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            to Table of Contents**


**As
      filed with the Securities and Exchange Commission on May 30,
      2006**





**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**







**FORM
      20-F**





o
              **REGISTRATION
                  STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE
                  ACT OF 1934**





**OR**





x
            **ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**




**For
      the Fiscal Year Ended: December 31, 2005**





**OR**





o
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES****EXCHANGE ACT OF 1934**





**OR**





o
            **SHELL
                COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES****EXCHANGE ACT OF 1934**




000-51341


(Commission
      file number)







**GENTIUM
      S.p.A.**


(Exact
      Name of Registrant as Specified in its Charter)




**NOT
      APPLICABLE**


(Translation
      of Registrant’s Name into English)







**Italy**


(Jurisdiction
      of incorporation or organization)




**Piazza
      XX Settembre 2**


**22079
      Villa Guardia (Como), Italy**


**+39
      031 385111**


(Address,
      including zip code, and telephone number,


including
      area code, of Registrant’s principal executive offices)




Securities
      registered or to be registered pursuant to Section 12(b) of the Act.




**None**


(Title
      of
      Class)






Securities
      registered or to be registered pursuant to Section 12(g) of the Act:




Name
                of each exchangeTitle
                of each class
            
            on
                which registeredAmerican
                Depositary Shares
            
            
            The
                Nasdaq National MarketOrdinary
                shares with a par value of €1.00 each*
            
            
            The
                Nasdaq National Market









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            to Table of Contents**


Securities
      for which there is a reporting obligation pursuant to Section 15(d) of the
      Act:




**None**


(Title
      of
      Class)




Indicate
      the number of outstanding shares of each of the issuer’s classes of capital or
      common stock as of the close of the period covered by the annual report.




**9,610,630
      ordinary shares**






Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act.


Yes
                o
            
            Nox




If
      this
      report is an annual or transition report, indicate by check mark if the
      registrant is not required to file reports pursuant to Section 13 or 15(d)
      of
      the Securities Exchange Act of 1934.


Yes o
            
            No
                x




Note
      -
      Checking the box above will not relieve any registrant required to file reports
      pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from
      their obligations under those Sections.




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, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in rule 12b-2 of the Exchange Act. (Check
      one):


Large
                accelerated filer o
            Accelerated
                filero
            Non-accelerated
                filer x




Indicate
      by check mark which financial statement item the registrant has elected to
      follow.


Item 17 o
            
            Item 18
              x




If
      this
      is an annual report, 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




Indicate
      by check mark whether the registrant has filed all documents and reports
      required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange
      Act
      of 1934 subsequent to the distribution of securities under a plan confirmed
      by a
      court.




Not
      applicable.






•
            
            Not
                for trading, but only in connection with the registration of the
                American
                Depositary Shares.




**Back
          to Table of Contents**





**TABLE
      OF CONTENTS**




PagePART
                  I
              
              5ITEM
                  1.
              IDENTITY
                  OF DIRECTORS, SENIOR MANAGEMENT AND
                  ADVISORS
              5ITEM
                  2.
              OFFER
                  STATISTICS AND EXPECTED TIMETABLE
              5ITEM
                  3.
              KEY
                  INFORMATION
              5SELECTED
                  FINANCIAL DATA
              5CAPITALIZATION
                  AND INDEBTEDNESS
              8REASONS
                  FOR THE OFFER AND USE OF
                  PROCEEDS
              9RISK
                  FACTORS
              9ITEM
                  4.
              INFORMATION
                  ON THE COMPANY
              20HISTORY
                  AND DEVELOPMENT OF THE COMPANY
              20CAPITAL
                  EXPENDITURES
              21BUSINESS
                  OVERVIEW
              21ORGANIZATIONAL
                  STRUCTURE
              37PROPERTY,
                  PLANTS AND EQUIPMENT
              38ITEM
                  4A.
              UNRESOLVED
                  STAFF COMMENTS
              39ITEM
                  5.
              OPERATING
                  AND FINANCIAL REVIEW AND
                  PROSPECTS
              39OPERATING
                  RESULTS
              40LIQUIDITY
                  AND CAPITAL RESOURCES
              47RESEARCH
                  AND DEVELOPMENT
              49TREND
                  INFORMATION
              50OFF-BALANCE
                  SHEET ARRANGEMENTS
              51TABULAR
                  DISCLOSURE OF CONTRACTUAL
                  OBLIGATIONS
              51ITEM
                  6.
              DIRECTORS,
                  SENIOR MANAGEMENT AND
                  EMPLOYEES
              52DIRECTORS
                  AND SENIOR
                  MANAGEMENT
              52COMPENSATION
              56BOARD
                  PRACTICES
              59EMPLOYEES
              61SHARE
                  OWNERSHIP
              62ITEM
                  7.
              MAJOR
                  SHAREHOLDERS AND RELATED PARTY
                  TRANSACTIONS
              62MAJOR
                  SHAREHOLDERS
              62RELATED
                  PARTY TRANSACTIONS
              66INTERESTS
                  OF EXPERTS AND COUNSEL
              68ITEM
                  8.
              FINANCIAL
                  INFORMATION
              68CONSOLIDATED
                  STATEMENTS
              68OTHER
                  FINANCIAL INFORMATION
              68SIGNIFICANT
                  CHANGES
              69ITEM
                  9.
              THE
                  OFFER AND LISTING
              69OFFER
                  AND LISTING DETAILS
              69PLAN
                  OF DISTRIBUTION
              70MARKETS
              70SELLING
                  SHAREHOLDERS
              70DILUTION
              70EXPENSES
                  OF THE ISSUE
              70
  -3-
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              to Table of Contents**
 ITEM
                  10.
              ADDITIONAL
                  INFORMATION
              71SHARE
                  CAPITAL
              71MEMORANDUM
                  AND ARTICLES OF ASSOCIATION
              71MATERIAL
                  CONTRACTS
              86EXCHANGE
                  CONTROLS
              89TAXATION
              89DIVIDENDS
                  AND PAYING AGENTS
              93STATEMENTS
                  BY EXPERTS
              93DOCUMENTS
                  ON DISPLAY
              93SUBSIDIARY
                  INFORMATION
              93ITEM
                  11.
              QUANTITATIVE
                  AND QUALITATIVE DISCLOSURES ABOUT MARKET
                  RISK
              93ITEM
                  12.
              DESCRIPTION
                  OF SECURITIES OTHER THAN EQUITY SECURITIES
              94PART
                  II
              
              94ITEM
                  13.
              DEFAULTS,
                  DIVIDEND ARRANGEMENTS AND
                  DELINQUENCIES
              94ITEM
                  14.
              MATERIAL
                  MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
                  AND USE OF PROCEEDS
              94ITEM
                  15.
              CONTROLS
                  AND PROCEDURES
              95ITEM
                  16A.
              AUDIT
                  COMMITTEE FINANCIAL EXPERT
              95ITEM
                  16B.
              CODE
                  OF ETHICS
              96ITEM
                  16C.
              PRINCIPAL
                  ACCOUNTANT FEES AND SERVICES
              96ITEM
                  16D.
              EXEMPTION
                  FROM THE LISTING STANDARDS FOR AUDIT
                  COMMITTEES
              96ITEM
                  16E.
              PURCHASES
                  OF EQUITY SECURITIES BY THE ISSUER AND
                  AFFILIATED PURCHASERS
              97PART
                  III
              
              97ITEM
                  17.
              FINANCIAL
                  STATEMENTS
              97ITEM
                  18.
              FINANCIAL
                  STATEMENTS
              97ITEM
                  19.
              EXHIBITS
              97




**INDEX
                TO FINANCIAL STATEMENTS**
            **F-1**






-4-
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          to Table of Contents**





**PART
      I**








***ITEM
              1.***
            ***IDENTITY
                OF DIRECTORS, SENIOR MANAGEMENT AND
                ADVISORS***





Not
      applicable.








***ITEM
              2.***
            ***OFFER
                STATISTICS AND EXPECTED
                TIMETABLE***





Not
      applicable.








***ITEM
              3.***
            ***KEY
                INFORMATION***




**GENTIUM
      S.P.A.**





We
      are a
      biopharmaceutical company focused on the research, discovery and development
      of
      drugs to treat and prevent a variety of vascular diseases and conditions related
      to cancer and cancer treatments.





**SELECTED
      FINANCIAL DATA**





The
      following selected financial data should be read in conjunction with “Operating
      and Financial Review and Prospects” and our financial statements and the related
      notes appearing elsewhere in this annual report. The selected financial data
      as
      of December 31, 2004 and December 31, 2005 and for each of the three years
      ended
      December 31, 2005 are derived from our audited financial statements, which
      are
      included in this annual report. The selected financial data as of December
      31,
      2003 and for the year ended December 31, 2002 has been derived from our audited
      financial statements, which are not included in this annual report. The selected
      financial data as of December 31, 2001 and December 31, 2002 and for the
      year ended December 31, 2001 has been derived from our unaudited financial
      statements, which are not included in this annual report. Our
      historical results are not necessarily indicative of results to be expected
      in
      any future period.




-5-
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          to Table of Contents**


Certain
      reclassification of prior period amounts have been made to our financial
      statements to conform to the current period presentation. The convenience
      translation into U.S. dollars has been done solely for the benefit of the
      reader, and does not imply that our results would actually have been these
      amounts in U.S. dollars had the U.S. dollar been our functional
      currency.




**Statement
              of Operations
              Data:**
            
            **For
                the Years Ended December 31,***(000s
              omitted except per share data)*
            
            **2001**
            
            **2002**
            
            **2003**
            
            **2004**
            
            **2005**
            
            
            **2005****(1)**Revenues:Sales
                to affiliates
            
            €
            6,459
            
            €
            5,915
            
            €
            6,532
            
            €
            2,870
            
            €
            3,260
            
            
            $
            3,860Third
                party product sales
            
            
            —
            
            
            —
            
            
            —
            
            
            243
            
            
            101
            
            
            
            120Total
                product sales
            
            
            6,459
            
            
            5,915
            
            
            6,532
            
            
            3,113
            
            
            3,361
            
            
            
            3,980Other
                income and revenues
            
            
            5
            
            
            392
            
            
            1,843
            
            
            583
            
            
            280
            
            
            
            332Total
                revenues
            
            
            6,464
            
            
            6,307
            
            
            8,375
            
            
            3,696
            
            
            3,641
            
            
            
            4,312Operating
                costs and expenses:Cost
                of goods sold
            
            
            2,531
            
            
            2,135
            
            
            2,435
            
            
            2,579
            
            
            2,911
            
            
            
            3,447Charges
                from affiliates
            
            
            1,025
            
            
            —
            
            
            1,485
            
            
            1,665
            
            
            1,047
            
            
            
            1,240Research
                and development
            
            
            2,206
            
            
            2,909
            
            
            2,253
            
            
            2,922
            
            
            4,557
            
            
            
            5,396General
                and administrative
            
            
            793
            
            
            864
            
            
            854
            
            
            1,194
            
            
            2,284
            
            
            
            2,705Depreciation
                and amortization
            
            
            185
            
            
            102
            
            
            67
            
            
            89
            
            
            118
            
            
            
            1406,740
            
            
            6,010
            
            
            7,094
            
            
            8,449
            
            
            10,917
            
            
            
            12,928Operating
                income (loss)
            
            
            (276
            )
            
            297
            
            
            1,281
            
            
            (4,753
            )
            
            (7,276
            )
            
            
            (8,616
            )Other
                income
            
            
            
            
            
            195Foreign
                currency exchange gain (loss), net
            
            
            —
            
            
            268
            
            
            156
            
            
            (55
            )
            
            (249
            )
            
            
            (295
            )Interest
                income (expense), net
            
            
            (147
            )
            
            (105
            )
            
            (71
            )
            
            (2,192
            )
            
            (4,148
            )
            
            
            (4,912
            )Pre-tax
                income (loss)
            
            
            (423
            )
            
            655
            
            
            1,366
            
            
            (7,000
            )
            
            (11,673
            )
            
            
            (13,823
            )Income
                tax expense (benefit):Current
            
            
            145
            
            
            128
            
            
            243
            
            
            65
            
            
            —
            
            
            
            —Deferred
            
            
            13
            
            
            108
            
            
            (84
            )
            
            (37
            )
            
            646
            
            
            
            765158
            
            
            236
            
            
            159
            
            
            28
            
            
            646
            
            
            
            765Net
                income (loss)
            
            €
            (581
            )
            €
            419
            
            €
            1,207
            
            €
            (7,028
            )
            €
            (12,319
            )
            
            $
            (14,588
            )Net
                income (loss) per share:Basic
                and Diluted
            
            €
            (0.12
            )
            €
            0.08
            
            €
            0.24
            
            €
            (1.41
            )
            €
            (1.78
            )
            
            $
            (2.11
            )





(1)
            Euro
                amounts are translated into U.S. dollars using the Noon Buying Rate
                for
                the euro on December 30, 2005, ofUS$1.1842
                per euro. No representation is made that the euro amounts referred
                to in
                this annual report could have ben or could be converted into U.S.
                dollars
                at any particular rate or at all.






-6-
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          to Table of Contents**




The
      following table summarizes certain of our balance sheet data.




**As
                of December 31,***(000’s
                omitted)*
            
            **2001**
            
            **2002**
            
            **2003**
            
            **2004**
            
            **2005**
            
            **2005****(1)****Balance
                Sheet Data:**Cash
                and cash equivalents
            
            
            €
            23
            
            €
            346
            
            €
            23
            
            €
            2,461
            
            €
            12,785
            
            $
            15,140Working
                capital (deficit)
            
            
            
            (3,897
            )
            
            (1,822
            )
            
            (3,037
            )
            
            (7,611
            )
            
            11,758
            
            
            13,924Property,
                net
            
            
            
            1,506
            
            
            1,736
            
            
            4,045
            
            
            8,543
            
            
            8,631
            
            
            10,221Total
                assets
            
            
            
            6,069
            
            
            6,643
            
            
            9,013
            
            
            15,909
            
            
            26,113
            
            
            30,923Long-term
                debt, net of current maturities
            
            
            
            51
            
            
            1,238
            
            
            1,112
            
            
            3,361
            
            
            2,485
            
            
            2,943Shareholders’
                equity (deficit)
            
            
            
            (1,647
            )
            
            (1,015
            )
            
            217
            
            
            (2,074
            )
            
            17,474
            
            
            20,693





(1)
            Euro
                amounts are translated into U.S. dollars using the Noon Buying Rate
                for
                the euro on December 30, 2005, ofUS$1.1842
                per euro. No representation is made that the euro amounts referred
                to in
                this annual report could have ben or could be converted into U.S.
                dollars
                at any particular rate or at all.





**Exchange
      Rate Information**




Fluctuations
      in the exchange rates between the euro and the U.S. dollar will affect the
      U.S.
      dollar amounts received by owners of ADSs on conversion by the depositary of
      dividends, if any, paid in euros on the ordinary shares represented by the
      ADSs.
      Moreover, such fluctuations may also affect the U.S. dollar price of the ADSs
      on
      the American Stock Exchange or the Nasdaq National Market System. The following
      table sets forth information regarding the exchange rates of U.S. dollars per
      euro for the periods indicated, calculated by using the average of the noon
      buying rates on the last day of each month during the periods presented.




**U.S.
                Dollar per Euro****Year**
            
            **Average**
            
            **Period
                End**2000
            
            
            0.9207
            
            
            0.93882001
            
            
            0.8909
            
            
            0.89012002
            
            
            0.9495
            
            
            1.04852003
            
            
            1.1411
            
            
            1.25972004
            
            
            1.2478
            
            
            1.35382005
            
            
            1.2400
            
            
            1.1842


Source:
      Federal Reserve Statistical Release H.10




The
      following table sets forth information regarding the high and low exchange
      rates
      of U.S. dollars per euro for the periods indicated using the noon buying rate
      on
      each day of such period.




**U.S.
                Dollar per Euro****Month**
            
            **High**
            
            **Low**November
                2005
            
            
            1.2067
            
            
            1.1667December
                2005
            
            
            1.2041
            
            
            1.1699January
                2006
            
            
            1.2287
            
            
            1.1980February
                2006
            
            
            1.2100
            
            
            1.1860March
                2006
            
            
            1.2197
            
            
            1.1886April
                2006
            
            
            1.2624
            
            
            1.2091May
                2006 (through May 25, 2006
            
            
            1.2888
            
            
            1.2607





Source:
      Federal Reserve Statistical Release H.10




On
      May
      25, 2006, the noon buying rate was €1.00 to $1.2777.




We
      use
      the euro as our native currency for financial reporting. This annual report
      contains translations of euros into U.S. dollars at specified rates solely
      for
      the convenience of the reader. No representation is made that the euro amounts
      referred to in this annual report could have been or could be converted into
      U.S. dollars at any particular rate or at all.




-7-
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**CAPITALIZATION
      AND INDEBTEDNESS**




Not
      applicable.




**REASONS
      FOR THE OFFER AND USE OF PROCEEDS**




Not
      applicable.




**RISK
      FACTORS**




*You
      should carefully consider the risks described below, in conjunction with the
      other information and financial statements and related notes included elsewhere
      in this annual report, before making an investment decision. You should pay
      particular attention to the fact that we conduct our operations in Italy and
      are
      governed by a legal and regulatory environment that in some respects differs
      significantly from the environment that prevails in other countries with which
      you may be familiar. Our business, financial condition or results of operations
      could be affected materially and adversely by any or all of these risks. In
      that
      event, the market price of our ADSs could decline and you could lose all or
      part
      of your investment.*




**Risks
      Relating to Our Business**




**We
      have generated limited revenues from commercial sales of our products to date,
      our revenues have declined significantly since 2003, and we do not know whether
      we will ever generate significant revenues or achieve
      profitability.**




We
      are
      focused on product development and have generated limited revenue from
      commercial sales of our products to date since 2003, because Sirton
      Pharmaceuticals S.p.A., our primary customer, has had a decrease in demand
      for
      some of the products we sell to it, as discussed below. In 2004, we had total
      product sales of **** €3.113
      million **** and
      in
      2005 we had total product sales of **** €3.361
      million **.**




We
      do not
      expect our total product sales to materially increase unless we are able to
      sell
      our product candidates, and we will continue to incur significant expenses
      as we
      research, develop, test and seek regulatory approval for these product
      candidates. While we were profitable in 2002 and 2003, we incurred a net loss
      of
€581 thousand in 2001, a net loss of €7.0 million in 2004 and a net loss
      of **** €12.3
      million in 2005. Our general and administrative expenses have increased as
      we
      added personnel to support our operations in connection with our development
      of
      our product candidates, internalized certain administrative services that were
      performed for us by our largest shareholder, FinSirton, and our affiliate,
      Sirton, and supported our operations in connection with being a public company.
      As a result, we anticipate incurring substantial and increasing losses for
      the
      foreseeable future. We cannot assure you that we will ever become profitable.
      If
      we fail to achieve profitability within the time frame expected by investors
      or
      securities analysts, the market price of our ADSs may decline.




**Most
      of our revenues are from sales to Sirton, our affiliate; those sales have
      declined over the past several years and may continue to decline in the
      future.**




Substantially
      all of our product sales in 2001, 2002 and 2003, approximately 92% of our
      product sales in 2004 and approximately 97% of our product sales in 2005 have
      been from the sale of our active pharmaceutical ingredients and products to
      Sirton, which has recently experienced financial difficulties. Sirton sells
      its
      finished products to one customer, Crinos, which sells them to the retail
      market. Our products have seen decreased demand over the past several years
      due
      to various market factors. As a result, Sirton’s demand for these products has
      decreased over the past several years, and may continue to decrease over the
      next several years until and unless both we and Sirton develop new customers.
      If
      we and Sirton are unsuccessful at developing new customers and the demand for
      our products continues to decrease, it could increase our need for additional
      capital, and our business could be adversely affected.




**We
      currently do not have any regulatory approvals to sell defibrotide to treat
      or
      prevent VOD or defibrotide to treat multiple myeloma or any of our other product
      candidates and we cannot guarantee that we will ever be able to sell any of
      these products anywhere in the world.**




We
      must
      demonstrate that our product candidates satisfy rigorous standards of safety
      and
      effectiveness before the FDA, the European Commission and other regulatory
      authorities will approve the products for commercial marketing. We or others
      must conduct clinical trials of those products which must be approved by the
      FDA
      or other regulatory agencies. These trials are time consuming and expensive,
      and
      we cannot guarantee whether they will be successful. Currently, the only
      regulatory approvals we have relate to the use of defibrotide to prevent
      vascular disease with risk of thrombosis in Italy. We do not have approval
      to
      sell defibrotide to treat or prevent VOD, defibrotide to treat multiple myeloma
      or any of our other product candidates anywhere in the world. We will need
      to
      conduct significant additional research, preclinical testing and clinical
      testing before we can file applications with the FDA, the European Commission
      and other regulatory authorities for approval




-8-
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          to Table of Contents**




of
      our
      product candidates. In addition, to compete effectively, our future products
      must be easy to use, cost-effective and economical to manufacture on a
      commercial scale. We may not achieve any of these objectives, and, as a result,
      may not be able to sell any of our product candidates anywhere in the world.




**The
      FDA and other regulatory authorities may require us to conduct a new clinical
      trial of defibrotide to treat VOD with multiple-organ failure using a control
      group.**




The
      Dana-Farber Cancer Institute at Harvard University conducted a Phase II clinical
      trial in the United States for the use of defibrotide to treat VOD with
      multiple-organ failure that concluded in December 2005. Based on our review
      of
      more than 200 articles in the medical literature, we believe that the survival
      rate for this disease is only approximately 20%. As a result of this fact and
      the fact that we and the Dana-Farber clinical investigators believe that there
      are no approved treatments available at this time, the Dana-Farber clinical
      investigators did not establish a control group of patients who do not receive
      the drug, as is customarily done in the FDA approval process. The FDA has stated
      a preference for a double-blind study that utilizes a control group but
      indicated that they would review a trial using a historical control only. Our
      Phase III clinical trial of defibrotide to treat VOD with multiple-organ failure
      that is currently underway uses historical control only. The FDA, upon reviewing
      this trial, may require us to conduct a new clinical trial using a control
      group
      and other regulatory authorities may take the same position. This could
      significantly delay the filing of a New Drug Application with the FDA or
      applications for other regulatory approval for this use because one or more
      of
      the clinical centers where the clinical trial is to be conducted may not be
      willing to conduct such a clinical trial on the basis that it is unethical
      to
      refuse treatment to patients when the treatment being investigated could
      potentially save their lives. The committee of clinical investigators who
      sponsored a Phase II/III clinical trial of defibrotide to treat VOD in Europe
      conducted by Consorzio Mario Negri Sud, which had a control group, cancelled
      the
      trial in October 2005 due to a lack of patients enrolling. We believe that
      patients were reluctant to enroll due to the possibility of being placed into
      the control group and not receiving treatment. A requirement for a control
      group
      would also require the expenditure of more funds on clinical trials and delay
      our ability to generate revenue from this product candidate.




**At
      present, we do not have sole control of the distribution of defibrotide in
      Italy, and we may not be be able to gain such control, which may adversely
      affect our clinical trials and our pricing of defibrotide.**




Because
      defibrotide is on the market in Italy, we believe it has been purchased and
      sold
      in other countries where its use is not licensed or permitted. This could impact
      our ability to enroll patients in our trials and the timing of such enrollments.
      Also, in the future, it could have a negative impact on our ability to
      appropriately price defibrotide for new indications, unless we can control
      the
      distribution of defibrotide in Italy. There can be no assurance of our ability
      to do so.




**Our
      additional product candidates are at early stages of development and will
      require clinical trials which may not be successful.**




We
      intend
      to apply for FDA and other regulatory agency approval for our additional product
      candidates, including other uses of defibrotide, in the future, and these
      additional product candidates will require that we conduct clinical trials
      and
      undergo the regulatory approval process. The commencement and completion of
      these clinical trials could be delayed or prevented by a variety of factors,
      including:




·
            delays
                in identifying and reaching agreement on acceptable terms with
                institutional review boards of clinical trial providers and prospective
                clinical trial sites;




·
            delays
                in obtaining FDA or other regulatory agency clearance to commence
                a
                clinical trial;




·
            delays
                in the enrollment of patients;




·
            lack
                of effectiveness of the product candidate during clinical trials;
                or




·
            adverse
                events or safety issues.




We
      do not
      know whether these future clinical trials will be initiated or completed at
      all.
      Significant delays in clinical trials will impede our ability to commercialize
      these additional product candidates and generate revenue, and could
      significantly increase our development costs.




**We
      may be required to suspend or discontinue clinical trials, including due to
      adverse events or other safety issues that could preclude approval of our
      products or due to difficulty enrolling participants.**




Our
      clinical trials may be suspended at any time for a number of safety-related
      reasons. For example, we may voluntarily suspend or terminate our clinical
      trials if at any time we believe that our product candidates present an
      unacceptable risk to the clinical trial patients. In addition, institutional
      review boards of clinical trial providers or regulatory agencies may order
      the
      temporary or permanent discontinuation of our clinical trials at any time if
      they believe that the clinical trials are not being conducted in accordance
      with
      applicable regulatory requirements, including if they present an unacceptable
      safety risk to patients.




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Administering
      any product candidate to humans may produce undesirable side effects. VOD and
      VOD with multiple-organ failure are complications associated with high dose
      chemotherapy and stem cell transplantation. Adverse events involving vascular
      disorders, coagulation, and potentially life-threatening bleeding have been
      reported in patients with VOD treated with defibrotide which potentially could
      be related to the defibrotide therapy. Hypotension has been reported as a
      possibly related serious adverse event in the trials of defibrotide to treat
      VOD
      with multiple-organ failure. Also, we discontinued a 69-patient Phase I/II
      clinical trial of defibrotide to prevent deep vein thrombosis after hip surgery
      in Denmark in 2002 after three patients experienced hypotension after receiving
      the defibrotide intravenously. That trial was discontinued due to the
      hypotension and because defibrotide can also be administered orally to prevent
      deep vein thrombosis. These adverse events reports will be weighed by FDA and
      other regulatory authorities in determining whether defibrotide can, from a
      risk-benefit perspective, be considered to be safe and effective to treat VOD
      with multiple-organ failure, to prevent deep vein thrombosis or any other
      indication for which approval is sought.




It
      is
      possible that as further data are collected and analyzed, additional adverse
      events or safety issues could emerge which could impact conclusions relating
      to
      the safety of these additional product candidates. As one of our current
      products and many of our product candidates utilize or will utilize defibrotide,
      any problems that arise from the use of this drug would severely harm our
      business operations, since most of our anticipated primary revenue sources
      would
      be negatively affected.




Furthermore,
      the committee of clinical investigators who sponsored a Phase II/III clinical
      trial of defibrotide to treat VOD in Europe that was conducted by Consorzio
      Mario Negri Sud cancelled the trial in October 2005 due to a lack of enrollees.
      In addition, the National Institute of Tumors in Milan cancelled a Phase I
      clinical trial of defibrotide to increase the number of stem cells available
      for
      transplant in December 2005 due to a lack of eligible enrollees. We are
      co-sponsoring with the European Group for Blood and Marrow Transplantation
      a
      Phase II/III clinical trial in Europe of defibrotide to prevent VOD in children,
      and a Phase II/III clinical trial in Europe of defibrotide to prevent VOD and
      transplant associated microangiopathy in adults. The participants in both of
      these trials randomly receive either defibrotide or no treatment. We may have
      difficulty enrolling participants in these trials as patients may be reluctant
      to take the risk of not receiving treatment with defibrotide. Further, because
      defibrotide is available on the market in Italy, we believe it has been
      purchased and sold in other countries where its use is not licensed. This could
      impact our ability to enroll patients in our trials and the timing of such
      enrollments. Our other clinical trials may also be discontinued if we or the
      sponsors are not successful in enrolling participants.




**Our
      products could be subject to restrictions or withdrawal from the market and
      we
      may be subject to penalties if we fail to comply with regulatory requirements,
      if and when any of our product candidates are approved.**




Any
      product for which we obtain marketing approval, together with the manufacturing
      processes, post-approval commitments, and advertising and promotional activities
      for such product, will be subject to continued regulation by the FDA and other
      regulatory agencies. Later discovery of previously unknown problems with our
      products or their manufacture, or failure to comply with regulatory
      requirements, may result in:




·
            restrictions
                on such products or manufacturing processes;




·
            withdrawal
                of the products from the market;




·
            voluntary
                or mandatory recalls;




·
            fines;




·
            suspension
                of regulatory approvals;




·
            product
                seizures; or




·
            injunctions
                or the imposition of civil or criminal penalties.




If
      we are
      slow to adapt, or unable to adapt, to changes in existing regulatory
      requirements or adoption of new regulatory requirements or policies, we may
      lose
      marketing approval for our products when and if any of them are approved.




**Our
      manufacturing facility is subject to continuing regulation by Italian
      authorities and is subject to inspection and regulation by the FDA and European
      regulatory. These authorities could force us to stop manufacturing our products
      if they determine that we are not complying with applicable regulations or
      require us to complete further costly alterations to our facility.**




Although
      our main business is discovering, researching and developing drugs, we also
      manufacture drugs, active pharmaceutical ingredients and other products at
      our
      manufacturing facility located near Como, Italy. This facility is subject to
      continuing regulation by the Italian Health Authority and other Italian
      regulatory authorities. During a biannual inspection of our manufacturing
      facility by the Italian Health Authority in October 2004, the Italian
      Health Authority noted by way of observations certain deficiencies in regard
      to
      the operation of our facility. We have corrected all of these deficiencies,
      and
      have kept the Italian Health Authority current with respect to the progress
      of
      our corrective actions. No penalties were imposed, our




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facility
      was not shut down and our manufacturing activities were not otherwise limited
      or
      curtailed as a result of the Italian Health Authorities’ notation of these
      deficiencies.




Our
      manufacturing facility is subject to inspection and regulation by the FDA and
      European regulatory authorities with respect to manufacturing our product
      candidates for investigational use. Also, part of the process for obtaining
      approval from the FDA and European regulatory authorities for our product
      candidates is approval by those authorities of our manufacturing facility’s
      compliance with current good manufacturing practices. After receiving initial
      approval, if any, the FDA or those European regulatory authorities will continue
      to inspect our manufacturing facility, including inspecting it unannounced,
      to
      confirm whether we are complying with the good manufacturing practices.




These
      regulators may require us to stop manufacturing our products and product
      candidates if they determine that we are not complying with applicable
      regulations or require us to complete costly alterations to our facility. We
      spent approximately €292 thousand in 2004 to correct the deficiencies noted
      by the Italian Health Authority and spent approximately €200 thousand in 2005 to
      complete these corrective actions. We spent approximately €7.2 million in
      2004 to substantially upgrade our facility in anticipation of the FDA and
      European regulatory approval process for our product candidates.




**If
      our third-party clinical trial vendors fail to comply with strict regulations,
      the clinical trials for our product candidates may be delayed or unsuccessful.**




We
      do not
      have the personnel capacity to conduct or manage all of the clinical trials
      that
      we intend for our product candidates. We rely on third parties to assist us
      in
      managing, monitoring and conducting most of our clinical trials. We expect
      to
      enter into clinical trial agreements with numerous centers in the United States
      and Canada regarding our Phase III clinical trial of defibrotide to treat VOD
      with multiple-organ failure. We have entered into co-sponsoring agreements
      with
      the European Group for Blood and Marrow Transplantation, regarding a Phase
      II/III clinical trial of defibrotide to prevent VOD in children in Europe and
      a
      Phase II/III clinical trial of defibrotide to prevent VOD and transplant
      associated microangiopathy in adults in Europe. We have entered into an
      agreement with Bradstreet Clinical Research & Associates, Inc. to
      perform clinical research project management services in connection with
      clinical trials conducted in the United States and agreements with KKS-UKT,
      GmbH
      and MDS Pharma Services Italy SpA **** to
      provide such services for our clinical trials in Europe. If these third parties
      fail to comply with applicable regulations or do not adequately fulfill their
      obligations under the terms of our agreements with them, we may not be able
      to
      enter into alternative arrangements without undue delay or additional
      expenditures, and therefore the clinical trials for our product candidates
      may
      be delayed or unsuccessful.




Furthermore,
      the FDA can be expected to inspect some or all of the clinical sites
      participating in our clinical trials, or our third party vendors’ sites, to
      determine if our clinical trials are being conducted according to current good
      clinical practices. If the FDA determines that our third-party vendors are
      not
      in compliance with applicable regulations, we may be required to delay, repeat
      or terminate the clinical trials. Any delay, repetition or termination of our
      clinical trials could materially harm our business.




**Our
      failure to raise additional funds in the future may delay the development of
      certain of our product candidates and sale of our products.**




The
      development and approval of our product candidates and the acquisition and
      development of additional products or product candidates by us, as well as
      the
      expansion of our research, regulatory and manufacturing operations, will require
      a commitment of substantial funds. Our future capital requirements are dependent
      upon many factors, some of which are beyond our control, including:




·
            the
                successful and continued development of our existing product candidates
                in
                preclinical and clinical testing;




·
            the
                costs associated with protecting and expanding our patent and other
                intellectual property rights;




·
            future
                payments, if any, received or made under existing or possible future
                collaborative arrangements;




·
            the
                timing of regulatory approvals needed to market our product candidates;
                and




·
            market
                acceptance of our products.




We
      will
      need additional funds before we have completed the development of our product
      candidates. We have no committed sources of additional funds. We cannot assure
      you that funds will be available to us in the future on favorable terms, if
      at
      all. If adequate funds are not available to us on terms that we find acceptable,
      or at all, we may be required to delay, reduce the scope of, or eliminate
      research and development efforts or clinical trials on any or all of our product
      candidates. We may also be forced to curtail or restructure our operations,
      obtain funds by entering into arrangements with collaborators on unattractive
      terms or relinquish rights to certain technologies or product candidates that
      we
      would not otherwise relinquish in order to continue independent
      operations.




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We
      are
      currently dependent on third parties to market and distribute our products
      in
      finished dosage form, and we may continue to be dependent on third parties
      to
      market and distribute our products and product candidates.




Our
      internal ability to handle the marketing and distribution functions for our
      current products and our product candidates is limited and we do not expect
      to
      develop the capability to provide marketing and distribution for all of our
      future products. Our long-term strategy includes having alliances with third
      parties to assist in the marketing and distribution of our product candidates.
      We have entered into an agreement with Sigma-Tau Pharmaceuticals, Inc. to market
      defibrotide to treat VOD in North America, Central America and South America
      and
      we may need to enter into similar agreements to market and distribute our other
      product candidates or develop these capabilities internally. We face, and will
      continue to face, intense competition from other companies for collaborative
      arrangements with pharmaceutical and biotechnology companies, for establishing
      relationships with academic and research institutions, for attracting
      investigators and sites capable of conducting our clinical trials and for
      licenses of proprietary technology. Moreover, these arrangements are complex
      to
      negotiate and time-consuming to document. Our future profitability will depend
      in large part on our ability to enter into effective marketing agreements and
      our product revenues will depend on those marketers’ efforts, which may not be
      successful.




**If
      we are unable to attract and retain key personnel, we may be unable to
      successfully develop and commercialize our product candidates or otherwise
      manage our business effectively.**




We
      are
      highly dependent on our senior management, especially Dr. Laura Ferro, our
      President and Chief Executive Officer, and Dr. Massimo Iacobelli, our
      Senior Vice President and Scientific Director, whose services are critical
      to
      the successful implementation of our product acquisition, development and
      regulatory strategies. If we lose their services or the services of one or
      more
      of the other members of our senior management or other key employees, our
      ability to successfully commercialize our product candidates or otherwise manage
      our business effectively could be seriously harmed. Dr. Ferro’s employment
      agreement with us is for a period of three years with a two year renewal option
      and prohibits her from competing with us during the term of her employment
      and
      for a period of one year after the termination of her employment.
      Dr. Ferro’s employment agreement provides that she is not obligated to
      spend more than 75% of her time working for our company. Cary Grossman, our
      Chief Financial Officer, is an independent contractor, rather than an employee.
      Mr. Grossman works for our company on an at-will basis, and has not
      committed to continue to work for us for any defined period of time. We have
      an
      understanding with Mr. Grossman that he will devote approximately 50% of his
      time working for our company. If Mr. Grossman’s services are discontinued and we
      are not able to hire an appropriate full-time, permanent Chief Financial Officer
      on a timely basis, we may not be able to maintain effective internal controls,
      accurately report our financial results or prevent fraud. As a result, our
      operating results could be harmed, we may fail to meet our reporting obligations
      and potential shareholders could lose confidence in our financial reporting,
      which would harm our business and the trading price of our ADSs.




Replacing
      key employees may be difficult and may take an extended period of time because
      of the limited number of individuals in our industry with the breadth of
      specific skills and experience required to develop, gain regulatory approval
      of
      and commercialize products successfully. Competition to hire from this limited
      pool is intense, and we may be unable to hire, train, retain or motivate these
      additional key personnel. In addition, under Italian law, we must pay our
      employees a severance amount based on their salary and years of service if
      they
      leave their employment, even if we terminate them for cause or they
      resign.




In
      order
      to expand our operations, we will need to hire additional personnel and add
      corporate functions that we currently do not have. Our ability to manage our
      operations and growth will require us to continue to improve our operational,
      financial and management controls and reporting system and procedures, or
      contract with third parties to provide these capabilities for us.




**Our
      independent registered public accounting firm reported a material weakness
      in
      our internal controls and we may not be able to remedy this material weakness
      or
      prevent future weaknesses. If we fail to maintain effective internal controls,
      we may not be able to accurately report our financial results or prevent fraud.
      As a result, potential shareholders could lose confidence in our financial
      reporting, which would harm our business and the trading price of our ordinary
      shares.**




Prior
      to
      our initial public offering in June 2005, we were a relatively small, family
      run
      Italian business. We had not been required to close our accounting records
      on a
      monthly or even quarterly basis. A very small accounting team handled the
      accounts for not only us, but also our then-parent, FinSirton S.p.A., and sister
      companies, Sirton and Foltene Pharmaceuticals S.p.A., all of which are also
      private companies. Therefore, the internal control structure was not adequate
      for a company publicly listed and reporting in the United States. Also, the
      financial reporting environment in Italy for private companies is significantly
      different than for public companies in the United States.




As
      an
      Italian company publicly listed in the United States, we are required by Italian
      law to keep our books according to the local statutory accounting methods,
      but
      we also prepare U.S. GAAP based financial statements for our Securities
      Act




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registration
      statements and Exchange Act reports. The preparation of our U.S. GAAP based
      financial statements is a manual process which involves the transformation
      of
      our Italian statutory financial statements into U.S. GAAP through a significant
      number of complex accounting adjustments and processes. This process also
      requires an ongoing review and update of the applicable U.S. GAAP that should
      be
      applied to the underlying Italian financial statements. This process is
      complicated and time-consuming and requires significant attention and time
      of
      our senior accounting personnel. Moreover, U.S. GAAP accounting adjustments
      tend
      to result in large differences between our Italian statutory and U.S. GAAP
      based
      financial statements.




When
      we
      started the process of preparing for our initial public offering, one of the
      first needs we identified to solve these issues was that of a full time,
      dedicated finance professional with knowledge of both U.S. and Italian
      accounting principles. We believe we satisfied that need by hiring Mr. Salvatore
      Calabrese, our Vice-President, Finance, in February of 2005. However, our
      independent registered public accounting firm informed us during the course
      of
      auditing our 2005 financial statements that our financial statement close
      process and the transformation of our Italian statutory financial statements
      into U.S. GAAP still did not reduce to an acceptably low level the risk that
      errors in amounts that would be material in relation to those financial
      statements may occur and may not be detected within a timely period by
      management in the normal course of business at December 31, 2005. Our
      independent registered public accounting firm considered these deficiencies
      in
      determining the nature, timing and extent of their procedures in their audit
      of
      our 2005 financial statements, and those deficiencies did not affect their
      report on our 2005 financial statements. The following highlights the issues
      identified and the steps that we are taking to remedy these items. We believe
      that all material weakness issues will be resolved during 2006.




· *Issue* *:*  For
      the
      first six months of 2005, we still relied on FinSirton for most of the data
      processing related to our significant processes, such as inventory costing,
      payroll and general ledger. We also had limited control over FinSirton’s
      information technology system related to the input or output of data.
      Additionally, we had no direct control over the security of data and access
      controls related to the control environment.




*Remedy* *:*  ** During
      the second six months of 2005, we established our own six (6) person accounting,
      controlling and reporting department, separate from FinSirton, which includes
      not only Mr. Calabrese but also Roberta Grandini as our controller. Ms. Grandini
      is experienced in U.S. GAAP and was previously the controller for the Italian
      subsidiary of a U.S. public biotechnology company. In addition, we purchased,
      and are in the process of installing, our own information technology system
      which will allow us to have full control, including information security
      control, over our data processing, including our underlying books and records.
      We expect that this transition from FinSirton’s accounting department and
      information technology system to our accounting department and information
      technology system will be complete by the end of the second quarter of
      2006.




· *Issue:*  Our
      process for budgeting, awarding, tracking and verifying research and development
      contracts and costs has historically been handled outside of the general
      accounting system. We have not had controls surrounding this process to closely
      monitor such areas as actual costs versus budgeted costs, actual costs billed
      versus the contractual amounts and the timing of when those costs have been
      incurred.




*Remedy* *:*  ** As
      mentioned above, during the second half of 2005, we established and expanded
      our
      own independent accounting department. In addition to Mr. Calabrese and Ms.
      Grandini, this department includes a contract administrator who now has primary
      responsibility for controlling the research and development contracts and costs.
      We also established internal procedures for purchases, cash disbursements,
      limits of authorization and segregation of duties. These procedures include
      requirements that all research and development expenditures be accompanied
      by a
      budget estimate, and any deviations be adequately explained. Additionally,
      the
      procedures require that expenses over €2,500 not previously budgeted must be
      approved by the internal control department, Mr. Calabrese and by our medical
      director before any purchase requests or contracts may be signed. Furthermore,
      on a quarterly basis, we perform an analysis of actual expenses versus budgeted
      expenses, and such analysis is presented and discussed with our management,
      our
      Audit Committee and the Board of Directors as a whole.




· *Issue* :  Our
      overall control environment continued to have difficulties in 2005 in closing
      our accounting records on a timely basis, given (i) the lack of personnel
      dedicated to performing such services for us, separate from our affiliated
      companies, (ii) our reliance upon FinSirton’s information technology system and
      (iii) the need for us to prepare Italian statutory financial statements and
      then
      manually convert those statements into U.S. GAAP financial statements.




*Remedy* *:*  ** We
      believe that our establishment of and expansion of our own, independent
      accounting department, including Mr. Calabrese and ** Ms.
      Grandini, and the acquisition of our own independent information technology
      system, will solve points (i) and (ii) above. In addition, although we will
      continue to need to prepare both Italian statutory financial statements and
      U.S.
      GAAP based financial statements, we believe that the expansion of our accounting
      department will help us close our records more quickly and that the
      establishment of our new information technology system will reduce the overall
      complexity of the process and the risk of errors.




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Any
      failure to implement new or improved internal controls, or resolve difficulties
      encountered in their implementation, could harm our operating results or cause
      us to fail to meet our reporting obligations. Inferior internal controls could
      also cause investors to lose confidence in our reported financial information,
      which could have a negative effect on the trading price of our ordinary shares.




**Our
      revenues, expenses and results of operations have been and will continue to
      be
      subject to significant fluctuations, which makes it difficult to compare our
      operating results from period to period.**




Since
      2003, our revenues have fluctuated significantly due to the need to temporarily
      cease operations at our manufacturing facility for an upgrade to the facility
      for seven months in 2004 and increase production at the facility in 2003 to
      stockpile inventory in anticipation of this cessation. Our revenues have also
      fluctuated due to changes in the amounts of each of our products that we sell
      in
      different periods. Due to the fact that we do not sell directly to the end-user,
      the timing of manufacturer orders can cause variability in sales. In 2005,
      we
      experienced higher sales volume in the second and in the fourth quarters;
      however we cannot predict if such fluctuation will happened in future years.
      Until we have successfully developed and commercialized a product candidate,
      we
      expect that substantially all of our revenues will result from the sale of
      our
      existing products. We expect that our operating results will vary significantly
      from quarter to quarter and year to year as a result of the timing and extent
      of:




·
            our
                research and development efforts;




·
            the
                revenues generated from the sale or licensing of our products;




·
            the
                execution or termination of collaborative arrangements;




·
            the
                receipt of grants;




·
            the
                initiation, success or failure of clinical trials; and




·
            the
                manufacture of our product candidates, or other development related
                factors.




Some
      of
      Series A senior convertible promissory notes we issued in the fourth quarter
      of
      2004 and the first quarter of 2005 were converted into our ordinary shares
      upon
      the closing of our initial public offering in June 2005 and the remainder were
      repaid in June and July 2005. Our results of operations in 2004 and 2005 reflect
      the interest expense we incurred on those notes. That interest expense included
      the amortization of the debt issue costs and of the original issue discount
      resulting from the inclusion of the warrants with the notes and the amortization
      of the value of the beneficial conversion feature resulting from the effective
      conversion price since the conversion ratio, which is equal
      to
      the principal amount of the notes divided by $8.10 (ninety percent (90%) of
      the
      initial offering price per ADS in our initial public offering), was less than
      the fair value of our ordinary shares at the time of issuance of the notes,
      which was $10.00. During 2004 and 2005, we incurred €1.828 million and €4.095
      million, respectively, of interest expense on these notes (including
      amortization of original issue discount and debt issue costs). As a result,
      our
      interest expense, pre-tax income (loss) and net income (loss) for those periods
      was less than it would have been otherwise.




Accordingly,
      our revenues and results of operations for any period may not be comparable
      to
      the revenues or results of operations for any other period.




**Most
      of our manufacturing capability is located in one facility that is vulnerable
      to
      natural disasters, telecommunication and information system failures, terrorism
      and similar problems, and we are not insured for losses caused by all of these
      incidents.**




We
      conduct most of our manufacturing operations in one facility located in Villa
      Guardia, near Como, Italy. This facility could be damaged by fire, floods,
      earthquake, power loss, telecommunication and information system failures,
      terrorism or similar events. Our insurance covers losses to our facility,
      including the buildings, machinery, electronic equipment and goods, for
      approximately €15 million, but does not insure against all of the losses
      listed above, including terrorism and some types of flooding. Although we
      believe that our insurance coverage is adequate for our current and proposed
      operations, there can be no guarantee that it will adequately compensate us
      for
      any losses that may occur. We are not insured for business interruption and
      we
      have no replacement manufacturing facility readily available.




**We
      obtain office and manufacturing space and certain administrative, financial,
      information technology, human resources, regulatory and quality control services
      from affiliates. This structure creates inherent conflicts of interest that
      may
      adversely affect us.**




Our
      largest shareholder is FinSirton, which owned approximately 39% of our ordinary
      shares at March 31, 2006. Dr. Ferro, who is our Chief Executive Officer and
      President and one of our directors, together with members of her family,
      controls FinSirton. FinSirton provides some of our office space, and corporate,
      payroll and information technology services. Sirton, which is a wholly owned
      subsidiary of FinSirton, has been and currently is our principal customer.
      Sirton also provides




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us
      with a
      number of business services such as, quality control and infrastructure
      services, and leases us office and manufacturing space.




If
      either
      of these affiliates failed to perform services for us adequately or caused
      us
      damage through their negligent conduct, our management would be presented with
      inherent conflicts of interest due to their ownership and oversight of
      FinSirton. We may have limited recourse in the event of such conflicts, and
      our
      business may be adversely affected by their occurrence.




**Our
      industry is highly competitive and subject to rapid technological changes.
      As a
      result, we may be unable to compete successfully or to develop innovative
      products, which could harm our business.**




Our
      industry is highly competitive and subject to significant and rapid
      technological change as researchers learn more about diseases and develop new
      technologies and treatments. While we are unaware of any other products or
      product candidates that treat or prevent VOD or the apoptosis that our product
      candidate oligotide is designed to treat, we believe that other companies have
      products or are currently developing products to treat some of the same
      disorders and diseases that our other product candidates are designed to treat.
      These companies include AnorMED Inc., AstraZeneca International, British
      Biotech plc, Abbott Laboratories, The Bayer Group, GlaxoSmithKline plc,
      Bristol-Myers Squibb Company, Eli Lilly Company, Boehringer Ingelheim, Axcan
      Pharma Inc., The Proctor & Gamble Company, Solvay
      Pharmaceuticals, Inc., Millenium Pharmaceuticals, Inc., ARIAD
      Pharmaceuticals, Inc., Celgene Corp., Titan Pharmaceuticals, Inc.,
      Cell Genesys, Inc., Human Genome Sciences, Inc., Chugai Pharmaceutical
      Co., Ltd., The National Cancer Institute, Seattle Genetics, Inc.,
      EntreMed, Inc., NeoRxx Corporation, Xcyte Therapies, Inc.,
      Amgen, Inc., CuraGen Corporation, Aesgen, Inc. and Endo Pharmaceutical
      Holdings Inc.




