder to acquire one series B-share. At full execution of all of the above the dilution is calculated to approximately 2.5 percent. In December 2006, we accepted a private investment from a Swedish institutional investor with support of the authorization (see above) given by the Annual Shareholders' Meeting. Issuance of 70,000 new shares at market price resulted in nearly 10.2 MSEK (US$ 1.5 million) of additional capital for the company. In December 2006, our 2005 investment in Protein Sciences Corporation was converted into an equity stake equal to approximately 6.7 percent of the fully diluted equity. In addition to being a manufacturing partner for Diamyd, Protein Sciences is also developing a late stage non-egg-based flu vaccine product, FluBlØk™. This drug candidate is based upon next-generation recombinant manufacturing technologies. Sales - Sales during the three month period amounted to 115 kSEK compared to 377 kSEK during the same period last year. Sales fluctuate from quarter to quarter and consist of Diamyd-related products such as GAD-protein sold to academic researchers. Costs - Costs for the Group amounted to 15.4 MSEK (6.9 MSEK) during the three month period. The increased costs are incurred by development of the manufacturing process and research and development cost in the subsidiary Diamyd Inc. Loss -The net loss for the Group for the three-month period amounted to 13.8 MSEK (6.0 MSEK). Financial Position and Liquidity - The Group's liquid assets amounted to 95.9 MSEK as of February 28th, 2007 (79.7 MSEK). Investments - No significant investments were made during the period. Change in Equity - As of February 28th, 2007, the Company's equity amounted to 132.2 MSEK (120.0 MSEK), resulting in a solvency ratio of 93.9 % (92.8 %). Personnel - The Company had 11 (7) employees as of February 28th, 2007. Parent Company - The Parent Company's net turnover amounted to 0 SEK as all sales are conducted in subsidiary companies. The period's investments were 0 SEK. FINANCIAL RESULTS Group's Consolidated Income Statement kSEK 6 months 6 months 3 months 3 months 12 months Sep-Feb Sep-Feb Dec-Feb Dec-Feb Sep-Aug 2006-2007 2005-2006 2006-2007 2005-2006 2005-2006 OPERATING EXPENSES Net sales Note 1 175 595 115 377 4,323 Other Operating Income 381 - 360 - 126 Total Operating Income 557 595 476 377 4,449 Operating Expenses Note 2 Cost Of Goods Sold -7 -383 -3 -6 -166 Research and Development -12,968 -7,752 -8,415 -3,359 -23,167 Patents -722 -314 -214 -35 -1,471 Personnel -5,848 -4,594 -3,113 -2,335 -9,876 Other External Expenses -5,075 -2,176 -3,089 -938 -8,680 Depreciation, Patents -1,094 -324 -517 -162 -1,626 Depreciation, Equipment -66 -57 -33 -29 -115 Total Operating Expenses -25,781 -15,600 -15,385 -6,864 -45,101 Operating Loss -25,225 -15,005 -14,910 -6,487 -40,652 FINANCIAL INCOME AND EXPENSES Dividends from Holdings - - - - 250 Interest Income 1,263 1,112 562 436 1,808 Interest Expense -528 - 548 - -56 Total Financial Income and Expense 734 1,112 1,109 436 2,002 Loss before Taxes -24,490 -13,893 -13,800 -6,051 -38,650 Taxes - - - - - NET LOSS FOR THE PERIOD -24,490 -13,893 -13,800 -6,051 -38,650 Group's Consolidated Balance Sheet kSEK Feb 28 Feb 28 Aug 31 2007 2006 2006 ASSETS Non-Current Assets Intangible assets 15,688 18,430 16,745 Tangible assets 251 170 133 Financial assets Note 3 21,418 800 800 Total Non-Current Assets 37,356 19,400 17,678 Current Assets Inventory 14 121 12 Trade and Other Receivables Trade Receivables 322 512 148 Other Receivables 3,707 1,761 2,879 Prepaid tax 404 198 326 Prepaid Expenses and Accrued Income 3,072 3,960 2,600 Total Trade and Other Receivables 7,505 6,431 5,953 Other Investments - - 21,735 Short-term investments 30,138 61,825 45,551 Cash and bank balances 65,738 17,865 13,190 Total Liquid Funds 95,876 79,690 58,741 Total Current Assets 103,395 86,242 86,441 TOTAL ASSETS 140,751 105,642 104,119 SHAREHOLDERS' EQUITY AND LIABILITIES Note 4 Shareholders' Equity Issued capital 9,772 8,735 8,735 Other Capital Contributions 349,995 420 288,938 Other Reserves 99 158,321 160 Accumulated Losses -227,691 -47,411 -203,201 Total Shareholders' Equity 132,175 120,065 94,632 Non-current liabilities - - - Current Liabilities Trade Payables 