In
      addition, low molecular weight heparin, made by Aventis and other companies,
      competes with calcium heparin, which is one of the active pharmaceutical
      ingredients that we sell to Sirton which makes it into a finished product for
      sale by Crinos.




Many
      of
      these competitors have substantially greater research and development
      capabilities and experience, and greater manufacturing, marketing and financial
      resources, than we do. In addition, these companies’ products and product
      candidates are in more advanced stages of development than ours or have been
      approved for sale by the FDA and other regulatory agencies. As a result, these
      companies may be able to develop their product candidates faster than we can
      or
      establish their products in the market before we can. Their products may also
      prove to be more effective, safer or less costly than our product candidates.
      This could hurt our ability to recognize any significant revenues from our
      product candidates.




In
      May 2003, the FDA designated defibrotide as an orphan drug to treat VOD. If
      the FDA approves the New Drug Application that we intend to file before
      approving a New Drug Application filed by anyone else for this use of
      defibrotide, the orphan drug status will provide us with limited market
      exclusivity for seven years from the date of the FDA’s approval of our New Drug
      Application. However, a marketing authorization may be granted for the same
      therapeutic indications to a similar medicinal product if we give our consent
      to
      the second applicant, we are unable to supply sufficient quantities of
      defibrotide, or the second applicant can establish in its application that
      the
      second medicinal product, although similar to defibrotide, is safer, more
      effective or otherwise clinically superior. In that case, our product would
      not
      have market exclusivity. Additionally, while we are not aware of any other
      company researching defibrotide for this use, if another company does develop
      defibrotide for this use, there is no guarantee that the FDA will approve our
      New Drug Application before approving anyone else’s defibrotide product for this
      use, in which case the first product approved would have market exclusivity
      and
      our product would not be eligible for approval until that exclusivity expires.




In
      July 2004, the European Commission designated defibrotide as an orphan
      medicinal product to both treat and prevent VOD. If the European regulators
      grant us a marketing authorization for those uses of defibrotide, we will have
      limited market exclusivity for those uses for ten years after the date of the
      approval. However, a marketing authorization may be granted for the same
      therapeutic indications to a similar medicinal product if we give our consent
      to
      the second applicant, we are unable to supply sufficient quantities of
      defibrotide, or the second applicant can establish in its application that
      the
      second medicinal product, although similar to defibrotide, is safer, more
      effective or otherwise clinically superior. In that case, our product would
      not
      have market exclusivity.




**If
      we are unable to adequately protect our intellectual property, our ability
      to
      compete could be impaired.**




Our
      long-term success largely depends on our ability to create and market
      competitive products and to protect those creations. Our pending patent
      applications, or those we may file in the future, may not result in patents
      being issued. Until a patent is issued, the claims covered by the patent may
      be
      narrowed or removed entirely, and therefore we may not obtain adequate patent
      protection. As a result, we may face unanticipated competition, or conclude
      that
      without patent rights the risk of bringing products to the market is too great,
      thus adversely affecting our operating results.




Because
      of the extensive time required for the development, testing and regulatory
      review of a product candidate, it is possible that before any of our product
      candidates can be approved for sale and commercialized, our relevant patent
      rights may




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expire
      or
      remain in force for only a short period following commercialization. Our issued
      United States patents expire between 2008 and 2019, and our United States
      patents for which we have submitted applications will expire between 2008 and
      2026. Our United States patent covering defibrotide expires in 2010, and our
      U.S. patent covering the chemical process for extracting defibrotide expires
      in
      2008. Our European patent covering both defibrotide and the chemical process
      for
      extracting defibrotide expires in 2007. There may be no opportunities to extend
      these patents and thereby extend FDA approval exclusivity, in which case we
      could face increased competition for our products that are derived from
      defibrotide. Patent expiration could adversely affect our ability to protect
      future product development and, consequently, our operating results and
      financial position.




We
      also
      rely on trade secrets to protect our technology, especially where we do not
      believe patent protection is appropriate or obtainable. However, trade secrets
      are difficult to protect. While we use reasonable efforts to protect our trade
      secrets, our employees, consultants, contractors, outside scientific
      collaborators and other advisors may unintentionally or willfully disclose
      our
      information to competitors. Enforcing a claim that a third party illegally
      obtained and is using our trade secrets is expensive and time consuming, and
      the
      outcome is unpredictable. In addition, courts outside the United States are
      sometimes less willing to protect trade secrets. We intend to eventually license
      or sell our products in China, Korea and other countries which do not have
      the
      same level of protection of intellectual property rights as exists in the United
      Sates and Europe. Moreover, our competitors may independently develop equivalent
      knowledge, methods and know-how.




**Risks
      Related to Ownership of the ADSs**




**Our
      largest shareholder exercises significant control over us, which may make it
      more difficult for you to elect or replace directors or management and approve
      or reject mergers and other important corporate events.**




Our
      largest shareholder, FinSirton, owned approximately 39% of our outstanding
      ordinary shares at March 31, 2006. Dr. Laura Ferro, who is our Chief
      Executive Officer and President and one of our directors, together with members
      of her family, controls FinSirton. As a result, Dr. Ferro and her family,
      through FinSirton, will substantially control the outcome of all matters
      requiring approval by our shareholders, including the election of directors
      and
      the approval of mergers or other important corporate events. They may exercise
      this ability in a manner that advances their best interests and not necessarily
      yours. In particular, Dr. Ferro may use her control over FinSirton’s
      shareholdings in our company to resist any attempts to replace her or other
      members of our board of directors or management or approve or reject mergers
      and
      other important corporate events. Also, the concentration of our beneficial
      ownership may have the effect of delaying, deterring or preventing a change
      in
      our control, or may discourage bids for the ADSs or our ordinary shares at
      a
      premium over the market price of the ADSs. The significant concentration of
      share ownership may adversely affect the trading price of the ADSs due to
      investors’ perception that conflicts of interest may exist or arise.




**If
      a significant number of ADSs are sold into the market, the market price of
      the
      ADSs could significantly decline, even if our business is doing well.**




Some
      of
      our executive officers (other than Cary Grossman, our Chief Financial Officer)
      and directors and our current largest shareholder, FinSirton, have agreed with
      the underwriters of our initial public offering to a lock-up of an aggregate
      of
      3,750,000 outstanding ordinary shares and 822,000 ordinary shares issuable
      upon
      exercise of options outstanding for a period of 18 months after the effective
      date of the registration statement relating to our initial public offering
      of
      securities, provided, however, that if the average price per ADS equals or
      exceeds 200% of the initial public offering price of the ADSs in our initial
      public offering for a minimum of twenty continuous trading days, the ordinary
      shares may be released from the lock-up at the request of the holder, which
      could result in the release from the lock-up restrictions of the 3,750,000
      outstanding shares held by FinSirton and the 822,000 ordinary shares issuable
      upon exercise of the options. Our Chief Financial Officer, Cary Grossman, has
      agreed with the underwriters to a lock-up of 85,000 ordinary shares issuable
      upon exercise of certain of his options for a period of 365 days after the
      effective date of the registration statement relating to our initial public
      offering of securities. Sales of a substantial number of ADSs representing
      these
      ordinary shares in the public market could depress the market price of the
      ADSs
      and impair our ability to raise capital through the sale of additional equity
      securities. The underwriters, in their sole discretion and at any time without
      notice, may release all or any portion of the ordinary shares held by our
      officers, directors, and existing shareholders subject to these lockup
      agreements. Our other outstanding ordinary shares, ordinary shares issuable
      upon
      exercise of warrants and ordinary shares issuable upon exercise of options
      are
      not subject to lock-up agreements. We have filed a registration statement
      registering the resale of 2,001,125 outstanding ordinary shares and ADSs and
      1,143,482 ordinary shares and ADSs issuable upon exercise of warrants by certain
      selling security holders. Further, we have agreed to register (upon request)
      1,159,505 outstanding ordinary shares currently held by two of our shareholders,
      73,334 shares issuable upon conversion of warrants issued in connection with
      our
      Series A senior convertible promissory notes held by one of our securityholders
      and 151,200 ordinary shares issuable upon exercise of purchase options we
      granted to the underwriters of our initial public offering for resale in the
      market. We intend to register ADSs representing such ordinary shares in addition
      to the ordinary shares themselves, and such registration and ultimate sale
      of
      the securities in the markets may adversely affect the market for the
      ADSs.




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Risks
      Relating to Being an Italian Corporation




**The
      process of seeking to raise additional funds is cumbersome, subject to the
      verification of a notary public as to compliance with our bylaws and applicable
      law and may require prior approval of our shareholders at an extraordinary
      meeting of shareholders.**




We
      were
      incorporated under the laws of the Republic of Italy. The principal laws and
      regulations that apply to our operations, those of Italy and the European Union,
      are different from those of the United States. In order to issue new equity
      or
      debt securities convertible into equity, with some exceptions, we must increase
      our authorized capital. In order to do so, our board must meet and resolve
      to
      recommend to our shareholders that they approve an amendment to our bylaws
      to
      increase our capital. Our shareholders must then approve that amendment to
      our
      bylaws in a formal meeting duly called, with the favorable vote of the required
      majority, which may change depending on whether the meeting is held on a first
      or subsequent call. These meetings take time to call. In addition, a notary
      public must verify the compliance of the capital increase with our bylaws and
      applicable Italian law. Further, under Italian law, our existing shareholders
      and any holders of convertible securities sometimes have preemptive rights
      to
      acquire any such shares on the same terms as are approved concurrent with the
      new increase of the authorized capital pro rata based on their percentage
      interests in our company. Also, our shareholders can authorize the board of
      directors to increase our capital, but the board may exercise such power for
      only five years. If the authorized capital is not issued by the end of those
      five years, the authorized capital expires, and our board and shareholders
      would
      need to meet again to authorize a new capital increase. Our shareholders
      authorized our board of directors to increase our capital by up to €90 million
      of par value for ordinary shares and €10 million for ordinary shares issuable
      upon conversion of convertible bonds on April 28, 2006. Italian law also
      provides that if the shareholders vote to increase our capital, dissenting,
      abstaining or absent shareholders representing more than 5% of the outstanding
      shares of our company may, for a period of 90 days following the filing of
      the
      shareholders’ approval with the Registry of Companies, challenge such capital
      increase if the increase was not in compliance with Italian law. In certain
      cases (if, for example, a shareholders’ meeting was not called), any interested
      person may challenge the capital increase for a period of 180 days following
      the
      filing of the shareholders’ approval with the Registry of Companies. Finally,
      once our shareholders authorize a capital increase, we must issue all of those
      authorized shares before the shareholders may authorize a new capital increase,
      unless the shareholders vote to cancel the previously authorized shares. These
      restrictions could limit our ability to issue new equity or convertible debt
      securities on a timely basis.




**We
      are restricted under Italian law as to the amount of debt securities that we
      may
      issue relative to our equity.**




Italian
      law provides that we may not issue debt securities for an amount exceeding
      twice
      the amount of the sum of the aggregate par value of our ordinary shares (which
      we call our capital), our legal reserve and any other disposable reserves
      appearing on our latest Italian GAAP balance sheet approved by our shareholders.
      The legal reserve is a reserve to which we allocate 5% of our Italian GAAP
      net
      income each year until it equals at least 20% of our Italian GAAP capital.
      One
      of the other reserves that we maintain on our balance sheet is a “share premium
      reserve”, meaning amounts paid for our ordinary shares in excess of the capital.
      At December 31, 2005, the sum of our capital, legal reserves and other reserves
      on our Italian GAAP balance sheet was **** €29.6
      million. If we issue debt securities in the future, until such debt securities
      are repaid in full, we may not voluntarily reduce our capital or our reserves
      (such as by declaring dividends) if it results in the aggregate of the capital
      and reserves being less than half of the outstanding amount of the debt. If
      our
      equity is reduced by losses or otherwise such that the amount of the outstanding
      debt securities is more than twice the amount of our equity, some legal scholars
      are of the opinion that the ratio must be restored by a recapitalization of
      our
      company. If our equity is reduced, we could recapitalize by issuing new shares
      or having our shareholders contribute additional capital to our company,
      although there can be no assurance that we would be able to find purchasers
      for
      new shares or that any of our current shareholders would be willing to
      contribute additional capital.




**If
      we suffer losses that reduce our capital to less than €120 thousand, we
      would need to either recapitalize, change our form of entity or be liquidated.**




Italian
      law requires us to reduce our shareholders’ equity and, in particular, our
      capital (aggregate par value of our ordinary shares) to reflect on-going losses.
      We are also required to maintain a minimum capital of €120 thousand. At
      December 31, 2005, our Italian GAAP capital was approximately €9.611 million. If
      we suffer losses from operations that would reduce our capital to less than
      €120 thousand, then either we must increase our capital (which we could do
      by issuing new shares or having our shareholders contribute additional capital
      to our company) or convert the form of our company into an S.r.l., which has
      a
      lower capital requirement of €10 thousand. If we did not take these steps,
      a court could liquidate our company.




**You
      may not have the same voting rights as the holders of our ordinary shares and
      may not receive voting materials in time to be able to exercise your right
      to
      vote.**




Except
      as
      described in this annual report and in the deposit agreement for the ADSs,
      with
      our depositary, holders of the ADSs will not be able to exercise voting rights
      attaching to the ordinary shares evidenced by the ADSs on an individual basis.
      Holders of the ADSs will have the right to instruct the depositary as their
      representative to exercise the rights attached to




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the
      ordinary shares represented by the ADSs. You may not receive voting materials
      in
      time to instruct the depositary to vote, and it is possible that you, or persons
      who hold their ADSs through brokers, dealers or other third parties, will not
      have the opportunity to exercise a right to vote.




**You
      may not be able to participate in rights offerings and may experience dilution
      of your holdings as a result.**




We
      may
      from time to time distribute rights to our shareholders, including rights to
      acquire our securities. Under our deposit agreement for the ADSs with our
      depositary, the depositary will not offer those rights to ADS holders unless
      both the rights and the underlying securities to be distributed to ADS holders
      are either registered under the Securities Act of 1933, as amended, or exempt
      from registration under the Securities Act with respect to all holders of ADSs.
      We are under no obligation to file a registration statement with respect to
      any
      such rights or underlying securities or to endeavor to cause such a registration
      statement to be declared effective. In addition, we may not be able to take
      advantage of any exemptions from registration under the Securities Act.
      Accordingly, holders of our ADSs may be unable to participate in our rights
      offerings and may experience dilution in their holdings as a result.




**You
      may be subject to limitations on transfer of your ADSs.**




Your
      ADSs
      represented by the ADRs are transferable on the books of the depositary.
      However, the depositary may close its transfer books at any time or from time
      to
      time when it deems expedient in connection with the performance of its duties.
      In addition, the depositary may refuse to deliver, transfer or register
      transfers of ADSs generally when our books or the books of the depositary are
      closed, or at any time if we or the depositary deem it advisable to do so
      because of any requirement of law or of any government or governmental body,
      or
      under any provision of the deposit agreement, or for any other reason.




**Due
      to the differences between Italian and U.S. law, the depositary (on your behalf)
      may have fewer rights as a shareholder than you would if you were a shareholder
      of a U.S. company.**




We
      are
      incorporated under the laws of the Republic of Italy. As a result, the rights
      and obligations of our shareholders are governed by Italian law and our bylaws,
      and are in some ways different from those that apply to U.S. corporations.
      Some
      of these differences may result in the depositary (on your behalf) having fewer
      rights as a shareholder than you would if you were a shareholder of a U.S.
      corporation. We have presented a detailed comparison of the Italian laws
      applicable to our company against Delaware law in “ *Item
      10, Additional Information,* C *omparison
      of Italian and Delaware Corporate Laws.”* We
      compared the Italian laws applicable to our company against Delaware law because
      Delaware is the most common state of incorporation for U.S. public
      companies.




**Italian
      labor laws could impair our flexibility to restructure our business.**




In
      Italy,
      our employees are protected by various laws giving them, through local and
      central works councils, rights of consultation with respect to specific matters
      regarding their employers’ business and operations, including the downsizing or
      closure of facilities and employee terminations. These laws and the collective
      bargaining agreements to which we are subject could impair our flexibility
      if we
      need to restructure our business.




**FORWARD-LOOKING
      STATEMENTS**




This
      annual report may contain forward-looking statements that involve substantial
      risks and uncertainties regarding future events or our future performance.
      When
      used in this annual report, the words “anticipate,” “believe,” “estimate,”
“may,” “intent,” “continue,” “will,” “plan,” “intend,” and “expect” and similar
      expressions identify forward-looking statements. You should read statements
      that
      contain these words carefully because they discuss our future expectations,
      contain projections of our future results of operations or of our financial
      condition or state other “forward-looking” information. We believe that it is
      important to communicate our future expectations to our investors. Although
      we
      believe that our expectations reflected in any forward-looking statements are
      reasonable, these expectations may not be achieved. The factors listed in the
      section captioned “Risk Factors,” as well as any cautionary language included in
      this annual report or incorporated by reference, provide examples of risks,
      uncertainties and events that may cause our actual results to differ materially
      from the expectations we describe in our forward-looking statements. Before
      you
      invest in our ordinary shares, you should be aware that the occurrence of the
      events described in the “Risk Factors” section and elsewhere in this annual
      report could have a material adverse effect on our business, performance,
      operating results and financial condition. All subsequent written and oral
      forward-looking statements attributable to us or persons acting on our behalf
      are expressly qualified in their entirety by the cautionary statements set
      forth
      in this annual report. Except as required by federal securities laws, we are
      under no obligation to update any forward-looking statement, whether as a result
      of new information, future events, or otherwise.




You
      should rely only on the information contained in this annual report. We have
      not
      authorized anyone to provide you with information different from that contained
      in this annual report. The information contained in this annual report is
      accurate only as of the date of this annual report.




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***ITEM
              4.***
            ***INFORMATION
                ON THE COMPANY***





**HISTORY
      AND DEVELOPMENT OF THE COMPANY**





We
      are a
      biopharmaceutical company focused on the research, discovery and development
      of
      drugs to treat and prevent a variety of vascular diseases and conditions related
      to cancer and cancer treatments. In 1986, our founding company received approval
      to sell in Italy a drug called “defibrotide” to treat deep vein thrombosis, and,
      in 1993, it received approval to manufacture and sell defibrotide to both treat
      and prevent all vascular disease with risk of thrombosis. Our primary focus
      is
      on development of defibrotide for other uses in the United States and Europe,
      including to treat and prevent VOD and to treat multiple myeloma. In addition
      to
      defibrotide, we sell urokinase and calcium heparin, which are active
      pharmaceutical ingredients used to make other drugs, sulglicotide, which is
      intended to be used to treat peptic ulcers, and other miscellaneous
      pharmaceutical products. We have also developed a formulation of the drug
      mesalazine to treat inflammatory bowel disease. We will need to raise additional
      financing and/or enter into collaborative or licensing agreements in the future
      to fund continuing research and development for our product
      candidates.




We
      are
      part of a group of pharmaceutical businesses founded in Italy in 1944 that
      has
      been involved in the research and development of drugs derived from DNA and
      DNA
      molecules since the 1970’s. In 1993, FinSirton S. p.A. formed our company as
      Pharma Research S.r.L., an Italian private limited company, to pursue research
      and development activities of prospective pharmaceutical specialty products.
      FinSirton is our largest shareholder, and is controlled by Dr. Laura Ferro,
      who is our Chief Executive Officer and President and one of our directors,
      and
      her family. We receive certain administrative and other services and lease
      office and manufacturing space from FinSirton and Sirton Pharamceuticals S.p.A.,
      a wholly-owned subsidiary of FinSirton. In December 2000, Crinos Industria
      Farmacobiologica S.p.A., a subsidiary of FinSirton, contributed its plants,
      equipment and patents relating the development of biological pharmaceutical
      products, including all of its rights relating to defibrotide, to us in return
      for 98% of our ordinary shares. FinSirton continued to own the remaining 2%.
      At
      that time, we changed from a private limited company to a corporation and in
      July 2001 we changed our name to Gentium S.p.A.




In
      May 2002, Crinos Industria Farmacobiologica S.p.A. sold its commercial
      division, including its products, licenses and patents relating to
      pharmaceutical products in Italy, including the brand name “Crinos,” to a newly
      formed subsidiary, called Crinos S.p.A., of Stada, a leader in the generic
      pharmaceutical industry in Europe. At that time, Crinos Industria
      Farmacobiologica S.p.A. changed its name to Sirton Pharmaceuticals S.p.A. since
      it no longer had the rights to the name “Crinos.” At the same time, we granted
      certain licenses to Crinos S.p.A. to market defibrotide and mesalazine. Sirton
      now produces pharmaceutical products for third parties, including taking
      ingredients that we manufacture and turning them into finished drugs, and
      markets various skin care products.




In
      2003
      and 2004, Sirton distributed the 98% of our ordinary shares that it owned to
      FinSirton as dividends. As a result, FinSirton became our 100% shareholder
      at
      that time. In January 2005 and April 2005, FinSirton sold some of our ordinary
      shares that it owned to third parties. In June 2005, we made an initial public
      offering of 2,400,000 ADSs, each representing the right to receive one ordinary
      share, and listed the ADSs on the American Stock Exchange. FinSirton remains
      our
      largest shareholder, owning 39% of our outstanding ordinary shares at March
      31,
      2006. FinSirton also holds 100% of the outstanding shares of
      Sirton.





We
      have
      Italian, United States and international trademark rights in “Gentium,” United
      States and European Union trademark rights in “Gentide,” international and
      Italian trademark rights in “Oligotide” and Italian trademark rights to “Pharma
      Research” and “Dinelasi.” We also have a number of patent registrations issued
      and pending in Italy, the United States and other countries. This annual report
      also refers to brand names, trademarks, service marks, and trade names of other
      companies and organizations, and these brand names, trademarks, service marks,
      and trade names are the property of their respective holders.




This
      annual report contains market data and industry forecasts that were obtained
      from industry publications and third parties.





Our
      principal executive offices are located at Piazza XX Settembre 2, 22079
      Villa Guardia (Como), Italy. Our telephone number is +39 031 385111.
      Our website is located at www.gentium.it. The information contained on our
      website is not part of this annual report. Our registered agent for service
      of
      process is CT Corporation System, located at 111 Eighth Avenue,
      13th Floor, New York, New York 10011, telephone number (212) 894-8940.
      Under our current bylaws, the duration of our company will expire on
      December 31, 2050.




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**CAPITAL
      EXPENDITURES**




The
      following table sets forth our capital expenditures, before retirements, for
      each year in the three-year period ended December 31, 2005. Most of our
      2003 and 2004 expenditures relate to the major upgrade of our facility we
      completed in 2004.




**For
                the Year Ended December 31,***(in
                thousands)*
            
            **2003**
            
            **2004**
            
            **2005**Land
                and buildings
            
            €
            10
            
            €
            1,244
            
            €
            109Plant
                and machinery
            
            
            26
            
            
            3,690
            
            
            642Industrial
                equipment
            
            
            23
            
            
            169
            
            
            50Other
            
            
            —
            
            
            75
            
            
            88Computer
                Software
            
            
            —
            
            
            —
            
            
            123Construction
                in progress
            
            
            2,509
            
            
            —
            
            
            292Total
            
            €
            2,568
            
            €
            5,178
            
            €
            1,304





**BUSINESS****OVERVIEW**




We
      are a
      biopharmaceutical company focused on the research, discovery and development
      of
      drugs to treat and prevent a variety of vascular diseases and conditions related
      to cancer and cancer treatments. In 1986, our founding company received approval
      to sell in Italy a drug called “defibrotide” to treat deep vein thrombosis, and,
      in 1993, it received approval to manufacture and sell defibrotide to both treat
      and prevent all vascular disease with risk of thrombosis. In addition to
      defibrotide, we sell urokinase and calcium heparin, which are active
      pharmaceutical ingredients used to make other drugs, sulglicotide, which is
      intended to be used to treat peptic ulcers, and other miscellaneous
      pharmaceutical products. We have also developed a formulation of the drug
      mesalazine to treat inflammatory bowel disease.




We
      are
      building upon our extensive experience with defibrotide, which our predecessors
      discovered over 20 years ago, to develop it for a variety of additional
      uses, including to treat and prevent hepatic Veno-Occlusive Disease, or VOD,
      a
      condition in which some of the veins in the liver are blocked as a result of
      toxic cancer treatments such as chemotherapy. A severe form of VOD with
      multiple-organ failure is a potentially devastating complication with a survival
      rate after 100 days of only approximately 20%, according to our review of
      more than 200 published medical articles. Results from a Phase II clinical
      trial
      conducted at Harvard University’s Dana-Farber Cancer Institute of VOD with
      multiple-organ failure that concluded in December 2005 showed that the survival
      rate after 100 days was approximately 39% **** after
      treatment with defibrotide. We believe that there is no drug approved by the
      FDA
      or European regulators to treat or prevent VOD.




In
      May 2003, the FDA designated defibrotide as an orphan drug for use to treat
      VOD and made grants of $525 thousand to Dana-Farber supporting research
      into the use of defibrotide to treat VOD with multiple-organ failure. We have
      supported this research with a grant of $480 thousand to Dana-Farber. In
      July 2004, the European Commission granted us orphan medicinal product
      designation for the use of defibrotide to both treat and prevent VOD.




Due
      to
      the historically low survival rate and lack of treatments for this condition,
      we
      believe there is an immediate need for a drug to treat VOD with multiple-organ
      failure. The FDA has a “fast track” designation program which is designed to
      facilitate the development and expedite their review of new drugs that are
      intended to treat serious or life-threatening conditions and that demonstrate
      the potential to address unmet medical needs. The
      FDA
      has approved our application for “fast track” designation for defibrotide to
      treat VOD with multiple-organ failure occurring after stem cell transplantation
      by means of injection. The FDA
      approval process for defibrotide for this use remains dependent upon the
      successful completion of clinical trials.




If
      we are
      successful in obtaining FDA approval and/or European regulatory approval for
      the
      initial use of defibrotide, we expect that the cash flows from operations
      generated by this use of defibrotide will contribute towards our working capital
      requirements and funding for the further development of defibrotide for other
      uses and our ultimate goal of FDA and European regulatory approval for other
      uses of defibrotide, including to prevent VOD and treat multiple myeloma.
      However, we will need to raise additional funds by either issuing new debt
      or
      equity securities or entering into licensing or similar collaborative
      arrangements in order to complete the development of these other uses of
      defibrotide.




If
      we are
      successful in bringing these advanced product candidates to market, we intend
      to
      use the cash flow from operations generated by them and our current products
      to
      continue to discover and develop
      additional uses of defibrotide, such as to mobilize and increase the number
      of
      stem cells available in patients’ and donors’ blood for subsequent stem cell
      transplantation, to prevent deep vein thrombosis in markets outside of Italy,
      and to develop other drugs, such as oligotide




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(which
      we
      believe may protect against damage to blood vessel wall cells caused by a
      particular cancer treatment) and Gen 301 (which we believe may prevent and
      treat oral ulcers that often develop during and after cancer treatments). These
      product candidates will be very expensive to develop, and it is likely that
      we
      will need to either raise additional funds through debt and/or equity
      financings, or enter into licensing or similar collaborative arrangements,
      or
      both, in addition to cash flow we may generate from operations, to complete
      these developments.




Our
      strategy is to continue to enter into collaborative and strategic agreements
      to
      assist us in the development, manufacturing and marketing of our products and
      product candidates. To date, we have licensed the right to market defibrotide
      to
      treat VOD in North America, Central America and South America, upon regulatory
      approval, to Sigma-Tau Pharmaceuticals, Inc., which markets drug treatments
      for rare conditions and diseases. Sigma-Tau Pharmaceuticals, Inc. is an
      United States subsidiary of Sigma Tau Finanziaria S.p.A., an international
      family of pharmaceutical companies. We sold the rights to develop and sell
      our
      formulation of mesalazine in Canada, upon approval by Health Canada, and the
      United States, upon FDA approval, to Axcan Pharma, Inc., a specialty
      pharmaceutical company with offices in North America and Europe. We licensed
      the
      right to distribute mesalazine in Italy to Crinos S.p.A., a subsidiary of Stada
      Arzneimittel AG. Crinos also markets defibrotide in Italy to both treat and
      prevent vascular disease with risk of thrombosis under a semi-exclusive license
      agreement with us. We intend to continue to seek similar agreements with
      strategic partners as to other products and product candidates.




We
      manufacture defibrotide, calcium heparin, sulglicotide and other miscellaneous
      pharmaceutical products at our manufacturing facility near Como, Italy, and
      we
      lease our affiliate Sirton’s facility to manufacture urokinase. Urokinase and
      calcium heparin are active pharmaceutical ingredients used to make other drugs.
      Sulglicotide is intended to be used to treat peptic ulcers. Almost all of our
      revenues during the past three years have come from sales of these products
      to
      Sirton. Our revenues from the sales of these products to date have been
      generated only in Italy and, in 2004, also in Korea and amounted to
€5.9 million, €6.5 million, €3.1 million and €3.4 million in
      2002, 2003, 2004 and 2005, respectively. In 2004 we completed an upgrade to
      our
      facilities that cost approximately €7.2 million which we believe will
      facilitate the FDA and European regulatory approval process for our product
      candidates and enable our future production. In anticipation of the renovations,
      we temporarily increased our production shifts and deliveries in 2003 and
      suspended our production for approximately seven months in 2004. Comparison
      of
      our results between those periods will therefore be difficult.




**Market
      Overview**




The
      American Cancer Society estimated that in 2006 approximately 1.4 million
      new patients in the United States will be diagnosed with cancer and that there
      will be approximately 565,000 patient deaths attributable to these cancers.
      Cancer is a group of diseases characterized by uncontrolled growth and spread
      of
      abnormal cells. If the spread is not controlled, it can result in death. Most
      cancer patients will receive one or more of chemotherapy, radiation therapy
      and
      hormone therapy.




Chemotherapy,
      radiation therapy and hormone therapy treatments for cancer are used to target
      and kill cancer cells. In some cases, the therapy treats the cancer directly;
      in
      other cases, it is administered
      to prepare the patient for a stem cell or bone marrow transplant, which treats
      cancer or other diseases. Unfortunately, these therapies often have significant
      negative side effects, including damage to the cells that line the blood vessel
      walls. The damage to these cells can lead to various disorders of the vascular
      system. Some patients may not be able to continue with cancer treatments because
      they develop these vascular system complications; other patients considered
      at
      high risk of developing these vascular system complications may not receive
      optimal cancer treatments or any treatment at all.




**VOD.** One of
      the disorders of the vascular system that can result from chemotherapy,
      radiation therapy, hormone therapy and stem cell and bone marrow transplants
      is
      VOD. These therapies can cause extensive damage to the cells that line the
      walls
      of small veins in the liver. The body’s natural response is to swell or clot the
      sites of injury, but this blocks or “occludes” the vein. This blockage of the
      veins is called “Veno-Occlusive Disease.” VOD can cause damage to the liver and,
      in its severe form, leads to failure of the liver and other organs
      (multiple-organ failure), which usually results in death. The International
      Bone
      Marrow Transplant Registry estimates that approximately 45,000 people worldwide
      received blood and bone marrow transplants, which are types of stem cell
      transplants, in 2002. Based on our review of more than 200 articles in the
      medical literature, we believe that approximately 20% of patients who undergo
      stem cell transplants develop VOD, approximately one-third of those patients
      progress to VOD with multiple-organ failure, and only approximately 20% of
      patients who develop VOD with multiple-organ failure survive more than 100
      days
      after the stem cell transplant. VOD poses a severe risk to the victim’s health.
      We believe that there are no FDA or European regulatory approved treatments
      at
      this time for VOD.




**Multiple
      myeloma.** Multiple
      myeloma is a cancer of the plasma cell. The American Cancer Society estimates
      that about 16,570 new cases of multiple myeloma will be diagnosed in the U.S.
      during 2006. Approximately 11,300 Americans are expected to die of multiple
      myeloma in 2006. The 5-year survival rate for patients with multiple myeloma
      is
      approximately 32%.




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Strategy




Our
      goal
      is to research, discover, develop and manufacture drugs derived from DNA
      extracted from natural sources and drugs that are synthetic oligonucleotides
      (molecules chemically similar to natural DNA) to treat and prevent of a variety
      of vascular diseases and conditions related to cancer and cancer treatments.
      The
      primary elements of our strategy include:




· **Obtain
      FDA approval to use defibrotide to treat VOD with multiple-organ
      failure.** The
      Dana-Farber investigator presented the results from its Phase II clinical trial
      of defibrotide in patients with VOD with multiple-organ failure at the 47th
      Annual Meeting of the American Society of Hematology held on December 12,
      2005. Results show that the survival rate after 100 days for the 142
      patients treated was approximately 39% after 100 days as compared to the
      historical 100 day survival rate of approximately 20%. The FDA has approved
      our application for “fast track” designation for defibrotide to treat VOD with
      multiple-organ failure occurring after stem cell transplantation by means of
      injection. The FDA approval process for defibrotide for this use remains
      dependent upon the successful completion of clinical trials. We are sponsoring
      a
      Phase III clinical trial of defibrotide for this use in the United
      States.




· **Obtain
      European regulatory approval to use defibrotide to treat VOD with multiple-organ
      failure.** We
      believe that we may be able to use results from U.S. clinical trials of
      defibrotide to treat VOD with multiple-organ failure to apply for European
      regulatory approval of this product candidate without the need to replicate
      the
      clinical trials in Europe.




· **Expand
      approval of defibrotide to include prevention of VOD in Europe and the United
      States.** A
      preliminary study indicated that defibrotide may provide safe and effective
      protection against VOD. We are co-sponsoring a Phase II/III clinical trial
      for
      this use of defibrotide in children in Europe and a Phase II/III clinical trial
      in Europe for both the prevention of VOD and the prevention of transplant
      associated microangiopathy in adults. We intend to start a Phase II/III clinical
      trial in the United States of this product candidate in 2007. If the clinical
      trials confirm the preliminary indications, we intend to pursue further
      development in Europe and the United States, and ultimately to apply for FDA
      and
      European regulatory approval for this use.




· **Expand
      approval of defibrotide to include treatment of multiple myeloma.** Based
      on
      preclinical studies conducted at the Jerome Lipper Multiple Myeloma Center
      at
      Harvard University’s Dana Farber Cancer Institute, a Phase I/II clinical study
      of defibrotide to treat multiple myeloma started in December 2005 which we
      expect will include approximately 10 cancer centers in Italy. The principal
      investigator for the clinical trial is Dr. Mario Boccadoro, M.D., Division
      of
      Hematology, University of Turin, Italy.




· **Discover
      and develop additional product candidates.** We and
      others have conducted preclinical studies of other uses of defibrotide and
      of
      other drugs in our pipeline. We plan to continue to develop these product
      candidates and to further expand the possible markets for our products and
      product candidates. If we are successful in bringing our initial product
      candidates to market, our cash flow from operations will fund some of the costs
      needed to develop these product candidates. These product candidates will be
      very expensive to develop, and we will need to either raise additional funds
      through debt and/or equity financings, or enter into strategic partnerships,
      or
      both, to complete these developments.




· **Increase
      our marketing capacity, including the use of strategic
      partnerships.** We have
      already entered into a strategic license agreement with Sigma-Tau
      Pharmaceuticals, Inc. to market defibrotide to treat VOD in North America,
      Central America and South America upon regulatory approval and have granted
      Sigma-Tau Pharmaceuticals, Inc. a right of first refusal to market
      defibrotide to prevent VOD, to mobilize and increase the number of stem cells
      available for transplant and in non-intravenous forms. We intend to pursue
      similar agreements with Sigma-Tau Pharmaceuticals, Inc. and other strategic
      partners to market defibrotide in other jurisdictions and to market our other
      product candidates and/or develop such capacity internally.




**Advanced
      Product Candidates**




We
      have
      extensive experience developing and manufacturing drugs derived from DNA
      extracted from natural sources and drugs that are synthetic oligonucleotides.
      Our most advanced product candidates utilize defibrotide, a drug which our
      founding company discovered and we currently manufacture and license to others
      for sale in Italy, to treat and prevent VOD and to treat multiple myeloma.
      Our
      most advanced product candidates and their stages of development are set forth
      below.




The
      FDA’s
      designation of a product candidate as an orphan drug means that if the FDA
      approves our New Drug Application for that product candidate before approving
      a
      New Drug Application filed by anyone else for that product candidate, we will
      have limited market exclusivity for that product candidate for seven years
      from
      the date of the FDA’s approval of our New Drug Application. If the FDA were to
      approve a New Drug Application filed by someone else for a product candidate
      prior to the FDA approving our New Drug Application for the product candidate,
      our ability to market the product candidate would be restricted by their orphan
      drug exclusivity. Similarly, the Commission of the European Communities
      designation of a product candidate as an orphan medicinal product means that
      if
      the European regulators grant us a marketing authorization for that product
      candidate, we will have limited market exclusivity for that product candidate
      for ten years after date of the approval. If the European regulators were to
      grant a marketing authorization filed by someone else for a




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product
      candidate prior to the European regulators granting a marketing authorization
      for the product candidate, our ability to market the product candidate could
      be
      restricted.




The
      following table sets forth the clinical trials of our advanced product
      candidates completed or being conducted to date.




**Product**
              **candidate**
            
            **Intended
                use**
            
            **Orphan
                drug**
              **designation**
            
            **Territory**
              **and
                status**
              **of
                clinical**
              **trial**
            
            **Sponsor
                of**
              **clinical
                trial**
            
            **Centers
                participating in clinical trial**
            
            **Number
                of patients participating in clinical trials**Defibrotide
            
            Treat
                VOD with multiple-organ failure
            
            Orphan
                drug designation in the United States and Europe
            
            United
                States, Phase I/II, results published in 2002
            
            Investigator
                at Dana-Farber Cancer Institute at Harvard University
            
            Dana-Farber
                Cancer Institute, Boston
              Brigham
                and Women’s Hospital, Boston
              The
                Children’s Hospital, Boston
              Massachusetts
                General Hospital, Boston
              Beth
                Israel Deaconess Medical Center, Boston
              Columbia
                University, New York
              Loyola
                University Medical Center, Chicago
              University
                of Colorado Health Center, Denver
              Duke
                University Medical Center, Durham
              Johns
                Hopkins Oncology Center, Baltimore
              Fred
                Hutchinson Cancer Research Center, Seattle.
            
            88Treat
                VOD with multiple-organ failure
            
            
            
            United
                States, Phase II, results published in December 2005
            
            Investigator
                at Dana-Farber Cancer Institute at Harvard University
            
            Dana-Farber
                Cancer Institute, Boston
              Brigham
                and Women’s Hospital, Boston
              The
                Children’s Hospital, Boston
              Massachusetts
                General Hospital, Boston
              Beth
                Israel Deaconess Medical Center, Boston
              Fred
                Hutchinson Cancer Research Center, Seattle
              Duke
                University Medical Center, Durham
              Johns
                Hopkins Oncology Center, Baltimore
              Memorial
                Sloan Kettering Cancer Center, New York
              City
                of Hope, Duarte
            
            142Treat
                VOD with and without multiple-organ failure
            
            
            
            Europe,
                “Compassionate use” study, results published in 2000
            
            Committee
                of clinical investigators
            
            Christie
                Hospital, Manchester
              Royal
                Free Hospital, London
              Ospedali
                Riuniti, Bergamo
              University
                Hospital, Munich
              University
                Hospital, Graz
            
            40Treat
                VOD with multiple-organ failure
            
            
            
            United
                States, Phase III, enrollment scheduled to begin in May
                2006
            
            Gentium
            
            Dana-Farber
                Cancer Institute, Boston
              Brigham
                and Women’s Hospital, Boston
              The
                Children’s Hospital, Boston
              Massachusetts
                General Hospital, Boston
            
            0






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**Product**
                **candidate**
              
              **Intended
                  use**
              
              **Orphan
                  drug**
                **designation**
              
              **Territory**
                **and
                  status**
                **of
                  clinical**
                **trial**
              
              **Sponsor
                  of**
                **clinical
                  trial**
              
              **Centers
                  participating in clinical trial**
              
              **Number
                  of patients participating in clinical trials**Defibrotide
              
              Prevent
                  VOD
              
              Orphan
                  drug designation in Europe
              
              Switzerland,
                  preliminary pilot clinical study completed
              
              University
                  Hospital of Geneva
              
              University
                  Hospital of Geneva
              
              104Europe,
                  Phase II/III, pediatric, started in January 2006
              
              European
                  Group for Blood and Marrow Transplantation
                  and Gentium
              
              Pediatric
                  Hematology Centers of Frankfurt, Ulm, Tübingen, Jena, Kiel, Düsseldorf,
                  München, Muenster, Hannover, Dresden, Hamburg, Zürich, Genf, Bern, Graz,
                  Wien, Tivka, Israel, Leiden, Utrecht, Goeteborg, Upsala, Huddinge,
                  Lund;
                  London, Bristol, Genua, Monza
              
              17****at
                  April 30, 2006Europe,
                  Phase II/III, adult, enrollment scheduled to begin in second quarter
                  of 2006
              
              European
                  Group for Blood and Marrow Transplantation and Gentium
              
              Trial
                  has not started
              
              0Defibrotide
              
              Treat
                  multiple myeloma
              
              
              
              United
                  States, preclinical studies, completed
              
              Investigator
                  at Dana-Farber Cancer Institute at Harvard University
              
              Dana-Farber
                  Cancer Institute at Harvard University
              
              0
                  (study was in rodents)Italy,
                  Phase I/II started in December 2005
              
              Investigator
                  at the University of Turin
              
              Approximately
                  10 centers, beginning with Hospital Molinetter of Tornio
              
              7
                  at April 30,2006
 ***Defibrotide
        to treat VOD with multiple-organ failure***




Our
      leading product candidate is defibrotide to treat VOD, and in particular VOD
      with multiple-organ failure. In May 2003, the FDA designated defibrotide as
      an orphan drug to treat VOD. In July 2004, the Commission of the European
      Communities designated defibrotide to treat and prevent VOD as an orphan
      medicinal product, which is similar to being designated an orphan drug by the
      FDA.




In
      2000,
      the British Journal of Hematology published the results of a 40 patient
“compassionate use” study of defibrotide to treat VOD conducted in 19 centers in
      Europe from December 1997 to June 1999. Nineteen patients, or 47.5%,
      survived more than 100 days. The publication indicated that four of the 19
      patients who survived more than 100 days subsequently died. Twenty-eight
      patients were judged likely to die or had evidence of multiple-organ failure,
      and 10, or 36%, of these patients survived more than 100 days. The
      100 day survival rate is a milestone generally used to determine transplant
      success. This publication stated that the defibrotide was generally safely
      administered with no significant side-effects.




In
      2002,
      the results from 88 patients with VOD with multiple-organ failure following
      stem
      cell transplants who were treated with defibrotide from March 1995 to
      May 2001 were published in *Blood* ,
      the
      Journal of the American Society of Hematology. This publication reported data
      on
      19 patients treated under individual Investigational New Drug Applications
      and
      on a subsequent 69 patient multi-center Phase I/II clinical trial that was
      conducted under an Investigational New Drug Application filed by a Dana-Farber
      investigator. The primary goal of the trial was the assessment of the potential
      effectiveness of the drug and its side effects, if any. All patients in the
      clinical trial received defibrotide on an emergency basis. This publication
      stated that 31 patients, or 35.2%, of those patients survived at least
      100 days after stem cell transplant with minimal adverse side effects,
      primarily transient mild hypotension. Thirteen of those 31 patients who had
      survived more than 100 days had died by October 2001, the latest date
      for which survival information was available. No mortality from VOD or other
      toxicity related to the cancer treatment was seen more than 134 days after
      treatment with defibrotide, with the most common cause of later death being
      relapse.




The
      Dana-Farber investigator also sponsored, under its Investigational New Drug
      Application, a Phase II clinical trial in the United States of defibrotide
      which
      enrolled 145 stem cell transplant patients with VOD with multiple-organ failure
      at eight cancer centers. This trial was funded by us and $525 thousand in
      grants from the orphan drug division of the FDA. The purpose of this trial
      was
      to evaluate the effectiveness of this drug, including the effect of the drug
      on
      the survival rate of patients with VOD with multiple-organ failure, the
      effective dosage and potential adverse side effects.




The
      Dana-Farber investigator presented the results from this Phase II clinical
      trial
      at the 47th Annual Meeting of the American Society of Hematology on December
      12,
      2005. Results show that the survival rate after 100 days for the 142
      patients treated was approximately 39% after 100 days with minimal adverse
      events as compared to the historical 100 day survival rate of approximately
      20%. We do not have information about the survival rate after
      100 days.




The
      FDA
      has approved our application for “fast track” designation for defibrotide to
      treat VOD with multiple-organ failure occurring after stem cell transplantation
      by means of injection. The FDA approval process for defibrotide for this use
      remains dependent upon the successful completion of clinical trials. Fast track
      designation may shorten and facilitate the approval process.




We
      started a Phase III clinical trial in the United States for this use in December
      2005. Enrollment of patients is scheduled to begin in May 2006. We are the
      sponsor and will conduct the Phase III clinical trial and any additional
      clinical




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trials
      required by the FDA under our own Investigational New Drug Application that
      we
      submitted to the FDA in December 2003. Sponsoring and conducting the additional
      clinical trials under our own Investigational New Drug Application will allow
      us
      to communicate directly with the FDA regarding the development of this drug
      for
      marketing approval.




Consorzio
      Mario Negri Sud had been conducting a multi-center Phase II/III clinical trial
      in Europe and Israel of defibrotide to treat VOD after stem cell transplants
      that was sponsored by a committee of clinical investigators. The trial was
      scheduled to include approximately 340 patients, of which approximately 60
      had
      been enrolled at December 31, 2004. We were funding the costs of this
      clinical trial. The committee of clinical investigators cancelled the trial
      in
      October 2005 due to a lack of patients enrolled in the trial. This trial
      included a randomly selected control group. We believe that patients may have
      been reluctant to enroll due to the possibility of being placed in the control
      group and not receiving treatment.




***Defibrotide
      to prevent VOD***




We
      believe there is a significant market opportunity for defibrotide to prevent
      VOD
      for patients at risk of developing VOD. Based on our experience researching
      VOD,
      we believe that many recipients of high doses of chemotherapy, radiation therapy
      or hormone therapy or of therapies that prepare for stem cell transplants have
      an elevated risk of developing VOD. We believe that there are no FDA or European
      regulatory approved drugs to prevent VOD at this time.




A
      preliminary pilot clinical study in Switzerland by the University Hospital
      of
      Geneva on defibrotide, in patients at high risk of VOD, suggested that
      defibrotide may provide effective and safe prevention against VOD. The study
      tested patients who received stem cell transplants. None of 52 successive
      transplant patients who received defibrotide as a preventative agent developed
      VOD. By comparison, 10 of 52 patients who underwent transplants in the same
      center before the study developed VOD, which was fatal in three cases. The
      study
      report indicated that mild to moderate toxicity such as mild nausea, fever
      and
      abdominal cramps was documented, although the report stated that it was
      difficult to determine whether the toxicity was directly attributable to the
      defibrotide, the chemotherapy that preceded the stem cell transplants or other
      drugs used during the stem cell transplants. The study report did not indicate
      the number of patients who experienced this toxicity.




We
      are
      co-sponsoring with the European Group for Blood and Marrow Transplantation,
      a
      not-for-profit scientific society, a Phase II/III clinical trial in Europe
      of
      defibrotide to prevent VOD in children. We expect this study, which began
      enrollment in the first quarter of 2006, to include 270 patients enrolled by
      several centers in Europe, who will randomly receive either defibrotide or
      no
      treatment.




We
      are
      also co-sponsoring with the European Group for Blood and Marrow Transplantation
      a second Phase II/III clinical trial in Europe of defibrotide to prevent VOD
      and
      transplant associated microangiopathy in adults. We expect the trial to include
      at least 370 patients, enrolled by several centers in Europe beginning by the
      second quarter of 2006, who will randomly receive either defibrotide or a
      placebo in a double-blind study. The total number of patients enrolled will
      be
      confirmed upon finalization of the study protocol.