2,989 4,291 1,624 Other Payables 1,400 1,175 2,114 Prepaid Income and Accrued Expenses 4,187 3,780 5,749 Total Current Liabilities 8,576 9,246 9,487 TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES 140,751 129,311 104,119 Change in Shareholders' Equity (kSEK) Share Capital Other Capital Contributions Other reserves Accumulated losses TOTAL Adjusted opening balance, August 31, 2005 8,418 271,571 560 -164,551 115,998 Translation Gain 207 207 Revaluation of Short-Term Investments -607 -607 Option Premiums 240 240 New Share Issue 317 17,127 17,444 Net Loss for the Year -38,650 -38,650 Closing balance, August 31, 2006 8,735 288,938 160 -203,201 94,632 Opening balance, September 1, 2006 8,735 288,938 160 -203,201 94,632 New Share Issue 942 49,802 50,744 New Share Issue 70 10,030 10,100 Option Premiums 25 1,225 1,250 Translation Gain -61 -61 Net Loss for the Period -24,490 -24,490 Closing balance, February 28, 2007 9,772 349,995 99 -227,691 132,175 Cash Flow Statement kSEK 6 months 6 months 3 months 3 months 12 months Sep-Feb Sep-Feb Dec-Feb Dec-Feb Sep-Aug 2006-2007 2005-2006 2006-2007 2005-2006 2005-2006 Cash Flow from Operations before Changes in Working Capital Operating loss -25,225 -15,005 -15,090 -6,487 -40,652 Interest Received 1,439 1,112 519 436 4,304 Interest Paid -528 - 548 - -56 Dividend Received - - - - - Non-Cash Flow Items Depreciation 1,160 - 550 - 1,740 Changes in Accrued Interest -176 381 -102 191 -2,496 Other Non-Cash Flow Items - 259 -1,055 203 1,933 Income Tax Paid -78 -56 -49 -56 -158 Net Cash Flow from Operating Activities before Changes in Working Capital -23,408 -13,309 -14,679 -5,713 -35,385 Increase (-) Decrease (+) Inventory -2 -113 -5 -12 -5 Increase (-) Decrease (+) Receivables -1,478 1,162 4,082 -2,408 2,040 Increase (+) Decrease (-) Liabilities -854 -759 -3,336 252 680 Net Cash Flow from Operating Activities -25,742 -13,019 -13,938 -7,881 -32,670 Cash Flow from Investing Activities Purchase of Intangible Assets -51 -50 -51 -22 -436 Purchase of Tangible Assets -185 - -68 - -28 Purchase of Financial Asserts 16,542 - 1,428 - -69,297 Net Cash Flow from Investing Activities 16,306 -50 1,309 -22 -69,761 Cash Flow from Financing Activities Change in Long-Term Liabilities - - - - -768 Option premiums 1,225 - 1,225 - - New share issue 60,869 818 10,125 818 1,058 - -23,669 - -23,669 - Net Cash Flow from Financing Activities 62,094 -22,851 11,350 -22,851 290 Total Cash Flow for the Period 52,657 -35,920 -1,280 -30,754 -102,141 Cash and Cash Equivalents at beginning of period 13,190 115,535 66,942 110,372 115,535 Net Foreign Exchange difference -109 25 76 22 -204 Cash and Cash Equivalents at end of period 65,738 79,640 65,738 79,640 13,190 Accounting Principles The consolidated financial statements have been prepared in compliance with the International Financial Reporting Standards (IFRS) established by the International Accounting Standards Board (IASB) and the interpretations published by the International Financial Reporting Interpretations Committee (IFRIC) as endorsed by the European Commission for application in the EU. This consolidated interim report has been prepared in accordance with IAS 34, Interim Financial Reporting, which is consistent with the requirements stated in the Swedish Financial Accounting Standards Council's recommendation RR 31, Interim Reporting for Groups. The Group applies the same accounting and valuation principles as in the annual report for 2005/2006. Notes Note 1. Sales kSEK 6 months 6 months 3 months 3 months 12 months Sep-Feb Sep-Feb Dec-Feb Dec-Feb Sep-Aug 2006-2007 2005-2006 2006-2007 2005-2006 2005-2006 Sales of GAD-protein and diagnostic products 170 474 112 260 707 Invoiced freight 6 14 4 10 14 Out-licensing of GAD-technology - - - - 3,602 Other operating income 381 107 360 107 - TOTAL 557 595 476 377 4,323 Note 2 - Balance for the period The business is making a loss. Deduction for losses in the Swedish company is valued at SEK 0 as a precaution. Note 3 - Financial Assets The Company converted the US$ 3 million investment in Protein Sciences into an equity position totaling approximately 6.7% on a fully-diluted basis. Note 4 - Shareholders' equity and liabilities All Company debts are