We
      intend
      to initiate development of defibrotide to prevent VOD in the United States
      by
      starting a clinical trial of this product candidate in 2007.




***Defibr*** ***otide
      to treat multiple myeloma***




Preclinical
      studies conducted by the Myeloma Center of the Dana-Farber Cancer Institute
      at
      Harvard University on human multiple myeloma in rodents suggests that
      defibrotide’s effect on the cells of blood vessel walls may help increase the
      effectiveness of other treatments for multiple myeloma. In particular, the
      overall survival rate of rodents with human multiple myeloma increased and
      tumor
      volume decreased when the animals were administered defibrotide in combination
      with other chemotherapy agents. The Myeloma Center of Dana-Farber is conducting
      additional preclinical studies of defibrotide’s effects on multiple myeloma.




An
      independent Phase I/II clinical study of defibrotide to treat multiple myeloma
      in combination with melphalan, prednisone, and thalidomide (MPT) started in
      December 2005 which we expect to include approximately 10 cancer centers in
      Italy. The principal investigator for the clinical trial is Dr. Mario Boccadoro,
      M.D., Division of Hematology, University of Turin, Italy. We will pay part
      of
      the costs of this trial. The trial is scheduled to be a dose-escalating,
      multi-center, non-comparative, open label study designed to assess the safety
      and the efficacy of Defibrotide with MPT regimen as a salvage treatment in
      advanced refractory MM patients. The Phase I component of the trial will combine
      oral MPT with escalating doses of defibrotide to determine the maximum tolerated
      dosage of defibrotide combined with MPT in 24 patients (three cohorts of eight
      patients). In the Phase II component of the trial, the oral MPT regimen will
      be
      combined with the maximum tolerated dosage of defibrotide and administered
      to 20
      consecutive patients to assess response rate and clinical efficacy.




**Additional
      Product Candidates**




We
      and
      other unrelated institutions have conducted preclinical studies of other uses
      of
      defibrotide and of other drugs in our pipeline. We plan to continue to develop
      our product candidates to further expand our possible markets. If we are
      successful in bringing our advanced product candidates to market, we intend
      to
      use our cash flow from operations generated by




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them
      and
      our current products to continue to fund some of the costs needed to develop
      these product candidates. These product candidates will be very expensive to
      develop, and we will need to either raise additional funds through debt and/or
      equity financings, or enter into strategic partnerships, or both, to complete
      these developments.




**Product
                Candidate**
            
            **Intended
                Use**
            
            **Stage
                of Development**Defibrotide
            
            Mobilize
                and increase the number of stem cells available in patients’ and donors’
                blood for subsequent stem cell transplantation
            
            Preclinical
                completed in Italy; Phase I trial in Italy cancelled due to lack
                of
                enrolleesDefibrotide
            
            Oral
                administration to prevent deep vein thrombosis outside
                Italy
            
            Phase
                I/II completed in DenmarkMesalazine
            
            Treat
                inflammatory bowel disease
            
            Phase
                III in United States and CanadaOligotide
            
            Protect
                against damage (apoptosis) of cells of the blood vessel walls caused
                by
                fludarabine, a chemotherapy agent
            
            Preclinical
                in GermanyGen
                301
            
            Prevent
                and treat mucositis
            
            Preclinical
                in England




***Defibrotide
      to mobilize and increase the number of stem cells available in patients’ and
      donors’ blood for subsequent stem cell transplantation***




We
      believe that we may be able to further expand our market for defibrotide to
      include its use to mobilize and increase the number of stem cells available
      for
      transplant. A stem cell transplant is a medical procedure that involves
      collecting stem cells from the blood of a patient before chemotherapy, radiation
      therapy or hormone therapy or a compatible donor intravenously and then
      re-administering them to the patient after the treatment. Stem cell transplants
      are used to treat side effects of certain cancer therapies. One side effect
      of
      chemotherapy, radiation therapy and hormone therapy is that these treatments
      can
      permanently damage the bone marrow, which inhibits or halts the production
      of
      blood cells and can be life threatening. There are many different types of
      blood
      cells, but they all develop from stem cells. Most of these stem cells are found
      in the bone marrow (the soft inside part of the bone), although some are found
      in the blood (peripheral blood stem cells). Doctors may use stem cell
      transplants to regenerate bone marrow after these cancer therapies. Stem cell
      transplants can also be used to treat some cancers directly, in addition to
      treating this side effect of some cancer treatments.




Peripheral
      blood stem cell transplants are less invasive than bone marrow transplants,
      which require a surgical procedure to remove bone marrow from the patient’s or
      donor’s bones. However, since blood is not as rich in stem cells as bone marrow,
      the availability of adequate amounts of peripheral blood stem cells from the
      patient or a compatible donor is critical to the effectiveness of a peripheral
      blood stem cell transplant.




Preclinical
      studies conducted by The National Institute of Tumors of Milan in rodents and
      non-human primates (rhesus monkeys) used defibrotide in combination with G-CSF,
      a drug commonly used to cause stem cells to migrate (mobilize) from the bone
      marrow into the blood circulatory system for collection and transplant. The
      preclinical study in rodents showed a statistically significant increase in
      certain types of stem cells available for transplant. The preclinical study
      in
      primates showed that the number of stem cells available for transplant increased
      by a factor of six.




The
      National Institute of Tumors of Milan was conducting a Phase I clinical trial
      in
      Italy to evaluate the safety and effectiveness of defibrotide to increase the
      number of stem cells available for transplant when used with G-CSF in humans.
      The primary objective of this study was to determine the dose of defibrotide
      to
      be injected over a 24-hour period by continuous intra-venous injection necessary
      to increase the number of stem cells to the level that was obtained in the
      rhesus monkeys study. Patients who did not achieve a target number of stem
      cells
      available for transplant after an initial treatment with G-CSF were eligible
      to
      be enrolled for this study. The strict enrollment criteria led to difficulties
      in enrolling patients and the National Institute of Tumors of Milan cancelled
      this trial in December 2005 for this reason.




***Defibrotide
      to prevent deep vein thrombosis***




We
      and
      our predecessors have manufactured and marketed defibrotide in Italy to treat
      deep vein thrombosis since 1986 and to both treat and prevent all vascular
      disease with risk of thrombosis since 1993. These uses of defibrotide both
      involve intra-venous injection and oral administration. Beginning in 2002,
      we
      licensed the right to sell defibrotide to treat and prevent all vascular disease
      with risk of thrombosis in Italy to Crinos.




Vascular
      disease with risk of thrombosis refers to several serious cardiovascular
      conditions, one of which is deep vein thrombosis. Deep vein thrombosis is a
      blockage of the veins in the legs that can have many causes, including hip
      surgery, pregnancy, cancer and cancer therapies and injuries. Deep vein
      thrombosis can lead to pulmonary embolism, the dislodging and migration of
      blood
      clots to the lungs, which is often fatal.




Our
      future plans include the development of oral administration of defibrotide
      to
      prevent deep vein thrombosis for markets outside of Italy. We concluded a
      69-patient Phase I/II clinical trial of defibrotide to prevent deep vein
      thrombosis after




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hip
      surgery in Denmark in 2002. In this clinical trial, the defibrotide was
      administered through intra-venous infusion for up to two days followed by oral
      administration for a further three to six days. This trial was discontinued
      after three patients receiving defibrotide through intra-venous infusion
      experienced hypotension, a serious adverse event. No serious adverse events
      were
      noted in patients receiving defibrotide orally. Based on the results of this
      trial and prior use of defibrotide to prevent deep vein thrombosis in Italy,
      we
      nonetheless believe that defibrotide may be safe and effective to prevent deep
      vein thrombosis. We believe that the largest market opportunity for this use
      of
      defibrotide involves administering it orally, as this would allow patients
      to take the drug at home instead of a hospital. We would need to conduct
      additional clinical trials in markets outside of Italy to explore the safety
      and
      effectiveness of oral administration of defibrotide for this use.




***Mesalazine***




Inflammatory
      bowel disease, or ulcerative colitis, is a disease that causes inflammation
      and
      lesions in the large intestine. We have created a gel formulation of mesalazine,
      an anti-inflammatory product intended to treat the disease. In 2002 we sold
      to
      Axcan the exclusive rights to develop and market in Canada, upon Health Canada
      approval, and the United States, upon FDA approval, our formulation of
      mesalazine to be developed to treat inflammatory bowel disease. Axcan is a
      Canadian pharmaceutical company that specializes in gastrointestinal therapies
      and markets its products through its own sales force in North America and
      Europe. In addition to certain upfront payments aggregating €1.258 million,
      Axcan has agreed to pay us deferred consideration in the amount of 4% of Axcan’s
      net sales of mesalazine in Canada and the United States during the first ten
      years of its commercialization.




Axcan
      completed an open-label, randomized 180-patient Phase III study to assess the
      evolution of the clinical symptoms of inflammatory bowel disease during the
      induction of remission by our formulation of mesalazine in 2005. This study
      was
      supported by two 50-patient placebo-controlled studies. Axcan has reported
      that
      they expect to “launch” the formulation in 2006 if it is approved by Health
      Canada and/or the FDA. We believe that patients will tolerate our formulation
      of
      mesalazine better than other companies’ formulations.




We
      also
      licensed the rights to develop and sell our formulation of mesalazine in Italy
      to Crinos, which has a right of first refusal to license the rights for
      substantially all other European countries.




***Oligotide***




We
      are
      developing oligotide, another product derived from natural DNA. One particular
      chemotherapy agent, fludarabine, is used to treat chronic lymphocytic leukemia.
      Fludarabine interferes with the growth of cancer cells, but it also causes
      damage, specifically apoptosis (a series of events in a cell that leads to
      its
      death), to blood vessel wall cells, which is an undesirable toxic effect of
      the
      chemotherapy. Researchers at the University of Regensburg, Germany, performed
      preclinical studies showing that oligotide, when used in combination with
      fludarabine, reduced the level of apoptosis in the cells of blood vessel walls
      to approximately the same level normally found in cells that have not been
      treated with fludarabine. We believe there is a potential market for oligotide
      to be used in conjunction with fludarabine and other cancer therapies to reduce
      the undesirable toxic effects of these cancer therapies. We may conduct further
      research on oligotide to investigate its effectiveness in protecting blood
      vessel cell walls against cancer therapies.




***Gen
      301***




Some
      cancer therapies, such as chemotherapy and radiation therapy, can cause
      mucositis. Mucositis is a condition in which the lining of the digestive system
      becomes inflamed and ulcerated, often resulting in sores in the mouth. Patients
      with these oral ulcerations suffer from pain and have an associated risk of
      developing life-threatening infections because the patients also have a
      diminished natural immune system following chemotherapy or radiation therapy.
      Gen 301 is another product derived from pig intestines that we are developing
      and investigating in preclinical studies to prevent and treat this complication. *Oral
      Complications in Cancer Chemotherapy, Cancer Incidence, and Mortality in the
      U.S.* ,
      a 2003
      article in *Dental
      Article Review and Testing* ,
      states
      that mucositis occurs in approximately 40% of cancer patients who receive
      chemotherapy and 80% of patients who receive certain stem cell transplants.
      50%
      of patients who develop oral ulcerations require intervention that often
      includes modifying or discontinuing the chemotherapy. *Oral
      Mucositis and the Clinical and Economic Outcomes of Hematopoietic Stem-Cell
      Transplantation* ,
      by
      Stephen T. Sonis, et. al. (2001) estimates that there is an additional cost
      of
      more than approximately €31 thousand for every patient that develops oral
      ulcerations during the 100-day post transplant period.




We
      are
      currently investigating Gen 301 in preclinical studies on a rodent model of
      mucositis caused by radiation therapy.




**Current
      Products**




Our
      revenues from the sales of our current products were €6.5 million,
€5.9 million, €6.5 million, €3.1 million and €3.4 million in 2001,
      2002, 2003, 2004 and 2005, respectively. We and our predecessors have
      manufactured defibrotide since 1986 using a manufacturing process on which
      we
      hold a U.S. patent and a European patent granted in 1991 and license others
      to
      sell it in Italy. In addition to defibrotide, we manufacture and sell in Italy
      urokinase and calcium heparin, which are active




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pharmaceutical
      ingredients used to make other drugs, sulglicotide, which is intended to treat
      peptic ulcers, and other miscellaneous pharmaceutical products. We have also
      developed a formulation of the drug mesalazine to treat inflammatory bowel
      disease.




***Defibrotide***




Currently,
      we manufacture defibrotide for Sirton, our affiliate. Sirton focuses on
      processing the defibrotide for either oral administration or intra-venous
      administration and sells the finished products to Crinos. Crinos markets
      defibrotide in Italy to both treat and prevent vascular disease with risk of
      thrombosis under a semi-exclusive license agreement. We have the right to grant
      a second license in Italy but only to a third party that has been expressly
      approved by Crinos.




***Urokinase***




Urokinase
      is made from human urine and has the potential to dissolve fibrin clots and,
      as
      such, is used to treat various vascular disorders such as deep vein thrombosis
      and pulmonary embolisms *.* We sell
      urokinase to Sirton, who uses it as an ingredient in the manufacture of generic
      drugs. Sirton sells the final formulated generic drugs to other companies,
      which
      then sell the drugs to hospitals and pharmacies.




***Heparin
      Calcium***




Heparin
      calcium is made from pig intestines and prevents the blood from clotting.
      Decreasing clot formation diminishes the likelihood of strokes and heart
      attacks. Heparin calcium has numerous uses including the treatment of certain
      types of lung, blood vessel, and heart disorders, and administration during
      or
      after certain types of surgery, such as open heart and bypass surgeries. Other
      uses include the flushing of catheters and other medical equipment. Heparin
      calcium and its salts are also part of many topical
      preparations to treat various inflammatory disorders. We sell heparin calcium
      to
      Sirton, who uses it as an ingredient in the manufacture of generic drugs. Sirton
      sells the final formulated generic drugs to other companies, which then sell
      the
      drugs to hospitals and pharmacies.




***Sulglicotide***




Sulglicotide
      is developed from pig intestines and appears to have ulcer healing and
      gastrointestinal protective properties. The effects of this drug have prompted
      us to commission a preclinical investigation by Epistem Ltd., an United
      Kingdom contract research organization specializing in studies of mucositis
      caused by anticancer or radiation therapies, into its function in potential
      prevention and treatment of mucous membrane damage. We also sell sulglicotide
      to
      Sirton for use in contract manufacturing of Gliptide, a drug marketed in Italy
      to treat peptic ulcers. In 2004, we sold sulglicotide to Samil, a Korean
      company, for use in manufacturing a product of Samil’s in Korea. Samil used this
      supply to manufacture its product for launch and marketing activities. In March
      2006 we received a purchase order from Samil for 490 kg of sulglicotide. We
      have
      been informed by Samil that another 490kg of sulglicotide may be needed in
      2006 .




**Seasonality**




Seasonality
      does not affect our business.




**Regulatory
      Matters**




***Overview***




The
      preclinical and clinical testing, manufacture, labeling, storage, distribution,
      promotion, sale, import and export, reporting and record-keeping of our product
      candidates are subject to extensive regulation by governmental authorities
      in
      the United States, principally the FDA and corresponding state agencies, and
      regulatory agencies in foreign countries.




Non-compliance
      with applicable regulatory requirements can result in, among other things,
      injunctions, seizure of products, total or partial suspension of product
      manufacturing and marketing, failure of the government to grant approval,
      withdrawal of marketing approvals, civil penalty actions and criminal
      prosecution. Except as discussed below, we believe that we are in substantial
      compliance in all material respects with each of the currently applicable laws,
      rules and regulations mentioned in this section. During a biannual inspection
      of
      our manufacturing facility by the Italian Health Authority in October 2004,
      the Italian Health Authority noted by way of observations certain deficiencies
      in regard to the operation of our facility. We have corrected all of these
      deficiencies, and have kept the Italian Health Authority current with respect
      to
      the progress of our corrective actions. Also, a regional Italian regulatory
      inspector, during an April 2005 inspection of our manufacturing facility,
      requested that we install an exhaust vent on one of our machines. We have
      installed this device. In order to obtain FDA approval for the sale of any
      of
      our product candidates, the FDA must determine that this facility meets their
      current good manufacturing practices, or GMP, including requirements for
      equipment verification and validation of our manufacturing and cleaning
      processes. The FDA has not yet inspected our facility, but we have recently
      completed an approximately €7.2 million major overhaul and upgrade in
      anticipation of such an inspection. We are not aware of any other situation
      that
      could be characterized as an incidence of non-compliance in the last three
      years.




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United
      States Regulatory Approval




FDA
      regulations require us to undertake a long and rigorous process before any
      of
      our product candidates may be marketed or sold in the United States. This
      regulatory process typically includes the following general steps:




·
            our
                performance of satisfactory preclinical laboratory and animal studies
                under the FDA’s good laboratory practices regulations;




·
            our
                obtaining the approval of independent Institutional Review Boards
                at each
                clinical site to protect the welfare and rights of human subjects
                in
                clinical trials;




·
            our
                submission to and acceptance by the FDA of an Investigational New
                Drug
                Application (IND) which must become effective before human clinical
                trials
                may begin in the United States;




·
            our
                successful completion of a series of adequate and well-controlled
                human
                clinical trials to establish the safety, purity, potency and effectiveness
                of any product candidate for its intended use;




·
            our
                submission to, and review and approval by, the FDA of a marketing
                application prior to any commercial sale or shipment of a product;
                and




·
            our
                development and demonstration of manufacturing processes which conform
                to
                FDA-mandated current good manufacturing practices.




This
      process requires a substantial amount of time and financial resources. In 2002,
      the FDA announced a reorganization that has resulted in the shift of the
      oversight and approval process for certain therapeutic biologic drugs and the
      related staff from the Center for Biologics Evaluation and Research to the
      Center for Drug Evaluation and Research. Our initial product candidate,
      defibrotide to treat VOD with multiple-organ failure, is being regulated through
      the latter.




*Preclinical
      Testing*




Preclinical
      tests generally include laboratory evaluation of a product candidate, its
      chemistry, formulation, stability and toxicity, as well as certain animal
      studies to assess its potential safety and effectiveness. We must submit the
      results of these preclinical tests, together with manufacturing information,
      analytical data and the clinical trial protocol, to the FDA as part of an
      Investigational New Drug Application, which must become effective before we
      may
      begin any human clinical trials. An application automatically becomes effective
      30 days after receipt by the FDA, unless the FDA, within this 30-day time
      period, raises concerns or questions about the intended conduct of the trials
      and imposes what is referred to as a clinical hold. If one or more of our
      products is placed on clinical hold, we would be required to resolve any
      outstanding issues to the satisfaction of the FDA before we could begin clinical
      trials. Preclinical studies generally take several years to complete, and there
      is no guarantee that an Investigational New Drug Application based on those
      studies will become effective, allowing clinical testing to begin.




In
      addition to FDA review of an application, each clinical institution that desires
      to participate in a proposed clinical trial must have the clinical protocol
      reviewed and approved by an independent Institutional Review Board. The
      independent Institutional Review Boards consider, among other things, ethical
      factors, informed consent and the selection and safety of human subjects.
      Clinical trials must be conducted in accordance with the FDA’s good clinical
      practices requirements.




In
      addition to FDA review of an Investigational New Drug Application, clinical
      trials must meet requirements for Institutional Review Board oversight, informed
      consent and the FDA’s good clinical practices. Prior to commencement of each
      clinical trial, the sponsor must submit to the FDA a clinical plan, or protocol,
      accompanied by the approval of the committee responsible for overseeing clinical trials
      at
      one of the clinical trial sites. The FDA, and/or the Institutional Review Board
      at each institution at which a clinical trial is being performed, may order
      the
      temporary or permanent discontinuation of a clinical trial at any time if it
      believes that the clinical trial is not being conducted in accordance with
      FDA
      requirements or presents an unacceptable risk to the clinical trial patients.




The
      sponsor must submit to the FDA the results of the pre-clinical and clinical
      trials, together with, among other things, detailed information on the
      manufacturing and composition of the product, in the form of New Drug
      Application or a Biologics License Application. Once the submission has been
      accepted for filing, the FDA has 180 days to review the application and
      respond to the applicant. The review process is often significantly extended
      by
      FDA requests for additional information or clarification.




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*Clinical
      Trials*




Human
      clinical trials are typically conducted in three sequential phases that may
      overlap, including the following:


Phase
      I




In
      Phase
      I clinical trials, a product candidate is typically given to either healthy
      people or patients with the medical condition for which the new drug is intended
      to be used. The main purpose of the trial is to assess a product candidate’s
      safety and the ability of the human body to tolerate the product candidate,
      and
      may also assess the dosage, absorption, distribution, excretion and metabolism
      of the product candidate.




Phase
      II




During
      Phase II, a product candidate is given to a limited number of patients with
      the
      disease or medical condition for which it is intended to be used in order to:




·
            further
                identify any possible adverse side effects and safety risks;




·
            assess
                the preliminary or potential effectiveness of the product candidate
                for
                the specific targeted disease or medical condition; and




·
            assess
                dosage tolerance and determine the optimal dose for a Phase III trial.




Phase
      III




If
      and
      when one or more Phase II trials demonstrate that a specific dose or range
      of
      doses of a product candidate is likely to be effective and has an acceptable
      safety profile, one or more Phase III trials are generally undertaken to
      demonstrate clinical effectiveness and to further test for safety in an expanded
      patient population with the goal of evaluating the overall risk-benefit
      relationship of the product candidate. The successful demonstration of clinical
      effectiveness and safety in one or more Phase III trials is typically a
      prerequisite to the filing of an application for FDA approval of a product
      candidate.




After
      approval, the FDA may also require a Phase IV clinical trial to continue to
      monitor the safety and effectiveness of the product candidate.




*Post-Approval
      Regulations*




If
      a
      product candidate receives regulatory approval, the approval is typically
      limited to specific clinical uses. Subsequent discovery of previously unknown
      problems with a product may result in restrictions on its use or even complete
      withdrawal of the product from the market. Any FDA-approved products
      manufactured or distributed by us are subject to continuing regulation by the
      FDA, including record-keeping requirements and reporting of adverse events
      or
      experiences. Drug manufacturers and their subcontractors are required to
      register their establishments with the FDA and state agencies, and are subject
      to periodic inspections by the FDA and state agencies for compliance with
      current good manufacturing practice, or GMP, which impose rigorous procedural
      and documentation requirements upon us and our contract manufacturers. Failure
      to comply with these requirements may result in, among other things, total
      or
      partial suspension of production activities, failure of the FDA to grant
      approval for marketing, and withdrawal, suspension, or revocation of marketing
      approvals.




If
      the
      FDA approves one or more of our product candidates, we and our contract
      manufacturers must provide certain updated safety and effectiveness information.
      Product changes, as well as changes in the manufacturing process or facilities
      where the manufacturing occurs or other post-approval changes, may necessitate
      additional FDA review and approval. The labeling, advertising, promotion,
      marketing and distribution of a drug or biologic product also must be in
      compliance with FDA requirements which include, among others, standards and
      regulations for direct-to-consumer advertising, communication of information
      relating to off-label uses, industry sponsored scientific and educational
      activities and promotional activities involving the Internet. The FDA has very
      broad enforcement authority, and failure to abide by these regulations can
      result in penalties, including the issuance of a warning letter directing a
      company to correct deviations from regulatory standards and enforcement actions
      that can include seizures, fines, injunctions and criminal prosecution.




*Fast
      track and orphan drug designation*




The
      FDA
      has developed “fast track” policies, which provide the potential for expedited
      review of an application. However, there is no assurance that the FDA will,
      in
      fact, accelerate the review process for a fast track product candidate. Fast
      track status is provided only for new and novel therapies that are intended
      to
      treat persons with life-threatening and severely debilitating diseases, where
      there is a defined unmet medical need, especially where no satisfactory
      alternative therapy exists or the new therapy is significantly superior to
      alternative therapies. During the development of product candidates that qualify
      for this status, the FDA may expedite consultations and reviews of these
      experimental therapies. Furthermore, an accelerated approval process is
      potentially available to product candidates that have been studied for their
      safety and effectiveness in treating serious or life-threatening illnesses.
      The
      FDA can base approval of a marketing application for a fast track product on
      an
      effect on a clinical endpoint, or on a surrogate endpoint that is reasonably
      likely to predict clinical benefit. The FDA may condition the approval of an
      application for certain fast track products on additional post-approval studies
      to validate the surrogate endpoint or confirm the effect on the clinical
      endpoint. Fast track status also provides the potential for a product candidate
      to have a “priority review.” A priority review allows for portions of the
      application to be submitted to the FDA for




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review
      prior to the completion of the entire application, which could result in a
      reduction in the length of time it would otherwise take the FDA to complete
      its
      review of the application. Fast track status may be revoked by the FDA at any
      time if the clinical results of a trial fail to continue to support the
      assertion that the respective product candidate has the potential to address
      an
      unmet medical need. A product approved under a “fast track” designation is
      subject to expedited withdrawal procedures and to enhanced scrutiny by the
      FDA
      of promotional materials.




The
      FDA
      may grant orphan drug status to drugs intended to treat a “rare disease or
      condition,” which is generally a disease or condition that affects fewer than
      200,000 individuals in the United States. If and when the FDA grants orphan
      drug
      status, the generic name and trade name of the therapeutic
      agent and its potential orphan use are disclosed publicly by the FDA. Aside
      from
      guidance concerning the non-clinical laboratory studies and clinical
      investigations necessary for approval of the application, orphan drug status
      does not convey any advantage in, or shorten the duration of, the regulatory
      review and approval process. The FDA may grant orphan drug designations to
      multiple competing product candidates targeting the same uses. A product that
      has been designated as an orphan drug that subsequently receives the first
      FDA
      approval for the designated orphan use is entitled to orphan drug exclusivity,
      which means the FDA may not approve any other applications to market the same
      drug for the same indication, except in very limited circumstances, for seven
      years from the date of FDA approval. Orphan drug status may also provide certain
      tax benefits. Finally, the FDA may fund the development of orphan drugs through
      its grants program for clinical studies.




The
      FDA
      has designated defibrotide as an orphan drug to treat VOD and has provided
      funding for clinical studies for this use. The FDA has approved the Company’s
      application for “fast track” designation for defibrotide to treat VOD with
      multiple-organ failure occurring after stem cell transplantation by means of
      injection. The FDA approval process for defibrotide for this use remains
      dependent upon the successful completion of clinical trials. If our other
      product candidates meet the criteria, we may also apply for orphan drug status
      and fast track status for such products.




*Market
      Exclusivity*




In
      addition to orphan drug exclusivity, a product regulated by the FDA as a “new
      drug” is potentially entitled to non-patent and/or patent exclusivity under the
      FFDCA against a third party obtaining an abbreviated approval of a generic
      product during the exclusivity period. Conversely, under current law, a third
      party cannot obtain an abbreviated approval of a drug regulated as a “biological
      product” and concomitantly there is no opportunity for non-patent or patent
      exclusivity under the FFDCA for biological products. An abbreviated approval
      allows an applicant to obtain FDA approval without generating, or obtaining
      a
      right of reference to, the basic safety and effectiveness data necessary to
      support the initial approval of the drug product or active ingredient. In the
      case of a new chemical entity (an active ingredient which has not been
      previously approved with respect to any drug product) non-patent exclusivity
      precludes an applicant for abbreviated approval from submitting an abbreviated
      application until five years after the approval of the new chemical entity.
      In
      the case of any drug substance (active ingredient), drug product (formulation
      and composition) and method of use patents listed with the FDA, patent
      exclusivity under the FFDCA precludes FDA from granting effective approval
      of an
      abbreviated application of an generic product until the relevant patent(s)
      expire, unless the abbreviated applicant certifies that the relevant listed
      patents are invalid, not infringed or unenforceable and the NDA/patent holder
      does not bring an infringement action within 45 days of receipt of
      notification of the certification or an infringement action is brought within
      45 days and a court determines that the relevant patent(s) are invalid, not
      infringed or un-enforceable or 30 months have elapsed without a court
      decision of infringement.




*User
      Fees*




A
      New
      Drug Application for a prescription drug product that has been designated as
      an
      orphan drug is not subject to the payment of user fees to the FDA unless the
      application includes as indication for other than a orphan indication.




A
      supplement proposing to include a new indication for a designated orphan disease
      or condition in an application is also not subject to a user fee, if the drug
      has been designated an orphan drug with regard to the indication proposed in
      such supplement.




There
      is
      no specific exemption for orphan drug products from annual product and
      establishment fees. However, sponsors of orphan drugs can request a waiver
      of
      such fees on hardship or other grounds.




Other
      federal legislation may affect our ability to obtain certain health information
      in conjunction with our research activities. The Health Insurance Portability
      and Accountability Act of 1996, or HIPAA, mandates, among other things, the
      adoption of standards designed to safeguard the privacy and security of
      individually identifiable health information. In relevant part, the U.S.
      Department of Health and Human Services, or HHS, has released two rules to
      date
      mandating the use of new standards with respect to such health information.
      The
      first rule imposes new standards relating to the privacy of individually
      identifiable health information. These standards restrict the manner and
      circumstances under which covered entities may use and disclose protected health
      information so as to protect the privacy of that information. The second rule
      released by HHS establishes minimum standards for the security of electronic
      health information. While we do not believe we are directly regulated as a
      covered entity under HIPAA, the HIPAA standards impose requirements on covered
      entities conducting research activities regarding the use and disclosure of
      individually identifiable health information collected in the course of
      conducting




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the
      research. As a result, unless they meet these HIPAA requirements, covered
      entities conducting clinical trials for us may not be able to share with us
      any
      results from clinical trials that include such health information.




***Foreign
      Regulatory Approval***




Outside
      of the United States, our ability to market our product candidates will also
      be
      contingent upon our receiving marketing authorizations from the appropriate
      foreign regulatory authorities whether or not FDA approval has been obtained.
      The foreign regulatory approval process in most industrialized countries
      generally includes risks that are similar with the FDA approval process we
      have
      described herein. The requirements governing conduct of clinical trials and
      marketing authorizations, and the time required to obtain requisite approvals
      may vary widely from country to country and differ from that required for FDA
      approval.




*European
      Union Regulatory Approval*




Under
      the
      current European Union regulatory system, applications for marketing
      authorizations may be submitted either under a centralized or decentralized
      procedure. The centralized procedure (which is compulsory for certain categories
      of drugs) provides for the grant of a single marketing authorization that is
      valid for all European Union member states. The decentralized procedure provides
      for mutual recognition of national approval decisions. Under this procedure,
      the
      holder of a national marketing authorization that is obtained in accordance
      with
      the procedure and requirements applicable in the member state concerned may
      submit an application to the remaining member states. Within 90 days of
      receiving the applications and assessment report, each member state must decide
      whether to recognize approval. The mutual recognition process results in
      separate national marketing authorizations in the reference member state and
      each concerned member state.




The
      centralized procedure




An
      applicant under the centralized procedure must be a person who is domiciled
      in
      the European Union or an entity established in the European Union. The applicant
      must file a preliminary request containing the information regarding the
      product candidate, including its description and the location of the production
      plant, as well as the payment of the application fees. The European Agency
      for
      the Evaluation of Medicinal Products (an European Union statutory entity)
      formally evaluates the preliminary request and indicates either an initial
      approval to review a full application or a rejection. If the European Agency
      indicates an initial approval to review a full application, the applicant must
      submit the application to the European Agency. This application must indicate
      certain specific information
      regarding the product candidate, including the composition (quality and
      quantity) of all the substances contained in the product, therapeutic
      indications and adverse events, modalities of use, the results of physical,
      chemical, biological and microbiological tests, pharmacological and toxicity
      tests, clinical tests, a description of production and related control
      procedures, a summary of the characteristics of the product as required by
      the
      European legislation and samples of labels and information to consumers. The
      applicant must also file copies of marketing authorizations obtained,
      applications filed and denials received for the same product in other countries,
      and must prove that the manufacturer of the product candidate is duly authorized
      to produce it in its country.




The
      European Agency (through its internal Committee for Proprietary Medicinal
      Products) examines the documents and information filed and may carry out
      technical tests regarding the product, request information from the member
      state
      concerned with regard to the manufacturer of the product candidate and, when
      it
      deems necessary, inspect the manufacturing facility in order to verify that
      the
      manufacturing facility is consistent with the specifications of the product
      candidate, as indicated in the application.




The
      Committee generates and submits its final opinion to the European Commission,
      the member states and the applicant. The Commission then issues its decision,
      which is binding on all member states. However, if the Commission approves
      the
      application, member states still have authority to determine the pricing of
      the
      product in their territories before it can be actually marketed.




The
      European Agency may reject the application if the Agency decides that the
      quality, safety and effectiveness of the product candidate have not been
      adequately and sufficiently proved by the applicant, or if the information
      and
      documents filed are incomplete, or where the labeling and packaging information
      proposed by the applicant do not comply with the relevant European rules.




The
      European Agency has also established an accelerated evaluation procedure
      applying to product candidates aimed at serious diseases or conditions for
      which
      no suitable therapy exists, if it is possible to predict a substantial
      beneficial effect for patients.




The
      marketing authorization is valid for five years and may be renewed, upon
      application, for further five year terms. After the issue of the authorization
      the holder must constantly take into consideration scientific and technical
      progress so that the product is manufactured and controlled in accordance with
      scientific methods generally accepted.




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We
      plan
      to apply for approvals for our product candidates under the centralized
      procedure. We believe that the centralized procedure will result in a quicker
      approval of our product candidates than the decentralized procedure due to
      the
      fact that we intend to market our product candidates in many European Union
      member states, rather than just one.




The
      decentralized procedure




The
      decentralized procedure provides for mutual recognition of national approval
      decisions. Under this procedure, the holder of a national marketing
      authorization—obtained in accordance with the procedure and requirements
      applicable in the member state concerned (see the description below for
      Italy)—may submit an application to the remaining member states. Within
      90 days of receiving the applications and assessment report, each member
      state must decide whether to recognize approval. The mutual recognition process
      results in separate national marketing authorizations in the reference member
      state and each concerned member state.




An
      application under the decentralized procedure begins with the applicant
      obtaining a national marketing authorization. An example of the process for
      obtaining a national marketing authorization in Italy is set forth below. The
      applicant then submits an application for authorization in other member states
      and the European Agency. If any of the member states refuses to recognize the
      authorization by the original member state, the matter is deferred to
      arbitration proceedings, unless the applicant withdraws
      its request in the member state refusing recognition. The characteristics of
      the
      product in the new applications must be identical to those approved in the
      original member state.




The
      competent Health Authority of a member state is bound to recognize the decision
      of another member state if it ascertains that the same application has been
      filed also in the other member state or that the approval has already been
      granted in the other member state. This requirement in intended to ensure the
      wide and effective application of mutual recognition within the European Union.




*Italian
      Regulatory Approval*




An
      application for marketing authorization in Italy must be filed with the
      competent office of the Italian Ministry of Health and must contain certain
      specific information, including the composition (quality and quantity) of all
      the substances contained in the product, therapeutic indications and adverse
      events, modalities of use, the results of physical, chemical, biological and
      microbiological tests, pharmacological and toxicity tests, clinical tests,
      a
      description of production and related control procedures and samples of labels
      and information to consumers. Italian legislation (in accordance with European
      laws) regulates in great detail the information to be indicated on the
      packaging. Marketing authorization includes a 10-year protection period during
      which no one else may use the results of the clinical trials included in the
      application to apply for a substantially similar drug. This period may be
      extended where there are new therapeutic indications for the same product,
      which
      require new complete clinical studies and justify the same protection as that
      granted to a new drug.




The
      Ministry may grant or deny the national authorization after a review of the
      contents of the application, both from a formal and substantial viewpoint.
      If an
      authorization is granted, it is valid for an initial period of five years and,
      upon application, may be renewed for subsequent five year terms. In particular,
      the Ministry examines the quality, effectiveness and safety of the product
      and
      the Italian Drugs’ Committee ( *Commissione
      Unica del Farmaco* ),
      a
      statutory agency supporting the Ministry in the authorization process, prepares
      an evaluation report on the test results. The Ministry may also order further
      tests prior to granting or denying the authorization regarding the suitability
      of the production and control methods described in the application. The Ministry
      may reject the authorization if the ordinary use of the drug has adverse events,
      the quality and quantity of the ingredients of the drugs do not correspond
      to
      the data indicated in the application, there is a lack, either total or partial,
      of beneficial therapeutic effects or the information and the documents included
      in the application do not comply with the requirements provided by law. After
      the Ministry grants a national authorization, the Ministry may temporarily
      suspend or revoke the authorization if the information disclosed in the relevant
      application turns out to be incorrect, the drug no longer meets the necessary
      quality, effectiveness or safety requirements, or adequate production controls
      have not been carried out.




Clinical
      Trials




Italy
      has
      recently implemented European legislation regarding good practices in drug
      clinical trials. As a result, clinical trials are now governed in great detail
      and failure to comply with these rules means that the results of the trials
      will
      not be taken into consideration in evaluating an application for a marketing
      authorization.




Prior
      to
      starting any clinical trial, the organizing and/or financing entity must obtain
      the approval of the competent health authorities (which vary depending on the
      type of drug concerned) and obtain the favorable opinion of the Ethical
      Committee, an independent body. Good practice rules include the following
      principles:




·
            the
                predictable risks and inconveniences shall not outweigh the beneficial
                effects for the person subject to the trials and for the other current
                and
                future patients;






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·
            the
                person participating in the trials must have been duly informed of
                all the
                relevant circumstances and in particular of the right to interrupt
                the
                experimentation at any time without any prejudicial consequence,
                and must
                have given consent after having been properly informed;




·
            the
                right of the participants to their physical and mental integrity,
                as well
                as their right to privacy, shall be respected;




·
            the
                entity organizing the trial must have obtained adequate insurance
                coverage
                for any damage that may derive to the participants because of the
                trial;




·
            the
                name of a person to be contacted for any information must be communicated
                to the participant; and




·
            the
                trial must be conducted by suitably qualified medical personnel.




The
      trial
      must be constantly monitored, in particular with regard to serious adverse
      events which are not envisaged in the approved clinical protocol. Whenever
      the
      safety of the participants is in danger due to unexpected serious adverse
      events, the Ministry of Health must be promptly informed by the entity
      organizing the trials. Italian legislation provides sanctions (criminal
      sanctions and administrative fines) in case of violation of specific good
      practice rules.




Post-approval
      issues




There
      are
      many national legislative instruments (implementing European Union rules)
      governing controls on drugs in the post-authorization phase. For instance,
      the
      holder of the national marketing authorization must promptly record in detail
      and notify any adverse reaction to the drug of which it becomes aware,
      regardless of the country where the reaction occurs, also preparing periodic
      update reports on these adverse events. For these and other purposes, the holder
      of the authorization must hire and maintain in its organization a person expert
      in the field and responsible for all drug controlling and reporting activities.




Moreover,
      any form of information and advertising aimed at promoting the sale of drugs
      is
      governed by specific national legislation (also implementing European Union
      rules), which provides for the requirements and limitations of advertising
      messages in general, as well as of other particular promotional activities,
      such
      as the organization of conferences regarding certain drugs and the distribution
      of free samples.




The
      export of drugs from Italy is not subject to authorization (except for plasma
      and blood-related products), but the import into Italy from non-European Union
      countries must be authorized by the Ministry of Health, on the basis of the
      adequacy of the quality controls to be carried out on the imported drugs.




European
      orphan drug status




European
      legislation lays down a particular procedure for the designation of medicinal
      products as orphan drugs. Such designation may include incentives for the
      research, development and marketing of these orphan drugs and, in case of a
      subsequent successful application for a marketing authorization regarding the
      same therapeutic indications, grants a substantial period of market exclusivity.




A
      medicinal product - at any stage of its development but in any case prior to
      the
      filing of any application for the marketing authorization - may be designated
      as
      an orphan drug if the person/entity that has applied for the designation can
      establish that it is intended for the diagnosis, prevention or treatment of
      a
      life-threatening or chronically debilitating condition affecting no more than
      five persons out of every ten thousand persons in the European Union, or that
      it
      is intended for the diagnosis, prevention or treatment of a life-threatening,
      seriously debilitating or serious and chronic condition in the European Union
      and that without incentives it is unlikely that the marketing of the medicinal product
      would generate sufficient income to cover the necessary investments. Moreover,
      the sponsor must prove that there is no satisfactory method of diagnosis,
      prevention or treatment of the condition in question that has been authorized
      in
      the European Union or, if such method exists, that the medicinal product will
      be
      of significant benefit to those affected by that condition.




In
      order
      to obtain the designation of a medicinal product as an orphan drug, the sponsor
      shall submit an application to the European Agency for the Evaluation of Medical
      Products, which must describe the indication of the active ingredients of the
      medicinal product, the proposed therapeutic indications and proof that the
      criteria established by the relevant European legislation are met.




The
      European Agency reviews the application and prepares a summary report to a
      special Committee for Orphan Medicinal Products, which issues an opinion within
      90 days of the receipt of the application. The European Commission must
      adopt a decision within 30 days of the receipt of the committee’s opinion.
      If the European Commission approves the application, the designated medicinal
      product is entered in the European Register of Orphan Medicinal Products and
      the
      product is eligible for incentives made available by the European Union and
      by
      member states to support research into, and development and availability of,
      orphan drugs.




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After
      the
      registration, the sponsor must submit to the European Agency an annual report
      on
      the state of development of the designated orphan drug. A designated orphan
      drug
      may be removed from the Register of Orphan Medicinal Products in three cases:




·
            at
                the request of the sponsor;




·
            if
                it is established, before the market authorization is granted, that
                the
                requirements laid down in the European orphan drug legislation are
                no
                longer met; or




·
            at
                the end of the period of market exclusivity (as explained below).




Orphan
      drug market exclusivity means that the European Union shall not, for a period
      of
      10 years from the grant of the marketing authorization for an orphan drug,
      accept any other application for a marketing authorization, grant a marketing
      authorization or accept an application to extend an existing marketing
      authorization, for the same therapeutic indications in respect of a similar
      medicinal product. This period, however, may be reduced to six years if at
      the
      end of the fifth year it is established that the criteria laid down in the
      legislation are no longer met by the orphan drug, or where the available
      evidence shows that the orphan drug is sufficiently profitable, so that market
      exclusivity is no longer justified.




However,
      as an exception to orphan drug market exclusivity, a marketing authorization
      may
      be granted for the same therapeutic indications to a similar medicinal product
      if:




·
            the
                holder of the marketing authorization for the orphan drug has given
                his
                consent to the second applicant;




·
            the
                holder of the marketing authorization for the orphan drug is unable
                to
                supply sufficient quantities of the latter; or




·
            the
                second applicant can establish in its application that the second
                medicinal product, although similar to the authorized orphan drug,
                is
                safer, more effective or otherwise clinically superior.




**Raw
      Materials**




We
      extract many of our products and product candidates from the DNA of pig
      intestines through well-established processes used by others to manufacture
      many
      other drugs. In particular, we extract defibrotide and calcium heparin from
      swine intestinal mucosa and sulglicotide from swine duodenum. In 2004, we
      entered into supply agreements with La.bu.nat. S.r.l. for La.bu.nat. to supply
      us with the swine
      intestinal mucosa and swine duodenum we need to produce defibrotide, calcium
      heparin and sulglicotide. We believe La.bu.nat can meet our current and
      near-term supply needs.




The
      initial contract term of the swine intestinal mucosa supply agreement expires
      on
      December 31, 2007, with automatically renewable three year periods, unless
      either party notifies the other party in writing six months prior to the annual
      date of termination. We must give written purchase orders to La.bu.nat at least
      two months in advance of the date of delivery. The purchase price was fixed
      at
€0.1677 per kilogram until April 10, 2005 (plus an additional €0.0135 for
      the first 2,400,000 kilograms), at which time the price increased 5% until
      December 31, 2006. After December 31, 2006, both parties may request
      renegotiation of the price with reference to market trends and manufacturing
      costs. In the event that the parties cannot agree on a renegotiated price,
      an
      arbitrator will determine the new price.




The
      initial contract term of the swine duodenum supply agreement expires on
      December 31, 2007, with automatically renewable three year periods, unless
      either party notifies the other party in writing six months prior to the annual
      date of termination. We must give written purchase orders to La.bu.nat at least
      four months in advance of the date of delivery. The purchase price was fixed
      at
€1.1286 per kilogram until December 31, 2005. In
      2006,
      the purchase price was reduced to €1.01574 per kilogram pursuant to a verbal
      agreement between us and La.bu.nat in which we obtained a 10% discount on the
      purchase price as an incentive to increase the purchase volume. The discount
      is
      not linked with any purchase objectives or commitments.




While
      we
      have no current arrangements with any other supplier of our critical raw
      material, we believe there are suitable alternative sources of pig intestine.
      The FDA and other regulatory bodies may evaluate La.bu.nat.’s or any other
      supplier’s processing centers as part of approving our product candidates and
      our ongoing production of our products.




Our
      other
      product, urokinase, is derived from human urine, which is subject to similar
      regulatory review. While we currently purchase the urine from only one supplier
      of urine and do not have a fixed supply agreement with that supplier, we believe
      there are suitable alternative sources of the material.




Historically,
      there has been no significant price volatility for any of our raw materials.
      It
      is possible that widespread illness or destruction of pigs could result in
      volatility of the price of pig intestines.




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Competition




Our
      industry is highly competitive and characterized by rapid technological change.
      Significant competitive factors in our industry include:




·
            controlling
                the manufacturing costs;




·
            the
                effectiveness and safety of products;




·
            the
                timing and scope of regulatory approvals;




·
            the
                willingness of private insurance companies and government sponsored
                health
                care programs to reimburse patients or otherwise pay for the drugs
                and the
                related treatments;




·
            the
                availability of alternative treatments for the disorders as well
                as the
                availability of alternatives to the treatments which cause or contribute
                to these disorders (such as chemotherapy, radiation therapy, stem
                cell
                transplants, etc.);




·
            the
                ability to perform clinical trials, independently or with others;




·
            intellectual
                property and patent rights and their protection; and




·
            sales
                and marketing capabilities.




We
      face
      competition in both the development and marketing of our product candidates.
      During development alternative treatments for similar or completely different
      disorders may limit our ability to get participants or co-sponsors for clinical
      trials with our product candidates. Any product candidates that we successfully
      develop that are approved for sale by the FDA or similar regulatory authorities
      in other countries may compete with products currently being used or that may
      become available in the future. Many organizations, including large
      pharmaceutical and biopharmaceutical companies, as well as academic and research
      organizations and government agencies, may be interested in pursuing the
      research and development of drug therapies that target the blood vessel wall.
      Many of these organizations have substantially greater capital resources than
      we
      have, and greater capabilities and resources for basic research, conducting
      preclinical studies and clinical trials, regulatory affairs, manufacturing,
      marketing and sales. As a result, our competitors may develop or license
      products or other novel technologies that are more effective, safer or less
      costly than our existing products or products that are being developed by us,
      or
      may obtain regulatory approval for products before we do. Clinical development
      by others may render our products or product candidates noncompetitive.




While
      we
      are unaware of any other products or product candidates that treat or prevent
      VOD or the apoptosis that our product candidate oligotide is designed to treat,
      we believe that other companies have products or are currently developing
      products to treat some of the same disorders and diseases that our other product
      candidates are designed to treat.




Our
      statements above are based on our general knowledge of and familiarity with
      our
      competitors.




**Legal
      Proceedings**




Currently,
      we are not a party to or engaged in any material legal proceedings.





**ORGANIZATIONAL
      STRUCTURE**




We
      are
      part of a group of pharmaceutical businesses founded in Italy in 1944 that
      has
      been involved in the research and development of drugs derived from DNA and
      DNA
      molecules since the 1970’s. In 1993, FinSirton formed our company as Pharma
      Research S.r.L., an Italian private limited company, to pursue research and
      development activities of prospective pharmaceutical specialty products.
      FinSirton is our largest shareholder, and is controlled by Dr. Laura Ferro,
      who is our Chief Executive Officer and President and one of our directors,
      together with her family. In December 2000, we changed from a private limited
      company to a corporation and in July 2001 we changed our name to Gentium
      S.p.A. Under our current bylaws, the duration of our company will expire on
      December 31, 2050. We have no subsidiaries.




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**PROPERTY,
      PLANTS AND EQUIPMENT**





**Manufacturing
      and Facilities**




We
      own a
      manufacturing facility near Como, Italy which, at December 31, 2005, is subject
      to three mortgages securing repayment of an aggregate of
      approximately **** €2.3
      million of debt owed to Banca Nazionale del Lavoro. In order to obtain FDA
      approval for the sale of any of our product candidates, the FDA must determine
      that this facility meets their current good manufacturing practices, or GMP,
      including requirements for equipment verification and validation of our
      manufacturing and cleaning processes. The FDA has not yet inspected our
      facility, but in 2004 we completed an approximately €7.2 million major
      overhaul and upgrade in anticipation of such an inspection. We have also
      upgraded our quality control laboratory equipment and upgrade equipment for
      our
      molecular biology and cell culture laboratories in 2005 in further anticipation
      of an FDA inspection at a cost of approximately €513 thousand.




We
      incurred costs of €207 thousand to purchase an electrical meter and back-up
      electrical power generator, including an advance payment to the utility company.
      We currently use Sirton’s electrical meter, but Italian law requires us to have
      separate equipment. We are waiting for permission from a local authority to
      install a back-up generator that we have bought. In the event of a power outage,
      such back-up generator would prevent interruption of our operations and allow
      us
      to be independent from Sirton. We are planning to install it in August 2006,
      when the manufacturing facility halts production and closes down for annual
      maintenance. We are also planning to replace a storage tank for certain
      solvents. We anticipate that the replacement of the storage tank will be
      necessary to satisfy the FDA that the facility meets their good manufacturing
      practices. We expect to complete these upgrades in 2007. We raised the money
      to
      fund these improvements from our sale of our Series A notes and our initial
      public offering, and we may also use some of the net proceeds of our initial
      public offering and our October 2005 private placement to pay for future
      improvements.




We
      produce defibrotide, sulglicotide and calcium heparin at this facility.
      Defibrotide and calcium heparin are produced simultaneously. However, since
      the
      first steps of the manufacturing processes for defibrotide and sulglicotide
      currently utilize the same equipment, we do not run the manufacturing facility
      to produce defibrotide and sulglicotide simultaneously. We typically produce
      one
      of these products for a few weeks and then produce the other for a few weeks.
      We
      are planning to replace a principal reactor in the defibrotide production line
      and to separate the defibrotide production line from the sulglicotide line
      by
      installing an additional reactor in August 2006. These improvements will
      increase our potential capacity to manufacture defibrotide and sulglicotide
      by a
      factor of two, although we would have to hire new employees to do so. We expect
      to spend €600 for these two reactors including installation costs. We plan to
      finance these expenditures with a five-year term loan. We produce urokinase
      in a
      separate facility that is owned by Sirton and leased to us under a written
      lease
      agreement.




We
      typically operate our manufacturing facility on two eight hour shifts per day.
      Our estimated current production, our production capacity (assuming we do not
      produce any sulglicotide) and percentage of utilization for defibrotide and
      calcium heparin for the fiscal year 2006 are set forth below:




**Product**
            
            **Estimated
                Current**
              **Production
                Levels**
              **(kilograms/year)**
            
            **Maximum
                Production**
              **Capacity
                With Two**
              **Eight
                Hour Shifts**
              **(kilograms/year)**
            
            **Percentage
                of**
              **Utilization**Defibrotide
            
            
            3,000
            
            
            4,400
            
            
            68
            %





**Product**
            
            **Estimated
                Current**
              **Production
                Levels**
              **(millions
                of units/year)**
            
            **Maximum
                Production**
              **Capacity
                With Two**
              **Eight
                Hour Shifts**
              **(millions
                of units/year)**
            
            **Percentage
                of**
              **Utilization**calcium
                heparin
            
            
            28,000
            
            
            41,000
            
            
            68
            %




We
      currently manufacture defibrotide to treat and prevent venous thrombosis in
      Italy. Compared to the dosage necessary to treat and prevent VOD and to treat
      multiple myeloma, the treatment for this current use is significantly longer
      and
      therefore the overall amount of defibrotide is much larger than would be used
      to
      treat or prevent VOD or to treat multiple myeloma. Accordingly, if we obtain
      FDA
      or European regulatory approvals for those new uses, a smaller portion of our
      maximum capacity would be required for the manufacture of defibrotide for those
      additional uses.




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Our
      estimated current production, production capacity (assuming we do not produce
      any defibrotide or calcium heparin) and percentage of utilization for
      sulglicotide for the fiscal year 2006 are set forth below:




**Product**
            
            **Estimated
                Current**
              **Production
                Level**
              **(kilograms/year)**
            
            **Maximum
                Production**
              **Capacity
                With Two**
              **Eight
                Hour Shifts**
              **(kilograms/year)**
            
            **Percentage
                of**
              **Utilization**Sulglicotide
            
            
            1,050
            
            
            2,750
            
            
            38
            %




Our
      contract with Samil requires us to increase our production of sulglicotide
      to
      2,600 kilograms in the period from June 20, 2005 to June 20, 2006 and to 3,400
      kilograms in the period from June 20, 2006 to June 20, 2007. However,
      we believe it would be possible to increase the production of our products
      and
      to manufacture defibrotide and sulglicotide simultaneously by adding additional
      shifts of employees. In August 2006, we are planning to install a new reactor
      totally dedicated to the production of sulglicotide. Such installation will
      allow us to increase the production capacity of both defibrotide and
      sulglicotide, although we would need to hire additional employees to run both
      simultaneously.






Our
      estimated current production, production capacity and percentage of utilization
      for urokinase for the fiscal year 2006 are set forth below:




**Product**
            
            **Estimated
                Current**
              **Production
                Level**
              **(millions
                of units/year)**
            
            **Maximum
                Production**
              **Capacity
                With One**
              **Eight
                Hour Shift**
              **(millions
                of units/year)**
            
            **Percentage
                of**
              **Utilization**Urokinase
            
            
            17.4
            
            
            37
            
            
            47
            %




Our
      business plan does not include increasing our current levels of production
      of
      urokinase.




Our
      facility is subject to customary regulation by regional agencies regarding
      worker health and safety, fire department, water, air, noise and environmental
      pollution and protection by Azienda Sanitaria Locale and Agenzia Regionale
      Prevenzione e Ambiente. We have engaged Lariana Depur, a consortium that
      specializes in the treatment of waste water, to treat our waste water. We
      monitor our waste water to control the levels of nitrogen, chlorides and
      chemical oxygen before delivering the waste water to Lariana Depur for
      additional treatment. We do not expect any difficulties in complying with these
      regulations. Also, we installed two scrubbers to reduce the odors and chemicals
      released into the air by the facility to comply with Italian
      regulations.




***ITEM
              4A.***
            ***UNRESOLVED
                STAFF COMMENTS***





Not
      applicable.




***ITEM
              5.***
            ***OPERATING
                AND FINANCIAL REVIEW AND
                PROSPECTS***





*You
      should read the following discussion together with the financial statements,
      related notes and other financial information included elsewhere in this annual
      report. This discussion may contain predictions, estimates and other
      forward-looking statements that involve risks and uncertainties, including
      those
      discussed under “Risk Factors” and elsewhere in this annual report. These risks
      could cause our actual results to differ materially from any future performance
      suggested below.*




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**OPERATING
      RESULTS**





**Overview**




We
      manufacture defibrotide at our facility. Currently, we sell the defibrotide
      to
      our affiliate, Sirton. Sirton focuses on processing the defibrotide for either
      oral administration or intra-venous administration and sells the finished
      products to Crinos S.p.A., a subsidiary of Stada Arzneimittel AG. Crinos markets
      defibrotide in Italy to both treat and prevent vascular disease with thrombosis
      under a semi-exclusive license agreement with us. We also manufacture and sell
      to Sirton two active pharmaceutical ingredients, urokinase and calcium heparin,
      used by Sirton to make generic drugs, and sulglicotide, which is intended to
      be
      used to treat peptic ulcers. We sell sulglicotide to unrelated third parties
      and
      are actively working on developing other customers for these products. We also
      manufacture a variety of other miscellaneous pharmaceutical products.




For
      each
      of the four years ended December 31, 2005, the sale of defibrotide,
      urokinase, calcium heparin, sulglicotide and our other products to Sirton
      amounted to approximately 100%, 100%, 92% and 97%, respectively, of our total
      product sales. The price of defibrotide to Sirton is based on comparable sale
      prices in years prior to 2002 to unrelated third-parties. The price for
      urokinase, calcium heparin, sulglicotide and our other products is based on
      comparable market prices charged by other manufacturers.






Sirton
      sells its finished products, including calcium heparin, primarily to one
      customer, Crinos, which sells them to the retail market. Calcium heparin, which
      is a by-product of manufacturing defibrotide, has seen decreased demand over
      the
      past several years due to a new competitive product, low molecular weight
      heparin, made by Aventis and other companies. Also, Crinos has limited its
      sale
      of urokinase to a single dose, which has a more limited market than multiple
      doses. As a result, Sirton’s demand for these products has decreased over the
      past several years, and may continue to decrease over the next several years
      until and unless both we and Sirton develop new customers outside of Crinos’s
      exclusive area. Despite the fact that Sirton has recently experienced financial
      difficulties which could impact our business, we believe that we can continue
      to
      operate without a significant change in our operations or any disposal of our
      assets.




We
      have
      also generated revenue from the receipt of research grants, from the sale of
      rights to our intellectual property, and from licensing agreements. Our
      licensing agreements have included up-front payments, some of which are paid
      based on achieving defined milestones and royalties from product sales in the
      licensed territories. Our revenues by type are as described below:




**For
                the Years Ended December 31,***(in
                thousands)*
            
            **2003**
            
            **2004**
            
            **2005**Product
                sales:Defibrotide
            
            €
            4,012
            
            €
            1,424
            
            €
            2,476Urokinase
            
            
            1,784
            
            
            1,316
            
            
            684Calcium
                heparin
            
            
            579
            
            
            51
            
            
            125Sulglicotide
            
            
            147
            
            
            243
            
            
            53Other
            
            
            10
            
            
            79
            
            
            23Total
                product sales
            
            
            6,532
            
            
            3,113
            
            
            3,361Other
                income
            
            
            1,843
            
            
            583
            
            
            280Total
                revenue
            
            €
            8,375
            
            €
            3,696
            
            €
            3,641




Of
      our
      product sales in the periods shown in the table above, all were sales in Italy
      to our affiliate Sirton except for 7.8% during the year ended December 31,
      2004, which were sales of sulglicotide in Korea. Substantially all of our other
      income was for licensing the rights to our product candidates in the United
      States and Canada.




Our
      cost
      of goods sold consists of material costs, direct labor and related benefits
      and
      payroll burden, utilities, quality control expenses, depreciation of our
      facility and other indirect costs of our facility.




The
      gross
      margin from our current revenues contributes towards our general and
      administrative expenses, research and development expenses, and capital
      expenditures. Our general and administrative expenses include compensation
      for
      our executive officers, office facilities, accounting and human resources,
      information technology services, professional fees and other corporate expenses,
      including public company expenses. Some of these services are provided pursuant
      to contracts with Sirton and FinSirton. We have implemented plans to decrease
      our reliance on shared services from these affiliates over time. As of December
      31, 2005, we are providing our own purchasing, logistic, quality assurance,
      accounting, controlling and




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reporting
      services and continue to obtain corporate services, payroll services,
      information technology services, infrastructure costs and quality control
      services from these affiliates. As of February 2006, we established our own
      treasury, regulatory and information technology departments, but we are still
      relying on the IT infrastructure provided by Sirton.




As
      discussed in our financial statements included herein, we also changed the
      estimated useful life of our productive equipment. As part of a fair value
      review of our assets, a third party specialist appraised the asset value and
      the
      residual life of our installed plant. On the basis of that independent
      appraisal, we increased the estimated life of our plant equipment from 8 to
      10
      years, effective October 1, 2005. The effect was to reduce the total
      depreciation expense by €239 thousand for the year ended December 31,
      2005.




We
      expect
      to continue to incur net losses as we continue the development of our product
      candidates, apply for regulatory approvals and expand our
      operations.





**Critical
      Accounting Policies and Estimates**




Our
      financial statements have been prepared in accordance with accounting principles
      generally accepted in the United States. The preparation of these financial
      statements requires management to make estimates and assumptions that affect
      the
      reported amounts of assets, liabilities, revenues, expenses and related
      disclosures. Actual results could differ from those estimates.




We
      believe the following policies to be the most critical to an understanding
      of
      our financial conditions and results of operations because they require us
      to
      make estimates, assumptions and judgments about matters that are inherently
      uncertain.




*Revenue
      Recognition*




Currently,
      our primary source of revenue is from the sale of products to our affiliate,
      Sirton. We recognize revenue from product sales when ownership of the product
      is
      transferred to and accepted by the customer, the sales price is fixed and
      determinable, and collectibility is reasonably assured. Provisions for returns
      and other adjustments related to sales are provided in the same period the
      related sales are recorded on the basis of historical rates of return.
      Historically our returns have been insignificant due to our most significant
      customer also being an affiliate. However, given our intent to grow our
      non-affiliate revenues, we expect that in the future we will be required to
      periodically estimate the amount of goods subject to return.




Licensing
      and royalty agreements generally contemplate that our technology or intellectual
      property will be utilized to commercialize or produce certain pharmaceutical
      products and that we will receive certain fees pursuant to these agreements.
      Up-front payments related to licensing agreements are deferred and recognized
      ratably over the life of the agreement. Royalty revenues are recognized in
      proportion to the underlying sales. We also derive revenues from research and
      development agreements with co-development partners. We initially defer
      milestone revenues on such arrangements and subsequently recognize them as
      income in proportion to the costs incurred for the related development phase
      and
      in accordance with the contract terms. Performance milestone payments are not
      subject to forfeiture. We recognize revenue from these contractual arrangements
      according to Staff Accounting Bulletin No. 104, “Revenue Recognition.” When
      necessary, we divide our agreements into separate units of accounting as
      required by Emerging Issues Task Force No. 00-21, “Revenue Arrangements
      with Multiple Deliverables” before using the applicable revenue recognition
      policy for each arrangement within the agreement. Accordingly, we recognize
      revenues on performance milestones contracts only when we have met specific
      targets or milestones set forth in the contracts. We defer and recognize as
      revenue non-refundable payments received in advance that are related to future
      performance over the life of the related research project.




We
      have
      used and expect to continue to enter into arrangements that have multiple
      deliverables. The timing and amount of revenue recognition is subject to our
      estimates of the relative fair values of the individual components of an
      agreement. In connection with recording revenue, we must make
      estimates and assumptions determining the expected conversion of the revenue
      streams to cash collected. The cash conversion estimation process requires
      that
      our management make assumptions based on historical results, future
      expectations, the economic and competitive environment and changes in the credit
      worthiness of customers, and other relevant factors. If these assumptions prove
      to be incorrect, our actual conversion rate of recorded revenue to cash may
      be
      lower than expected and we would be required to increase our allowance for
      doubtful accounts.




Our
      current estimate of bad debt expense is zero, as approximately 95% of our
      product sales are with one affiliate. If we increased our estimate of bad debt
      to 1% of sales, our operating results would have been lower by approximately
      €65 thousand, € 31 thousand
      and €34 thousand for the three years ended December 31, 2005, respectively.
      These amounts would have a material impact on our results of operation and
      our
      shareholder’s equity, but no impact on our cash flow in those periods.




*Inventories*




We
      state
      inventories at the lower of cost or market, determining cost on an average
      cost
      basis. We periodically review inventories and reduce items that we consider
      outdated or obsolete to their estimated net realizable value. We estimate
      reserves




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for
      excess and obsolete inventories based on inventory levels on hand, future
      purchase commitments, and current and forecasted product demand. Our reserve
      level, and as a result our overall profitability, is therefore subject to our
      ability to reasonably forecast future sales levels versus quantities on hand
      and
      existing purchase commitments. Forecasting of demand and resource planning
      are
      subject to extensive assumptions that we must make regarding, among other
      variables, expected market changes, overall demand, pricing incentives and
      raw
      material availability. Significant changes in these estimates could indicate
      that inventory levels are excessive, which would require us to reduce
      inventories to their estimated net realizable value. We capitalize inventory
      costs associated with certain by-products, based on management’s judgment of
      probable future commercial use and net realizable value. We could be required
      to
      permanently write down previously capitalized costs related to commercial
      inventory upon change in such judgment, a delay in commercialization, delay
      of
      approval by regulatory bodies, or other potential factors. In the highly
      regulated industry in which we operate, raw materials, work in progress and
      finished goods inventories have expiration dates that must be factored into
      our
      judgments about the recoverability of inventory cost. Additionally, if our
      estimate of a product’s demand and pricing is such that we may not fully recover
      the cost of inventory, we must consider that in our judgment as well. In the
      context of reflecting inventory at the lower of cost or market, we will record
      a
      permanent inventory write-down as soon as a need for such a write down is
      determined.




*Impairment
      of Long-lived Assets*




Our
      long-lived assets consist primarily of product rights and property and
      equipment. In accordance with Statement of Financial Accounting Standards
      No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”
(SFAS 144), we evaluate our ability to recover the carrying value of long-lived
      assets used in our business, considering changes in the business environment
      or
      other facts and circumstances that suggest their value may be impaired.




To
      assess
      impairment of property, manufacturing facility and equipment and amortizing
      intangible assets for purposes of U.S. generally accepted accounting principles,
      we use the guidance outlined in SFAS 144. If, based on the preceding
      discussion, our management has concluded that impairment indicators exist,
      we
      will initially review by assessing the undiscounted cash flows expected to
      be
      derived from the asset or group of assets, comparing the lowest level of total
      expected undiscounted cash flow to the carrying value. If the carrying value
      of
      the asset or the group of assets exceeds the sum of the undiscounted cash flows,
      impairment is considered to exist. An impairment charge is assessed by comparing
      the assets’ fair value to the carrying value. Fair value can be calculated by a
      number of different approaches, including discounted cash flow, comparables,
      market valuations or quoted market prices. The process and steps required to
      assess the possible impairments of assets, including the identification of
      possible impairment indicators, assessing undiscounted cash flows, selecting
      the
      appropriate discount rate, the calculation of the weighted average cost of
      capital and the discounts or premiums inherent in market prices requires a
      substantial amount of management discretion and judgment. If actual results
      differ from these estimates, or if we adjust these estimates in future periods,
      operating results could be significantly affected.




*Research
      and Development Expenses*




We
      have
      several activities and cost drivers that we collectively refer to as “research
      and development.” These activities include salaries and benefits of our direct
      employees, facility costs, overhead costs, clinical trial costs and related
      trial product manufacturing costs, contracted services, subcontractor costs
      and
      other research and or developmental related costs. Research and development
      costs, including any upfront payments and milestones paid to collaborators,
      are
      expensed as incurred. The timing of upfront fees and milestone payments in
      the
      future may cause variability in future research and development expenses.
      Clinical trial costs include costs associated with contract research
      organizations. The billings that we receive from contract research organizations
      for services rendered can lag for several months. We accrue the estimated costs
      of the contract research organizations related services based on our estimate
      of
      management fees, site management and monitoring costs and data management costs.
      Our research and development department is in continuous communication with
      our
      contract research organizations suppliers to assess both their progress on
      the
      underlying study and the reasonableness of their cost estimates. Differences
      between estimated trial costs and actual have not been material to date, and
      any
      changes have been made when they become known. Under this policy, research
      and
      development expense can vary due to accrual adjustments related to the
      underlying clinical trials and the expenses incurred by the contract research
      organizations. For the years ended December 31, 2003, 2004 and 2005, we
      have incurred research and development expenses of €2.253 million,
€2.922 million and €4.557 million, respectively. As of December 31, 2005,
      we had €2.649 million of future payables under outstanding contracts with
      various contract research organizations. Most of these contracts are on a cost
      plus basis or actual cost basis.




*Share-Based
      Compensation*




We
      have
      adopted the fair value based method of accounting for share-based employee
      compensation in accordance with the provisions of Statement of Financial
      Accounting Standards No. 123R, “Share Based Payment” (SFAS 123R).
      SFAS 123R requires us to estimate a significant number of variables in
      order to derive a fair value of an equity based instrument. For example, the
      risk of the underlying deliverable equity instruments (i.e., our ordinary
      shares) as compared to the market as a whole, is generally reflected in our
      unique “Beta”. This is a unique measurement to each company, and requires
      several assumptions. The most common and generally accepted valuation models
      related to option pricing also include many




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significant
      assumptions related to such variables as dividend yields, share prices and
      the
      estimated life of the option before being exercised. The actual selection of
      which valuation model to use requires judgment, as there are several models
      to
      choose from.




In
      using
      the option pricing model that we have selected, changes in the underlying
      assumptions have the following effect on the resulting fair value output:




**An
                increase to the:**
            
            **Results
                in a fair value**
              **estimate
                that is:**Price
                of the underlying share
            
            HigherExercise
                price of option
            
            LowerExpected
                volatility of stock
            
            HigherExpected
                dividends on stock
            
            LowerRisk-free
                interest rate
            
            HigherExpected
                term of option
            
            Higher




In
      our
      current valuation, we consider the volatility factor to be critical. We have
      used a weighted average 40% factor based on what we believe is a representative
      sample of similar biopharmaceutical companies. However, this sample is not
      perfect as it omits, for example, Italian companies, due to the fact that there
      are a limited number of companies such as ourselves publicly traded in the
      U.S.
      market. If we increased our
      volatility factor to 80%, the fair value of our stock options granted in 2004
      and in 2005 would have increased by $41 thousand and **** $1.857
      million, respectively, and would have resulted in $23 thousand and **** $337  thousand **** in
      additional compensation expense in 2004 and 2005, respectively. Therefore,
      significant changes to these estimates could have a material impact on the
      results of our operations.




*Accounting
      for income taxes*




We
      use
      the liability method of accounting for income taxes, as set forth in Statement
      of Financial Accounting Standards No. 109, “Accounting for Income Taxes.”
Under this method, we recognize deferred tax assets and liabilities for the
      expected future tax consequences of temporary differences between the carrying
      amounts and the tax basis of assets and liabilities and net operating loss
      carry-forwards, all of which we calculate using presently enacted tax rates.
      We
      establish valuation allowances when necessary to reduce deferred tax assets
      to
      the amount that we expect to be realized.




In
      our
      accompanying financial statements we have reserved for all of our deferred
      tax
      assets as we currently believe that it is more likely than not that the assets
      will not be recoverable during their estimated life. In establishing our
      deferred tax position, in particular deferred tax assets, we only establish
      the
      tax asset if we believe that it is probable that this asset will be an allowable
      deduction in our tax jurisdiction. The assessment of the “recoverability” of
      that asset is a separate exercise, which uses the “more likely than not”
criteria. In Italy, which is currently the only taxing jurisdiction where we
      are
      required to file a tax return, we have assessed that due to the limited
      lives of our net operating losses (limited to 5 years), we believe that
      these assets will not be recoverable before expiration. Although we have paid
      some corporate income taxes in the past, the significant amount of other tax
      assets in conjunction with the higher level of expected expenditures, the
      already existing net operating losses and limited taxable income expected in
      the
      near future resulted in our estimating that a complete valuation allowance
      was
      necessary. Significant changes either to the underlying facts, such as an
      increase in the net operating loss life in Italy, or our estimates, such as
      our
      ability to generate meaningful taxable income, could result in changes to our
      existing valuation allowance. Such changes could have a material impact on
      our
      results of operations or financial position.




**Recent
      Accounting Pronouncements**




In
      May 2005, the FASB issued Statement of Financial Accounting Standard No
      154, “Accounting Changes and Error Corrections” (SFAS 154), which replaces APB
      Opinion No. 20, “Accounting Changes,” and supersedes FASB Statement
      No. 3, “Reporting Accounting Changes in Interim Financial Statements - an
      amendment of APB Opinion No. 28.” SFAS 154 requires retrospective
      application to prior periods’ financial statements of changes in accounting
      principle, unless it is impracticable to determine either the period-specific
      effects or the cumulative effect of the change. When it is impracticable to
      determine the period-specific effects of an accounting change on one or more
      individual prior periods presented, SFAS 154 requires that the new accounting
      principle be applied to the balances of assets and liabilities as of the
      beginning of the earliest period for which retrospective application is
      practicable and that a corresponding adjustment be made to the opening balance
      of retained earnings for that period rather than being reported in an income
      statement. When it is impracticable to determine the cumulative effect of
      applying a change in accounting principle to all prior periods, SFAS 154
      requires that the new accounting principle be applied as if it were adopted
      prospectively from the earliest date practicable. SFAS 154 is effective for
      accounting changes and corrections of errors made in fiscal years beginning
      after December 15, 2005. We have adopted the provisions of SFAS 154, which
      did not have a significant impact on our results of operations.




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In
      July 2005, the FASB published an Exposure Draft of a proposed
      Interpretation, “Accounting for Uncertain Tax Positions.” The Exposure Draft
      seeks to reduce the significant diversity in practice associated with
      recognition and measurement in the accounting for income taxes. It would apply
      to all tax positions accounted for in accordance with SFAS 109, “Accounting for
      Income Taxes.” The Exposure Draft requires that a tax position meet a “probable
      recognition threshold” for the benefit of the uncertain tax position to be
      recognized in the financial statements. This threshold is to be met assuming
      that the tax authorities will examine the uncertain tax position. The Exposure
      Draft contains guidance with respect to the measurement of the benefit that
      is
      recognized for an uncertain tax position, when that benefit should be
      recognized, and other matters. This proposed interpretation would clarify the
      accounting for uncertain tax positions in accordance with SFAS 109. The FASB
      staff is considering the comment letters that have been received and is
      determining the plan for deliberations. The FASB board expects to issue a final
      interpretation, which would include amendments to SFAS 109, in the first quarter
      of 2006. We are currently evaluating the impact this proposed interpretation
      would have on our results of operations.




**Results
      of Operations**




The
      following tables set forth our results of operations expressed as a percentage
      of total product sales:




**For
                The Years Ended December 31,****2003**
            
            **2004**
            
            **2005***000s
                omitted*
            
            **Amount**
            
            **Percent**
            
            **Amount**
            
            **Percent**
            
            **Amount**
            
            **Percent**Sales
                to affiliates
            
            €
            6,532
            
            
            100.0
            %
            €
            2,870
            
            
            92.2
            %
            €
            3,260
            
            
            97.0
            %Third
                party product sales
            
            
            
            
            
            
            
            
            243
            
            
            7.8
            
            
            101
            
            
            3.0Total
                product sales
            
            
            6,532
            
            
            100.0
            
            
            3,113
            
            
            100.0
            
            
            3,361
            
            
            100.0Other
                income and revenues
            
            
            1,843
            
            
            28.2
            
            
            583
            
            
            18.7
            
            
            280
            
            
            8.3Total
                Revenues
            
            
            8,375
            
            
            128.2
            
            
            3,696
            
            
            118.7
            
            
            3,641
            
            
            108.3Operating
                costs and expenses:Cost
                of goods sold
            
            
            2,435
            
            
            37.3
            
            
            2,579
            
            
            82.8
            
            
            2,911
            
            
            86.6Charges
                from affiliates
            
            
            1,485
            
            
            22.7
            
            
            1,665
            
            
            53.5
            
            
            1,047
            
            
            31.2Research
                and development
            
            
            2,253
            
            
            34.5
            
            
            2,922
            
            
            93.9
            
            
            4,557
            
            
            135.6General
                and administrative
            
            
            854
            
            
            13.1
            
            
            1,194
            
            
            38.4
            
            
            2,284
            
            
            68.0Depreciation
                and amortization
            
            
            67
            
            
            1.0
            
            
            89
            
            
            2.9
            
            
            118
            
            
            3.57,094
            
            
            108.6
            
            
            8,449
            
            
            271.4
            
            
            10,917
            
            
            324.8Operating
                income (loss)
            
            
            1,281
            
            
            19.6
            
            
            (4,753
            )
            
            (152.7
            )
            
            (7,276
            )
            
            (216.5
            )Foreign
                currency exchange gain (loss), net
            
            
            156
            
            
            2.4
            
            
            (55
            )
            
            (1.8
            )
            
            (249
            )
            
            (7.4
            )Interest
                expense
            
            
            (71
            )
            
            (1.1
            )
            
            (2,192
            )
            
            (70.4
            )
            
            (4,148
            )
            
            (123.4
            )Pre-tax
                income (loss)
            
            
            1,366
            
            
            20.9
            
            
            (7,000
            )
            
            (224.9
            )
            
            (11,673
            )
            
            (347.3
            )Income
                tax expense (benefit)Current
            
            
            243
            
            
            3.7
            
            
            65
            
            
            2.1Deferred
            
            
            (84
            )
            
            (1.3
            )
            
            (37
            )
            
            (1.2
            )
            
            646
            
            
            19.2Total
                income tax expense....
            
            
            159
            
            
            2.4
            
            
            28
            
            
            0.9
            
            
            646
            
            
            19.2NET
                INCOME (loss)
            
            €
            1,207
            
            
            18.5
            %
            €
            (7,028
            )
            
            (225.8
            )%
            €
            (12,319
            )
            
            (366.5
            )%Net
                income/(loss) per share:Basic
                and diluted net income/(loss) per share
            
            
            0.24
            
            
            
            
            
            (1.41
            )
            
            
            
            
            (1.78
            )Weighted
                average shares used to compute basic and diluted net income/(loss)
                per
                share
            
            
            5,000,000
            
            
            
            
            
            5,000,000
            
            
            
            
            
            6,933,104





**Year
      Ended December 31, 2005 Compared to Year Ended December 31,
      2004**




*Product
      sales.*




Our
      sales
      were €3.36 million **** for
      2005
      compared to €3.11 million in 2004. The timing of manufacturer orders can cause
      variability in sales. Total product sales in 2005 were in line with the prior
      period although sales to our affiliate increased




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13%
      to
€3.26 million and sales to third parties decreased 58% to €101 thousand. Sales
      to affiliates increased due to higher sales volume of our main product,
      defibrotide, which represents 74% (or 2.47 million) and 46% (or €1.42 million)
      of the total product sales in 2005 and 2004, respectively. The increase in
      affiliate sales of defibrotide was partially offset by a decrease in sales
      of
      urokinase which decreased from **** 42%
      (or
€1.31 million) to 20% (or €684 thousand) of the total product sales. The
      decrease is due to Crinos, the principal customer of our affiliate Sirton,
      selling urokinase in only a single dose, which has a more limited market than
      multiple doses. Third party product sales decreased primarily due to lower
      sales
      volume of sulglicotide to a Korean customer. The Korean customer delayed the
      launch of a new product which uses sulglicotide. We expect future growth in
      sulglicotide revenue due to the expected launch of the Korean customer’s product
      in 2006.




*Cost
      of goods sold.*




Our
      cost
      of goods sold was €2.91 million for 2005 compared to **** €2.58
      million **** in
      2004.
      In 2005, we wrote down €291 thousand of inventory which was charged to cost of
      goods sold to adjust cost to its estimated net realizable value. Cost of goods
      sold as percent of product sales was 86.6% in 2005 and 82.8% in 2004. The slight
      increase in costs as a percentage of sales was due to the revised estimate
      on
      manufacturing facilities and equipment useful life which resulted in lower
      depreciation expenses allocated to cost of goods sold in the fourth quarter
      of
      2005 offset by the increase in inventory write-off and quality control
      expenses.




*Other
      income and revenues*




Our
      other
      income and revenues was €280 thousand for 2005 compared to **** €583
      thousand **** in
      2004.
      In 2004, the Company recognized a milestone payment of €273 thousand under its
      license agreement with Sigma-Tau Pharmaceuticals, Inc. due to the issuance
      of an
      investigational new drug application for the Phase III clinical trial of
      defibrotide to treat VOD.




*Research
      and development expenses* .




We
      incurred research and development expenses of €4.56 million for 2005 compared to
€2.92 million in 2004. The increase was primarily related to the timing and
      amount of research and development expenses for the development of defibrotide
      to treat and prevent VOD and performance of related obligations under our
      license agreement with Sigma-Tau. Also contributing to the increase were growth
      in headcount and outside services to support increased activity in our clinical
      trials, including the preparation of regulatory filings and clinical production
      costs and stock based compensation expense of €117.




*General
      and administrative expenses* .




Our
      general and administrative expenses were €2.28 million in 2005 compared to €1.19
      million **** in
      2004.
      The increase in 2005 was primarily due to increased headcount and facilities
      related expenses, general corporate expenses of being a public company, increase
      in internally provided administrative services to replace administrative
      services previously provided by affiliates and stock based compensation expense
      of €329.




*Depreciation
      and amortization expense.*




Depreciation
      and amortization expense was €118 thousand in 2005 compared to €89 thousand in
      2004. Depreciation expense excludes depreciation on our manufacturing facilities
      which are included in cost of goods sold.




*Interest
      income (expense), net* .




The
      components of interest expense have changed primarily due to the effects of
      our
      issuance of our Series A senior convertible promissory notes in the fourth
      quarter of 2004 and first quarter of 2005. In the 2005 period, interest expense
      on the Series A notes was €4.095 million, including non-cash interest expense of
€3.837 million from amortization of the issue discount and issue cost. Interest
      expense for the 2004 period is net of interest which was capitalized as part
      of
      our manufacturing facility overhaul. The increase in interest expense was
      partially offset by income amounting to €156 resulting from higher level of
      invested funds due to the completion of our initial public offering in June
      2005.




*Income
      taxes.*




Income
        tax expense was €646 thousand on a pre-tax loss of €11.67 million for the year
        ended December 31, 2005.  We incurred income tax expense of €28
        thousand on a pre-tax loss of €7 million for the year ended December 31,
        2004.  In the 2005 period our income tax expense included an update of our
        assumptions underlying the recovery of a pre-paid tax asset that we inherited
        from the original spin-off from Sirton.  We believe that the tax benefits
        related to the prepayment will no longer be available, therefore we have
        written
        off the entire pre-paid tax asset.




*Net
      loss* .




Our
      net
      loss was €12.3 million in 2005 compared to €7.0 million in 2004. The increase
      was primarily due to the increase in interest expense, stock based compensation,
      research and development, general and administrative expenses, deferred tax
      write-off and a decrease in other income and revenue.




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**Year
      Ended December 31, 2004 Compared to Year Ended December 31,
      2003**




*Sales
      revenue.*




Our
      sales
      were €3.11 million for the year ended December 31, 2004 compared to €6.53
      million for the comparable period in 2003, a decrease of 52%. The decrease
      was
      primarily due to a need to temporarily cease operations at our manufacturing
      facility from February 2004 through August 2004 to complete a major facility
      overhaul and upgrade. A decline in sales to our principal customer and
      affiliate, Sirton, due to decreased demand by Sirton’s principal customer,
      Crinos, also contributed to the decrease, slightly offset by an increase in
      revenues of €243 thousand from sales of sulglicotide.




*Cost
      of goods sold.*




Our
      cost
      of goods sold was €2.57 million for the year ended December 31, 2004 compared to
€2.43 million for the comparable period in 2003. Our cost of goods sold as a
      percentage of product sales increased to 83% in 2004 from 37% in 2003. The
      increase in costs as a percentage of product sales was primarily due to the
      absorption of the fixed portion of our production costs by a reduced level
      of
      sales and the cost of materials for testing batches of product as we restarted
      our facility after the upgrade.




*Other
      income and revenues.*




Our
      other
      income and revenues was €583 thousand for the year ended December 31, 2004,
      compared to €1.84 million for the comparable period in 2003. Other income is
      primarily due to our recognition of revenues for performance milestone payments
      received under our license agreement with Sigma Tau Pharmaceuticals, Inc. and
      upfront payments recognized ratably over the expected life of the research
      period.




*Research
      and development expenses* .




We
      incurred research and development expenses of €2.92 million for the year ended
      December 31, 2004 compared to €2.25 million for the comparable period in
      2003. The expenses were primarily for the development of defibrotide to treat
      and prevent VOD. The difference between the periods is primarily due to the
      timing and expenses incurred for clinical trials.




*General
      and administrative expense* .




Our
      general and administrative expense was €1.194 million for the year ended
      December 31, 2004 compared to €854 thousand for the comparable period in 2003.
      The slight decrease in expenses incurred is mainly due to the overhaul of our
      manufacturing facilities in 2004 and stock based compensation
      expense.




*Depreciation
      and amortization expense.*




Depreciation
      and amortization expense was €89 thousand for the year ended December 31, 2004
      compared to €67 thousand for the comparable period in 2003. Depreciation expense
      excludes depreciation on our manufacturing facilities which are included in
      cost
      of goods sold.




*Interest
      income (expense), net* .




Interest
      expense was €2.20 million for the year ended December 31, 2004 compared to €71
      thousand for the comparable period in 2003. Interest expense increased because
      of our increased borrowings, including our new mortgage, our equipment
      financing, loans from our affiliate, Sirton, and the issuance of our Series
      A
      senior convertible promissory notes. In 2004, interest expense included non-cash
      interest expense from the amortization of the beneficial conversion feature
      of
      our Series A notes of €1.77 million and amortization of debt issue costs in the
      aggregate amount of €1.775 million. Interest expense for the 2004 period is net
      of interest which was capitalized as part of our manufacturing facility
      overhaul.




*Income
      taxes* .


Income
        tax expense was €28 thousand on a pre-tax loss of €7 million for the year ended
        December 31, 2004.  We incurred tax expenses of €159 thousand for the
        comparable 2003 period on a pre-tax income of €1.366 million.  The Company
        has significant tax assets, therefore the 2003 Italian tax provision allowed
        the
        utilization of certain tax assets related to our considerable differences
        between the carrying value of our fixed assets. Also, as Italy is a dual-income
        tax jurisdiction, non-taxable income for the corporate income tax rate does
        not,
        necessarily, indicate that no income taxes are due.  In 2003 some amounts
        of tax expense were paid due to the taxable income on our local tax
        return.  In 2004, less tax expense overall was due, even though our taxable
        income was considerably worse. Given our considerable tax assets and expected
        high levels of research and development going forward, we don't expect to
        have
        any cash tax expense for at least 3 years.




*Net
      income (loss)* .




Our
      net
      loss was €7.02 million for the year ended December 31, 2004 compared to a net
      income of €1.2 million for the comparable 2003 period. The increased loss was
      primarily due to the decrease in revenues and the related decrease in gross
      margin and the increase in general and administrative expenses.




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**LIQUIDITY
        AND CAPITAL RESOURCES**




For
      the
      three years ended December 31, 2003, we funded our operations principally from
      operating cash flow, which included research grants, and the sale and licensing
      of intellectual property. For the year ended December 31, 2004, we used € 4.377
      million of cash in operating activities and we spend €5.341million on capital
      expenditures. We funded our operations in 2004 principally with loans from
      our
      affiliate, Sirton, in the amount of €3.0 million, short-term borrowings from a
      financial institution in the amount of €2.690 million and the proceeds of our
      Series A notes in the amount of $6.098 million. We used €800 thousand of the
      proceeds of the sale of the Series A notes to repay a portion of the loans
      we
      owed to Sirton during the year ended December 31, 2004.




From
      January 2005 through the closing of our initial public offering in June 2005,
      described below, we funded our operations and repaid an additional €700 thousand
      of the loans we owed to Sirton with additional proceeds of the sale of our
      Series A notes in the amount of $1.912 million and capital contributions from
      our then-majority shareholder, FinSirton, in the amount of €3.9 million. We also
      used part of the proceeds of the sale of the Series A notes to pay for part
      of
      the costs of our initial public offering.




In
      June
      2005 we completed an initial public offering of 2.4 million of our ADSs
      generating gross proceeds of $21.6 million. In addition, the holder of $2.912
      million of our Series A notes converted its notes into 359,505 of our ordinary
      shares concurrent with the closing of our initial public offering. In July
      2005,
      the underwriters of our initial public offering exercised part of their
      over-allotment option by purchasing an additional 300,000 of our ADSs generating
      additional gross proceeds of $2.7 million. We repaid the remaining €1.5 million
      of the loans we owed to Sirton and the remaining $5.098 million of our Series
      A
      notes with the proceeds of the initial public offering and over-allotment option
      exercise. These proceeds also funded our operations in 2005.




In
      October 2005, we completed a private placement of 1,551,125 of our ADSs together
      with warrants to purchase 620,450 ADSs in consideration for a price of $7.05
      per
      unit, for aggregate gross proceeds of $10.9 million.




The
      Company applied to a national banking institution, Intesa-Mediocredito, for
      a
      medium/long-term financing facility of up to €1 million to finance the Company’s
      purchase and installation of two reactors in our manufacturing facility. In
      February 2006, Intesa-Mediocredito notified the Company that it would grant
      the
      financing facility, and in April 2006, Intesa-Mediocredito granted the
      financing. The financing has a five-year term and bears interest at the
      three-month Euribor rate plus 1.7%. It is secured by Banca Intesa debt
      securities in the aggregate amount of €525 thousand that the Company purchased
      and which expire on May 10, 2011. The Company makes installment payments on
      the
      financing facility of €131 thousand every six months until its final maturity in
      April 2011.




Under
      Italian law, a local authority, the Lombardy Regional Authority, provided
      various incentives to the Company to purchase the new reactors, on the theory
      that the reactors improve the working conditions for the Company’s employees and
      constitute an investment in innovation. These incentives were in the form of
      the
      agreement by the Lombardy Regional Authority to pay (i) up to €75 thousand of
      certain social securities contributions that the Company is obligated to pay
      to
      the national government and (ii) up to €80 thousand of interest due on the
      financing facility.




We
      expect
      to devote substantial resources to continue our research and development
      efforts, on regulatory expenses, and to expand our licensing and collaboration
      efforts. Our funding requirements will depend on numerous factors including:




·
            whether
                we are able to commercialize and sell defibrotide for the uses for
                which
                we are developing it;




·
            the
                scope and results of our clinical trials;




·
            advancement
                of other product candidates in development;




·
            the
                timing of, and the costs involved in, obtaining regulatory approvals;




·
            the
                cost of manufacturing activities;




·
            the
                costs involved in preparing, filing, prosecuting, maintaining and
                enforcing patent claims and other patent-related costs, including
                litigation costs and results of such litigation; and




·
            our
                ability to establish and maintain additional collaborative arrangements.




We
      do not
      expect our revenues to increase significantly until we successfully obtain
      FDA
      and European regulatory marketing approval for, and begin selling, defibrotide
      to treat VOD with multiple-organ failure. We believe that some of the key
      factors that will affect our internal and external sources of cash are:




·
            our
                ability to obtain FDA and European regulatory marketing approval
                for and
                to commercially launch defibrotide to treat VOD with multiple-organ
                failure;




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·
            the
                success of our other clinical and pre-clinical development programs,
                including development of defibrotide to prevent VOD and to treat
                multiple
                myeloma;




·
            the
                receptivity of the capital markets to financings of biotechnology
                companies; and




·
            our
                ability to enter into additional strategic agreements with corporate
                and
                academic collaborators and the success of such relationships.




In
      2005,
      we used approximately €8.9 million of cash to fund operations and working
      capital requirements, including research and development, and incurred capital
      expenditures of approximately €1.4 million. As of December 31, 2005, we had cash
      and cash equivalents of €12.8 million. In 2006, we expect to use approximately
€15 million of cash to fund operating activities, €1.7 million for capital
      expenditures and €0.9 million for scheduled payments on our debt for an
      aggregate of €3.4 million.




Therefore,
      in order to meet our capital requirements and maintain an adequate safety
      reserve of cash, we expect to need additional funding in 2006. Changes in our
      operating plans, delays in obtaining approval to market our product candidates,
      lower than anticipated revenues, increased expenses or other events, including
      those described in “Risk Factors,” may cause us to seek additional debt or
      equity financing on an accelerated basis. Financing may not be available on
      acceptable terms, or at all, and our failure to raise capital when needed could
      negatively impact our growth plans and our financial condition and results
      of
      operations. Additional equity financing may be dilutive to the holders of our
      ordinary shares and debt financing, if available, may involve significant cash
      payment obligations and covenants and/or financial ratios that restrict our
      ability to operate our business.




Italian
      law provides for limits and restrictions on our issuance of debt securities.
      We
      may not issue debt securities for an amount exceeding twice the amount of the
      sum of the aggregate par value of our ordinary shares (which we call our
      capital), our legal reserve and any other disposable reserves appearing on
      our
      latest balance sheet approved by our shareholders. The legal reserve is a
      reserve to which we allocate 5% of our net income each year until it equals
      at
      least 20% of our capital. One of the other reserves that we maintain on our
      balance sheet is a “share premium reserve”, meaning amounts paid for our
      ordinary shares in excess of the capital. At December 31, 2005, the sum of
      our
      capital, legal reserves and other reserves on our Italian GAAP balance sheet
      was **** €29.6
      million. If we issue debt securities in the future, we may not voluntarily
      reduce our capital or our reserves (such as by declaring dividends) if it
      results in the aggregate of the capital and reserves being less than half of
      the
      outstanding amount of the debt. If our equity is reduced by losses or otherwise
      such that the amount of the outstanding debt securities is more than twice
      the
      amount of our equity, some legal scholars are of the opinion that the ratio
      must
      be restored by a recapitalization of our company. If our equity were reduced,
      we
      could recapitalize by means of issuing new shares or having our shareholders
      contribute additional capital to our company, although there can be no assurance
      that we would be able to find purchasers for new shares or that any of our
      shareholders would be willing to contribute additional capital.




In
      order
      to issue new equity or debt securities convertible into equity, with some
      exceptions, we must increase our authorized capital. In order to do so, our
      board must meet and resolve to recommend to our shareholders that they approve
      an amendment to our bylaws to increase our capital. Our shareholders must then
      approve that amendment to our bylaws in a formal meeting duly called, with
      the
      favorable vote of the required majority, which may change depending on whether
      the meeting is held on a first or subsequent call. These meetings take time
      to
      call. In addition, a notary public must verify the compliance of the capital
      increase with our bylaws and applicable Italian law. Further, under Italian
      law,
      our existing shareholders and any holders of convertible securities sometimes
      have preemptive rights to acquire any such shares on the same terms as are
      approved concurrent with the new increase of the authorized capital pro rata
      based on their percentage interests in our company. Also, our shareholders
      can
      authorize the board of directors to increase our capital, but the board may
      exercise such power for only five years. If the authorized capital is not issued
      by the end of those five years, the authorized capital expires, and our board
      and shareholders would need to meet again to authorize a new capital increase.
      Our shareholders authorized our board of directors to increase our capital
      by up
      to €90 million of par value for ordinary shares and €10 million for ordinary
      shares issuable upon conversion of convertible bonds on April 28, 2006. Italian
      law also provides that if the shareholders vote to increase our capital,
      dissenting, abstaining or absent shareholders representing more than 5% of
      the
      outstanding shares of our company may, for a period of 90 days following the
      filing of the shareholders’ approval with the Registry of Companies, challenge
      such capital increase if the increase was not in compliance with Italian law.
      In
      certain cases (if, for example, a shareholders’ meeting was not called), any
      interested person may challenge the capital increase for a period of 180 days
      following the filing of the shareholders’ approval with the Registry of
      Companies. Finally, once our shareholders authorize a capital increase, we
      must
      issue all of those authorized shares before the shareholders may authorize
      a new
      capital increase, unless the shareholders vote to cancel the previously
      authorized shares. These restrictions could limit our ability to issue new
      equity or convertible debt securities on a timely basis.




If
      we are
      unable to obtain additional financing, we may be required to reduce the scope
      of, or delay or eliminate some or all of our planned research, development
      and
      commercialization activities, which could harm our financing condition and
      operating results.




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**RESEARCH
      AND DEVELOPMENT**




We
      discover, research and conduct initial development of our product candidates
      at
      our facilities in Italy, and also hire consultants to do so in various countries
      in Europe and the United States. We typically conduct preclinical laboratory
      and
      animal studies of product candidates either ourselves or through other research
      facilities. We typically engage medical centers to conduct clinical trials
      of
      our product candidates. In certain cases, where we believe the development
      costs
      will be substantial, we may enter into strategic partnerships to help us develop
      those product candidates. We expense research and development costs as
      incurred.




**Research
      and Development Expenses**




Our
      research and development expenses consist primarily of costs associated with
      research, preclinical development and clinical trials for our product
      candidates. During the years ended December 31, 2003, 2004 and 2005, we had
      three major categories of research projects relating to our advanced product
      candidates: defibrotide to treat VOD, defibrotide to prevent VOD and assorted
      other projects. The table below presents our research and development expenses
      by project for each of the years ended December 31, 2003, 2004 and
      2005.