non-interest-bearing. Key ratios 6 months 6 months 3 months 3 months 12 months Sep-Feb Sep-Feb Dec-Feb Dec-Feb Sep-Aug 2006-2007 2005-2006 2006-2007 2005-2006 2005-2006 Return on Equity, % -21.6 -11.8 -10.4 -5.3 -36.8 Return on Capital Employed, % -21.6 -11.8 -10.4 -5.3 -36.7 Return on Assets, % -20.0 -10.9 -9.8 -4.9 -33.6 Shareholders' Equity per Share, SEK 13.5 13.7 13.5 13.7 10.8 Shareholders' Equity per Share after dilution, SEK 13.7 14.1 13.5 13.9 11.0 Cash flow per share, SEK 5.5 -4.3 -0.1 -3.6 -11.9 Solidity, % 93.9 92.8 93.9 92.8 90.9 Earnings per share SEK -2.6 -1.6 -1.4 -0.7 -4.5 Earnings per share after dilution, SEK -2.6 -1.6 -1.4 -0.7 -4.5 Number of shares 9,772,478 8,735,216 9,772,478 8,735,216 8,735,216 Number of shares, Average 9,546,639 8,428,615 9,700,478 8,439,188 8,582,797 Number of shares, Diluted 9,642,786 8,531,266 9,799,739 8,635,284 9,544,076 Stockholm, April 20, 2007 The Board of Diamyd Medical AB (publ) This report has not been reviewed by Diamyd Medical's auditors. Financial Calendar 9-month report (March-May) June 29, 2007 Year End Report (September-August) October 26, 2007 For further information, please contact: Stockholm-office Anders Essen-Möller CEO and President Tel: +46 8 661 0026 E-mail: investor.relations@diamyd.com Pittsburgh office Michael Christini President Tel: +1 412 770 1310 E-mail: Michael.Christini@diamyd.com For media contact in the US, please contact: Gregory Tiberend Executive Vice President Richard Lewis Communications, Inc. Tel: +1 212 827 0020 E-mail: gtiberend@rlcinc.com Diamyd Medical AB (publ). Linnégatan 89 B, SE-115 23 Stockholm, Sweden. Tel: +46 8 661 00 26, fax: +46 8 661 63 68 or E-mail: info@diamyd.com. VATno: SE556530-142001. About Diamyd Medical Diamyd Medical is a Life Science company focused on developing treatments for diabetes and its complications. The Company's furthest developed project is the GAD-based candidate drug Diamyd® for autoimmune diabetes. Diamyd® has demonstrated significant and positive results in Phase II clinical trials in both type 1 and autoimmune type 2 diabetes patients (LADA) in Sweden. GAD65, a major autoantigen in autoimmune diabetes, is the active substance in Diamyd®. GAD65 is also an enzyme that converts the excitatory neurotransmitter glutamate to the inhibitory transmitter GABA. In this context GAD may have an important role not only in diabetes, but also in several CNS-related diseases. Diamyd Medical has an exclusive world-wide license from UCLA in Los Angeles regarding the therapeutic use of the GAD65 gene. Diamyd Medical has sublicensed its UCLA GAD65 Composition of Matter license to Neurologix Inc., New Jersey, for treatment of Parkinson's disease with an AAV-vector. Other projects comprise drug development within gene therapy using the exclusively licensed and patent protected Nerve Targeted Drug Delivery System (NTDDS). The Company's lead gene therapy projects include using enkephalin and GAD for chronic pain, e.g. diabetes pain or cancer pain. All projects in this field are currently in preclinical phases. Diamyd Medical has offices in Stockholm (Sweden) and in Pittsburgh (USA). The Diamyd Medical share is quoted on the Stockholm Nordic Exchange in Sweden (ticker symbol: DIAM B) and on the OTCQX-list in the US (ticker symbol: DMYDY) administered by the Pink Sheets and the Bank of New York (PAL). Further information is available at www.diamyd.com Disclaimer: This document contains certain "statements" relating to present understandings, future events and future performance, including statements relating to the progress, timing and completion of our research, development and clinical trials; our ability to market, commercialize and achieve market acceptance for product candidates; and our current and future strategic partner relationships. These statements can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Diamyd Medical undertakes no obligation to publicly update such statements, whether because of new information, future events or otherwise, nor does Diamyd Medical give any guarantees that the statements, given or implied, are correct. This document is a translation from the Swedish original. No guarantees are made that the translation is free from errors.