**For
                the Year Ended December 31,***(in
                thousands)*
            
            **2003**
            
            **2004**
            
            **2005**Defibrotide
                to treat VOD
            
            €
            2,077
            
            €
            2,521
            
            €
            4,123Defibrotide
                to prevent VOD
            
            
            25
            
            
            112
            
            
            175Others
            
            
            151
            
            
            289
            
            
            259Total
            
            €
            2,253
            
            €
            2,922
            
            €
            4,557




The
      Dana-Farber Cancer Institute at Harvard University sponsored and completed
      in
      December 2005 a Phase II clinical trial in the United States of defibrotide
      to
      treat VOD with multiple-organ failure. We started enrollment of patients in
      a
      Phase III clinical trial of this product candidate in the United States in
      the
      second quarter of 2006. We do not anticipate
      obtaining FDA or European regulatory approval of this product candidate before
      2008. The table above also includes research and development expenses that
      we
      incurred in connection with a Phase II/III clinical trial of defibrotide to
      treat VOD in Europe and Israel that was sponsored by a committee of clinical
      investigators and conducted by Consorzio Mario Negri Sud. The committee of
      clinical investigators terminated this trial in October 2005.




Defibrotide
      to prevent VOD is also currently in a Phase II/III clinical trial of children
      in
      Europe sponsored by our company and the
      European Group for Blood and Marrow Transplant ation.
      We
      expect to begin a Phase II/III clinical trial of defibrotide to prevent VOD
      and
      transplant associated microangiopathy in adults in Europe in the second quarter
      of 2006, which will be sponsored by our company and the European Group for
      Blood
      and Marrow Transplantation. We do not anticipate obtaining European regulatory
      approval of this product candidate before 2009.




An
      independent Phase I/II clinical trial in Italy of defibrotide, in combination
      with melphalan, prednisone and thalidomide, to treat patients with advanced
      and
      refractory multiple myeloma started in December 2005. As a result, no costs
      associated with development of this product candidate are reflected in the
      table
      above. This clinical trial is being conducted at approximately 10 cancer centers
      in Italy, starting with Hospital Molinette of Torino, and the principal
      investigator is Dr. Mario Boccadoro, M.D., at the Division of Hematology,
      University of Turin, Italy.




The
      table
      above includes research and development expenses that we incurred in connection
      with a Phase I clinical trial of defibrotide to mobilize and increase the number
      of stem cells available in patients’ and donors’ blood for subsequent stem cell
      transplantation sponsored by the National Institute of Tumors of Milan. The
      National Institute of Tumors of Milan terminated this trial in December 2005.
      We
      cannot estimate when, if ever, we will be able to obtain European regulatory
      approval of this product candidate.




We
      expect
      to continue to increase our research and development expenses for the research
      and development of defibrotide to treat and prevent VOD and the treatment of
      multiple myeloma and possibly for other indications for defibrotide. This will
      involve sponsoring or funding, or both, clinical trials in both the United
      States and Europe. Development timelines and costs are difficult to estimate
      and
      may vary significantly for each product candidate and from quarter to quarter.
      The process of seeking regulatory approvals, and the subsequent compliance
      with
      applicable regulations, requires the expenditure of substantial resources.
      We
      expect that we will need additional funds before we have completed the
      development of our product candidates. We may seek to raise these funds through
      licensing and other collaboration agreements or through the sale of debt or
      equity securities. There can be no assurance that we will be successful in
      raising additional funds or that if we are, it will be on favorable
      terms.




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A
      further
      discussion of the risks and uncertainties associated with developing our product
      candidates and certain consequences of failing to do so are set forth in the
      risk factors under the heading “Risks Relating to Our Business” as well as other
      risk factors.




**Intellectual
      Property Rights And Patents**




As
      of
      December 31, 2005, we had seven issued U.S. patents, four pending U.S. patent
      applications, 28 issued foreign patents, 96 pending foreign patent applications
      and three international patent applications (not nationalized yet). These
      include the following. The United States Patent & Trademark Office issued a
      patent covering our manufacturing process
      of defibrotide in 1991, which expires in 2008. In April 2001, we filed a
      patent application with the United States Patent & Trademark Office and
      corresponding patent applications in certain foreign countries regarding the
      use
      of defibrotide in stem cell transplants, which expires in 2021.




Patent
      rights and other proprietary rights are important in our business. We have
      sought, and intend to continue to seek, patent protection for our inventions
      and
      rely upon patents, trademarks, trade secrets, know-how, continuing technological
      innovations and licensing opportunities to develop and maintain a competitive
      advantage.




However,
      the patent positions of companies like ours involve complex legal and factual
      questions and, therefore, their enforceability cannot be predicted with any
      certainty. Our patents, those licensed to us, and those that may be issued
      to us
      in the future may be challenged, invalidated or circumvented, and the rights
      granted under them may not provide us with protection or competitive advantages
      against competitors with similar technology. Furthermore, our competitors may
      independently develop similar technologies or duplicate any technology developed
      by us. Because of the extensive time required for development, testing and
      regulatory review of a potential product, it is possible that, before any of
      our
      product candidates can be approved for sale and commercialized, our relevant
      patent rights may expire or remain in force for only a short period following
      commercialization.





**TREND
      INFORMATION**




As
      a
      result of the temporary cessation of operations from February through August
      of
      2004 in connection with the upgrade of our manufacturing facility, comparison
      of
      our operating results in 2004 and 2005 may not be meaningful.




Currently,
      our primary source of revenue is from the sale of products to our affiliate,
      Sirton. Sirton manufactures finished products from, in part, our products,
      and
      sells those products primarily to one customer, Crinos. Sirton sells its
      finished products, including calcium heparin, primarily to one customer, Crinos,
      which sells them to the retail market. Calcium heparin has seen decreased demand
      over the past several years due to a new competitive product, low molecular
      weight heparin, made by Aventis and other companies . Also,
      Crinos has limited its sale of urokinase to a single dose, which has a more
      limited market than multiple doses. As a result, Sirton’s demand for these
      products of ours has decreased over the past several years, and may continue
      to
      decrease over the next several years until and unless both we and Sirton develop
      new customers.




On
      November 11, 2003, we entered into a Supply Agreement with Samil Pharm.
      Co., Ltd., a Korean corporation. Under this agreement, we supply Samil with
      sulglicotide, and Samil has the following purchase obligations:




**Period**
            
            **Purchase
                Amount**June 20,
                2005 to June 20, 2006
            
            at
                least 2,600 kilogramsJune 20,
                2006 to June 20, 2007
            
            at
                least 3,400 kilogramsAfter
                June 20, 2007
            
            to
                be renegotiated




In
      any
      given period, excess purchases by Samil may be applied as a reduction of the
      immediately following period’s minimum purchases or as compensation for a
      failure to purchase the immediately preceding period’s minimum purchase, at
      Samil’s choice. Samil informed us that it experienced a delay in the launch of
      its product that uses sulglicotide because of further market analyses required
      in order to properly position the product into the Korean market. Samil launched
      its product in early 2006 and in March **** 2006
      we
      received a purchase order from Samil for 490 kg of sulglicotide. Additionally,
      we have been informed by Samil that another 490 kg of sulglicotide may be needed
      in 2006. We expect future growth in sulglicotide revenue due to the expected
      penetration of the Samil’s product in the Korean market. However, we cannot be
      certain that the Samil will be successful on its efforts.




In
      connection with the issue of our Series A senior convertible promissory notes,
      we incurred debt issues costs which are amortized over the term of the notes
      and
      included in interest expense. In addition, we recorded original issue discount
      on the notes due to the beneficial conversion feature of the notes and related
      detachable warrants. As of December 31, 2005, all of the notes have been repaid
      or converted into our ordinary shares. We incurred interest expense in 2005
      on
      the notes in the amount of **** €4.095
      million, including amortization of the issue costs and issue discount of €3.837
      million.




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As
      a
      public reporting company, we incur significant legal, accounting and other
      expenses that we did not incur as a private company. In addition, the
      Sarbanes-Oxley Act of 2002, as well as new rules subsequently implemented by
      the
      Securities and Exchange Commission, the American Stock Exchange and the Nasdaq
      National Market System, have required changes in corporate governance practices
      of public companies. We expect these new rules and regulations to increase
      our
      legal and financial compliance costs and to make some activities more
      time-consuming and costly. We also expect these new rules and regulations to
      make it more difficult and more expensive for us to obtain director and officer
      liability insurance.




**OFF-BALANCE
      SHEET ARRANGEMENTS**




We
      do not
      have any off-balance sheet arrangements.




**TABULAR
      DISCLOSURE OF CONTRACTUAL
      OBLIGATIONS**




**Contractual
      Obligations and Commitments**




Our
      major
      contractual obligations and commitments relate to our real estate mortgages,
      other financing from banks and financial institutions and various service
      agreements (including those related to our clinical trials).




The
      following table summarizes our long-term commitments as of December 31,
      2005.




*(000s
                omitted)*
            
            **Total**
            
            **1
                Year**
            
            **2
                Years**
            
            **3
                Years**
            
            **4
                Years**
            
            **5
                Years**
            
            **More
                than 5 Years**Long-Term
                Debt Obligations:Mortgage
                loans
            
            €
            2,255
            
            €
            655
            
            €
            400
            
            €
            400
            
            €
            400
            
            €
            400
            
            €
            —Equipment
                loans
            
            
            696
            
            
            195
            
            
            195
            
            
            175
            
            
            131
            
            
            —
            
            
            —Research
                loan
            
            
            450
            
            
            66
            
            
            67
            
            
            68
            
            
            68
            
            
            70
            
            
            111€
            3,401
            
            €
            916
            
            €
            662
            
            €
            643
            
            €
            599
            
            €
            470
            
            
            111Purchase
                Obligations and OperatingLeases:Inter-company
                services and lease
            
            
            815
            
            
            163
            
            
            163
            
            
            163
            
            
            163
            
            
            163
            
            
            —Clinical
                research
            
            
            1,885
            
            
            967
            
            
            437
            
            
            412
            
            
            69
            
            
            —
            
            
            —Consultants
            
            
            764
            
            
            756
            
            
            9
            
            
            —
            
            
            —
            
            
            —
            
            
            —3,464
            
            €
            1,886
            
            €
            609
            
            €
            575
            
            €
            232
            
            €
            163Total
            
            €
            6,865
            
            €
            2,802
            
            €
            1,271
            
            €
            1,218
            
            €
            831
            
            €
            633
            
            €
            111




We
      have a
      mortgage loan with Banca Nazionale del Lavoro that was originally granted for
      €1.549 million in May 1999 and bears interest at the six-month Euribor
      rate plus 1.0%. The loan is secured by some of our real property and was
      originally granted to our affiliate, Sirton, but we assumed it in 2002 in
      connection with a corporate reorganization of Sirton. We are required to make
      installment payments on the loan every six months until the final maturity
      in
      February 2006. At December 31, 2005, the amount outstanding under this loan
      was €119 thousand. This loan was repaid in full in February 2006.




We
      have
      another mortgage loan with Banca Nazionale del Lavoro originally granted for
      €1.291 million in November 1996 that bears interest at the six-month
      Euribor rate plus 1.75%. The loan is secured by a mortgage on some of our real
      property and was originally granted to our affiliate, Sirton, but we assumed
      it
      in 2002 as part of the corporate reorganization of Sirton. We are required
      to make
      installment payments on the loan every six months until the final maturity
      in
      October, 2006. At December 31, 2005, the amount outstanding under this loan
      was
€136 thousand.




We
      received a loan commitment from the Minister for University and Research granted
      through San Paolo-IMI Bank. The loan is for financing research and development
      of defibrotide to treat and prevent VOD, and it bears interest at 1.0% per
      annum. In order to receive advances on the loan, we must provide the Minister
      with documentation supporting research and development expenses. We will need
      to
      repay this loan in installments every six months beginning six months after
      the
      completion of the related research and development, but no later than January
      2012. At December 31, 2005, the amount outstanding under this loan
      was **** €450
      thousand.




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On
      July
      9, 2004, we obtained a loan in the approximate amount of €487 thousand from
      Cassa di Risparmio di Parma e Piacenza. The loan was obtained pursuant to Law
      No. 1329 of 28 November 1965 (Legge Sabatini), a law that facilitates the
      purchase and the lease of new production equipment. The loan is secured by
      a
      lien on our equipment and machinery. On August 4, 2004, we obtained an
      additional loan in the amount of €388 thousand from Cassa di Risparmio di
      Parma e Piacenza under the same terms and conditions. At December 31, 2005,
      the
      amount outstanding under both of these loans was **** €656
      thousand.




On
      July
      20, 2004, we obtained a third mortgage loan in the amount of €2.0 million from
      Banca Nazionale del Lavoro. The mortgage loan is secured by real estate owned
      by
      us and real estate owned by Sirton, and was secured by a guarantee executed
      by
      FinSirton. Banca Nazionale del Lavoro released Sirton from its mortgage and
      FinSirton from its guarantee in April 2006; we deposited €550,000 with Banca
      Nazionale del Lavoro to secure repayment of the loan. In addition, payment
      of up
      to €1.0 million of our trade payables to Sirton is subordinated and made
      junior in right of payment to the prior payment in full in cash of the mortgage
      loan. No payment or prepayment of up to €1.0 million of the trade payables
      to Sirton may be made until our obligations under the mortgage loan are
      performed in full. Amounts due under the mortgage loan bear interest at the
      six-month Euribor rate plus 1.40%. We make installment payments on the loan
      every six months until its final maturity in August 2010. At December 31, 2005,
      the amount outstanding under this loan was €2.0 million.




Our
      commitments for clinical research consist of fixed price contracts with
      third-party research organizations related to clinical trials for the
      development of defibrotide and related consulting services for advice regarding
      FDA issues.




***ITEM
              6.***
            ***DIRECTORS,
                SENIOR MANAGEMENT AND
                EMPLOYEES***





**DIRECTORS
      AND SENIOR MANAGEMENT******




Set
      forth
      below is the name, age, position and a brief account of the business experience
      of each of our executive officers, significant employees and directors as of
      April 30, 2006. The business address of each of the individuals listed below,
      except for Cary Grossman, is Piazza XX Settembre 2, 22079 Villa Guardia (Como),
      Italy. Cary Grossman’s business address is 9821 Katy Freeway, Suite 500,
      Houston, Texas, 77024.




**Name**
            
            **Date
                of Birth**
              **(mm/dd/yyyy)**
            
            **Position**Dr.
                Laura Ferro
            
            08/03/1951
            
            President
                and Chief Executive Officer, DirectorCary
                Grossman
            
            02/15/1954
            
            Executive
                Vice-President and Chief Financial OfficerDr.
                Massimo Iacobelli
            
            04/28/1959
            
            Senior
                Vice-President, Scientific DirectorDr.
                Guenther Eissner
            
            01/28/1964
            
            Senior
                Vice-President, Chief of Biology Research LaboratoryDanilo
                Moltrasio
            
            08/12/1954
            
            Chief
                of Chemical Research LaboratoryArmando
                Cedro
            
            07/16/1955
            
            Chief
                of ManufacturingSalvatore
                Calabrese
            
            01/04/1970
            
            Vice-President,
                Finance and SecretaryDr.
                Kenneth Anderson (1)
            
            10/03/1951
            
            DirectorGigliola
                Bertoglio (2)
            
            08/22/1934
            
            DirectorLuca
                Breveglieri (3)
            
            01/23/1952
            
            DirectorMarco
                Codella
            
            09/17/1959
            
            DirectorDavid
                Kroin (4)
            
            08/24/1975
            
            DirectorDr.
                Lee M. Nadler (5)
            
            03/22/1947
            
            DirectorDr.
                Andrea Zambon (6)
            
            01/14/1958
            
            Director





(1)
            Member
                of the compensation committee.




(2)
            Member
                of the audit committee and nominating and corporate governance
                committee.




(3)
            Member
                of the nominating and corporate governance
                committee.




(4)
            Member
                of the audit committee and nominating and corporate governance
                committee.




(5)
            Member
                of the compensation committee and nominating and corporate governance
                committee.




(6)
            Member
                of the audit committee and compensation
                committee.




**Dr. Laura
      Ferro** has
      served as our President and Chief Executive Officer and one of our directors
      since 1991. Her current term as a director expires on the date of the ordinary
      shareholders’ meeting approving our 2006 financial statements, which would
      normally be held in April 2007. Dr. Ferro is also the President and Chief
      Executive Officer of our largest shareholder, FinSirton. She also serves as
      Vice
      President of Sirton, a subsidiary of FinSirton that specializes in manufacturing
      pharmaceutical products. Dr. Ferro is also a member of the board of
      directors of each of FinSirton, Sirton and Foltene




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Laboratories
      S.p.A., a former subsidiary of FinSirton that is in the hair care products
      business. From 1991 to 1997, Dr. Ferro held various executive positions at
      Sirton, including Chief Executive Officer and Chairperson of the research and
      development unit. Prior to that, Dr. Ferro was a practicing physician for
      15 years. Dr. Ferro is the chairperson of the research committee of
      Europharm, the European Association of Small and Medium-Sized Pharmaceutical
      Companies, and is a member of the executive committee of Farmindustria, an
      Italian pharmaceutical industry group. She is also the President of the
      Gianfranco Ferro Foundation, a not-for-profit Italian organization with the
      mission of stimulating research, education and dissemination of information
      on
      the correct use of medications
      and adverse events of medicines. Dr. Ferro received her M.D. and Ph.D.
      degrees from the University of Milan, and a MBA from Bocconi University in
      Milan
      in 1994. Dr. Ferro is a licensed physician. She was certified in psychiatry
      at the University of Milan in 1981, and in Clinical Pharmacology at the
      University of Milan in 1994.




**Cary
      M. Grossman** has
      served as our Executive Vice President and Chief Financial Officer since
      August 2004. He is also the Chairman and Chief Executive Officer of Coastal
      Bancshares Acquisition Corp., a special purpose acquisition company.
      Mr. Grossman is a Director of Sand Hill IT Security Acquisition Corp., a
      special purpose acquisition company, and I-Sector Corporation, which provides
      network infrastructure and Internet protocol telephony solutions. From 2002
      until 2003 he served as the Executive Vice President and Chief Financial Officer
      of U S Liquids, Inc, an American Stock Exchange listed environmental services
      company. Mr. Grossman left U S Liquids, Inc. in 2003 as a result of
      the acquisition of three of its businesses by a private equity firm and was
      President and Chief Executive Officer of the acquiring company, ERP
      Environmental Services until November 2003. From 1997 until 2002,
      Mr. Grossman served Pentacon, Inc., a provider of inventory management
      services and distributor of components to Fortune 50 original equipment
      manufacturers, as a board member and in several senior executive positions
      including: Chairman of the Board of Directors (2001-2002), Acting Chief
      Financial Officer (2001-2002) and Lead Director (1998-2001). Pentacon and
      substantially all of its subsidiaries filed a Joint Chapter 11 Plan of Debtors
      in 2002. From 1991 until 2002, Mr. Grossman was the Managing Partner of
      McFarland, Grossman & Company, Inc., an investment banking and
      financial advisory firm he co-founded in 1991. Prior to that, Mr. Grossman
      practiced public accounting for 15 years. He earned a Bachelor of Business
      Administration in Accounting from The University of Texas, and is a Certified
      Public Accountant.





**Dr. Massimo
      Iacobelli** has
      served as our Senior Vice-President, Scientific Director since 2002 and as
      our
      Vice President, Clinical Development and Chief Medical Office from 1995 to
      2002.
      From 1990 to 1994, he was the Senior Vice-President, Medical Marketing, at
      Sirton. From 1988 to 1989, Dr. Iacobelli directed the Drug Safety
      Department at Bayer S.p.A. He received a medical degree from Università degli
      Studi, Napoli, Italy.





**Dr. Guenther
      Eissner** has
      served as our Senior Vice-President, Chief of Biology Research Laboratory since
      August 2004. Since May 1998, Dr. Eissner has served as the Senior
      Scientific Group Leader of the Lab for Experimental Allogeneic BMT in the
      Department of Hematology and Oncology at the University of Regensburg, Germany.
      From October 1997 to April 1998, Dr. Eissner was the Group Leader
      at the Medical Clinic III, Ludwig-Maximilians-University of Munich, Germany.
      From 1992 to September 1997, he worked at the Institute for Clinical
      Molecular Biology of the GSF-Research Center for Environment and Health, in
      Munich, Germany. Prior to 1992, Dr. Eissner served as group leader at the
      Medical Clinic III, Ludwig-Maximilians-University of Munich, Germany.
      Dr. Eissner received a degree in Human Biology (Theoretical Medicine) from
      Philipps-University of Marburg, Germany, a Masters degree from the Max
      Planck-Institute for Biochemistry at Martinsried, Germany, and a Ph.D. from
      the
      Institute for Immunology of the Ludwig-Maximilians-University of Munich,
      Germany.




**Danilo
      Moltrasio** has
      served as our Chief of Chemical Research Laboratory since February 1997.
      From 1995 to January 1997, he served as our Pharmaceutical Technology
      Laboratory Manager. From 1994 to 1995, he served as the head of our
      Pharmaceutical Technology Laboratory. From 1983 to 1994 he served as the head
      of
      the Analytical Laboratory of Research and Development of Sirton. From 1981
      to
      1983, he served as one of Sirton’s chemical analysts. Mr. Moltrasio
      received a degree in Chemistry and Pharmaceutical Technology from the University
      of Milan, Italy.




**Armando
      Cedro** has
      served as our Chief of Manufacturing since 2003. From 1997 to 2003, he served
      as
      our Active Pharmaceutical Ingredient Production Manager. From 1987 to 1997,
      he
      served as the Chemical Research and Development Laboratories and Pilot Plant
      Manager at Sirton. From 1982 to 1987, he served as the Chemical Development
      Laboratory Manager at Societa Prodotti Antibiotici, a manufacturer of antibiotic
      pharmaceutical products. Mr. Cedro received a degree in Industrial
      Chemistry from the Universita degli Studi di Milano, Italy.




**Salvatore
      Calabrese** has
      served as our Vice-President, Finance and Secretary since February 2005.
      From December 2003 until February 2005, he was an Accounting and
      Finance Manager for Novuspharma, S.p.A., a development stage biopharmaceutical
      company focused on the discovery and development of cancer drugs and a
      subsidiary of Cell Therapeutics, Inc., a public reporting company, which
      then merged into Cell Therapeautics, Inc. He reported to the Chief
      Financial Officer of Cell Therapeutics, Inc. and was responsible for cost
      containment, budgeting, financial reporting and the implementation of
      Sarbanes-Oxley compliance. From September 1996 until November 2003,
      Mr. Calabrese was employed by PricewaterhouseCoopers as an accountant and
      was a Manager in Assurance Business Advisory Services at the time
      of




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departure.
      From October 2000 to June 2003, Mr. Calabrese worked in the
      Boston, MA office of PricewaterhouseCoopers. He earned a Bachelors’ Degree in
      Economics at the University of Messina and a Masters’ Degree in Accounting,
      Audit and Financial Control at the University of Pavia. He is also a chartered
      accountant in the Republic of Italy.





**Dr. Kenneth
      Anderson** has
      served as one of our directors since June 2005. His current term expires on
      the
      date of the ordinary shareholders’ meeting approving our 2006 financial
      statements, which would normally be held in April 2007. Dr. Anderson has
      been a professor at the Dana-Farber Cancer Institute, Cancer Research and
      Clinical Care, since 1980, a professor of medicine at Harvard Medical School
      since 2000 and a Kraft Family professor of medicine at Harvard Medical School
      since 2002. He has been the Chief of the Division of Hematologic Neoplasia
      at
      the Dana-Farber Cancer Institute since 2002, the Vice Chair of the Joint Program
      in Transfusion Medicine at Harvard Medical School since 2000, the Director
      of
      the Jerome Lipper Multiple Myeloma Center at the Dana-Farber Cancer Institute
      since 2000, the Associate Medical Director of Brigham and Women’s Hospital Blood
      Bank since 1998 and an attending physician at the Bone Marrow Transplantation
      Service at Brigham and Women’s Hospital since 1997. Dr. Anderson is a
      member of 11 medical and scientific societies and on the editorial boards of
      11
      medical and scientific journals. He received a Bachelors’ degree, summa cum
      laude, from Boston University in 1973, a M.D. from Johns Hopkins University
      School of Medicine in 1977 and a Masters’ Degree in Art from Harvard University
      in 2000.





**Gigliola
      Bertoglio** has
      served as one of our directors since December 2004. Her current term as a
      director expires on the date of the ordinary shareholders’ meeting approving our
      2006 financial statements, which would normally be held in April 2007.
      Ms. Bertoglio has been a self-employed consultant since January 2003.
      From 1970 through 2002 she was employed by Reconta Ernst & Young (the
      Italian affiliate of Ernst & Young LLP) and its predecessors and was an
      audit partner beginning in 1977. From 1998 until leaving the firm, she was
      responsible for the firm’s Capital Market Group in Italy. From 1989 to 1998, she
      was responsible for directing the firm’s Professional Standards Group and member
      of the Accounting and Auditing Standards Group of Ernst & Young
      International and as a coordinating audit partner on clients with international
      operations. From 1977 to 1989, Ms. Bertoglio was a partner of the Italian
      firm of Arthur Young & Co. (the predecessor to Ernst & Young)
      where she was responsible for directing the firm’s Professional Standards Group
      and serving in an advisory role to the Accounting and Auditing Standards Group
      of Arthur Young International and as a coordinating audit partner on clients
      with international operations. From 1970 to 1977, she was an Audit Manager
      (1970
      to 1974) and an Audit Principal (1975 to 1977) with the Italian firm of Arthur
      Young & Co. in its Rome and Milan offices. Prior to 1970,
      Ms. Bertoglio was employed in the New York offices of Horwath &
Horwath and LKH&H, both of which were public accounting firms. She earned a
      degree in Public Accounting from New York University and a Diploma in Accounting
      from Economics Institution in Biella, Italy. She was a Certified Public
      Accountant (active license to August 31, 2002, inactive after that) in the
      United States and included in the Register of Authorized Auditors of Consob,
      the
      Italian Stock Exchanges regulatory agency of public companies.





**Luca
      Breveglieri** has
      served as one of our directors since April 2006. His current term expires on
      the
      date of the ordinary shareholders’ meeting approving our 2006 financial
      statements, which would normally be held in April 2007. Mr. Breveglieri is
      an
      Italian-qualified attorney and has been a partner of Breveglieri Verzini e
      Soci,
      an Italian law firm, since 2000. From 1982 to 2000, Mr. Breveglieri was the
      founding partner of Breveglieri e Associati. Mr. Breveglieri is an Italian
      certified public accountant. Mr. Breveglieri received a degree in law from
      Universita degli Studi, Pisa, Italy, in 1977.





**Marco
      Codella** has
      served as one of our directors since June 2005. His current term expires on
      the
      date of the ordinary shareholders’ meeting approving our 2006 financial
      statements, which would normally be held in April 2007. Mr. Codella has
      been the Chief Financial Officer of Sigma Tau Industrie Farmaceutiche Riunite
      S.p.A., an international family of pharmaceutical companies, since May 1999.
      Mr. Codella has been a professor of Economics and Management Accounting at
      University of Rome, La Sapienza since 2001. From 1997 to 1999, Mr. Codella
      was the Finance, IT and Logistics Director of Crown Cork & Seal Italy
      S.p.A., an Italian subsidiary of Crown Holdings, Inc., a manufacturer of
      packaging products to consumer marketing companies. From 1994 to 1997,
      Mr. Codella was the Finance and IT Director of Crown Cork & Seal Italy
      S.p.A. From 1990 to 1994, Mr. Codella held various finance positions at
      Digital Equipment Italia S.p.A., an Italian subsidiary of Digital Equipment
      Corporation, a computer company. From 1987 to 1990, Mr. Codella was the
      Finance Manager of an Italian subsidiary of Ampex Corporation, a provider of
      technology for acquisition, storage and processing of visual information. From
      1984 to 1987, Mr. Codella was an auditor at Deloitte, Haskins & Sells,
      an accounting firm. Mr. Codella is a director of Eubiotina Research S.p.A.,
      Biosint S.p.A., Avantgarde S.p.A., SigmaTau Health Science S.p.A., Techogen
      S.p.A. and Kenton S.r.l., each of which is a subsidiary of Sigma Tau Finanziaria
      S.p.A., and Fonchim, a pension fund for chemical industry workers.
      Mr. Codella is an Italian certified public accountant. Mr. Codella
      graduated summa cum laude from Rome University in 1984 with a degree in
      economics.




**David
      Kroin** ,
      has
      served as a member of our board of directors since December 2005. His current
      term as a director expires on the date of the ordinary shareholders’ meeting
      approving our 2006 financial statements, which would normally be held in April
      2007. Mr. Kroin has been the Managing Director of Great Point Partners, LLC, an
      asset
      management firm focusing in the healthcare industry, with an emphasis on life
      sciences ,
      since
      September 2003. From December 1998 to




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September
      2003, Mr.
      Kroin was a senior member of the healthcare group at J.H. Whitney &
Co. **,** an
      alternative-asset-management firm. From June 1997 to December 1998, Mr. Kroin
      worked as an analyst in the corporate finance and mergers and acquisitions
      group
      at Merrill Lynch &
      Co., Inc .
       Mr. Kroin graduated from the University of Michigan with a B.S. in
      actuarial mathematics in May 1997. Mr. Kroin was nominated for election by
      Biomedical Value Fund, L.P. and Biomedical Offshore Value Fund, Ltd., two of
      the
      investors in our October 2005 private placement, pursuant to a voting agreement
      among the participants in the private placement and FinSirton.





**Dr.
      Lee M. Nadler** has
      served as one of our directors since June 2005. His current term expires on
      the
      date of the ordinary shareholders’ meeting approving our 2006 financial
      statements, which would normally be held in April 2007. Dr. Nadler is the
      Senior Vice President of Experimental Medicine at Harvard University’s
      Dana-Farber Cancer Institute and a Professor of Medicine at Harvard University.
      He joined the staff of the Dana-Farber Cancer Institute in 1977, and was
      promoted to the faculty in 1980. He served as chief and chair of several
      departments, including serving as the First Chairperson of the Dana-Farber
      Cancer Institute’s Department of Adult Oncology. Dr. Nadler received a
      medical degree from Harvard Medical School in 1973.




**Dr. Andrea
      Zambon** has
      served as one of our directors since June 2005. His current term expires on
      the
      date of the ordinary shareholders’ meeting approving our 2006 financial
      statements, which would normally be held in April 2007. Dr. Zambon was a
      co-founder and President of a web-based company, OKSalute S.p.A. serving the
      medical community from 2000 until 2002. From 2000 until 2004 he was President
      of
      Zambon, S.p.A, the holding company of Zambon Group, S.p.A., an Italian
      pharmaceutical and chemical company that operates in 19 countries in Europe,
      North and South America and Asia. From 1989 until 1999, he served in various
      capacities at Zambon Group S.p.A., including President and Chief Executive
      Officer from 1993 to 1999, Managing Director from 1991 to 1993, Managing
      Director of Zambon Research, S.p.A. in 1990, a research subsidiary of Zambon
      Research S.p.A., and manager of the international regulatory affairs unit in
      1989. From 1988 to 1989, Dr. Zambon was employed by Smith Kline &
Beckman in various departments, including clinical development, regulatory
      affairs, and market research, for three new chemical businesses. From 1986
      to
      1987 he was employed by Zambon Group, S.p.A. where he helped establish its
      research and development division. He has served on numerous corporate and
      industry association boards. Dr. Zambon earned a Medical Degree from the
      University of Milan Medical School.




**Our
      Scientific Advisory Board**




Our
      scientific advisory board advises us with respect to our product development
      strategy as well as the scientific and business merits of licensing
      opportunities or acquisition of compounds and the availability of opportunities
      for collaborations with other pharmaceutical companies. We have in the past
      compensated and in the future intend to compensate scientific advisory board
      members with cash fees for attending meetings *.* In
      addition to Dr. Lee Nadler and Dr. Kenneth Anderson, who are also
      directors, the current scientific advisory board members are:




**Dr. Alessandro
      M. Gianni** is the
      Head of the Bone Marrow Transplant Unit at The National Institute of Tumors
      of
      Milan in Italy. Dr. Gianni has been the Director of the Department of
      Leukemias and Lymphomas of the Milan Cancer Institute since February 2004.
      Since 1998, he has been the Director of the Chair of Medical Oncology at the
      University of Milan and has been a professor at the University of Milan since
      1978. Since 1992, he has been the Director of several different units of the
      Division of Medical Oncology at the Milan Cancer Institute. He is a member
      of
      the European Group for Blood and Marrow Transplantation, the American
      Association for Cancer Research, the American Society of Clinical Oncology,
      the
      Italian Society of Experimental Hematology, the European Hematology Association
      and the International Society of Hematotherapy & Graft Engineering. He
      has authored or co-authored more than 250 publications in peer-reviewed
      journals. Dr. Gianni graduated from the Liceo Classico Alessandro Manzoni,
      Milan, in 1962 and obtained his Medical Degree, magna cum laude, from the
      University of Milan in 1968.




**Professor
      Cy Stein, M.D. Ph.D.** is the
      Head of Medical Genitourinary Oncology and Professor of Medicine, Urology and
      Molecular Pharmacology at the Albert Einstein College of Medicine, New York.
      He
      also serves as an Attending Physician at the Montefiore Medical Center and
      is a
      Diplomate of nearly 20 years’ standing of both the American Board of
      Internal Medicine and the American Board of Oncology. Professor Stein has been
      a
      director of CytonGenix, Inc., a biomedical research and development
      company, since 2003. Professor Stein has been involved for the past
      15 years with preclinical and clinical trials of nucleic acid therapies for
      cancers, with increasing emphasis in recent years on RNA interference. Professor
      Stein received a Bachelor of Arts from Brown University in 1974, a Ph.D. in
      organic chemistry in 1978 from Stanford University and a Medical Degree from
      Albert Einstein College of Medicine in 1982.




**Peter
      Levitch** has been
      president of Peter Levitch & Associates (PLA), an independent
      consulting firm to health professionals, since 1981, providing guidance in
      the
      development of pharmaceuticals, medical devices, biologics and diagnostics.
      The
      primary focus of PLA is bringing products through the clinical evaluation and
      FDA regulatory approval phases. Mr. Levitch has participated in over 250
      FDA applications as well as a number of marketing applications for drugs,
      biologicals and medical devices. Mr. Levitch has worked with such companies
      as Amgen, Genentech, Centocor, Cytogen Hybritech/Eli Lilly, Baxter, Monsanto,
      Becton Dickenson and Seragen, among many others. From 1980 to 1981,
      Mr. Levitch was Vice President, Clinical and Regulatory Affairs for Oxford
      Research International Corp. From 1969 to 1980 he was




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employed
      by Ortho Diagnostics, Inc., a division of Johnson & Johnson, first
      as Manager of Clinical Research and, from 1973 to 1980, as Director of
      Regulatory and Clinical Affairs. Mr. Levitch has authored or co-authored
      numerous articles and abstracts including “Preparing an IND for New Drugs,”
“Phase I Clinical Study of Gamma Interferons” and “Gaining FDA Approval of
      Biotechnology Derived Products.” He has conducted lectures on such topics as
“Preparing INDs and NDAs and Managing Clinical Research,” “Good Clinical
      Practices,” “Conducting FDA Meetings,” and “FDA Approvable Indications,” among
      many others. Mr. Levitch earned a B.A. in Zoology-Chemistry from Hofstra
      University in 1954 and a M.A. in Physiology from Hofstra University in 1957.




**Ralph
      B. D’Agostino, Sr. Ph.D.** has been
      a Professor of Mathematics/Statistics at Boston University since 1977 and a
      Professor of Public Health at Boston University, School of Public Health,
      Department of Epidemiology and Biostatistics since 1982. He has been the editor
      of Statistics in Medicine since 1998. Dr. D’Agostine is also an Associate
      Editor of American Journal of Epidemiology, and on the editorial board of
      Current Therapeutic Research and the Journal of Hypertension. He has been the
      director of the Statistics and Consulting Unit at Boston University and Director
      of Data Management and Statistics at the Framingham Study. Dr. D’Agostino
      has served as an expert consultant to the FDA since 1974. He is a Fellow of
      the
      American Statistical Association and the Cardiovascular Epidemiology section
      of
      the American Heart Association. He has twice, in 1981 and 1995, received the
      FDA
      Commissioner’s Special Citation. He received an A.B. in Mathematics, summa cum
      laude, from Boston University in 1962, a A.M. in Mathematics from Boston
      University in 1964 and a Ph.D. in Mathematical Statistics from Harvard
      University in 1968.




**Dr. Stephen
      Fredd M.D.** has been
      a consultant to the pharmaceutical industry since 2002. From 1980 to 2002,
      Dr. Fredd was the Deputy Director of the Division of Cardi-Renal Drugs of
      the Center for Drug Evaluation and Research at the FDA. From 1987 to 1997,
      he
      was the Director and Founder of the Division of Gastrointestinal and Coagulation
      Drugs of the Center for Drug Evaluation and Research at the FDA. From 1982
      to
      1987, Dr. Fredd was a Medical Officer and the Acting Director of the
      Officer of Orphan Products Development of the Office of the Commissioner at
      the
      FDA. From 1980 to 1982, he was a Medical Officer at the Division of
      Antinflammatory, Oncological and Radiopharmaceutical Drugs of the Center for
      Drug Evaluation and Research at the FDA. From 1965 to 1980, Dr. Fredd was a
      privately practicing doctor of internal medicine. From 1977 to 1980, he was
      an
      Assistant Professor of Medicine at George Washington University Medical Center,
      and from 1965 to 1977, he was an Instructor in Medicine at New York University
      Medical Center. Dr. Fredd received FDA Awards of Merit in 1989 and 1997,
      FDA Commendable Service Awards in 1987 and 1998 and the FDA Commissioner’s
      Special Citation in 1989. Dr. Fredd received an A.B., magna cum laude, from
      Princeton University in 1955 and a M.D. from New York University Medical Center
      in 1959.




**Richard
      Champlin, M.D** .
      has
      been a Professor of Medicine and Chairman of the Department of Blood and Marrow
      Transplantation at the University of Texas M. D. Anderson Cancer Center since
      1990. From 1981 to 1990, Dr. Champlin was an Assistant and Associate Professor
      of Medicine and directed the Transplantation Biology Program at the UCLA Center
      for the Health Sciences. Dr. Champlin chaired the Working Committee on
      Alternative Donors and Cell Sources of the International Bone Marrow Transplant
      Registry from 1995 to 2000. He was the founding president of the American
      Society of Blood and Marrow Transplantation from 1992 to 1994 and president
      of
      the Council for Donor, Transplant and Collection Centers for the National Marrow
      Donor Program from 1990 to 1993. He has been a vice president of the Foundation
      for Accreditation of Hematocellular Therapy since 1996, was a member of the
      Biologic Response Modifiers Advisory Board for the FDA from 1999 to 2002 and
      was
      a member of the Hematology Board, American Board of Internal Medicine from
      1996
      to 2002.  Dr. Champlin is a member of several scientific societies and
      serves on the Editorial Boards of Blood, Bone Marrow Transplantation and Journal
      of Hematotherapy. He has been the President of the Center for International
      Blood and Marrow Transplantation since 2003. Dr. Champlin received a M.D. from
      the University of Chicago’s Pritzker School of Medicine in 1975.





**COMPENSATION**





**Compensation
      of Directors and Executive Officers**




For
      the
      year ended December 31, 2003, the aggregate cash compensation to our
      executive officers and directors as a group was approximately
€530 thousand. For the year ended December 31, 2004, the aggregate
      cash compensation to our executive officers and directors as a group was
      approximately €601 thousand. For the year ended December 31, 2005, the
      aggregate cash compensation to our executive officers and directors as a group
      was approximately €900 thousand.




**Share-Based
      Compensation Plans**




*2004
      Equity Incentive Plan*




Our
      board
      of directors proposed capital increases for our equity incentive plans to our
      shareholders on September 2, 2004. Our shareholders approved those capital
      increases on September 30, 2004. Our board of directors approved the
      specific terms of our 2004 Equity Incentive Plan effective as of
      September 30, 2004. Our shareholders approved the specific terms of our
      2004 Equity Incentive plan on April 28, 2005. The incentive plan authorizes
      1,500,000 ordinary shares for issuance. The




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maximum
      number of shares that may be issued under the incentive plan subject to
      incentive share options is 1,500,000. At December 31, 2005, there were 992,000
      shares underlying outstanding options, with a weighted average exercise price
      of
      $8.72. Shares subject to share awards that have expired or otherwise terminated
      without having been exercised in full again become available for the grant
      of
      awards under the incentive plan. In the event of a share split or other
      alteration in our capital structure, without the receipt of consideration,
      appropriate adjustments will be made to the authorized shares and outstanding
      awards to prevent dilution or enlargement of participant’s rights. The plan is
      governed by Delaware law.




Our
      incentive plan provides for the grant of incentive share options (as defined
      in
      Section 422 of the U.S. Internal Revenue Code) to employees, including
      officers and employee-directors, and nonstatutory share options, restricted
      share purchase rights, restricted share unit awards, share appreciation rights
      and share bonuses to employees, including our officers, directors and
      consultants who are subject to tax in the United States. The incentive plan
      also
      provides for the periodic automatic grant of nonstatutory share options to
      our
      non-employee directors.




The
      incentive plan is administered by our board of directors or a committee
      appointed by our board of directors. The board or the committee determines
      recipients and types of awards to be granted, including the number of shares
      subject to an award, the vesting schedule of awards, the exercisability of
      awards, and subject to applicable restrictions, other terms of awards. The
      board
      of directors has delegated administration of the incentive plan to the
      compensation committee.




The
      term
      of share options granted under the incentive plan generally may not exceed
      ten
      years, although the capital increase relating to the ordinary shares issuable
      upon exercise of such options expires on September 30, 2009. Our compensation
      committee determines the price of share options granted under the incentive
      plan, provided that the exercise price for an incentive share option cannot
      be
      less than 100% of the fair market value of our ordinary shares on the date
      of
      grant. No incentive share option may be granted to any person who, at the time
      of the grant, owns (or is deemed to own) ordinary shares possessing more than
      10% of our total voting ordinary shares, unless the option exercise price is
      at
      least 110% of the fair market value of the ordinary shares on the date of grant
      and the term of the incentive share option does not exceed five years from
      the
      date of grant. The exercise price for a nonstatutory share option can vary
      in
      accordance with a predetermined formula while the option is outstanding. In
      addition, the aggregate fair market value, determined at the time of grant,
      of
      the ordinary shares with respect to which an incentive share option first
      becomes exercisable during any calendar year (under the incentive plan and
      all
      of our other equity compensation plans) may not exceed $100 thousand.




Options
      granted under the incentive plan vest at the rate determined by our compensation
      committee. Typically, options granted under the incentive plan vest over three
      years, at the rate of one-third of the shares covered by the option vesting
      each
      year.




Generally,
      the optionee may not transfer a share option other than by will or the laws
      of
      descent and distribution unless the optionee holds a nonstatutory share option
      that provides otherwise. However, an optionee may designate a beneficiary who
      may exercise the option following the optionee’s death. An optionee whose
      service relationship with us ceases for any reason may exercise the option
      to
      the extent it was vested for the term provided in the share option agreement.
      Options generally expire three months after the termination of an optionee’s
      service. However, if an optionee is permanently disabled or dies during his
      or
      her service, that person’s options generally may be exercised up to
      12 months following disability or death.




Share
      appreciation rights granted under our incentive plan may be paid in our ordinary
      shares, cash or a combination of the two, as determined by our board of
      directors. The grant of a share appreciation right may be granted subject to
      a
      vesting schedule determined by our board of directors.




Restricted
      share purchase rights granted under the incentive plan may be granted pursuant
      to a repurchase option in our favor that will lapse in accordance with a vesting
      schedule and at a price determined by the board of directors (or a committee
      appointed by the board of directors). Restricted share unit awards may be
      granted subject to a vesting schedule determined by the board of directors
      (or a
      duly appointed committee). Share bonuses may be awarded in consideration of
      past
      services without a purchase payment. Rights under a share bonus or a restricted
      share purchase award are transferable only upon such terms and conditions as
      are
      set forth in the relevant agreement, as determined by the board of directors
      (or
      the committee appointed by the board of directors) in its sole discretion.




When
      we
      become subject to Section 162(m) of the Internal Revenue Code which denies
      a deduction to publicly held companies for certain compensation paid to
      specified employees in a taxable year to the extent the compensation exceeds
      $1.0 million, no person may be granted share options and/or share appreciation
      rights under the incentive plan covering more than 500,000 ordinary shares
      in
      any fiscal year. In addition, no person may be granted restricted share purchase
      rights, share units and/or share bonuses under the incentive plan covering
      more
      than 250,000 ordinary shares in any fiscal year. However, in connection with
      a
      participant’s first year of employment, such participant may be granted options
      and/or share appreciation rights covering up to 600,000 ordinary shares and
      restricted share purchase rights, share units and/or share bonuses covering
      up
      to 500,000 ordinary shares.




Each
      director (other than Dr. Nadler) who is not otherwise one of our employees
      or consultants automatically was granted a nonstatutory share option for 10,000
      ordinary shares upon his or her initial election or appointment to our board
      of




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directors
      after the completion of our initial public offering. These grants vest one-third
      one year after the date of grant and the remainder in twenty-four equal monthly
      installments beginning one year and one month from the date of grant, provided
      that the person is still serving as a non-employee director on each such vesting
      date. Upon the conclusion of each regular annual meeting of our shareholders,
      each non-employee director receives a nonstatutory share option for 5,000
      ordinary shares. These grants vest in twelve equal monthly installments
      beginning one month from the date of grant, provided that the person is still
      serving as a non-employee director on each such vesting date. The exercise
      price
      of the options granted to non-employee directors is equal to the fair market
      value of our ordinary shares on the date of grant and the term ends on September
      30, 2009.




In
      the
      event of certain corporate transactions (including, but not limited to, a sale
      or other disposition of all or substantially all of our assets, a merger or
      a
      consolidation), all outstanding awards under the incentive plan will be subject
      to the terms and conditions of the agreement memorializing the transaction.
      The
      agreement may provide for the assumption or substitution of awards by any
      surviving entity, the acceleration of vesting (and exercisability, if
      applicable) or the cancellation of awards with or without consideration. In
      addition, at the time of grant, our board of directors may provide for
      acceleration of vesting in the event of a change in control. In the event of
      a
      change in control, non-employee director options outstanding under the incentive
      plan will automatically become vested and will terminate if not exercised prior
      to such a change in control.




The
      board
      of directors may amend the incentive plan at any time. Amendments will be
      submitted for shareholder approval to the extent required by applicable laws,
      rules and regulations. The incentive plan will terminate on September 30,
      2014 unless sooner terminated by the board of directors or a committee appointed
      by the board of directors.




**2004
      Italy Stock Award Sub-Plan**




Our
      2004
      Italy Stock Award Sub-Plan is a part of our 2004 Equity Incentive Plan and
      provides for the grant of share options and the issuance of share grants to
      certain of our employees who reside in the Republic of Italy and who are liable
      for income tax in the Republic of Italy. Generally, the exercise price for
      a
      share option under the Italy sub-plan cannot be less than the average of the
      closing price of our ordinary shares listed on the American Stock Exchange
      or
      the Nasdaq National Market System, as applicable, over the 30 days
      preceding the date of grant. No share option granted under our Italy sub-plan
      may cover more than 10% of the voting rights in our annual meeting of
      shareholders or 10% of our capital or equity. Share grants will be made in
      consideration for past services.




Generally,
      a participant under the Italy sub-plan may not transfer a share award other
      than
      by applicable law. However, a participant under the Italy sub-plan may designate
      a beneficiary who may exercise the award following the participant’s death.




In
      the
      event of certain corporate transactions (including, but not limited to, a sale
      or other disposition of all or substantially all of our assets, a merger or
      a
      consolidation), all outstanding awards under the Italy sub-plan will be subject
      to the terms and conditions of the agreement memorializing the transaction.
      The
      agreement may provide for the assumption or substitution of awards by any
      surviving entity, the acceleration of vesting (and exercisability, if
      applicable) or the cancellation of awards with or without consideration. In
      addition, at the time of grant, our board of directors may provide for
      acceleration of vesting in the event of a change in control.




The
      Italy
      sub-plan will terminate on September 30, 2014 unless sooner terminated by
      our board of directors.




**2004
      Nonstatutory Share Option Plan and Agreement**




Our
      board
      of directors proposed capital increases for our equity incentive plans to our
      shareholders on September 2, 2004 and our shareholders approved those
      capital increases on September 30, 2004. Our board adopted the specific
      terms of our 2004 Nonstatutory Share Option Plan and Agreement on
      October 1, 2004. Our shareholders approved the specific terms of our 2004
      Nonstatutory Share Option Plan and Agreement on April 28, 2005. The sole person
      eligible to receive an option under the plan is Cary Grossman, our Executive
      Vice President and Chief Financial Officer. On October 1, 2004,
      Mr. Grossman received an option to purchase all 60,000 shares authorized
      for issuance under the plan. The exercise price of the option issued under
      the
      plan is $4.50. The option became fully vested on December 15, 2004. On
      March 23, 2006, we and Mr. Grossman amended and restated this option to have
      an
      exercise price of $5.58 to comply with a requirement under Italian law. We
      entered into an agreement with Mr. Grossman whereby we agreed to pay him $64,800
      (the amount of the aggregate increase in the exercise price), subject to certain
      conditions, in return for amending the exercise price. In certain corporate
      transactions, a surviving or acquiring corporation may either assume the option
      or substitute other awards for the outstanding option. If the surviving or
      acquiring corporation does not assume or substitute the outstanding option,
      the
      option will terminate prior to the event if not otherwise exercised, provided
      that Mr. Grossman is providing service to us at the time of the corporate
      transaction. The option has a term ending on September 30, 2009.




**Other
      pension and retirement plans**





We
      do not
      have any other pension or retirement plans.




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**BOARD
      PRACTICES**





**Board
      Composition**




Our
      board
      of directors currently consists of eight members: Dr. Anderson,
      Ms. Bertoglio, Mr. Breveglieri, Mr. Codella, Dr. Ferro, Mr.
      Kroin, Dr. Nadler and Dr. Zambon. Dr. Anderson, Ms. Bertolglio, Mr.
      Breveglieri, Mr. Kroin, Dr. Nadler and Dr. Zambon have never been employed
      by us
      or any of our subsidiaries and are independent directors. FinSirton agreed
      to
      vote its shares in favor of electing one person to be designated by Biomedical
      Value Fund, L.P. and Biomedical Offshore Value Fund, Ltd .
      for so
      long as such entities collectively own ADSs representing at least 5% of our
      outstanding ordinary shares. Mr. Kroin is the designee of those two
      shareholders. We do not have any agreements with any of our directors that
      provide for benefits upon termination of employment, although under Italian
      law,
      if directors are removed by the vote of shareholders at an ordinary
      shareholders’ meeting prior to the end of their term without cause, they are
      entitled to receive the consideration that they would have received through
      the
      end of their term.




Our
      Compensation Committee and shareholders usually determine the compensation
      of
      our directors. Our Compensation Committee and shareholders have approved the
      following director compensation for the term from our April 2006 ordinary
      shareholder meeting to our April 2007 shareholder meeting. Each director would
      receive, as applicable:




·
            €20 thousand
                per year for being a member of the board;




·
            an
                additional €12 thousand per year for being the chairperson of the
                audit committee;




·
            €1 thousand
                for each board meeting attended;




·
            €1 thousand
                per committee meeting attended for the chairperson of the nominating
                and
                corporate governance committee and the chairperson of the compensation
                committee;




·
            €500
                per committee meeting attended for the other members of the nominating
                and
                corporate governance committee and the compensation committee; and




·
            €2 thousand
                per committee meeting attended for all members of the audit committee,
                including the chairperson.




We
      granted options to purchase 10,000 ordinary shares to each of our non-employee
      directors (other than Dr. Nadler) upon consummation of our initial public
      offering. We granted Dr. Nadler additional cash compensation instead of options
      to purchase ordinary shares. Each of our non-employee directors also receive
      an
      option to purchase an additional 5,000 ordinary shares upon reelection at each
      annual shareholders’ meeting.




**Board
      Committees and Code of Ethics**




Our
      board
      of directors has established an audit committee, a compensation committee and
      a
      nominating and corporate governance committee.




*Audit
      Committee.* Our
      audit committee consists of Ms. Bertoglio, Mr. Kroin and Dr. Zambon,
      each of whom is an independent director. Ms. Bertoglio is our audit
      committee financial expert. The audit committee is a standing committee of,
      and
      operates under a written charter adopted by, our board of directors. The audit
      committee:




·
            establishes
                procedures for the receipt, retention and treatment of complaints
                received
                by us regarding accounting, internal accounting controls or auditing
                matters and the confidential, anonymous submission by our employees
                of
                concerns regarding questionable accounting or auditing matters;




·
            has
                the authority to engage independent counsel and other advisors, as
                it
                determines necessary to carry out its duties, and determine the
                compensation of such counsel and advisors, as well as its ordinary
                administrative expenses; and




·
            approves
                related party transactions.





Our
      audit
      committee directly oversees our independent accountants, including the
      resolution of disagreements between management and the independent accountants.
      As discussed below, under Italian law, our board of statutory
      auditors




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also
      oversees our independent accountants with respect to our Italian GAAP financial
      statements. Under Italian law, our shareholders must be the party that appoints,
      terminates and determines the compensation for our independent accountants,
      although our audit committee does make recommendations on such matters to our
      board of directors, which in turn makes recommendations to our
      shareholders.





We
      anticipate that the audit committee will prepare an “Organizational and
      Operational Model” permitted by Italian Legislative Decree of June 8, 2001
      No. 231 (relating to the administrative responsibility of companies). We
      expect that this document will consist of:




·
            operating
                procedures and reporting system;




·
            internal
                supervisory and monitoring body; and




·
            a
                disciplinary system*.*




*Compensation
      Committee.* Our
      compensation committee consists of Dr. Anderson, Dr. Nadler and
      Dr. Zambon, each of whom is independent director. Under Nasdaq rules, the
      compensation of a U.S. domestic company’s chief executive officer and all other
      officers must be determined, or recommended to the board of directors, either
      by
      a compensation committee comprised of independent directors or a majority of
      the
      independent directors of its board of directors. Disclosure of individual
      management compensation information is mandated by the Exchange Act proxy rules,
      but foreign private issuers are generally exempt from that requirement. Our
      compensation committee performs the duties required by the rules of Nasdaq
      including making decisions and recommendations regarding salaries, benefits,
      and
      incentive compensation for our executive officers. Part of the compensation
      of
      our directors is fixed periodically by our shareholders at their annual ordinary
      shareholder meetings. We disclose the aggregate compensation of our executive
      officers and directors in our Exchange Act reports, but not individual
      compensation of those officers or directors.




*Nominating
      and Corporate Governance Committee.* Our
      nominating and corporate governance committee consists of Ms. Bertoglio, Mr.
      Breveglieri, Mr. Kroin and Dr. Nadler, each of whom is an independent director.
      Under Nasdaq rules, the directors of a U.S. domestic company must be either
      selected or recommended for the board of directors’ selection by either a
      nominating committee comprised solely of independent directors or by a majority
      of the independent directors. Under Italian law, directors may be nominated
      by
      our shareholders or our board of directors. Our nominating and corporate
      governance committee performs the duties required by Nasdaq, including assisting
      the board of directors in fulfilling its responsibilities by:




·
            identifying
                and approving individuals qualified to serve as members of our board
                of
                directors;




·
            selecting
                director nominees for our annual meetings of shareholders;




·
            evaluating
                our board’s performance; and




·
            developing
                and recommending to our board corporate governance guidelines and
                oversight with respect to corporate governance and ethical conduct.




Our
      shareholders will be able to nominate directors other than those nominated
      by
      the nominating committee.




*Other
      Committees.* Our
      board of directors may establish other committees as it deems necessary or
      appropriate from time to time, including, but not limited to, an executive
      committee.





**Board
      of Statutory Auditors**




Under
      Italian law, in addition to electing our board of directors, our shareholders
      also elect a board of statutory auditors. The statutory auditors are elected
      for
      a term of three years, may be reelected for successive terms and may be removed
      only for cause and with the approval of a competent court. Each member of the
      board of statutory auditors must provide certain evidence that he or she is
      qualified to act in that capacity under Italian law, and that he or she meets
      certain professional standards. The board of statutory auditors is required
      to
      verify that we comply with applicable law and our by-laws, respect the
      principles of correct administration and maintain adequate organizational
      structure, internal controls and administrative and accounting system, and
      oversees our independent accountants with respect to our Italian GAAP financial
      statements.




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The
      following table sets forth the names of the three members of our board of
      statutory auditors and the two alternate statutory auditors and their respective
      positions, as of the date of this annual report. The current board of statutory
      auditors was elected on April 28, 2006 for a term that ends at the date of
      the
      ordinary shareholders’ meeting to approve our 2008 annual financial statements,
      which would normally be held in April 2009.




**Name**
            
            **Position**Giorgio
                Iacobone
            
            ChairmanCarlo
                Ciardiello
            
            MemberAugusto
                Belloni
            
            MemberDomenico
                Ferrari
            
            AlternateRomano
                Chiapponi
            
            Alternate




Mr. Belloni
      also serves as a member of the board of statutory auditors of Sirton.




Our
      board
      of statutory auditors met five times and attended two shareholder and board
      of
      directors meetings during 2003, and met five times and attended five shareholder
      and three board of directors meetings during 2004. In 2005, they met five times
      and attended four board of directors meetings and two shareholders meetings.
      In
      2005, we accrued $35 thousand as compensation for their service as our statutory
      auditors.




**Indemnification
      of Directors and Executive Officers and Limitation of Liability**




We
      have
      entered into indemnification agreements with each of our current and future
      directors and executive officers which may, in some cases, be broader than
      the
      specific indemnification provisions contained in Italian law.




At
      present, there is no pending litigation or proceeding involving any of our
      directors, officers, employees, or agents where indemnification by us will
      be
      required or permitted and we are not aware of any threatened litigation or
      proceeding that may result in a claim for such indemnification.




We
      have
      purchased directors’ and officers’ liability insurance, including liabilities
      arising under the Securities Act, and intend to maintain this insurance in
      the
      future.




**EMPLOYEES**




The
      table
      below shows the number, activity and geographic location of our permanent
      employees as of December 31, 2003, 2004 and 2005. All of our employees are
      in
      Italy, although Cary Grossman, our Chief Financial Officer, who was hired as
      an
      independent contractor in August 2004, is based in the United States. Prior
      to June 2005, most of our administrative, accounting, finance and business
      development services were performed by employees of FinSirton and Sirton. In
      2005 we established our administrative, finance and accounting
      department.




**As
                of December 31,****2003**
            
            **2004**
            
            **2005**Administration,
                accounting, finance, business development
            
            
            1
            
            
            1
            
            
            6R&D,
                clinical, regulatory, quality assurance & control
            
            
            11
            
            
            17
            
            
            17Production
            
            
            14
            
            
            17
            
            
            26Total
            
            
            26
            
            
            35
            
            
            49




Italian
      law imposes certain confidentiality obligations on our employees and provides
      that either any intellectual property created by them while in our employ belong
      to us or we have a right of option on it, although we must compensate them
      for
      such intellectual property creation. Our employees in Italy are subject to
      national collective bargaining agreements. National agreements are negotiated
      collectively between the national associations of companies within a given
      industry and the respective national unions. National agreements provide a
      basic
      framework on working conditions, including, among other things, pay, security
      and other provisions. Our employees other than executive officers in Italy
      were
      subject to a collective bargaining agreement that was renewed on May 10, 2005
      and expires on December 31, 2009. Our executive officers in Italy are subject
      to
      a collective bargaining agreement that was renewed on November 20, 2004 and
      expires on December 31, 2008. We believe that we maintain satisfactory
      relations with our employees.




Under
      Italian law, employees are entitled to amounts based on salary and years of
      service upon leaving their employment, even if we terminate them for cause
      or
      they resign. We had a liability for these termination indemnities of
€706 thousand **** at
      December 31, 2005. Under Italian law, we make social security and national
      healthcare contributions for our employees to the Italian government, which
      provides pension and healthcare insurance benefits.




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**SHARE
      OWNERSHIP**







Dr. Laura
      Ferro and members of her family control FinSirton. As a result, Dr. Ferro
      may be deemed to beneficially own FinSirton’s shares of our company.
      Dr. Ferro disclaims such beneficial ownership.




As
      of
      March 31, 2006, Cary Grossman had beneficial ownership of 114,583 ordinary
      shares, which constitutes 1.2 percent of the ordinary shares of our company,
      issuable upon exercise of currently exercisable options.




To
      our
      knowledge, none of our other directors and officers listed herein owned one
      percent or more of our ordinary shares at March 31, 2006. See “Item 7, Major
      Shareholders and Related Party Transactions.”




***ITEM
              7.***
            ***MAJOR
                SHAREHOLDERS AND RELATED PARTY
                TRANSACTIONS***





**MAJOR
      SHAREHOLDERS**




The
      following table shows information with respect to the beneficial ownership
      of
      our ordinary shares as of March 31, 2006 by:




·
            each
                person, or group of affiliated persons, who we know owns beneficially
                5%
                or more of our ordinary shares, and




·
            all
                of our directors and executive officers as a group.




Except
      as
      indicated in the footnotes to this table and subject to community property
      laws
      where applicable, the persons named in the table have sole voting and investment
      power with respect to all ordinary shares shown as beneficially owned by them.
      Beneficial ownership and percentage ownership are determined in accordance
      with
      the rules of the SEC. Ordinary shares underlying our convertible securities
      that
      are exercisable within 60 days from March 31, 2006 are deemed outstanding
      for computing the amount and percentage owned by the person or group holding
      such convertible securities, but are not deemed outstanding for computing the
      percentage owned by any other person or group. The address for those individuals
      for which an address is not otherwise indicated is: c/o Gentium S.p.A., Piazza
      XX Settembre 2, 22079 Villa Guardia (Como), Italy.




**Number
                of Shares**
              **Beneficially
                Owned**
            
            **Percent****Principal
                Shareholders**FinSirton
                S.p.A.(1)
            
            
            3,750,000
            
            
            39.0
            %Dr.
                Jeffrey R. Jay (2)
            
            
            1,489,362
            
            
            14.8Great
                Point Partners, LLC (3)
            
            
            1,489,362
            
            
            14.8Paolo
                Cavazza (4)
            
            
            1,446,166
            
            
            14.8Claudio
                Cavazza (5)
            
            
            1,232,838
            
            
            12.7Sigma
                Tau Finanziaria S.p.A. (6)
            
            
            1,232,839
            
            
            12.7Biomedical
                Value Fund, L.P. (7)
            
            
            744,681
            
            
            7.6Biomedical
                Offshore Value Fund, Ltd. (8)
            
            
            744,681
            
            
            7.6Alexandra
                Global Master Fund Ltd. (9)
            
            
            484,978
            
            
            5.0**All
                directors and executive officers as a group (14 persons)
                (10)**
            
            
            3,864,583
            
            
            40.2
            %





(1)
            The
                board of directors of FinSirton, including Dr. Laura Ferro, who is
                our
                Chief Executive Officer, President and one of our directors, may
                be deemed
                to share voting or dispositive control with FinSirton over the ordinary
                shares in Gentium that FinSirton beneficially owns. The members of
                the
                board of directors of FinSirton, including Dr. Ferro, disclaim beneficial
                ownership of such shares.




(2)
            Based
                upon information obtained from a Schedule 13D filed with the Securities
                and Exchange Commission, as amended. Address is 2 Pickwick Plaza,
                Suite
                450, Greenwich, Connecticut, 06830. Consists of (i) 531,915 ADSs
                owned by
                Biomedical Value Fund, L.P., (ii) 212,766 ADSs issuable upon exercise
                of
                warrants exercisable within 60 days of March 31, 2006 owned by Biomedical
                Value Fund, L.P., (iii) 531,915 ADSs owned by Biomedical Offshore
                Value
                Fund, Ltd. and (iv) 212,766 ADSs issuable upon exercise of warrants
                exercisable within 60 days of March 31, 2006 owned by Biomedical
                Offshore
                Value Fund, Ltd. Dr. Jay is the senior managing member of Great
                Point






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Partners,
      LLC, which is the investment manager of each of Biomedical Value Fund, L.P.
      and
      Biomedical Offshore Value Fund, Ltd. As a result, Dr. Jay has shared voting
      and
      investment power with respect to the ADSs owned by Biomedical Value Fund, L.P.
      and Biomedical Offshore Value Fund, Ltd., and may be deemed to be the beneficial
      owner of such ADSs. Dr. Jay disclaims beneficial ownership of such ADSs, except
      to the extent of any pecuniary interest.




(3)
            Based
                upon information obtained from a Schedule 13D filed with the Securities
                and Exchange Commission, as amended. Address is 2 Pickwick Plaza,
                Suite
                450, Greenwich, Connecticut, 06830. Consists of (i) 531,915 ADSs
                owned by
                Biomedical Value Fund, L.P., (ii) 212,766 ADSs issuable upon exercise
                of
                warrants exercisable within 60 days of March 31, 2006 owned by Biomedical
                Value Fund, L.P., (iii) 531,915 ADSs owned by Biomedical Offshore
                Value
                Fund, Ltd. and (iv) 212,766 ADSs issuable upon exercise of warrants
                exercisable within 60 days of March 31, 2006 owned by Biomedical
                Offshore
                Value Fund, Ltd. Great Point is the investment manager of each of
                Biomedical Value Fund, L.P. and Biomedical Offshore Value Fund, Ltd.
                As a
                result, Great Point has shared voting and investment power with respect
                to
                the ADSs owned by Biomedical Value Fund, L.P. and Biomedical Offshore
                Value Fund, Ltd., and may be deemed to be the beneficial owner of
                such
                ADSs. Great Point disclaims beneficial ownership of such ADSs, except
                to
                the extent of any pecuniary
                interest.




(4)
            Based
                upon information obtained from a Schedule 13D filed with the Securities
                and Exchange Commission, as amended. Address is Via Tesserte, 10,
                Lugano,
                Switzerland. Consists of (i) 800,000 outstanding ordinary shares
                held by
                Sigma Tau Finanziaria S.p.A., (ii) 359,505 outstanding ordinary shares
                held by Defiante Farmaceutica L.d.A., (iii) 73,334 ordinary shares
                issuable upon exercise of warrants currently exercisable held by
                Defiante;
                (iv) 152,376 outstanding ADSs held by Chaumiere Consultadoria e Servicos
                S.A.; and (v) 60,951 ADSs issuable upon exercise of warrants exercisable
                within 60 days of March 31, 2006 held by Chaumiere Consultadoria
                e
                Servicos S.A. Mr. Paolo Cavazza owns, directly and indirectly, 40%
                of the
                outstanding equity of Sigma Tau Finanziaria S.p.A. and so may be
                deemed to
                beneficially own the shares beneficially owned by Sigma Tau Finanziaria
                S.p.A. In connection with a purchase by Sigma Tau Finanziaria S.p.A.
                of
                800,000 ordinary shares from FinSirton in April 2005, FinSirton
                agreed that, if the per share price in a sale by our shareholders
                of all
                of our ordinary shares is less than $5.00 per share, FinSirton will
                transfer to Sigma Tau Finanziaria S.p.A. an additional number of
                ordinary
                shares equal to (x) $3.2 million divided by the product determined
                by
                multiplying (i) 0.8 by (ii) the per share sale price less
                (y) 800,000 ordinary shares. Sigma Tau Finanziaria S.p.A. owns,
                directly and indirectly, 100% of the outstanding equity of Defiante
                and so
                may be deemed to be the beneficial owner of the outstanding ordinary
                shares held by Defiante and issuable upon exercise of Defiante’s warrants.
                Mr. Paolo Cavazza and members of his family indirectly own Chaumiere
                and
                so may be deemed to beneficially own the ordinary shares beneficially
                owned by Chaumiere.




(5)
            Based
                upon information obtained from a Schedule 13G filed with the Securities
                and Exchange Commission, as amended. Address is Via Sudafrica, 20,
                Rome,
                Italy 00144. Consists of (i) 800,000 outstanding ordinary shares
                held by
                Sigma Tau Finanziaria S.p.A., (ii) 359,505 outstanding ordinary shares
                held by Defiante Farmaceutica L.d.A., and (iii) 73,334 ordinary shares
                issuable upon exercise of warrants currently exercisable held by
                Defiante.
                Mr. Claudio Cavazza owns, directly and indirectly, 60% of the outstanding
                equity of Sigma Tau Finanziaria S.p.A. and so may be deemed to
                beneficially own the shares beneficially owned by Sigma Tau Finanziaria
                S.p.A. In connection with a purchase by Sigma Tau Finanziaria S.p.A.
                of
                800,000 ordinary shares from FinSirton in April 2005, FinSirton
                agreed that, if the per share price in a sale by our shareholders
                of all
                of our ordinary shares is less than $5.00 per share, FinSirton will
                transfer to Sigma Tau Finanziaria S.p.A. an additional number of
                ordinary
                shares equal to (x) $3.2 million divided by the product determined
                by
                multiplying (i) 0.8 by (ii) the per share sale price less
                (y) 800,000 ordinary shares. Sigma Tau Finanziaria S.p.A. owns,
                directly and indirectly, 100% of the outstanding equity of Defiante
                and so
                may be deemed to be the beneficial owner of the outstanding ordinary
                shares held by Defiante and issuable upon exercise of Defiante’s warrants.




(6)
            Based
                upon information obtained from a Schedule 13D filed with the Securities
                and Exchange Commission, as amended. Address is Via Sudafrica 20,
                00144
                Roma, Italy. Consists of (i) 800,000 outstanding ordinary shares
                held by
                Sigma Tau Finanziaria S.p.A., (ii) 359,505 outstanding ordinary shares
                held by Defiante and (iii) 73,334 ordinary shares issuable upon exercise
                of warrants currently exercisable held by Defiante. Sigma Tau Finanziaria
                S.p.A. owns, directly and indirectly, 100% of the outstanding equity
                of
                Defiante and so may be deemed to be the beneficial owner of the
                outstanding ordinary shares held by Defiante and issuable upon exercise
                of
                Defiante’s warrants. The board of directors of Sigma Tau Finanziaria
                S.p.A. may be deemed to share voting or dispositive power with Sigma
                Tau
                Finanziaria S.p.A. over the ordinary shares in our company that Sigma
                Tau
                Finanziaria S.p.A. beneficially owns, and so may be deemed to beneficially
                own the ordinary shares that Sigma Tau Finanziaria S.p.A. beneficially
                owns. In connection with a purchase by Sigma Tau Finanziaria S.p.A.
                of
                800,000 ordinary shares from FinSirton in April 2005, FinSirton
                agreed that, if the per share price in a sale by our shareholders
                of all
                of our ordinary shares is less than approximately $5.00 per share,
                FinSirton will transfer to Sigma Tau Finanziaria S.p.A. an additional
                number of ordinary shares equal to (x) $3.2 million divided by the
                product
                determined by multiplying (i) 0.8 by (ii) the per share sale price
                less
                (y) 800,000 ordinary shares.






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(7)
            Based
                upon information obtained from a Schedule 13D filed with the Securities
                and Exchange Commission, as amended. Address is 2 Pickwick Plaza,
                Suite
                450, Greenwich, Connecticut, 06830. Includes 212,766 ADSs issuable
                upon
                exercise of warrants exercisable within 60 days of March 31,
                2006.




(8)
            Based
                upon information obtained from a Schedule 13D filed with the Securities
                and Exchange Commission, as amended. Address is P.O. Box 1748 GT,
                Cayman
                Corporate Centre, 27 Hospital Road, Georgetown, Grand Cayman, Cayman
                Islands CJ08. Includes 212,766 ADSs issuable upon exercise of warrants
                exercisable within 60 days of March 31,
                2006.




(9)
            Address
                is c/o Alexandra Investment Management, LLC, 467 Third Avenue,
                39thFloor, New York, New York 10016. Includes 84,978 ADSs representing
                ordinary shares issuable upon exercise of warrants currently exercisable.
                Alexandra Investment Management, LLC, serves as investment advisor
                to
                Alexandra Global Master Fund Ltd. By reason of such relationship,
                Alexandra Investment Management, LLC, may be deemed to share dispositive
                control over the ADSs beneficially owned by Alexandra Global Master
                Fund
                Ltd. and therefore may be deemed to be a beneficial owner of such
                securities. Alexandra Investment Management, LLC disclaims such beneficial
                ownership. Mikhail A. Filimonov and Dimitri Sogoloff are managing
                members
                of Alexandra Investment Management, LLC. By reason of such relationship,
                Mr. Filimonov and Mr. Sogoloff may be deemed to share dispositive
                control
                over the ADSs beneficially owned by Alexandra Global Master Fund
                Ltd. and
                therefore may be deemed to be a beneficial owner of such securities.
                Mr.
                Filimonov and Mr. Sogoloff disclaims such beneficial
                ownership.




(10)
            Includes
                114,583 ordinary shares issuable upon exercise of currently exercisable
                options.




As
      of
      March 31, 2006, there were no record holders of our ordinary shares located
      in
      the United States. There were no changes in percentage ownership by holders
      of
      5% or more of our outstanding ordinary shares since January 1, 2003 except
      for the following.




· FinSirton
      sold 450,000 of our ordinary shares that it owned to third parties in January
      2005 and an additional 800,000 shares in April 2005 to Sigma Tau Finanziaria
      S.p.A.. Mr. Paolo Cavazza and Mr. Claudio Cavazza may be deemed to have acquired
      the ordinary shares acquired by Sigma Tau Finanziaria S.p.A.




· In
      connection with our initial public offering in June 2005, Defiante acquired
      359,505 ordinary shares upon the exercise of our Series A notes, and Mr. Paolo
      Cavazza, Mr. Claudio Cavazza and Sigma Tau Finanziaria S.p.A. may be deemed
      to
      have acquired such shares.




· All
      shareholders of our company prior to our initial public offering were
      substantially diluted by the shares issued in that public offering, and all
      shareholders of our company prior to our October 2005 private placement were
      substantially diluted by the shares issued in that private
      placement.




· In
      our
      October 2005 private placement, Biomedical Value Fund, L.P. acquired 531,915
      ordinary shares, Biomedical Offshore Value Fund, Ltd. acquired 531,915 ordinary
      shares and Chaumiere Consultadoria e Servicos S.A. acquired 152,376 ordinary
      shares. Dr. Jay may be deemed to have acquired the ordinary shares acquired
      by Biomedical
      Value Fund, L.P. and Biomedical Offshore Value Fund, Ltd. Mr. Paolo Cavazza
      may
      be deemed
      to have acquired the ordinary shares acquired by Chaumiere Consultadoria e
      Servicos S.A..




The
      holders of 5% or more of our outstanding ordinary shares do not have different
      voting rights than other holders of our ordinary shares. Dr. Ferro and her
      family, through their ownership of 100% of the outstanding ordinary shares
      of
      FinSirton, effectively control all decisions and actions that must be made
      or
      taken by holders of our ordinary shares by virtue of the fact that FinSirton
      owned approximately 39% of our outstanding ordinary shares at March 31,
      2006.




**Change
      of control arrangements**




There
      are
      no arrangements of which we are aware that could result in a change of control
      over us other than those described above and the following.




·
            We
                and certain parties are subject to certain registration rights, as
                described below.




·
            FinSirton
                has agreed to vote its ordinary shares in our company in favor of
                electing
                a nominee to our board of directors, as described
                below.





Registration
      Rights




*Holders
      of shares issued upon conversion of Series A notes and warrants*




We
      have
      registered the resale of 429,000 ordinary shares pursuant to an investor rights
      agreement with the purchasers of our Series A notes and related warrants with
      respect to the ordinary shares issued upon conversion of the Series A notes
      and
      issuable upon exercise of the warrants. We have not registered the resale of
      another 73,334 ordinary shares issuable upon exercise of warrants that are
      covered by the investor rights agreement. The agreement provides that, beginning
      270 days after




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the
      effective date of the registration statement relating to our initial public
      offering, the holders of a majority of the ordinary shares that were issued
      upon
      conversion of our Series A notes or exercise of our warrants would be entitled
      to demand that we register their shares for resale under the Securities Act
      of
      1933, as amended. We are not required to effect more than three registrations
      for these holders under these demand registration rights. These demand rights
      terminate on June 21, 2008. No more than two of the demand registrations may
      be
      effected using a Form F-1 registration statement. The securities registered
      pursuant to F-1 registrations must have an aggregate offering price of $2.5
      million and any short-form or Form F-3 registrations must have an aggregate
      offering price of $1.0 million.




The
      investor rights agreement also provides that if we propose to register any
      of
      our securities under the Securities Act, either for our own account or for
      the
      account of other shareholders exercising registration rights, the holders of
      warrants or ordinary shares received upon conversion of the Series A notes
      or
      warrants are entitled to notice of the registration and are entitled to include
      such ordinary shares in any such registration. These “piggyback rights” are
      subject to conditions and limitations, among them a minimum aggregate offering
      price of $1.0 million each and the right of the underwriters of an offering
      to
      limit the number of ordinary shares included in the registration. These
      piggyback rights terminate on June 21, 2008.




We
      have
      registered ADSs representing such ordinary shares, in addition to the ordinary
      shares themselves. We are generally required to bear all of the expenses of
      these registrations, except underwriting discounts and selling commissions.
      Registration of ADSs representing any ordinary shares held by security holders
      with registration rights results in those ADSs becoming freely tradable without
      restriction under the Securities Act immediately upon effectiveness of
      registration.




*Alexandra
      Global Master Fund Ltd., Generation Capital Associates and Sigma Tau Finanziaria
      S.p.A.*




We
      have
      registered the resale of 450,000 **** ordinary
      shares pursuant to an investor rights agreement with Alexandra Global Master
      Fund Ltd. and Generation Capital Associates with respect to an aggregate of
      450,000 ADSs held by those parties and with Sigma Tau Finanziaria S.p.A. with
      respect to 800,000 ordinary shares held by Sigma Tau Finanziaria S.p.A. (the
      resale of the 800,000 ordinary shares held by Sigma Tau Finanziaria S.p.A.
      has
      not been registered). Each investor rights agreement provides that beginning
      six
      months after the effective date of the registration statement relating to our
      initial public offering, the holders of the majority of the ordinary shares
      covered by that agreement would be entitled to demand that we register their
      shares for resale under the Securities Act. These “demand rights” are subject to
      limitations described in the agreements. We are not required to effect more
      than
      two registrations under these demand registration rights pursuant to each
      agreement. These demand rights terminate on June 21, 2008. The securities
      registered pursuant to F-1 registrations must have an aggregate offering price
      of $2.0 million and any short-form or Form F-3 registrations must have an
      aggregate offering price of $1.0 million.




Each
      investor rights agreement also provides that if we propose to register any
      of
      our securities under the Securities Act, either for our own account or for
      the
      account of other shareholders exercising registration rights, the holders are
      entitled to notice of the registration and are entitled to include ordinary
      shares in any such registration. These “piggyback rights” are subject to
      conditions and limitations, among them a minimum aggregate offering price of
      $1.0 million each and the right of the underwriters of an offering to limit
      the
      number of shares included in the registration. These piggyback rights terminate
      on June 21, 2008.




We
      have
      registered ADSs representing such ordinary shares in addition to the ordinary
      shares themselves. We are generally required to bear all of the expenses of
      these registrations, except underwriting discounts and selling commissions.
      Registration of ADSs representing any ordinary shares held by security holders
      with registration rights results in those ADSs becoming freely tradable without
      restriction under the Securities Act immediately upon effectiveness of
      registration.




*Underwriters
      of our initial public offering*




We
      have
      issued purchase options to purchase an aggregate of 151,200 ordinary shares
      to
      the underwriters of our initial public offering. Each purchase option provides
      that, beginning one year after the effective date of the registration statement
      relating to our initial public offering and ending four years after the
      effective date of the registration statement relating to our initial public
      offering, the holders of a majority of all of the ordinary shares issuable
      upon
      exercise of the purchase options may, on one occasion, demand that we register
      for resale all or any portion of the purchase options and all of the ordinary
      shares issuable upon exercise of the purchase options and kept the registration
      statement effective for at least six consecutive months.




Each
      purchase option also provides that if we propose to register any of our
      securities under the Securities Act, either for our own account or for the
      account of other shareholders exercising registration rights, the holders are
      entitled to notice of the registration and are entitled to include ordinary
      shares in any such registration, which we must keep effective for at least
      six
      consecutive months. These “piggyback rights” commence one year after the
      effective date of the registration statement relating to our initial public
      offering and terminate on seven years after the effective date of the
      registration statement relating to our initial public offering.




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We
      intend
      to register ADSs representing such ordinary shares in addition to the ordinary
      shares themselves. We are generally required to bear all of the expenses of
      these registrations, except underwriting discounts and selling commissions.
      Registration of ADSs representing any ordinary shares held by security holders
      with registration rights would result in those ADSs becoming freely tradable
      without restriction under the Securities Act immediately upon effectiveness
      of
      registration.




*October
      2005 private placement participants*




We
      have
      registered the resale of 2,264,643 **** ordinary
      shares pursuant to a registration rights agreement between us and the purchasers
      of our ordinary shares and warrants in our October 2005 private placement
      agreement. We must keep the registration statement effective until all of the
      securities registered have been sold or may be sold without volume restrictions
      pursuant to Rule 144(k).




We
      have
      registered ADSs representing such ordinary shares in addition to the ordinary
      shares themselves. We are generally required to bear all of the expenses of
      these registrations, except underwriting discounts and selling commissions.
      Registration of ADSs representing any ordinary shares held by security holders
      with registration rights would result in those ADSs becoming freely tradable
      without restriction under the Securities Act immediately upon effectiveness
      of
      registration.





Voting
      Agreements


In
      connection with our October 2005 private placement, FinSirton agreed to vote
      its
      ordinary shares in our company in favor of electing one nominee to our board
      of
      directors selected by Biomedical Value Fund, L.P. and Biomedical Offshore Value
      Fund, Ltd. for so long as those entities collectively own ADSs representing
      5%
      of our outstanding ordinary shares. Mr. Kroin is the designee of these
      entities.




**RELATED
      PARTY TRANSACTIONS**




Other
      than described below, since January 1, 2005, there have not been, and there
      is not currently proposed, any transaction or loan between us and any affiliate
      of ours, any of our directors, executive officers, holders of 10% or more of
      our
      ordinary shares, any member of their immediate family or any enterprise over
      which any such person is able to exercise a significant influence other than
      our
      employment agreement with Dr. Laura Ferro, our President and Chief
      Executive Officer.




**Control
      by Dr. Ferro’s Family**





Dr. Laura
      Ferro, who is our Chief Executive Officer and President and one of our
      directors, and members of her family control FinSirton. As a result,
      Dr. Ferro and her family indirectly control 39% of our outstanding ordinary
      shares at March 31, 2006.




**Agreements
      with FinSirton, Sirton, Alexandra, Sigma-Tau, Biomedical Value Fund, LP and
      Biomedical Offshore Value Fund, Ltd.**




On
      October 15, 2004, our then-majority shareholder, FinSirton, entered into a
      pledge agreement with respect to our issuance of $8.010 million of
      Series A senior convertible promissory notes. Under the agreement,
      FinSirton pledged 1,650,000 of our ordinary shares held by FinSirton to secure
      the performance of all of our obligations under the notes. The notes were repaid
      in June 2005 with the net proceeds of our initial public offering or converted
      into our ordinary shares.




As
      of
      December 31, 2004, we had inter-company outstanding debt in the amount of
€2.2 million to Sirton, a wholly-owned subsidiary of FinSirton. Sirton lent
      us €1.0 million in each of March 2004 and May 2004,
€400 thousand in June 2004, and €600 thousand in July 2004.
      All loans were borrowed at 3.5% interest per annum and each matures on
      October 1, 2008. We repaid €800 thousand of the loans in 2004 and
€700 thousand in January 2005 with the net proceeds from the sale of
      our Series A notes. We repaid the remaining €1.5 million of the loans
      with net proceeds of our initial public offering in June 2005.




On
      July 20, 2004, we obtained a mortgage loan in the amount of
€2.0 million from Banca Nazionale del Lavoro. The mortgage loan is secured
      by the real estate owned by us and by Sirton, and was secured by a guarantee
      executed by FinSirton. Banca Nazionale del Lavoro released Sirton from its
      mortgage and FinSirton from its guarantee in April 2006; at the same time,
      we
      deposited €550,000 with Banca Nazionale del Lavoro to secure repayment of the
      loan. We cannot make any payment or prepayment of principal of or interest
      on up
      to €1.0 million of the amounts that we owe Sirton under our service
      agreements with Sirton until we have performed in full our obligations under
      the
      mortgage loan. Amounts under the mortgage loan will bear interest at the
      six-month Euribor rate plus 1.4%. The mortgage loan will mature on
      August 6, 2010.




On
      January 2, 2004, we entered into an Agreement for the Supply of Services
      with FinSirton pursuant to which FinSirton supplied us with accounting and
      personnel administration services. This agreement was to expire on
      December 31, 2004, but was renewed for 2005. In 2004 and 2005, we paid
      FinSirton €189 thousand and €152 thousand, respectively, under this
      agreement. On January 2, 2006, we entered into a Service Agreement with
      FinSirton pursuant to which FinSirton supplies




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us
      with
      general management and personnel administration services. This agreement is
      to
      expire on December 31, 2006. The agreement is renewable automatically each
      year
      barring cancellation of the agreement, which requires notice one month prior
      to
      expiration. We pay FinSirton €950 per employee per year for personnel services
      and €48 thousand per year for general management services. No other
      services are provided by FinSirton.




On
      January 2, 2004 we entered into a Service Agreement with Sirton pursuant to
      which Sirton supplied us with a number of business services including quality
      assurance, quality control, analytical assistance for research and development,
      regulatory services, engineering services, procurement and logistic services,
      general and car rental services, administrative assistance, library services,
      utilities services, and maintenance services. This agreement was to expire
      on
      December 31, 2004, but was renewed for 2005. In 2004 and 2005, we paid
      Sirton €1.10 million and €855 thousand, respectively, under this
      agreement. On January 2, 2006, we entered into a Service Agreement with Sirton
      pursuant to which Sirton supplies us with a number of business services
      including quality control, analytical assistance for research and development,
      engineering services, general and car rental services, utilities services,
      and
      maintenance services. This agreement expires on December 31, 2006, but is
      renewable automatically each year barring cancellation of the agreement, which
      requires notice one month prior to expiration.




On
      January 2, 2004, we entered into an Agreement for the Supply of Services
      with Sirton pursuant to which Sirton supplied us with organizational assistance
      in business management by drawing up strategic plans and coordinating our
      internal resources. This agreement was to expire on December 31, 2004 but
      was renewed for 2005. The agreement was not renewed in 2006. In 2004 and 2005,
      we paid Sirton €40 thousand and €54 thousand, respectively, under this
      agreement.




On
      January 1, 2005, we entered into a Commercial Lease Contract with Sirton to
      lease manufacturing space. This agreement expires on December 31,
      2010. **** As of
      December 31, 2005, we owed €8 thousand to Sirton under this agreement.




On
      January 1, 2005, we entered into a Commercial Lease Contract with FinSirton
      to lease space for offices, laboratories and storage facilities. This agreement
      expires on December 31, 2010. As of December 31, 2005, we paid FinSirton
€76 thousand and we owed €76 thousand under this agreement.




On
      January 2, 2004 we entered into an Active Ingredient Supply Agreement with
      Sirton pursuant to which we supplied Sirton with defibrotide and certain
      ingredients for generic drugs that Sirton manufactures. This agreement was
      to
      expire on December 31, 2004, but was renewed for 2005. In 2004 and 2005,
      Sirton paid us €2.870 million and **** €3.691 million **,** respectively,
      under this agreement. On January 2, 2006, we entered into a Contract to Supply
      Active Ingredients with Sirton, pursuant to which we manufacture urokinase,
      calcium heparin, defibrotide, sulglicotide and glucidamine for Sirton, which
      Sirton uses to produce specialty pharmaceutical products. Sirton also processes
      and sells the defibrotide to Crinos. The agreement automatically renews each
      year unless one party gives written notice of its intent to terminate the
      agreement at least one month prior to the annual termination date. The prices
      are as follows: €53 per unit of urokinase, €2.300 per unit of defibrotide for
      injection, €660 per unit of oral defibrotide, €390 per unit of sulglicotide, and
€160 per unit of glucidamine.




On
      March 29, 2005, we borrowed €106 thousand from Alexandra Global Master
      Fund Ltd., one of our shareholders. The loan bore interest at 8% per annum,
      which interest was payable on maturity. We repaid this loan in April 2005
      with the proceeds of a capital contribution from our then-majority shareholder,
      FinSirton.




In
      April 2005, Sigma Tau Finanziaria S.p.A. became one of our shareholders by
      purchasing 800,000 outstanding ordinary shares from FinSirton. Pursuant to
      a
      voting agreement between Sigma-Tau Finanziaria S.p.A. and FinSirton, a designee
      of Sigma-Tau Finanziaria S.p.A., Marco Codella, was elected to be a member
      of
      our board of directors upon consummation of our initial public offering in
      June
      2005. Mr. Codella is the Chief Financial Officer of Sigma Tau Industrie
      Farmaceutice Reunite S.p.A., which is a wholly-owned subsidiary of Sigma-Tau
      Finanziaria S.p.A. Sigma Tau Finanziaria S.p.A. is an affiliate of:




·
            Defiante
                Farmaceutica, L.d.a., which converted its Series A notes into 359,505
                ordinary shares at the consummation of our initial public offering
                and
                holds warrants issued in connection with the Series A notes to purchase
                73,334 ordinary shares;




·
            Chaumiere
                Consultadoria e Servicos S.A., which purchased 152,376 ADSs and warrants
                to purchase 60,951 ADSs in our October 2005 private placement;
                and




·
            Sigma-Tau
                Pharmaceuticals, Inc., which is a party to a License and Supply
                Agreement with us pursuant to which we have licensed the right to
                market
                defibrotide to treat VOD in North America, Central America and South
                America to Sigma-Tau Pharmaceuticals, Inc. and pursuant to which
                Sigma-Tau Pharmaceuticals, Inc has agreed to purchase defibrotide
                for this
                use from us. This agreement is described in more detail in “Business—Our
                Strategic Alliances—License and Distribution Agreements.” Sigma-Tau
                Pharmaceuticals, Inc. also has a right of first refusal to market
                defibrotide for certain other uses in North America, Central America
                and
                South America.






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David
      Kroin, a member of Gentium’s Board of Directors, is the Managing Director of
      Great Point Partners, LLC. Great Point Partners LLC is the investment manager
      of
      Biomedical Value Fund, LP and Biomedical Offshore Value Fund Ltd. Mr.
      Kroin was elected to Gentium’s board of directors pursuant to a voting agreement
      among the participants in the October 2005 private placement and FinSirton,
      Gentium’s largest shareholder.




**Nadler
      Consulting Agreement**




We
      have
      entered into a consulting agreement, dated as of April 1, 2005, with Dr. Nadler,
      one of our directors, under which we have retained Dr. Nadler as an independent
      contractor in connection with providing consulting and advising services
      relating to our clinical development of defibrotide to treat VOD in the United
      States and participating in our scientific advisory board. In return, we have
      agreed to pay Dr. Nadler a fee of $15,000 per year, a fee of $5,000 per meeting
      of our scientific advisory board outside the United States and a fee of $3,000
      for each meeting of our scientific advisory board in the United States, as
      well
      as reimbursing Dr. Nadler for his reasonable and necessary expenses incurred
      in
      providing his services. The consulting agreement has an initial term of twelve
      months and is automatically renewed for additional one-year periods unless
      terminated by either party upon notice given at least 30 days prior to the
      end
      of such period.




**Anderson
      Consulting Agreement**




We
      have
      entered into a consulting agreement, dated as of April 27, 2006, with Dr.
      Anderson, one of our directors, under which we have retained Dr. Anderson as
      an
      independent contractor in connection with providing consulting and advisory
      services relating to our clinical development of defibrotide to treat VOD in
      the
      United States and participating in our scientific advisory board. In return,
      we
      have agreed to pay Dr. Anderson a fee of $15,000 per year, a fee of $5,000
      per
      meeting of our scientific advisory board outside the United States and a fee
      of
      $3,000 for each meeting of our scientific advisory board in the United States,
      provided that such fees do not in the aggregate exceed $60,000 in any calendar
      year. The agreement also provides that Dr. Anderson be reimbursed for his
      reasonable and necessary expenses incurred in providing his services. The
      consulting agreement has an initial term of twelve months and is automatically
      renewed for additional one-year periods unless terminated by either party upon
      notice given at least 30 days prior to the end of such period.




**Indemnification
      Agreements**




We
      have
      entered into indemnification agreements with each of our directors and officers
      containing provisions that may require us to indemnify them against liabilities
      that may arise by reason of their status or service as directors or officers
      and
      to advance their expenses incurred as a result of any proceeding against them.
      However, we will not indemnify directors or officers with respect to liabilities
      arising from willful misconduct of a culpable nature.





**INTERESTS
      OF EXPERTS AND COUNSEL**





Not
      applicable.





***ITEM
              8.***
            ***FINANCIAL
                INFORMATION***





**CONSOLIDATED
      STATEMENTS**




Please
      refer to Item 18, “Financial Statements” of this annual report.




**OTHER
      FINANCIAL INFORMATION**




**Export
      Sales**





Not
      applicable.




**Legal
      Proceedings**





We
      are
      not a party to any legal or governmental proceeding that is pending or, to
      our
      knowledge, threatened or contemplated against our company that, if determined
      adversely to us, would have a materially adverse effect, either individually
      or
      in the aggregate, on the business, financial condition or results of
      operations.




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**Dividend
      Policy**




We
      have
      never declared or paid any cash dividends on our ordinary shares. We currently
      intend to retain all available funds to support our operations and to finance
      the growth and development of our business *.* We are
      not subject to any contractual restrictions on paying dividends. Under Italian
      law and our bylaws, our payment of any annual dividend must be proposed by
      our
      board of directors and is subject to the approval of our shareholders at the
      annual ordinary shareholders’ meeting. Before dividends may be paid out of our
      net income in any year, we must allocate an amount equal to 5% of the net income
      to our legal reserve until such reserve is at least equal to 20% of the
      aggregate par value of our issued shares, which we call our “capital.” If a loss
      in our capital occurs, we may not pay dividends until the capital is
      reconstituted or reduced by the amount of such losses. We may pay dividends
      out
      of available retained earnings from prior years, provided that after such
      payment, we will have a legal reserve at least equal to the legally required
      minimum of 20% of the capital. We may not approve or pay dividends until this
      minimum is met. If the minimum is met, the board of directors proposes the
      issuance of a dividend and the shareholders approve that issuance, the
      shareholders’ resolution will specify the manner and the date for their payment.




Any
      dividend we declare will be paid to the holders of ADSs, subject to the terms
      of
      the deposit agreement, to the same extent as holders of our ordinary shares,
      less the fees and expenses payable under the deposit agreement. Any dividend
      we
      declare will be distributed by the depositary to the holders of the ADSs. Cash
      dividends on our ordinary shares, if any, will be paid in U.S. dollars.




If
      we
      issue debt securities in the future, until those debt securities are repaid
      in
      full, we may not declare dividends if it results in the aggregate of the capital
      and reserves being less than half of the outstanding amount of the
      debt.




The
      board
      of directors may not approve interim dividends at times between our annual
      ordinary shareholders’ meetings. Any future determination relating to dividend
      policy will be made at the discretion of our board of directors and will depend
      on a number of factors, including our future earnings, capital requirements,
      financial condition, future prospects and other factors as the board of
      directors may deem relevant.




Under
      Italian law, Italian companies are required to supply to the Italian tax
      authorities certain information regarding the identity of non-resident
      shareholders in connection with the payment of dividends. Shareholders are
      required to provide their Italian tax identification number, if any, or
      alternatively, in the case of legal entities, their name, country of
      establishment and address, or in the case of individuals, their name, address
      and place and date of birth, or in the case of partnerships, the information
      required for individuals with respect to one of their representatives. In the
      case of ADSs owned by non-residents of Italy, we understand that the provision
      of information concerning the depositary, in its capacity as holder of record
      of
      the ordinary shares underlying the ADSs, will satisfy this requirement. However,
      beneficial U.S. ADS holders are entitled to a reduction of the withholding
      taxes
      applicable to dividends paid to them under the income tax convention currently
      in effect between the United States and Italy. In order for you to benefit
      from
      that reduction, we are required to furnish certain information concerning you
      to
      the Italian tax authorities, and therefor any claim by you for those benefits
      would need to be accompanied by the required information.





**SIGNIFICANT
      CHANGES**





No
      significant changes have occurred since the date of the most recent annual
      financial statements.





***ITEM
              9.***
            ***THE
                OFFER AND LISTING***





**OFFER
      AND LISTING DETAILS**





Our
      ADSs
      are listed on Nasdaq under the symbol “GENT.” Neither our ordinary shares nor
      our ADSs are listed on a securities exchange outside the United States. The
      Bank
      of New York is our depositary for purposes of issuing the ADRs representing
      the
      ADSs. Each ADS represents one ordinary share.




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Trading
      in our ADSs on the Nasdaq National Market System commenced on May 16, 2006.
      Prior to this date, our ADSs were traded on the American Stock Exchange,
      beginning June 16, 2005 and ending on May 15, 2006, the date we de-listed.
      The
      following table sets forth, for each of the periods indicated, the high and
      low
      closing prices per ADS as reported by the American Stock Exchange and Nasdaq,
      as
      applicable.




**Price
                Range of ADSs****High**
            
            **Low****2005**Second
                Quarter (beginning June 16, 2005)
            
            $
            9.10
            
            $
            8.77Third
                Quarter
            
            $
            8.99
            
            $
            6.92Fourth
                Quarter
            
            $
            8.68
            
            $
            7.05**2006**First
                Quarter
            
            $
            13.25
            
            $
            7.85**Month
                Ended**November
                30, 2005
            
            $
            8.68
            
            $
            7.05December
                31, 2005
            
            $
            8.46
            
            $
            7.75January
                31, 2006
            
            $
            9.55
            
            $
            7.85February
                28, 2006
            
            $
            10.05
            
            $
            9.20March
                31, 2006
            
            $
            13.25
            
            $
            9.78April
                30, 2006
            
            $
            19.76
            
            $
            13.01May
                31, 2006 (through May 25, 2006)
            
            $
            17.20
            
            $
            12.50




The
      closing price of the ADSs on Nasdaq on May 25, 2006 was $12.50.




Sources:
      American Stock Exchange and the Nasdaq Stock Market




**PLAN
      OF DISTRIBUTION**





Not
      applicable.






**MARKETS**





Our
      ADSs
      are listed on the Nasdaq National Market under the symbol “GENT.” Neither our
      ordinary shares nor our ADSs are listed on a securities exchange outside the
      United States.





**SELLING
      SHAREHOLDERS**





Not
      applicable.








**DILUTION**





Not
      applicable.








**EXPENSES
      OF THE ISSUE**





Not
      applicable.






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***ITEM
              10.***
            ***ADDITIONAL
                INFORMATION.***


**SHARE
      CAPITAL**





Not
      applicable.








**MEMORANDUM
      AND ARTICLES OF ASSOCIATION**




**Bylaws**




The
      following is a summary of certain information concerning our ordinary shares
      and
      by-laws ( *Statuto* )
      and of
      Italian law applicable to companies whose shares are not listed in a regulated
      market in the European Union, as in effect at the date of this annual report.
      The summary contains all the information that we consider to be material
      regarding the shares but does not purport to be complete and is qualified in
      its
      entirety by reference to our by-laws or Italian law, as the case may be.




In
      January 2003, the Italian government approved a wide-ranging reform of the
      corporate law provisions of the Italian Civil Code, which came into force on
      January 1, 2004. On September 30, 2004, our shareholders approved a
      number of amendments to our by-laws dictated or made possible by the 2003
      corporate law reform. Our bylaws were also amended on April 28, 2005, November
      29, 2005 and April 28, 2006. The following summary takes into account the 2003
      corporate law reform and the consequent amendments to our by-laws.




*General*




As
      of
      March 31, 2006, our issued and outstanding share capital consisted of 9,610,630
      ordinary shares, par value €1 per share. The euro was adopted in Italy on
      January 1, 1999. The redenomination of the ordinary shares from lire into euro
      was approved by our shareholders on December 27, 2000. All the issued and
      outstanding shares are fully paid, non-assessable and in registered form.




We
      are
      registered with the Companies’ Registry of Como, with our registered office at
      Comune di Villa Guardia, frazione Civello, Italy, registration number
      02098100130.




Our
      corporate purpose is the manufacturing, on behalf of our company and third
      parties, and marketing in both Italy and other countries, of pharmaceutical
      preparations, pharmaceutical products, raw materials for pharmaceutical and
      parapharmaceutical use and in general all and any products sold by pharmacies
      or
      for hospital use, excluding in all cases the retail sale in Italy of
      pharmaceutical preparations and products, medical articles and clinical
      apparatuses in general and organic and inorganic products that may be used
      in
      agrotechnical and/or zootechnical fields. We may also prepare and organize
      for
      our own account or on behalf of third parties the documentation required for
      obtaining authorizations for marketing pharmaceutical products in compliance
      with the regulations in force in the countries of destination and be the holders
      of those authorizations. We may grant and/or transfer licenses to Italian and
      foreign enterprises or corporate bodies or acquire licenses for ourself or
      third
      parties. For each product contemplated by our corporate purposes, we may carry
      out research programs in general and in particular technological, chemical,
      pharmacotoxicological and clinical research programs in the hospital and
      pharmaceutical field. We are generally authorized to take any commercial
      transactions necessary or useful to achieve our corporate purpose, with the
      exclusion of investment services and other financial or professional activities
      reserved by Italian law to authorized entities.




*Authorization
      of shares*




Our
      shareholders may authorize the issuance of additional shares at any time at
      an
      extraordinary shareholders’ meeting. However, the newly issued shares may not be
      purchased before all the outstanding shares are entirely paid for. On September
      30, 2004, after a recommendation by our board of directors, our shareholders
      approved a capital increase to allow for the issuance of:




·
            up
                to 1,560,000 ordinary shares upon the exercise of options available
                for
                grant under our share option plans;




·
            up
                to 1,335,000 ordinary shares upon the conversion of the Series A
                senior convertible promissory notes;




·
            up
                to 881,100 ordinary shares upon the exercise of the warrants; and




·
            4,554,000
                ordinary shares, including the shares underlying the ADSs in our
                initial
                public offering (including ordinary shares underlying the underwriters’
                purchase option and the over-allotment option).




As
      of
      March 31, 2006, 4,610,630 of such new ordinary shares had been issued and fully
      paid. The authorization for the ordinary shares authorized at this meeting
      is
      valid until September 30, 2009, except that 1,353,297 of these ordinary shares
      were authorized for issuance in connection with our issuance of the Series
      A
      notes and related warrants, but were not actually issued, and so become
      unauthorized and unissuable under Italian law.




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On
      November 29, 2005, after a recommendation by our board of directors, our
      shareholders approved a capital increase of 713,518 ordinary shares to be
      reserved for issuance upon exercise of the warrants we issued to the
      participants in our October 2005 private placement and the placement agent
      for
      that private placement.




On
      April
      28, 2006, after a recommendation by our board of directors, our shareholders
      approved an amendment to our bylaws that provides that our board of directors
      be
      granted, pursuant to articles 2443 and 2420- *ter* of
      the
      Italian Civil Code, with the power to (i) increase the capital of our company
      in
      cash, up to Euro 90 million of par value, in one or more transactions, and
      to
      reserve all or part of such amount for the exercise of warrants issued by means
      of the same resolution of our board of directors providing for the relevant
      capital increase; (ii) issue convertible bonds (including subordinated) and
      increase the capital of our company, in one or more transactions, up to Euro
      10
      million of par value, through the issuance of ordinary shares reserved for
      the
      conversion of such convertible bonds, and to reserve all or part of such
      convertible bonds for issuance upon the exercise of warrants issued by means
      of
      the same resolution of our board of directors providing for issuance of the
      convertible bonds; and (iii) in each case, exclude or limit the option right
      of
      our shareholders if our board of directors determines that exclusion or
      limitation to be in the interest of our company.




*Form
      and transfer of shares*




Our
      ordinary shares are not represented by share certificates; rather, they are
      registered in book-entry form. All of our ordinary shares are issued through
      Monte Titoli, an Italian clearinghouse and depositary, and held through various
      participants, primarily financial institutions, on Monte Titoli’s system.
      Transfers in our ordinary shares are processed on Monte Titoli’s system. We
      update our shareholder book ( *libro
      soci* )
      that we
      keep at our corporate offices for Italian law purposes from time to time with
      the names of the record shareholders based on information that will be provided
      to us by Monte Titoli participants.




This
      shareholder book is the controlling register of our record shareholders for
      Italian law purposes, including for establishing the record shareholders for
      shareholder meetings, declaration of dividends and stock splits or combinations.
      A shareholders’ name must be entered on this shareholder book in order for the
      shareholder to establish its rights against us.




*Dividend
      rights*




Our
      payment of any annual dividend must be proposed by our board of directors and
      is
      subject to the approval of our shareholders at the annual ordinary shareholders’
meeting. Before dividends may be paid out of our unconsolidated net income
      in
      any year, we must allocate an amount equal to 5% of the Italian GAAP net income
      to our legal reserve until such reserve is at least equal to 20% of the
      aggregate par value of our issued shares, which we call our “capital.” If a loss
      in our capital occurs, we may not pay dividends until the capital is
      reconstituted or reduced by the amount of such losses. We may pay dividends
      out
      of available retained earnings from prior years, provided that after such
      payment, we will have a legal reserve at least equal to the legally required
      minimum of 20% of the capital. We may not approve or pay dividends until this
      minimum is met. If the minimum is met, the board of directors proposes the
      issuance of a dividend and the shareholders’ resolution approves that issuance,
      the shareholders’ resolution will specify the manner and the date for their
      payment. Any dividends which shareholders do not collect within five years
      of
      the date on which they become payable will be forfeited by those shareholders
      and we will keep the money. The board of directors may not approve interim
      dividends at times between our annual ordinary shareholders’ meetings.




*Board
      of directors*




Pursuant
      to our by-laws, our board of directors must consist of between three and eleven
      individuals. Our board of directors is elected at an ordinary shareholders’
meeting for a period of one year.




Our
      directors, who may but are not required to be shareholders, may be re-elected.
      Our board of directors has complete power of our ordinary and extraordinary
      administration and in particular may perform all acts it deems advisable for
      the
      achievement of our corporate purposes, except for the actions reserved by
      applicable law or the by-laws to a vote of the shareholders at an ordinary
      or
      extraordinary shareholders’ meeting. See also, “Item 10, Additional Information,
      Memorandum and Articles of Association, Meetings of Shareholders.”




If
      we
      cannot repay our creditors, and a court determines that our directors did not
      perform their duties regarding the preservation of our assets, the court may
      find our directors liable to our creditors.




Our
      board
      of directors must appoint a chairman ( *presidente* )
      and may
      appoint a vice-chairman and a secretary. The chairman of the board of directors
      is our legal representative. Our board of directors may delegate certain powers
      to one or more managing directors ( *amministratori
      delegati* )
      or to
      an executive committee ( *comitato
      esecutivo* ),
      determine the nature and scope of the delegated powers of each director and
      of
      the executive committee and revoke such delegation at any time. Italian law
      provides that the board or, if it delegates such duties, the managing directors
      or executive committee, must ensure that our organizational and accounting
      structure is appropriate to our business. If the board delegates these duties
      to
      managing directors or an executive committee, then the managing directors or
      the
      executive committee, as the case may be, must report to our




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board
      of
      directors at least every six months on our business and the main transactions
      carried out by us or by our subsidiaries, if any. The board, the managing
      directors or the executive committee, as the case may be, must report to our
      board of statutory auditors at least every six months on our business and the
      main transactions carried out by us or our subsidiaries, if any.




Our
      board
      of directors may also appoint one or more senior managers ( *direttori
      generali* )
      who
      report directly to the board. These senior managers may be employees, and the
      board may delegate any powers to them that the board has not already delegated
      to managing directors or an executive committee, and subject to the limitations
      discussed below.




Under
      Italian law, our board of directors may not delegate certain responsibilities,
      including the preparation and approval of draft financial statements, the
      approval of merger and de-merger plans to be presented to shareholders’
meetings, increases in the amount of our share capital or the issuance of
      convertible debentures (if any such power has been delegated to our board of
      directors by our shareholders at an extraordinary shareholders’ meeting) and the
      fulfillment of the formalities required when our capital is required to be
      reduced as a result of accumulated losses that affect our stated capital by
      more
      than one third. See also, “Item 10, Additional Information, Memorandum and
      Articles of Association, Meetings of Shareholders.”




Meetings
      of our board of directors are called eight days in advance by letter or, in
      case
      of necessity, two days in advance, by fax, e-mail with receipt or telegram
      to
      each director and each statutory auditor. Statutory auditors are normally
      required to attend our board meetings, but if a meeting has been duly called,
      the board can validly take action at the meeting even if the board of statutory
      auditors do not attend. If the meeting has not been duly called, the meeting
      is
      nevertheless validly constituted if all of the directors in office and all
      of
      the statutory auditors are present. The chairman may call meetings on his own
      initiative and meetings must be called upon the request of two directors.




Meetings
      of our board of directors may be held in person, or by audio-conference or
      tele-conference, in any member state of the European Union or in the United
      States. The quorum for meetings of our board of directors is a majority of
      the
      directors in office. Resolutions are adopted by the vote of a majority of the
      directors present at a meeting at which a quorum is present.




Under
      Italian law, directors having any interest in a proposed transaction must
      disclose their interest to the board and to the statutory auditors, even if
      such
      interest is not in conflict with our interest in the same transaction. The
      interested director is not required to abstain from voting on the resolution
      approving the transaction, but the resolution must state explicitly the reasons
      for, and the benefit to us of, the approved transaction. If these provisions
      are
      not complied with, or if the transaction would not have been approved without
      the vote of the interested director, the resolution may be challenged by a
      director or by our board of statutory auditors if the approved transaction
      may
      be prejudicial to us. A managing director, a member of the executive committee
      or any senior manager having any interest in a proposed transaction that he
      or
      she has authority to approve must solicit prior board approval of such
      transaction. The interested director or senior manager may be held liable for
      damages to us resulting from a resolution adopted in breach of the above rules.
      Finally, directors may be held liable for damages to us if they illicitly profit
      from insider information or corporate opportunities.




Under
      Italian law, directors may be removed from office at any time by the vote of
      shareholders at an ordinary shareholders’ meeting although, if removed in
      circumstances where there was no just cause, such directors may have a claim
      for
      damages against us. These damages may include, but are not limited to,
      compensation that would otherwise have been paid to the director for the
      remainder of their term and damage to their reputation. Directors may resign
      at
      any time by written notice to our board of directors and to the chairman of
      our
      board of statutory auditors. Our board of directors must appoint substitute
      directors to fill vacancies arising from removals or resignations, subject
      to
      the approval of the board of statutory auditors, to serve until the next
      ordinary shareholders’ meeting. If at any time more than half of the members of
      our board of directors resign or otherwise cease to be directors, the board
      of
      directors in its entirety ceases to be in office and our board of statutory
      auditors must promptly call an ordinary shareholders’ meeting to appoint new
      directors.




The
      remuneration of our directors is determined by our shareholders at ordinary
      shareholders’ meetings. Our board of directors, after consultation with our
      board of statutory auditors, may determine the remuneration of directors that
      perform management or other special services for us, such as managing directors.
      Our directors are entitled to reimbursement for expenses reasonably incurred
      in
      connection with their service as directors, such as expenses incurred in travel
      to attend board meetings.




Effective
      January 1, 2004, an Italian share corporation may adopt one of three
      different models of corporate governance structure. The three models are:




·
            a
                board of directors and a board of statutory auditors, which is the
                historical model that all companies had prior to January 1, 2004;




·
            a
                one-tier model with a single board of directors, including an audit
                committee composed of independent non-executive directors; or






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·
            a
                two-tier model, including a management board, which is entrusted
                with
                management responsibilities, and a supervisory board which is entrusted
                mainly with control and supervisory responsibilities and, among other
                functions, appoints and removes the members of the management board
                and
                approves our annual financial statements.




Replacing
      the historical model with the new one-tier model or two-tier model requires
      an
      extraordinary shareholders meeting resolution. The amended by-laws approved
      by
      our shareholders on September 30, 2004 do not provide for a change in our
      governance structure. As a result, we continue to have a board of directors
      and
      a board of statutory auditors.




*Statutory
      auditors*




In
      addition to electing our board of directors, our shareholders elect a board
      of
      statutory auditors ( *Collegio
      Sindacale* )
      from
      individuals qualified to act in such capacity under Italian law. At our ordinary
      shareholders’ meetings, the statutory auditors are elected for a term of three
      fiscal years, may be re-elected for successive terms and may be removed only
      for
      cause and with the approval of a competent court. Each member of our board
      of
      statutory auditors must provide certain evidence that he is qualified to act
      in
      such capacity under Italian law and meets certain professional standards.




Our
      by-laws currently provide that the board of statutory auditors shall consist
      of
      three statutory auditors and two alternate statutory auditors (who are
      automatically substituted for a statutory auditor who resigns or is otherwise
      unable to serve).




Our
      board
      of statutory auditors is required, among other things, to verify that we:




·
            comply
                with applicable laws and our by-laws;




·
            respect
                principles of good governance; and




·
            maintain
                adequate organizational structure, internal controls and administrative
                and accounting system.




Our
      board
      of statutory auditors is required to meet at least once each ninety days. In
      addition, our statutory auditors are supposed to attend meetings of our board
      of
      directors and shareholders’ meetings. If they do not attend two consecutive
      meetings of the board of directors or shareholders, they may be terminated
      for
      cause by the shareholders. Our statutory auditors may decide to call a meeting
      of our shareholders, ask for information about our management from our
      directors, carry out inspections and verifications at our offices and exchange
      information with our external auditors. Any shareholder may submit a complaint
      to our board of statutory auditors regarding facts that the shareholder believes
      should be subject to scrutiny by our board of statutory auditors, which must
      take any complaint into account in its report to the shareholders’ meeting. If
      shareholders collectively representing 5% of our share capital submit such
      a
      complaint, our board of statutory auditors must promptly undertake an
      investigation and present its findings and any recommendations to a
      shareholders’ meeting (which must be convened immediately if the complaint
      appears to have a reasonable basis and there is an urgent need to take action).
      Our board of statutory auditors may report to a competent court serious breaches
      of directors’ duties. The court may take such actions as it feels appropriate,
      including inspecting our company’s operations, removing directors, appointing
      temporary administrators to manage our company and any other actions that the
      court feels is necessary to preserve the value of our company for our creditors
      and shareholders.




As
      mentioned in the preceding section, effective January 1, 2004, Italian
      share corporations may depart from the traditional Italian model of corporate
      governance structure and opt for two alternative models, neither of which
      includes a board of statutory auditors. Our amended by-laws do not provide
      for a
      change in our governance structure, although we do have an audit committee
      simply as an internal body of our board of directors.




*External
      auditor*




The
      2003
      corporate law reform requires us to appoint an external auditor or a firm of
      external auditors, each of them qualified to act in such capacity under Italian
      law, that shall verify during the fiscal year that our accounting records are
      correctly kept and accurately reflect our activities, and that our financial
      statements correspond to the accounting records and the verifications conducted
      by the external auditors and comply with applicable rules. The external auditor
      or the firm of external auditors express their opinion on the financial
      statements in a report that may be reviewed by the shareholders at our offices
      prior to the annual shareholders’ meeting. The report remains on file at our
      offices and may be reviewed after the annual shareholders’ meeting as well; it
      is also published for review by the general public.




The
      external auditor or the firm of external auditors are appointed for a three-year
      term by the vote of our shareholders at an ordinary shareholders’ meeting. At
      the ordinary shareholders’ meeting, the shareholders may ask questions of the
      board of statutory auditors about their view of the auditors prior to voting
      on
      whether to appoint the auditors. Once appointed, the shareholders may remove
      the
      auditors only for cause and with the approval of the board of statutory auditors
      and of a competent court.




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On
      April
      28, 2006, our shareholders appointed Reconta Ernst & Young S.p.A., with
      offices in Italy, as our external auditors for a one-year term expiring at
      the
      time of the annual shareholders meeting to approve the financial statements
      for
      2006.




*Meetings
      of shareholders*




Shareholders
      are entitled to attend and vote at ordinary and extraordinary shareholder’s
      meetings. Votes may be cast personally or by proxy. Shareholders’ meeting may be
      called by our board of directors (or our board of statutory auditors) and must
      be called if requested by holders of at least 10% of the issued shares.
      Shareholders are not entitled to request that a meeting of shareholders be
      convened to vote on issues which as a matter of law shall be resolved upon
      the
      basis of a proposal, plan or report by our board of directors. If the
      shareholders’ meeting is not called despite the request by shareholders and such
      refusal is unjustified, a competent court may call the meeting.




We
      may
      hold meetings of shareholders at our registered office in Villa Guardia, or
      elsewhere within Italy, any other state of the European Union or in the United
      States following publication of notice of the meeting in the *“Gazzetta
      Ufficiale della Repubblica Italiana”* or in
      the newspaper *“Il
      Sole 24 Ore”* at least
      15 days before the date fixed for the meeting. Our bylaws provide that we
      must mail written notice of meetings to our shareholders at least 10 days before
      the date fixed for the meeting. The depositary will mail to all record holders
      of ADSs a notice containing a summary of all information included in any notice
      of a shareholders’ meeting received by the depositary. The notice of a
      shareholders’ meeting must specify two meeting dates for an ordinary or
      extraordinary shareholders’ meeting (first and second “calls”). The notice of
      the shareholders’ meeting also specifies the dates for further calls. The notice
      must contain a list of the items to be dealt with and state the day, hour and
      place for the meeting for both the first and second calls. However, if the
      above
      procedures are not complied with, the shareholders’ meeting will still be deemed
      to be validly held if all outstanding shares are represented, all other holders
      having the right to vote are present and the meeting is attended by a majority
      of the board of directors and the board of statutory auditors.




We
      must
      convene an ordinary shareholders’ meeting at least once a year within
      120 days after the end of the fiscal year. Our annual financial statements
      must be approved by vote of our shareholders at this annual ordinary
      shareholders’ meeting. We may delay holding the shareholders’ meeting to up to
      180 days after the end of the fiscal year if we must prepare consolidated
      financial statements or if particular circumstances concerning our structure
      or
      our purposes so require. At ordinary shareholders’ meetings, our shareholders
      also appoint the external auditors, approve any distribution of dividends that
      have been proposed by our board of directors, elect our board of directors
      and
      statutory auditors, determine their remuneration and vote on any business matter
      the resolution or authorization of which is entrusted to the shareholders by
      law.




We
      may
      call extraordinary shareholders’ meetings to vote upon split-ups, dissolutions,
      appointment of receivers and similar extraordinary actions. We may also call
      extraordinary shareholders’ meetings to vote upon proposed amendments to our
      by-laws, issuance of convertible debentures, mergers and de-mergers and capital
      increases and reductions, if the actions may not be authorized by the board
      of
      directors. The board of directors has the authority to transfer our registered
      office within Italy, authorize, on a non-exclusive basis, amendments to our
      by-laws that are required by law, authorize mergers by absorption into us of
      our
      subsidiaries in which we hold all or at least 90% of the issued share capital,
      authorize reductions of our share capital in case of withdrawal of a shareholder
      and indicate who among the directors is our legal representative. If the
      shareholders authorize the issuance of shares or other securities at an
      extraordinary meeting, they may delegate the power to make specific issuances
      to
      the board of directors.




Once
      our
      shareholders have authorized the issuance of securities, those securities must
      be fully paid for before the shareholders may authorize the issuance of
      additional securities, unless the shareholders meet and vote to cancel those
      authorized but not purchased securities.




The
      quorum for an ordinary meeting of our shareholders on the first call is 50%
      of
      the outstanding ordinary shares, while on second call there is no quorum
      requirement. In either case, resolutions are carried by the majority of ordinary
      shares present or represented at the meeting. The quorum for an extraordinary
      meeting of shareholders is a majority of the outstanding ordinary shares on
      the
      first call and more than one-third of the outstanding shares on second call.
      Resolutions are carried by a majority of the outstanding ordinary shares on
      first call and at least two-thirds of the holders of shares present or
      represented at the meeting on second call. In addition, certain matters (such
      as, for example, a change in our purpose, the transfer of our registered office
      outside Italy or our liquidation prior to the date set forth in our by-laws)
      must be carried by the holders of more than one-third of the outstanding
      ordinary shares (not just the ordinary shares present or represented at the
      meeting).




Shareholders
      are entitled to one vote per ordinary share. Neither Italian law nor our by-laws
      limit the right of non-resident or foreign owners to hold or vote their shares.
      Shareholders do not need to “lodge” their share certificates (if any) or any
      communication from their broker in order to take part in the meeting. As a
      registered shareholder, the depositary (or its nominee) will be entitled to
      vote
      the ordinary shares underlying the ADSs. The deposit agreement requires the
      depositary (or its nominee) to accept voting instructions from owners of ADSs
      and to execute such instructions to the extent permitted by law.




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Shareholders
      may appoint proxies by delivering in writing an appropriate instrument of
      appointment to us. Our directors, auditors and employees may not be proxies.
      Italian law provides that any one proxy cannot represent more than 20
      shareholders prior to the company “making recourse to the risk capital market.”
Italian scholars are undecided as to whether listing shares on an exchange
      outside of Italy constitutes “making recourse to the risk capital market.” If we
      are deemed to make recourse to the risk capital market by means of listing
      ADSs
      representing our ordinary shares on the Nasdaq National Market System, any
      one
      proxy cannot represent more than 50 shareholders if the aggregate par value
      of
      our ordinary shares is €5 million or less or more than 100 shareholders if
      the aggregate par value of our ordinary shares is more than €5 million but
      less than or equal to €25 million. If the aggregate par value of our
      ordinary shares is more than €25 million, any one proxy cannot represent
      more than 200 shareholders. At December 31, 2005, we had 9,610,630 shares
      outstanding, the aggregate par value of which is €9,610,630, and so if we are
      deemed to make recourse to the risk capital market, each proxy may not represent
      more than 100 shareholders.




*Preemptive
      rights*




Pursuant
      to Italian law, holders of outstanding ordinary shares and convertible
      debentures are entitled to subscribe for issuance of ordinary shares or
      convertible debentures in proportion to their holdings at the time that the
      shareholders authorize the capital increase for those issuances, unless those
      issuances are for non-cash considerations. The preemptive rights may be waived
      or limited by shareholders’ resolution adopted by the affirmative vote of
      holders of more than 50 percent of the ordinary shares at an extraordinary
      meeting of shareholders and such waiver or limitation is in the interest of
      our
      company. There can be no assurance that the holders of ADSs may be able to
      exercise fully any preemptive rights to which the holders of ordinary shares
      may
      be entitled. If ADS holders are not able to exercise their preemptive rights,
      the depositary will, to the extent possible, dispose of such rights for their
      account.




FinSirton
      waived its preemptive right in connection with the authorization of our private
      placement of the Series A notes and warrants, the issuance of options under
      our equity incentive plans and the issuance of 4,554,000 additional ordinary
      shares, which includes the shares underlying the ADSs offered in our initial
      public offering and the shares issued in our October 2005 private placement.
      Our
      shareholders waived their preemptive rights in connection with the authorization
      of 713,518 ordinary shares to be reserved for issuance upon exercise of the
      warrants we issued to the participants in our October 2005 private placement
      and
      the placement agent for that private placement.




*Preference
      shares; other securities*




Italian
      law permits us to issue preference shares with limited voting rights, other
      classes of equity securities with different economic and voting rights,
“participation certificates” with limited economic and voting rights, as well as
“tracking shares,” if our by-laws permit such issuances. Our by-laws currently
      do allow us to issue these securities. We may also issue convertible and
      non-convertible debt securities. In order to issue these securities, our board
      of directors would need to recommend to our shareholders that they approve
      the
      issuance of particular securities in connection with a capital increase, and
      the
      shareholders would need to vote to approve such an issuance and capital increase
      at an extraordinary meeting. The board would also need to recommend, and the
      shareholders would need to approve by vote at the extraordinary meeting,
      specific terms of the securities. The shareholders may vote at the extraordinary
      meeting to delegate to the board of directors the power to issue those
      securities from time to time, but not more than five years from the date of
      the
      extraordinary meeting.




*Debt-equity
      ratio*




Italian
      law provides that we may issue debt securities for an amount not exceeding
      twice
      the amount of the sum of the aggregate par value of our ordinary shares (which
      we call our capital), our legal reserve and any other disposable reserves
      appearing on our latest Italian balance sheet approved by our shareholders.
      The
      legal reserve is a reserve to which we allocate 5% of our Italian GAAP net
      income each year until it equals at least 20% of our Italian GAAP capital.
      One
      of the other reserves that we maintain on our balance sheet is a “share premium
      reserve”, meaning amounts paid for our ordinary shares in excess of the capital.
      Until our outstanding debt securities are repaid in full, we may not voluntarily
      reduce our capital or distribute our reserves (such as by declaring dividends)
      in the event the aggregate of the capital and reserves, following such reduction
      of capital and/or distribution of reserves, is less than half of the outstanding
      amount of the debt securities. If our equity is reduced by losses or otherwise
      such that the amount of the outstanding debt securities is more than twice
      the
      amount of our equity, we cannot distribute profits to our shareholders until
      the
      ratio between the amount of our debt securities and our capital and reserves
      is
      restored. Moreover, some legal scholars are of the opinion that in such a case
      the ratio must be restored by a recapitalization of our company. If our equity
      is reduced, we could recapitalize by means of issuing new shares or having
      our
      current shareholders contribute additional capital to our company, although
      there can be no assurance that we would be able to find purchasers for new
      shares or that any of our current shareholders would be willing to contribute
      additional capital. These laws regarding the ratio of debt securities to capital
      and reserves do not apply to issuances of debt securities to professional
      investors (as defined by Italian law). However, in such a case, should the
      professional investors transfer such debt securities to third parties not
      qualified as professional investors, the former remain liable to us for the
      payment of such securities.




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Reduction
      of equity by losses




Italian
      law requires us to reduce our shareholders’ equity in certain situations. Our
      shareholders’ equity has three main components: capital, legal reserves and
      other shareholders’ equity (such as any premium paid for the shares over the par
      value and any retained earnings). We apply our losses from operations against
      our shareholders’ equity other than legal reserves and capital first. If
      additional losses remain, or if we have no shareholders’ equity other than legal
      reserves and capital, and the additional losses are more than one-third of
      the
      amount of our legal reserves and capital, our board of directors must call
      a
      shareholder’s meeting as soon as possible. The shareholders must vote to elect
      to either reduce the legal reserves and capital by the amount of the remaining
      losses, or to carry the losses forward for up to one year. If the shareholders
      vote to elect to carry the losses forward up to one year, and at the end of
      the
      year, the losses are still more than one-third of the amount of the legal
      reserves and capital, then we must reduce our legal reserves and capital by
      the
      amount of the losses. However, as an S.p.A., we must maintain capital of at
      least €120 thousand. If the amount of the losses would reduce our capital
      to less than €120 thousand, then:




·
            we
                would need to increase our capital, which we could do by issuing
                new
                shares or having our shareholders contribute additional capital to
                our
                company, although there can be no assurance that we would be able
                to find
                purchasers for new shares or that any of our current shareholders
                would be
                willing to contribute additional capital; or




·
            our
                shareholders would need to convert our company to an “S.r.l”, which has a
                lower capital requirement of €10 thousand; or




·
            if
                neither of these options were taken, our shareholders or, if they
                do not
                so resolve, a court of competent jurisdiction, could appoint a receivor
                to
                liquidate our company.




*Segregation
      of assets and proceeds*




Pursuant
      to the 2003 corporate law reform, effective January 1, 2004, our board of
      directors may resolve to segregate our assets into one or more separate pools.
      Such pools of assets may have an aggregate value not exceeding 10% of our
      shareholders’ equity. Each pool of assets must be used exclusively for the
      carrying out of a specific business and may not be attached by our general
      creditors Similarly, creditors with respect to such specific business may only
      attach those assets that are included in the corresponding pool. Tort creditors,
      on the other hand, may always attach any of our assets. Our board of directors
      may authorize us to issue securities carrying economic and administrative rights
      relating to a pool. In addition, financing agreements relating to the funding
      of
      a specific business may provide that the proceeds of such business be used
      exclusively to repay the financing. Such proceeds may be attached only by the
      financing party and such financing party would have no recourse against other
      assets of ours.




We
      have
      no present intention to enter into any such transaction and none is currently
      in
      effect.




*Liquidation
      rights*




Pursuant
      to Italian law and subject to the satisfaction of the claims of all creditors,
      our shareholders are entitled to a distribution in liquidation that is equal
      to
      the par value of their shares (to the extent available out of our net assets).




*Purchase
      of shares by us*




We
      are
      permitted to purchase our outstanding shares, subject to certain conditions
      and
      limitations provided for by Italian law. We may only purchase the shares out
      of
      profits available for dividends or out of distributable reserves, in each case
      as appearing on the latest shareholder-approved financial statements. Further,
      we may only repurchase fully paid-in shares. Such purchases must be authorized
      by our shareholders by vote at an ordinary shareholders’ meeting. The number of
      shares to be acquired, together with any shares previously acquired by us or
      any
      of our subsidiaries may not (except in limited circumstances) exceed in
      aggregate 10% of the total number of shares then issued and the aggregate
      purchase price of such shares may not exceed the earnings reserve specifically
      approved by shareholders. Shares held in excess of such 10% limit must be sold
      within one year of the date of purchase. Similar limitations will apply with
      respect to purchases of our ordinary shares by any subsidiaries we may create
      in
      the future.




A
      corresponding reserve equal to the purchase price of such shares must be created
      in the balance sheet, and such reserve is not available for distribution, unless
      such shares are sold or cancelled. Shares purchased and held by us may be resold
      only pursuant to a resolution of our shareholders adopted at an ordinary
      shareholders’ meeting. The voting rights attaching to the shares held by us or
      our subsidiaries cannot be exercised, but the shares can be counted for quorum
      purposes in shareholders’ meetings. Dividends and other rights, including
      pre-emptive rights, attaching to such shares will accrue to the benefit of
      other
      shareholders.




*Notification
      of the acquisition of shares*




In
      accordance with Italian antitrust laws, the Italian Antitrust Authority is
      required to prohibit the acquisition of control in a company which would thereby
      create or strengthen a dominant position in the domestic market or a significant
      part




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thereof
      and which would result in the elimination or substantial reduction, on a lasting
      basis, of competition, provided that certain turnover thresholds are exceeded.
      However, if the turnover of the acquiring party and the company to be acquired
      exceed certain other monetary thresholds, the antitrust review of the
      acquisition falls within the exclusive jurisdiction of the European Commission.




*Minority
      shareholders’ rights; withdrawal rights*




Shareholders’
      resolutions which are not adopted in conformity with applicable law or our
      by-laws may be challenged (with certain limitations and exceptions) within
      ninety days by absent, dissenting or abstaining shareholders representing
      individually or in the aggregate at least 5% of our share capital (as well
      as by
      our board of directors or our board of statutory auditors). Shareholders not
      reaching this threshold or shareholders not entitled to vote at our meetings
      may
      only claim damages deriving from the resolution.




Dissenting
      or absent shareholders may withdraw from the company as a result of
      shareholders’ resolutions approving, among others things, material modifications
      of our purpose or of the voting rights of our ordinary shares, our
      transformation from a share corporation into a different legal entity or the
      transfer of our registered seat outside Italy. In such a case, our other
      shareholders would have a pre-emptive right to purchase the shares of the
      withdrawing shareholder. Should no shareholder exercise that pre-emptive right,
      the shares must be offered to third parties or, in the absence of any third
      party wishing to buy them, they will be purchased by us by using the available
      reserves. In the event no reserve is available, our capital must be reduced
      accordingly. According to the 2003 corporate law reform, any repurchase of
      such
      shares by us must be on terms authorized by our board of directors, upon
      consultation with our board of statutory auditors and our external auditor,
      having regard to our net assets value, our prospective earnings and the market
      value of our ordinary shares, if any. Under the 2003 corporate law reform,
      we
      may set forth different criteria in our bylaws for the consideration to be
      paid
      to withdrawing shareholders. We have not done so as of the date of this annual
      report.




Each
      shareholder may bring to the attention of the board of statutory auditors facts
      or acts which such shareholder deems wrongful. If such shareholders represent
      more than 5% of our share capital, our board of statutory auditors must
      investigate without delay and report its findings and recommendations to our
      shareholders’ meeting. Shareholders representing more than 10% of our share
      capital have the right to report to the competent court serious breaches of
      the
      duties of the directors which may be prejudicial to us or to our subsidiaries.
      In addition, shareholders representing at least 20% of our share capital may
      commence derivative suits before the competent court against our directors,
      statutory auditors and general managers. We may waive or settle the suit unless
      shareholders holding at least 20% of the shares vote against such waiver or
      settlement. We will reimburse the legal costs of such action in the event that
      the claim of such shareholders is successful and the court does not award such
      costs against the relevant directors, statutory auditors or general managers.




*Liability
      for mismanagement of subsidiaries*




Pursuant
      to the 2003 corporate law reform, if we, acting in our own interest or the
      interest of third parties, mismanage a company that we control, we are liable
      to
      that company’s shareholders and creditors for ensuing damages. That liability is
      excluded if the ensuing damage is fully eliminated, including through subsequent
      transactions, or the damage is effectively offset by the global benefits
      deriving in general to the company from the continuing exercise of such
      direction and coordination powers. We are presumed to have control over, among
      other companies, any subsidiary whose financial statements are consolidated
      into
      ours. Since we currently have no subsidiaries, this law does not apply to us
      at
      this time.




**Limitation
      of Liability and Indemnification Matters**




Insofar
      as indemnification for liabilities arising under Securities Act of 1933, as
      amended, or the Securities Act, may be permitted to directors, officers or
      persons controlling our company under the foregoing provisions, we have been
      informed that in the opinion of the Securities and Exchange Commission such
      indemnification is against public policy as expressed in the Securities Act
      and
      is therefore unenforceable.




**The
      Nasdaq National Market**




Our
      ADSs
      are listed on The Nasdaq National Market under the trading symbol
“GENT.”





**Comparison
      of Italian and Delaware Corporate Laws**




WE
      ARE
      GOVERNED BY THE CORPORATE LAWS IN ITALY, WHICH ARE IN SOME CASES LESS FAVORABLE
      TO SHAREHOLDERS THEN THE CORPORATE LAWS IN DELAWARE, UNITED STATES.




The
      following is a summary of material differences between the Delaware General
      Corporate Law and the laws of Italy.




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Mergers
      and other extraordinary corporate transactions




Under
      Delaware law, a merger or consolidation requires the approval of a majority
      of
      the votes cast by the holders of shares entitled to vote in person or by proxy
      and if any class or series is entitled to vote thereon as a class, the
      affirmative vote of a majority of the shares within each class or series
      entitled to vote as a class in person or by proxy, unless the certificate of
      incorporation requires a greater vote. The sale, lease, exchange or other
      disposition of all, or substantially all, the property and assets, of a Delaware
      corporation requires a majority vote unless the certificate of incorporation
      requires a greater vote. Under Delaware law, the dissolution of a corporation
      requires a majority vote unless the certificate of incorporation requires a
      greater vote.




Under
      Italian law, a merger or consolidation requires the approval of a majority
      of
      the votes cast by the shareholders entitled to vote in person or by proxy at
      an
      extraordinary shareholders’ meeting. Our bylaws designate power to approve
      mergers of wholly-owned subsidiaries and subsidiaries of which we own at least
      90% to our board of directors, although our shareholders may overrule our board
      of directors.




*Amendments
      to charter documents*




Under
      Delaware law, charter documents are composed of two documents: a certificate
      of
      incorporation and bylaws. An amendment to the certificate of incorporation
      ordinarily requires a majority vote (unless the certificate of incorporation
      requires a greater vote). If a class or series is entitled separately to vote
      on
      an amendment, its majority vote (unless the certificate of incorporation
      requires a greater vote), separately calculated, is necessary to approve the
      amendment. In addition, under Delaware law, the holders of outstanding shares of
      a class or series are entitled to vote as a class upon a proposed amendment
      by a
      majority vote (unless the certificate of incorporation requires a greater vote),
      whether or not entitled to vote thereon by the provisions of a company’s
      certificate of incorporation, if the amendment would have certain effects
      identified in Delaware law.




Under
      Delaware law, directors of a corporation may adopt, amend or repeal the
      corporation’s bylaws, unless the certificate of incorporation reserves the power
      exclusively to the shareholders, or the shareholders, in amending, repealing
      or
      adopting a particular bylaw, expressly provide that the board of directors
      may
      not amend or repeal that bylaw. Unless the certificate of incorporation or
      a
      bylaw adopted by the shareholders provides otherwise, a corporation’s
      shareholders may amend, repeal or adopt the corporation’s bylaws even though the
      bylaws may also be amended, repealed or adopted by its directors.




Under
      Italian law, the charter documents are composed of articles of association
      and
      bylaws. An amendment to these documents requires the approval of a majority
      of
      the votes cast by the shareholders entitled to vote in person or by proxy at
      an
      extraordinary shareholders’ meeting, except that certain extraordinary actions,
      such as change in our purpose, liquidation or issuance of preferred shares
      and
      others, only require the approval of more than one-third of our outstanding
      shares for both first and second call.




*Naming
      of companies*




Under
      Delaware law a company shall use one of these same endings or others, including
      “association”, “company”, “corporation”, “club”, “foundation”, “fund”,
“incorporated,” “institute”, “society”, “union”, “syndicate” or “limited” (or
      abbreviations thereof, with or without punctuation), or words (or abbreviations
      thereof, with or without punctuation) of like import of foreign countries or
      jurisdictions (provided they are written in roman characters or letters).




Under
      Italian law, the name of a corporation must end in “S.p.A.” or “Societá per
      Azioni.”




*Capital*




Delaware
      law permits companies to be incorporated with par value shares, no par value
      shares or a combination of such. If a Delaware company issues par value shares
      and receives an amount in excess of the par value, the directors may attribute
      a
      portion of the excess as “capital.” If a Delaware company issues no par value
      shares, the directors may attribute a portion of the amount paid as “capital.”




Italian
      law permits companies to be incorporated with par value shares, no par value
      shares or a combination of such. If an Italian company issues par value shares
      and receives an amount in excess of the par value, the par value is attributed
      as “capital” and the excess is attributed to a “premium reserve,” which is part
      of shareholders’ equity. If an Italian company issues no par value shares, the
      entire amount is attributed as “capital.”




*Franchise
      tax*




Delaware
      levies a franchise tax based on authorized capital. Italian law has no such
      tax.




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Liability
      of shareholders




The
      liability of shareholders of a Delaware company is limited to the amount paid
      for their shares. The liability of shareholders of a Italian company is also
      limited to the amount paid for their shares.




*Quorum
      of shareholders*




Under
      Delaware law, with respect to any matter, a quorum shall be present at a meeting
      of shareholders if the holders of a majority of the shares entitled to vote
      are
      represented at the meeting in person or by proxy, unless otherwise provided
      in
      the certificate of incorporation. Where a separate vote by a class or series
      or
      classes or series is required, a quorum shall be present at a meeting of
      shareholders if the holders of a majority of the shares entitled to vote are
      represented at the meeting in person or by proxy, unless otherwise provided
      in
      the certificate of incorporation.




Under
      Italian law, a quorum shall be present at an ordinary meeting of shareholders
      on
      first call if the holders of 50% of the outstanding ordinary shares are
      represented at the meeting in person or by proxy, but there is no quorum
      requirement on second call. A quorum shall be present at an extraordinary
      meeting of shareholders on first call if the holders of a majority of the
      outstanding ordinary shares are represented at the meeting in person or by
      proxy
      and if the holders of more than one-third of the outstanding shares are
      represented at the meeting in person or proxy on second call.




*Actions
      without a meeting-shareholders*




Under
      Delaware law, shareholders may take action without a meeting if a consent in
      writing is signed by the shareholders having the minimum number of votes that
      would be necessary to take such action at a meeting, unless the certificate
      of
      incorporation provides otherwise.




Under
      Italian law, shareholders may not act without a meeting.




*Special/extraordinary
      meetings*




Under
      Delaware law, special meetings of shareholders may be called by the board of
      directors or by such person or persons as may be authorized by the certificate
      of incorporation or the bylaws.




Under
      Italian law, an extraordinary shareholders’ meeting may be called by our board
      of directors and must be called if requested by holders of at least 10% of
      the
      issued shares. Shareholders are not entitled to request that a meeting of
      shareholders be convened to vote on issues which as a matter of law shall be
      resolved upon the basis of a proposal, plan or report by our board of directors.
      If the shareholders’ meeting is not called despite the request by shareholders
      and such refusal is unjustified, a competent court may call the meeting.




*Director
      qualifications*




Under
      Delaware law, directors need not be residents of Delaware or shareholders of
      the
      corporation unless the certificate of incorporation or bylaws so require. The
      certificate of incorporation or bylaws may prescribe other qualifications for
      directors.




Under
      Italian law, the only requirement for directors is that they have not been
      deemed “legally incompetent” to be a director under Italian law. “Legal
      incompetence” is determined by a competent court and can be determined for
      reasons such as lack of mental capacity, physical incapability, emotional
      instability, bankruptcy, certain criminal convictions or drug or alcohol
      addiction.




*Election
      of directors*




Under
      Delaware law, unless otherwise provided in the certificate of incorporation,
      shareholders are not entitled to cumulative voting in the election of directors.
      Absent such provision, the directors of a corporation are elected by a plurality
      of the votes cast by the holders of shares entitled to vote in person or by
      proxy at a meeting of shareholders at which a quorum is present.




Under
      Italian law, shareholders are not entitled to cumulative voting in the election
      of directors. The directors of a corporation are elected by a majority of the
      votes cast by the holders of shares entitled to vote in person or by proxy
      at an
      ordinary meeting of shareholders at which a quorum is present.




*Actions
      without a meeting - directors*




Under
      Delaware law, any action required or permitted to be taken at any meeting of
      the
      board of directors may be taken without a meeting if all members of the board
      consent to it in writing or by electronic transmission, and the writing or
      electronic transmission is filed with the minutes of proceedings of the board
      unless otherwise restricted by the certificate of incorporation or bylaws.




Under
      Italian law, directors may not act without a meeting.




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Removal
      of directors




Under
      Delaware law, one or more or all the directors of a corporation may be removed
      for cause or, unless provided in the certificate of incorporation, removed
      without cause by the shareholders by the affirmative vote of the majority of
      votes cast by the holders of shares entitled to vote thereon, subject to certain
      exceptions.




Under
      Italian law, directors may be removed from office at any time by the vote of
      shareholders at an ordinary shareholders’ meeting although, if removed in
      circumstances where there was no just cause, such directors may have a claim
      for
      damages against us. These damages may include, but are not limited to,
      compensation that would otherwise have been paid to the director for the
      remainder of their term and damage to their reputation. Our board of directors
      must appoint substitute directors to fill vacancies arising from removals,
      subject to the approval of the board of statutory auditors, to serve until
      the
      next ordinary shareholders’ meeting. If at any time more than half of the
      members of our board of directors are removed or otherwise cease to be
      directors, the board of directors in its entirety ceases to be in office and
      our
      board of statutory auditors must promptly call an ordinary shareholders’ meeting
      to appoint new directors.




*Location
      of directors meetings*




Delaware
      law provides that, unless otherwise restricted by the certificate of
      incorporation or bylaws, the board may hold its meetings outside of the State
      of
      Delaware. Under Italian law and our bylaws, meetings of our board of directors
      may be held in person, or by audio-conference or tele-conference, in any member
      state of the European Union or in the United States.




*Limitation
      of liability and indemnification*




Delaware
      law requires directors and members of any committee designated by the board
      of
      directors to discharge their duties in good faith and with that degree of
      diligence, care and skill which ordinary prudent people would exercise under
      similar circumstances and positions. Delaware law permits a corporation to
      set
      limits on the extent of a director’s liability. Italian law requires directors
      and members of any committee designated by the board of directors to discharge
      their duties in good faith and with that degree of diligence required by the
      nature of their office and their specific competence. If we cannot repay our
      creditors, and a court determines that our directors did not perform their
      duties regarding the preservation of our assets, the court may find our
      directors liable to our creditors. Italian law permits a corporation to set
      limits on the extent of a director’s liability. We intend to enter into
      indemnification agreements with our directors. We have already agreed to
      indemnify our directors for any tax penalties inflicted upon, among other
      people, our directors who, when acting on our behalf and in our interest, breach
      or cause breaches of tax laws unintentionally, except in the case of fraud,
      and
      to consider, on a case by case basis, waiving our right of recourse against
      directors who breach tax laws that result in monetary penalties inflicted on
      us.




*Dividends*




Delaware
      law provides that the board of directors of a corporation may authorize and
      the
      corporation may make distributions subject to any restrictions in its
      certificate of incorporation. However, Delaware law provides that distributions
      may not be made if, after giving effect to the distribution, the corporation
      would not be able to pay its debts as they become due in the usual course of
      its
      business or total assets would be less than total liabilities.




Under
      Italian law, our payment of any annual dividend must be proposed by our board
      of
      directors and is subject to the approval of our shareholders at the annual
      ordinary shareholders’ meeting. Before dividends may be paid out of our
      unconsolidated net income in any year, we must allocate an amount equal to
      5% of
      the net income to our legal reserve until such reserve is at least equal to
      20%
      of the aggregate par value of our issued shares, which we call our “capital.” If
      our capital is reduced as a result of accumulated losses, we may not pay
      dividends until the capital is reconstituted or reduced by the amount of such
      losses. We may pay dividends out of available retained earnings from prior
      years, provided that after such payment, we will have a legal reserve at least
      equal to the legally required minimum of 20% of the capital. We may not approve
      or pay dividends until this minimum is met. If the minimum is met, the board
      of
      directors proposes the issuance of a dividend and the shareholders’ resolution
      approves that issuance, the shareholders’ resolution will specify the manner and
      the date for their payment. Any dividends which shareholders do not collect
      within five years of the date on which they become payable will be forfeited
      by
      those shareholders and we will keep the money. The board of directors may not
      approve interim dividends at times between our annual ordinary shareholders’
meetings.




*Return
      of capital*




Delaware
      law provides that corporations may return capital by dividend, redemption or
      repurchase subject to certain solvency tests. Shareholder approval is not
      required for these transactions so long as the corporation meets the solvency
      tests.




Under
      Italian law, we are permitted to purchase our outstanding shares, subject to
      certain conditions and limitations provided for by Italian law. We may only
      purchase the shares out of profits available for dividends or out of
      distributable reserves, in each case as appearing on the latest
      shareholder-approved financial statements. Further, we may only repurchase
      fully
      paid-in shares. Such purchases must be authorized by our shareholders by vote
      at
      an ordinary shareholders’ meeting. The




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number
      of
      shares to be acquired, together with any shares previously acquired by us or
      any
      of our subsidiaries may not (except in limited circumstances) exceed in
      aggregate 10% of the total number of shares then issued and the aggregate
      purchase price of such shares may not exceed the earnings reserve specifically
      approved by shareholders. Shares held in excess of such 10% limit must be sold
      within one year of the date of purchase. Similar limitations will apply with
      respect to purchases of our ordinary shares by any subsidiaries we may create
      in
      the future.




A
      corresponding reserve equal to the purchase price of such shares must be created
      in the balance sheet, and such reserve is not available for distribution, unless
      such shares are sold or cancelled. Shares purchased and held by us may be resold
      only pursuant to a resolution of our shareholders adopted at an ordinary
      shareholders’ meeting. The voting rights attaching to the shares held by us or
      our subsidiaries cannot be exercised, but the shares can be counted for quorum
      purposes in shareholders’ meetings. Dividends and other rights, including
      pre-emptive rights, attaching to such shares will accrue to the benefit of
      other
      shareholders.




*Officers*




Under
      Delaware law, a corporation is required to have such officers as are required
      to
      sign instruments to be filed with the Secretary of State and stock certificates.
      It is necessary that the corporation have at least two officers to comply with
      this requirement. The corporation has complete freedom to designate its
      executives by whatever names it wishes and to allocate the managerial power
      delegated to executives as the corporation may wish. Any number of offices
      may
      be held by the same person unless otherwise provided by the certificate of
      incorporation or the by-laws. Officers may be chosen in any way and by any
      person or body if the by-laws or a resolution of the governing body so
      specifies.




Under
      Italian law, there are no requirements for any specific numbers or titles of
      officers.




*Share
      certificates*




Under
      Delaware law, the shares of a corporation shall be represented by certificates,
      provided that the board of directors of the corporation may provide by
      resolution or resolutions that some or all of any or all classes or series
      of
      its stock shall be uncertified stock. However, existing shareholders and future
      shareholders are able to obtain a stock certificate signed by or in the name
      of
      the corporation by the chairman or vice-chairman of the board of directors
      or
      the president or vice-president, and by the treasurer or an assistant treasurer,
      or the secretary or an assistant secretary of such corporation if they desire.
      The terms governing preferred stock must be expressed “in clear language” in the
      certificate of incorporation (or by a separate resolution authorized by the
      charter).




Under
      Italian law, the shares of a corporation may be issued in either registered
      or
      certificated form. Our bylaws provide that our ordinary shares are not
      certificated. Rather, they are held through various participants, primarily
      institutions, on Monte Titoli’s system and registered by book-entry form on our
      shareholders book.




*Preemptive
      rights*




Under
      Delaware law, shareholders do not possess preemptive rights as to the issuance
      of additional securities by the corporation, unless the certificate of
      incorporation provide otherwise.




Under
      Italian law, holders of outstanding ordinary shares and convertible debentures
      are entitled to subscribe for issuance of ordinary shares or convertible
      debentures in proportion to their holdings at the time that the shareholders
      authorize the capital increase for those issuances, unless those issuances
      are
      for non-cash considerations. The preemptive rights may be waived or limited
      by
      shareholders’ resolution adopted by the affirmative vote of holders of more than
      50 percent of the ordinary shares at an extraordinary meeting of
      shareholders and such waiver or limitation is in the interest of our company.




*Liquidation
      rights generally*




Under
      Delaware law, shareholders are entitled to share ratably in the distribution
      of
      assets upon the dissolution of their corporation. Preferred shareholders
      typically do not participate in the distribution of assets of a dissolved
      corporation beyond their established contractual preferences. Once the rights
      of
      preferred shareholders have been fully satisfied, holders of common stock are
      entitled to the distribution of any remaining assets.




Under
      Italian law, and subject to the satisfaction of the claims of all creditors,
      our
      shareholders are entitled to a distribution in liquidation that is equal to
      the
      par value of their shares (to the extent available out of our net assets).
      Preferred shareholders and holders of “participating certificates” typically do
      not participate in the distribution of assets of a dissolved corporation beyond
      their established contractual preferences. Once the rights of preferred
      shareholders and holders of participating certificates have been fully
      satisfied, holders of ordinary shares are entitled to the distribution of any
      remaining assets.




*Shareholder
      derivative suits*




Under
      Delaware law, a derivative suit may be brought only if the plaintiff was a
      record or beneficial owner of shares at the time of the transaction of which
      he
      or she complains, and the initial pleading in the suit states that the
      ownership




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requirement
      is satisfied, and with particularity, the efforts of the plaintiff to have
      the
      suit brought for the corporation by the board of directors, or the reasons
      for
      not making such efforts. The court may require the plaintiff to give security
      for the expenses incurred or expected to be incurred by the defendants. The
      court may also require the plaintiff to pay expenses to the defendants if the
      court finds, upon final judgment for the defendants, that the suit was brought
      without reasonable cause.




Under
      Italian law, a shareholder’s name must be entered in the shareholder’s register
      in order to establish his rights as a shareholder against us. Each shareholder
      may bring to the attention of the board of statutory auditors facts or acts
      which such shareholder deems wrongful. If such shareholders represent more
      than
      5% of our share capital, our board of statutory auditors must investigate
      without delay and report its findings and recommendations to our shareholders’
meeting. Shareholders representing more than 10% of our share capital have
      the
      right to report to the competent court serious breaches of the duties of the
      directors which may be prejudicial to us or to our subsidiaries. In addition,
      shareholders representing at least 20% of our share capital may commence
      derivative suits before the competent court against our directors, statutory
      auditors and general managers. We may waive or settle the suit unless
      shareholders holding at least 20% of the shares vote against such waiver or
      settlement. We will reimburse the legal costs of such action in the event that
      the claim of such shareholders is successful and the court does not award such
      costs against the relevant directors, statutory auditors or general managers.




*Dissenters’
      rights*




Any
      shareholder of a Delaware corporation has the right to dissent from any plan
      of
      merger or consolidation to which the corporation is a party, provided that
      unless the certificate of incorporation otherwise provides, a shareholder shall
      not have the right to dissent from any plan of merger or consolidation with
      respect to shares of a class or series which is listed on a national securities
      exchange or is held of record by not less than 2,000 holders on the record
      date
      fixed to determine the shareholders entitled to vote upon the plan of merger
      or
      consolidation. A dissenting shareholder has a right of appraisal of its shares.




Under
      Italian law, shareholders’ resolutions which are not adopted in conformity with
      applicable law or our by-laws may be challenged (with certain limitations and
      exceptions) within ninety days by absent, dissenting or abstaining shareholders
      representing individually or in the aggregate at least 5% of our share capital
      (as well as by our board of directors or our board of statutory auditors).
      Shareholders not reaching this threshold or shareholders not entitled to vote
      at
      our meetings may only claim damages deriving from the resolution.




Dissenting
      or absent shareholders may withdraw from the company as a result of
      shareholders’ resolutions approving, among others things, material modifications
      of our purpose or of the voting rights of our ordinary shares, our
      transformation from a share corporation into a different legal entity or the
      transfer of our registered office outside Italy. In such a case, our other
      shareholders would have a pre-emptive right to purchase the shares of the
      withdrawing shareholder. Should no shareholder exercise that pre-emptive right,
      the shares must be offered to third parties or, in the absence of any third
      party wishing to buy them, they will be purchased by us by using the available
      reserves. In the event no reserve is available, our capital must be reduced
      accordingly. According to the 2003 corporate law reform, any repurchase of
      such
      shares by us must be on terms authorized by our board of directors, upon
      consultation with our board of statutory auditors and our external auditor,
      having regard to our net assets value, our prospective earnings and the market
      value of our ordinary shares, if any. Under 2003 corporate law reform, we may
      set forth different criteria in our bylaws for the consideration to be paid
      to
      withdrawing shareholders in such withdrawal. We have not done so as of the
      date
      of this annual report.




*Interested
      shareholder transactions*




Delaware
      corporations are subject to the State of Delaware’s “business combination”
statute. In general, that statute prohibits a publicly-traded corporation from
      engaging in various “business combination” transactions with any “interested
      stockholder” for a period of three years after the time that the shareholder
      became an interested stockholder, unless the business combination is approved
      by
      the board prior to the time the shareholder became an interested stockholder,
      the interested stockholder acquired 85% or more of the outstanding shares in
      a
      transaction in which it became an interested stockholder, or the business
      combination is approved by the board and by holders of two-thirds of the shares
      not held by the interested stockholder. A “business combination” includes
      mergers, assets sales and other transactions resulting in financial benefit
      to a
      shareholder. An “interested stockholder” is a person who, together with
      affiliates and associates, owns 15% or more of a corporation’s voting stock.




Under
      Italian law, directors having any interest in a proposed transaction must
      disclose their interest to the board and to the statutory auditors, even if
      such
      interest is not in conflict with our interest in the same transaction. The
      interested director is not required to abstain from voting on the resolution
      approving the transaction, but the resolution must state explicitly the reasons
      for, and the benefit to us of, the approved transaction. If these provisions
      are
      not complied with, or if the transaction would not have been approved without
      the vote of the interested director, the resolution may be challenged by a
      director or by our board of statutory auditors if the approved transaction
      may
      be prejudicial to us. A legal representative of our company having any interest
      in a proposed transaction that he or she has authority to approve must solicit
      prior board approval of such




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transaction.
      The interested director may be held liable for damages to us resulting from
      a
      resolution adopted in breach of the above rules. Finally, directors may be
      held
      liable if they illicitly profit from insider information or corporate
      opportunities.




*Inspection
      of books and records*




Under
      Delaware law, upon the written request of any shareholder, the corporation
      shall
      mail to such shareholder its balance sheet as at the end of the preceding fiscal
      year, and its profits and loss and surplus statements for such fiscal year.
      Inspection rights are extended to any person who beneficially owns stock through
      either a voting trustee or nominee who holds the stock of record on behalf
      of
      such person. Where the shareholder is other than a record holder, such person
      must state under oath the person’s status as a shareholder and produce
      documentary evidence of beneficial ownership. Any shareholder is entitled to
      examine a corporation’s relevant books and records for any proper purpose,
      namely, a purpose reasonably related to such person’s interest as a shareholder,
      upon written demand stating the purpose thereof.




Under
      Italian law, our shareholders may review the report of the board of directors
      on
      the management of our company and the report of our statutory auditors and
      our
      accounting firm on our financial statements during the fifteen days prior to
      the
      ordinary shareholders’ meeting to approve those financial statements. The report
      remains on file at our offices and may be reviewed after the annual
      shareholders’ meeting as well; it is filed with the Companies’ Registry of Como
      for review by the general public. Moreover, any shareholder is entitled to
      examine the shareholders’ ledger and the ledger of the minutes of the
      shareholders’ meeting, at any time.




*Registered
      office*




Delaware
      law requires a “registered office” in Delaware. Italian law requires a
      registered office in Italy.




*Issuance
      of shares*




Under
      Delaware law, directors have the authority to issue shares of common stock.
      If
      the certificate of incorporation so provides, they may also designate the terms
      of preferred stock and issue shares of preferred stock.




Under
      Italian law, issuances of any shares, ordinary or otherwise, require an
      amendment to our bylaws to increase our capital, which must be recommended
      to
      our shareholders by our board of directors and approved by a vote of our
      shareholders at an extraordinary meeting of shareholders. Our shareholders
      may
      not authorize the issuance of shares for a period of more than five years from
      the date of the extraordinary shareholders’ meeting. Once our shareholders have
      authorized the issuance of securities, those securities must be paid for before
      the newly issued shares may be purchased. The board would also need to
      recommend, and the shareholders would need to approve by vote at the
      extraordinary meeting, specific terms of the securities. Also, our shareholders
      can authorize the board of directors to increase our capital, but the board
      may
      exercise such power for only five years. If the authorized capital is not issued
      by the end of those five years, the authorized capital expires, and our board
      and shareholders would need to meet again to authorize a new capital increase.
      Our shareholders authorized our board of directors to increase our capital
      by up
      to €90 million of par value for ordinary shares and €10 million for ordinary
      shares issuable upon conversion of convertible bonds on April 28, 2006. Italian
      law also provides that if the shareholders vote to increase our capital,
      dissenting, abstaining or absent shareholders representing more than 5% of
      the
      outstanding shares of our company may, for a period of 90 days following the
      filing of the shareholders’ approval with the Registry of Companies, challenge
      such capital increase if the increase was not in compliance with Italian law.
      In
      certain cases (if, for example, a shareholders’ meeting was not called), any
      interested person may challenge the capital increase for a period of 180 days
      following the filing of the shareholders’ approval with the Registry of
      Companies. Finally, once our shareholders authorize a capital increase, we
      must
      issue all of those authorized shares before the shareholders may authorize
      a new
      capital increase, unless the shareholders vote to cancel the previously
      authorized shares.




*Debt-equity
      ratio*




Under
      Delaware law, a corporation is not restricted as to the amount of debt
      securities that it may issue.




Under
      Italian law, we may issue debt securities for an amount not exceeding twice
      the
      amount of the sum of the aggregate par value of our ordinary shares (which
      we
      call our capital), our legal reserve and any other disposable reserves appearing
      on our latest Italian balance sheet approved by our shareholders. The legal
      reserve is a reserve to which we allocate 5% of our net income each year until
      it equals at least 20% of our capital. One of the other reserves that we
      maintain on our balance sheet is a “share premium reserve”, meaning amounts paid
      for our ordinary shares in excess of the capital. Until our outstanding debt
      securities are repaid in full, we may not voluntarily reduce our capital or
      distribute our reserves (such as by declaring dividends) in the event the
      aggregate of the capital and reserves, following such reduction of capital
      and/or distribution of reserves, is less than half of the outstanding amount
      of
      the debt securities. If our equity is reduced by losses or otherwise such that
      the amount of the outstanding debt securities is more than twice the amount
      of
      our equity, we cannot distribute profits to our shareholders until the ratio
      between the amount of our debt securities and our capital and reserves is
      restored. Moreover, some legal scholars are of the opinion that in such a case
      the ratio must be restored by a recapitalization of our company. If our equity
      is reduced, we could recapitalize by means of issuing new shares or having
      our
      current shareholders




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contribute
      additional capital to our company, although there can be no assurance that
      we
      would be able to find purchasers for new shares or that any of our current
      shareholders would be willing to contribute additional capital. These laws
      regarding the ratio of debt securities to capital and reserves do not apply
      to
      issuances of debt securities to professional investors (as defined by Italian
      law). However, in such a case, should the professional investors transfer such
      debt securities to third parties not qualified as professional investors, the
      former remain liable to us for the payment of such securities.




*Reduction
      of equity by losses*




Under
      Delaware law, a corporation’s shareholders’ equity is reduced by losses, and may
      become negative.




Italian
      law requires us to reduce our shareholders’ equity in certain situations. Our
      shareholders’ equity has three main components: capital, legal reserves and
      other shareholders’ equity (such as any premium paid for the shares over the par
      value and any retained earnings). We apply our losses from operations against
      our shareholders’ equity other than legal reserves and capital first. If
      additional losses remain, or if we have no shareholders’ equity other than legal
      reserves and capital, and the additional losses are more than one-third of
      the
      amount of our legal reserves and capital, our board of directors must call
      a
      shareholder’s meeting as soon as possible. The shareholders must vote to elect
      to either reduce the legal reserves and capital by the amount of the remaining
      losses, or to carry the losses forward for up to one year. If the shareholders
      vote to elect to carry the losses forward up to one year, and at the end of
      the
      year, the losses are still more than one-third of the amount of the legal
      reserves and capital, then we must reduce our legal reserves and capital by
      the
      amount of the losses. However, as an S.p.A., we must maintain capital of at
      least €120 thousand. If the amount of the losses would reduce our capital
      to less than €120 thousand, then:




·
            we
                would need to increase our capital, which we could do by issuing
                new
                shares or having our shareholders contribute additional capital to
                our
                company, although there can be no assurance that we would be able
                to find
                purchasers for new shares or that any of our current shareholders
                would be
                willing to contribute additional capital; or




·
            our
                shareholders would need to convert our company to an “S.r.l”, a private
                limited liability company, which has a lower capital requirement
                of
                €10 thousand; or




·
            if
                neither of these options were taken, our shareholders or, if they
                do not
                so resolve, a court of competent jurisdiction, could appoint a receivor
                to
                liquidate our company.




***Comparison
      of our Corporate Governance Procedures with Nasdaq’s Corporate Governance
      Requirements***




The
      Nasdaq Marketplace Rules set forth the corporate governance requirements of
      companies listed on The Nasdaq Stock Market. Subsection (a)(1) of Marketplace
      Rule 4350 provides that a foreign private issuer may follow its home country
      practices in lieu of the corporate governance requirements of The Nasdaq Stock
      Market, under certain circumstances. Pursuant to this Marketplace Rule
      4350(a)(1), we follow Italian practices in lieu of two of The Nasdaq Stock
      Market’s corporate governance requirements pertaining to: (1) quorum
      requirements and (2) our audit committee.




*Quorum
      requirements.* **




*The
      Nasdaq Stock Market:* Marketplace
      Rule 4350(f) sets forth The Nasdaq Stock Market’s quorum requirement for
      shareholder meetings, stating that “in no case shall such quorum be less than 33
      1/3% of the outstanding shares of the company’s common voting stock.”




*Italian
      law:* In
      accordance with Italian law, our shareholders are entitled to attend and vote
      at
      regular and special shareholders’ meetings. Shareholders are notified of two
      meeting dates for a regular or special shareholders’ meeting (first and second
“calls”). The quorum for a regular meeting of shareholders on the first call is
      50% of the outstanding ordinary shares, while on a second call there is no
      quorum requirement. The quorum for a special meeting of shareholders is a
      majority of the outstanding ordinary shares on the first call and more than
      one-third of the outstanding shares on a second call.




*Appointment,
      Compensation, Retention and Oversight of Independent
      Accountants.* **




*The
      Nasdaq Stock Market:* Rule
      4350(d)(3) of The Nasdaq Marketplace Rules requires compliance with Rule 10A-3
      of the Securities Exchange Act of 1934, as amended, which requires that:




·
            a
                company’s audit committee be directly responsible for the appointment,
                compensation, retention and oversight of the work of any registered
                public
                accounting firm engaged (including resolution of disagreements between
                management and the auditor regarding financial reporting) for the
                purpose
                of preparing or issuing an audit report or performing other audit,
                review
                or attest services for the company;




·
            each
                such registered public accounting firm must report directly to the
                audit
                committee;




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·
            that
                the audit committee establish procedures for the receipt, retention
                and
                treatment of complaints regarding accounting, internal accounting
                controls
                or auditing matters;




·
            that
                the audit committee have authority to engage independent counsel
                and other
                advisors;




·
            that
                the audit committee determine compensation for the independent
                accountants; and




·
            that
                the audit committee determine compensation for any advisors to the
                audit
                committee, as well as its ordinary administrative
                expenses.




*Italian
      law:* Under
      Italian law, our shareholders, not the audit committee, must be the party that
      appoints, terminates and determines the compensation for our independent
      accountants, although our audit committee does make recommendations on such
      matters to our board of directors, which in turn makes recommendations to our
      shareholders. As a result, our audit committee is not able to perform all of
      the
      duties required by Rule 10A-3 of the Securities Exchange Act of 1934, as
      amended. Our audit committee directly oversees our independent accountants,
      including the resolution of disagreements between management and the independent
      accountants. Under Italian law, our board of statutory auditors also oversees
      our independent accountants with respect to our Italian GAAP financial
      statements. Rule 10A-3 provides that foreign private issuers with a board
      of statutory auditors established in accordance with local law or listing
      requirements and meeting specified requirements with regard to independence
      and
      responsibilities (including the performance of most of the specific tasks
      assigned to audit committees by the rule, to the extent prohibited by local
      law)
      (“Statutory Auditor Requirements”) are exempt from the audit committee
      requirements established by the rule. Our board of directors has determined
      that, because of the existence and nature of our board of statutory auditors,
      together with the performance of other duties under Rule 10A-3 by our
      shareholders and the performance of the remaining duties by our audit committee,
      we either satisfy Rule 10A-3 or qualify for an exemption provided by
      Rule 10A-3 from the audit committee requirements of
      Rule 10A-3.




**MATERIAL
      CONTRACTS**





**License
      and Distribution Agreements**




On
      December 7, 2001, we entered into a License and Supply Agreement with
      Sigma-Tau Industrie Pharmaceutiche Riunite S.p.A., which later assigned the
      contract to an affiliate, Sigma Tau Pharmaceuticals, Inc., which markets
      drug treatments for rare conditions and diseases. Sigma Tau Industrie
      Pharmaceutiche Riunite S.p.A. and Sigma Tau Pharmaceuticals, Inc. are
      subsidiaries of Sigma Tau Finanziaria S.p.A., an international family of
      pharmaceutical companies. Under this agreement, we have licensed the right
      to
      market defibrotide in North America, Central America and South America to treat
      VOD to Sigma-Tau Pharmaceuticals, Inc. This license expires on the earlier
      of the eighth year of our launch of the product or the expiration of the U.S.
      patent regarding the product, which expires on 2010.




In
      return
      for the license, Sigma-Tau Pharmaceuticals, Inc. agreed to pay us an
      aggregate of $4.9 million, of which it has paid us $4.0 million to
      date. It will owe us an additional $550 thousand within 30 days of the
      end of a Phase III pivotal study, and $350 thousand within 30 days of
      obtaining an FDA New Drug Application or Biologic License Application and other
      approvals necessary for the marketing of defibrotide in the United States.
      We
      will not recognize the amounts due for these performance criteria until the
      performance obligations are fully satisfied. If we unilaterally discontinue
      development of defibrotide to treat VOD (after written notice to Sigma-Tau
      Pharmaceuticals, Inc.) and then resume the development, substantially
      availing our company of the stages previously completed, either independently
      or
      with a third party, within 36 months of the discontinuation, then we will
      be required to promptly reimburse Sigma-Tau Pharmaceuticals, Inc. for the
      amounts received. We do not have any intention to discontinue the development
      of
      this product candidate.




If
      during
      the drug development stages we realize that the activities to bring the product
      to completion would require a material increase of expenditures, either party
      can terminate the agreement. If we or Sigma-Tau Pharmaceuticals, Inc.
      terminates the agreement for that reason and we then resume the development,
      substantially availing our company of the stages previously completed, either
      independently or with a third party, within 36 months of the termination,
      we will be required to promptly reimburse Sigma-Tau Pharmaceuticals, Inc.
      for the amounts received. We are not aware of any factors that would require
      a
      material increase of expenditures for the remaining development
      activities.




Sigma-Tau
      Pharmaceuticals, Inc. must purchase all of its defibrotide for this use
      from us at a price equal to the higher of €50.00 per unit or 31% of its net
      sales of defibrotide, and must also pay us a royalty equal to 7% of its net
      sales of defibrotide. We also granted Sigma-Tau Pharmaceuticals, Inc. an exclusive,
      irrevocable right of first refusal to market defibrotide to prevent VOD, to
      mobilize and increase the number of stem cells available in patients’ and
      donors’ blood for subsequent stem cell transplantation, and in non-intravenous
      forms for these indications, under certain circumstances, in North America,
      Central America and South America.




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On
      October 9, 2002, we entered into a Purchase Agreement with Sirton and
      Axcan, a specialty pharmaceutical company with offices in North America and
      Europe. Under this agreement, we and Sirton sold the rights to develop, make,
      use and sell our formulation of mesalazine in the United States, upon FDA
      approval, and Canada, upon Health Canada approval, to Axcan in consideration
      for
      Axcan paying us:




·
            €170 thousand
                upon execution of the agreement;




·
            €300 thousand
                within 60 days of filing New Drug Application for our formulation of
                mesalazine with the FDA;




·
            €750 thousand
                within 60 days of Axcan’s receipt of marketing approval for our
                formulation of mesalazine in the United States by the FDA; and




·
            4%
                of Axcan’s net sales of the product in the United States and Canada during
                the first ten years of its commercialization.




At
      December 31, 2005, Axcan had paid us an aggregate of €170 thousand. In
      addition to the above amounts, Axcan agreed to pay Sirton an aggregate of
€280 thousand in consideration for certain intellectual property related to
      our formulation of mesalazine transferred by Sirton to Axcan in connection
      with
      the purchase. We and Sirton also granted Axcan a right of first refusal to
      purchase or license the rights to exploit, register, promote or commercialize
      our formulation of mesalazine in territories outside of substantially all
      European countries.




On
      May 17, 2002, we, Sirton (then known as Crinos Industria Farmacobiologica
      S.p.A.), SFS Stada Financial Services Ltd. and Crinos S.p.A. entered into
      an Umbrella Agreement. Under this Umbrella Agreement, Sirton spun off its
      marketing and sales division, including the brand-name “Crinos” to Crinos
      S.p.A., a newly formed subsidiary of Stada Arzneimittel AG. As part of the
      sale,
      we granted Crinos S.p.A. a semi-exclusive license to market defibrotide in
      Italy
      to treat and prevent of vascular disease with risk of thrombosis for no
      consideration. We have the right to grant a second license in Italy but only
      to
      a third party that has been expressly approved by Crinos. This agreement remains
      valid until the later of the expiration of the patent on defibrotide in Italy
      in
      2009, and the date there is no market remaining for defibrotide, as determined
      in good faith by the parties. We also granted Crinos S.p.A. a right of first
      refusal for an exclusive or semi-exclusive license to market defibrotide in
      Italy for additional uses approved in the future, as well as for all uses in
      all
      European countries. Crinos S.p.A. can exercise this right of first refusal
      within 45 days of Gentium sending written notice of an offer to market or
      co-market defibrotide for a new use or in a new European country. As a further
      part of the sale, we granted Crinos S.p.A. a semi-exclusive license to market
      mesalazine in Italy. We have the right to grant a second license in Italy but
      only to a third party that has been expressly approved by Crinos. This agreement
      remains valid until the later of the expiration of the patent on mesalazine
      in
      Italy in 2015, and the date there is no market remaining for mesalazine, as
      determined in good faith by the parties. We also granted Crinos a right of
      first
      refusal for an exclusive or semi-exclusive license to market mesalazine in
      Italy
      for additional uses approved in the future, as well
      as
      for all uses in all other European countries. Crinos can exercise this right
      of
      first refusal free of charge within 45 days of Gentium sending written
      notice of an offer to market or co-market mesalazine for a new therapeutic
      use
      or in a new European country.




On
      July 15, 2004, we entered into a License Agreement with Crinos, pursuant to
      which we granted Crinos a non-exclusive license to use the know-how and the
      patent to market defibrotide under the trademark “Noravid” in Italy for both
      current and future uses as approved by the Italian Ministry of Health. This
      License Agreement is in addition to the license included as part of the Umbrella
      Agreement discussed above. In return for the license, Crinos will pay us a
      3%
      royalty on its net sales of defibrotide in Italy. **** To
      date,
      Crinos has not sold defibrotide under the trademark “Noravid” and thus has not
      paid us any amounts under this License Agreement. Crinos is required to purchase
      the defibrotide exclusively from Sirton (we sell defibrotide to Sirton under
      a
      Supply Agreement). We provide Crinos with the existing technical information,
      know how and scientific assistance which Crinos needs to market, promote, and
      sell defibrotide. The agreement remains valid until the expiration of the patent
      in 2009, but can be extended for renewable three year periods if the parties,
      in
      good faith, determine that defibrotide still has a market life after the patent
      expires.




On
      June 11, 2002, we entered into a License and Supply Agreement with Abbott
      S.p.A., pursuant to which we granted Abbott a semi-exclusive license to use
      the
      know-how and the patent to market our formulation of mesalazine under the
      trademark “Quota” in Italy. We also agreed to transfer our Italian regulatory
      approvals for mesalazine and the trademark “Quota” to Abbott under this
      agreement. In return, Abbott paid us €155 thousand when we signed the
      agreement, and paid us another €155 thousand when we transferred our
      Italian regulatory approvals for mesalazine to them. Abbott is required to
      purchase our formulation of mesalazine exclusively from us. We are required,
      upon Abbott’s request, to purchase the active ingredient used in our formulation
      of mesalazine from Abbott. We provide Abbott with the existing technical
      information, know how and scientific assistance which Abbott needs to market,
      promote, and sell our formulation of mesalazine. The agreement remains valid
      until the later of the expiration of the final patent on our formulation of
      mesalazine in Italy in 2016 or ten years from Abbott’s first third-party sale of
      our formulation of mesalazine (not including quantities distributed solely
      for
      research purposes, clinical trials, samples, or promotions), but is
      automatically renewed for an additional period of the same




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number
      of
      years unless either party gives notice within 180 days of the date the
      agreement would terminate. We also granted Abbott a right of first refusal
      for a
      semi-exclusive license to market additional formulations of mesalazine in Italy.
      Abbott can exercise this right of first refusal free of charge within
      60 days of Gentium sending Abbott written notice of an offer to co-market
      new formulations of mesalazine received by Gentium from a third party.




On
      January 2, 2006 we entered into a Contract to Supply Active Ingredients
      with Sirton, pursuant to which we manufacture urokinase, calcium heparin,
      defibrotide, sulglicotide and glucidamine for Sirton, which Sirton uses to
      produce specialty pharmaceutical products. Sirton also processes and sells
      the
      defibrotide to Crinos. The agreement automatically renews each year unless
      one
      party gives written notice of its intent to terminate the agreement at least
      one
      month prior to the annual termination date. The prices are as follows: €53 per
      unit of urokinase, €2.300 per unit of defibrotide for injection, €660 per unit
      of oral defibrotide, €390 per unit of sulglicotide, and €160 per unit of
      glucidamine. In 2005, we received €3.691 from Sirton under a predecessor
      agreement.




On
      November 11, 2003, we entered into a Supply Agreement with Samil Pharm.
      Co., Ltd., a Korean corporation. Under this agreement, we supply Samil with
      sulglicotide. From January 20, 2004 to June 20, 2005, Samil must
      purchase at least 1,600 kilograms of sulglicotide. From June 20, 2005 to
      June 20, 2006, Samil must purchase at least 2,600 kilograms of
      sulglicotide. From June 20, 2006 to June 20, 2007, Samil must purchase
      at least 3,400 kilograms of sulglicotide. After June 20, 2007, both parties
      will renegotiate quantity and price. In any given period, excess purchases
      by
      Samil may be applied as a reduction of the immediately following period’s
      minimum purchases or as compensation for
      a
      failure to purchase the immediately preceding period’s minimum purchases, at
      Samil’s choice. Samil must submit purchase orders at least 90 days prior to
      a requested delivery date, and the minimum quantity which they can order is
      one
      batch (120 kilograms) or a multiple thereof. The price of the sulglicotide
      was
      originally set at €460/kilogram for between 0 and 2,000 kilograms, €452/kilogram
      for 2,001 to 3,000 kilograms, €440/kilogram for 3,001 to 4,000 kilograms, and
€420/kilogram for 4,001 to 5,000 kilograms. These prices will change based on
      inflation and raw material price increases. As of December 31, 2005, we had
      not
      received any orders for sulglicotide from Samil. Samil informed us that it
      experienced a delay in the launch of its product that uses sulglicotide because
      of further market analyses required to properly position the product into the
      Korean market. In March 2006 we received a purchase order for 490 kg which
      we
      expect to deliver to Samil in June 2006. This agreement expires on June 20,
      2014. The agreement automatically renews for two year periods unless either
      party giving notice of termination at least 180 days before the expiration
      of the initial term of the agreement or any successive two year period.




**Clinical
      Trial Agreements**




On
      February 26, 2004, we entered into a Trial Agreement with the European
      Blood and Marrow Transplantation Group. Under this agreement, the European
      Blood
      and Marrow Transplantation Group is conducting a clinical trial of defibrotide
      to prevent VOD in children after stem cell transplants, in consideration for
      €476 thousand to be paid over five years. Through December 31, 2005, we
      have not made any payments to the European Blood and Marrow Transplantation
      Group. We can terminate the clinical trial and the contract prior to completion
      of the clinical trial, but we would have to make pro-rata payments to the
      European Blood and Marrow Transplantation Group based on then enrolled eligible
      patients.




Effective
      October 24, 2005, we entered into a Services Agreement with MDS Pharma Services
      SpA, an Italian research organization. Under this agreement, MDS will manage
      the
      clinical and regulatory aspects of a portion of our clinical trial of
      defibrotide to prevent VOD in children that we are co-sponsoring with the
      European Blood and Marrow Transplantation Group. The agreement expires upon
      the
      earlier of 48 months after the effective date or completion of the services.
      We
      paid MDS €67 thousand for services provided in 2005 under a predecessor letter
      of intent.




On
      June 14, 2000, Sirton (then known as Crinos Industria Farmacobiologica
      S.p.A.) entered into a Research Agreement with Consorzio Mario Negri Sud. We
      succeeded to Sirton’s interest in this agreement as part of a corporate
      restructuring of the FinSirton companies in 2002. Under this agreement,
      Consorzio was conducting a Phase II/III clinical trial in Europe and Israel
      of
      defibrotide to treat VOD after stem cell transplants. In October, 2005, the
      sponsor cancelled this contract due to a lack of patients being enrolled in
      the
      trial. We do not owe Consorzio any additional amounts in connection with this
      agreement.




On
      March 19, 2004 we entered into a General Consulting Agreement with
      Bradstreet Clinical Research & Associates, Inc., a New
      Jersey-based clinical research organization. Under this agreement, Bradstreet
      provides us with clinical and regulatory consulting services. Bradstreet
      provides estimated project budgets to us to determine the manner in which the
      services are to be provided and the number of hours required to provide the
      services. We pay Bradstreet on an hourly basis after Bradstreet presents us
      with
      monthly invoices and corresponding timesheets. Bradstreet is also entitled
      to
      reimbursement of its reasonable and customary expenses, including travel
      expenses. In 2005, we paid Bradstreet an aggregate of approximately
      $438 thousand. The agreement is effective for an indefinite period of time,
      but either party may terminate the agreement by giving 60 days’ notice to
      the other party.




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On
      April 20, 2004 we entered into a Consulting Agreement with KKS-UKT, GmbH, a
      German clinical research organization. Under this agreement, KKS provided us
      with clinical and regulatory consulting services. KKS provides estimated project
      budgets to us to determine the manner in which the services will be performed.
      This agreement expired on April 20, 2005 and we renewed it for a subsequent
      six month period. In 2005, we paid KKS an aggregate of €15 thousand under
      this agreement.




**Service
      Agreements**




On
      January 2, 2006, we entered into a Service Agreement with FinSirton
      pursuant to which FinSirton supplies us with general management and personnel
      administration services. This agreement is to expire on December 31, 2006.
      The agreement is renewable automatically each year barring cancellation of
      the
      agreement, which requires notice one month prior to expiration. We pay FinSirton
      €950 per employee per year for personnel administration services and
€48 thousand per year for general management services. No other services
      are provided by FinSirton. In 2005, we paid FinSirton €152 thousand under a
      predecessor agreement.




On
      January 2, 2006 we entered into a Service Agreement with Sirton pursuant to
      which Sirton supplies us with a number of business services including quality
      control, analytical assistance for research and development, engineering
      services, general and car rental services, utilities services, and maintenance
      services. This agreement expires on December 31, 2006, but is renewable
      automatically each year barring cancellation of the agreement, which requires
      notice one month prior to expiration. In 2005, we paid Sirton €855 thousand
      under a predecessor agreement.




On
      January 2, 2004, we entered into an Agreement for the Supply of Services
      with Sirton pursuant to which Sirton supplies us with organizational assistance
      in business management by drawing up strategic plans and coordinating our
      internal resources. This agreement expired on December 31, 2004 and it was
      renewed for 2005. The agreement is renewable automatically each year barring
      cancellation of the agreement, which requires notice one month prior to
      expiration. The agreement was not renewed in 2006. In 2004 and 2005, we paid
      Sirton €40 thousand and $54 thousand, respectively, under this
      agreement.




**EXCHANGE
      CONTROLS******




No
      exchange control consent is required in Italy for the transfer to persons
      outside of Italy of dividends or other distributions with respect to, or of
      the
      proceeds from the sale of, shares of an Italian company.





**TAXATION******




**Tax
      Consequences Applicable to US Holders**




The
      following contains a description of the principal United States federal and
      Italian tax consequences of the purchase, ownership and disposition of ADSs
      or
      ordinary shares by a US holder, as defined below. This summary does not purport
      to be a comprehensive description of all of the tax considerations that may
      be
      relevant to a decision to purchase ADSs representing our ordinary shares and
      each potential purchaser is therefore urged to consult its own tax advisor.




In
      particular, this summary deals only with US holders who will hold their ADSs
      as
      a capital asset and does *not* address
      the tax treatment of a US holder (i) who owns ADSs representing 10% or more
      of our voting shares (either directly or through attribution); (ii) who
      holds ADSs in connection with a permanent establishment or fixed base of
      business located in Italy; (iii) who holds ADSs in the ordinary course or
      as an integral part of the holder’s trade or business or as part of a hedging,
      straddle, integrated or conversion transaction; (iv) who is subject to
      special treatment under the US income tax laws (such as securities dealers,
      brokers, traders that elect to mark to market, insurance companies, banks,
      tax-exempt organizations, partnerships and other pass-through entities);
      (v) whose functional currency is not the US dollar; or (vi) who is a
      resident of Italy for purposes of the income tax convention that currently
      is in
      effect between the United States and Italy. In addition, the following
      discussion does not address any aspect of state, local or non-US tax laws (other
      than certain Italian tax laws) or any alternative minimum tax consequences.




The
      summary is based upon tax laws of the United States and Italy and on the
      provisions of the income tax convention between the United States and Italy
      (the
“Income Tax Convention”) in each case as in effect on the date hereof, all of
      which are subject to change (possibly with retroactive effect). We will not
      update this summary to reflect changes in laws and if such a change occurs,
      this
      summary could become inaccurate. In this regard, a new tax treaty to replace
      the
      current income tax convention was signed on August 25, 1999, but has not
      yet been ratified. (This new treaty, if ratified, would not change significantly
      the provisions of the income tax convention that are discussed below.) For
      purposes of these laws and income tax conventions, beneficial owners of ADRs
      representing ADSs should be treated as the beneficial owners of the ordinary
      shares represented by the ADSs. Prospective purchasers of the ADSs are advised
      to consult their own tax advisors as to the tax




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consequences
      of the purchase, ownership and disposition of the ADSs including, in particular,
      state and local tax consequences.




For
      purposes of this section, a US holder means (i) an individual citizen or
      resident of the United States; (ii) a corporation (or other entity taxable
      as a corporation for U.S. federal income tax purposes) organized in or under
      the
      laws of the US or any political subdivision thereof; (iii) an estate the
      income of which is includible in gross income for US federal income tax purposes
      regardless of its source; (iv) a trust if a US court is able to exercise
      primary jurisdiction over the administration of the trust and one or more US
      persons have the authority to control all substantial decisions of the trust;
      and (v) any other person that is subject to US federal income taxation on a
      net income basis in respect of income attributable to its ownership of the
      ADSs.
      A US owner means a US holder that is considered a resident of the United States
      for purposes of the Income Tax Convention and who is not subject to an
      anti-treaty shopping provision.




**Italian
      Taxation of US Holders**




*General.* Under
      Italian law, financial instruments issued by an Italian company are subject
      to
      the same tax regime as shares, provided that their remuneration is entirely
      represented by a participation in the economic results of the issuer. Pursuant
      to Article 10(3) of the Income Tax Convention, the tax regime of dividends
      set
      forth therein applies to income from corporate rights of an Italian company,
      which is subject to the same taxation treatment as income from shares under
      the
      laws of Italy. One interpretation of these laws would be that a beneficial
      owner
      of an ADS should be subject to the same tax regime as a beneficial owner of
      a
      share for purposes of both Italian law and the Income Tax Convention. However,
      no official interpretation has been issued by the Italian tax authorities on
      this subject matter to date.




*Income
      Tax Withholding on Dividends.* We
      do not anticipate making any distributions with respect to our ordinary shares
      in the foreseeable future. However, if we were to make distributions with
      respect to our ordinary shares, we would generally be required under Italian
      law, except as otherwise discussed below, to apply a 27% final withholding
      tax
      on payments made to holders of ADSs who are not residents of Italy for tax
      purposes. Under Italian law, US owners can claim a refund of up to four-ninths
      of the Italian withholding tax withheld on dividends (thereby effectively
      reducing the rate of withholding to 15%) by presenting evidence to the Italian
      tax authorities that income taxes have been fully paid on the dividends in
      the
      country of residence of the US owners in an amount at least equal to the total
      refund claimed. US holders should consult their own tax advisers concerning
      the
      possible availability of this refund, which traditionally has been payable
      only
      after extensive delays.




Under
      the
      Income Tax Convention, dividends paid to US owners will be subject to Italian
      withholding tax at a reduced rate of 15%. However, the amount that we will
      initially make available to the depositary for payment to US owners will reflect
      withholding at the 27% rate. US owners who comply with the certification
      procedures described below may claim a refund of the difference between the
      27%
      rate and the 15% rate (referred to herein as a “treaty refund”). The
      certification procedure will require the US owner (i) to obtain from the US
      Internal Revenue Service (generally, by filing Form 8802) a form of
      certification required by the Italian tax authorities with respect to each
      dividend payment (Form 6166, printed on U.S. Department of Treasury
      stationary), unless a previously filed certification is effective with respect
      to the payment, (ii) to produce a statement whereby the US owner represents
      that it is a US owner that does not maintain a permanent establishment in Italy,
      and (iii) to set forth certain other required information. The time for
      processing requests for certification by the Internal Revenue Service can be
      lengthy. Accordingly, US owners should begin the process of obtaining a
      certification from the Internal Revenue Service as soon as possible after
      receiving instructions from the depositary.




The
      depositary’s instructions will specify certain deadlines for delivering the
      documentation required to obtain a treaty refund, including the certification
      that the US owners must obtain from the US Internal Revenue Service. In the
      case
      of ADSs held by US owners through a broker or other financial intermediary,
      the
      required documentation should be delivered to such financial intermediary for
      transmission to the depositary. In all other cases, US owners should deliver
      the
      required documentation directly to the depositary. We have agreed with the
      depositary that if the required documentation is received by the depositary
      on
      or within 30 days after the dividend payment date and, in our reasonable
      judgment, such documentation satisfies the requirements for a refund of Italian
      withholding taxes under the income tax convention then in effect between the
      United States and Italy, we will (within 45 days after that) pay an amount
      equal to the treaty refund to the depositary for the benefit of the US owners
      entitled thereto.




If
      the
      depositary does not receive a US owner’s required documentation within
      30 days after the dividend payment date, the US owner may for a short grace
      period (specified in the depositary’s instructions) continue to claim an amount
      equal to the treaty refund by delivering the required documentation (either
      through the US owner’s financial intermediary or directly, as the case may be)
      to the depositary. However, after this grace period, the treaty refund must
      be
      claimed directly from the Italian tax authorities rather than through the
      depositary. Expenses and extensive delays have been encountered by US owners
      seeking refunds from the Italian tax authorities.




*Income
      Tax on Capital Gains.* Under
      Italian law, capital gains realized by a person who is not a resident of Italy
      (not having a permanent establishment or fixed base through which carries on
      or
      performs business services in Italy) on the disposal




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of
      a
“qualified” shareholding held as a capital asset contribute to determine the
      overall taxable income for income tax purposes, to the extent of forty percent
      (40%) of the overall gain. Losses can be offset against taxable gains for a
      corresponding amount and, if in excess, can be carried forward up to four years.
      A “qualified” shareholding is defined as ordinary shares and/or rights
      (including ADSs) that represent more than 20% of share capital voting in the
      ordinary shareholders’ meeting or 25% of a company’s total share capital. A
“disposal” of a qualified shareholding occurs if, in any 12-month period
      following the date when a shareholding meets one of the thresholds illustrated
      above, a shareholder disposes of shares or ADSs that, individually or in the
      aggregate, constitute a “qualified” shareholding. The taxable gain realized by
      (i) an individual shareholder who is not a resident of Italy would be subject
      to
      progressive personal income tax ratespresently ranging from 23% to 39% (plus
      certain local surcharges and special contribution at a 4% rate applicable to
      the
      amount of any taxable income exceeding €100,000); (ii) a corporate shareholder
      who is not a resident of Italy would be subject to corporate income tax,
      currently levied at a rate of 33%.




Generally,
      Italian capital gain tax, levied at a rate of 12.5%, is imposed on gains
      realized upon the transfer or sale of “non-qualified” shareholdings whether held
      within or outside Italy. A “non-qualified” shareholding is defined as an
      interest in ordinary shares and/or rights (including ADSs) which does not reach
      the thresholds described above for a qualified shareholding.




Furthermore,
      pursuant to the Income Tax Convention, a US owner will not be subject to Italian
      capital gain tax or to Italian individual or corporate income tax unless such
      US
      owner has a permanent establishment or fixed base in Italy to which the owner’s
      ADSs is effectively connected. To this end, US owners selling ADSs and claiming
      benefits under the Income Tax Convention may be required to produce appropriate
      documentation establishing that the above-mentioned conditions have been met.




*Estate
      and Gift Tax.* There
      are no Italian estate or gift taxes. However, should you make a gift of ADSs
      for
      a value exceeding €180,759.91 and the relationship between you and the
      beneficiary does not qualify for the exemption regime applicable to gifts made
      in favor of certain family members ( *e.g.* ,
      spouse,
      parents, children, grandchildren), the gift may be subject to the transfer
      taxes
      that would ordinarily apply had the ADSs been transferred for consideration
      and
      limited to the excess thereof. The threshold is increased to €516,456.91 in case
      the beneficiary is either underage ( *i.e.* ,
      younger
      than 18) or a person with a handicap recognized pursuant to applicable law.




*Transfer
      tax.* An Italian transfer tax is normally payable on the transfer of ADSs in an
      Italian company. The transfer tax is currently payable at the following rates:




·
            €0.0072
                per €51.56, or portion thereof, of the price at which ADSs are transferred
                when the transfer is made between private parties or through an
                intermediary other than those discussed below;




·
            €0.0258
                per €51.65, or portion thereof, of the price at which ADSs are transferred
                when the transfer is made between a bank, investment services company
                or
                currency dealer and other persons set forth in Legislative Decree
                No. 58
                of February 24, 1998, and (b) a private party, or between private
                parties
                through the intervention of one of these intermediaries; or




·
            €0.0062
                per €51.65, or portion thereof, of the price at which ADSs are transferred
                when the transfer is made between the intermediaries discussed above.




The
      transfer tax will not be payable, however, with respect to any transfer of
      ADSs
      involving non-Italian residents concluded with the intervention of one of the
      intermediaries discussed above.




**United
      States Taxation of US Holders**




*Taxation
      of Distributions Made on ADSs.* As
      previously indicated, we do not anticipate making any distributions with respect
      to our ordinary shares in the foreseeable future. However, if we were to make
      distributions with respect to our ordinary shares, the amount of such
      distribution (including the amount of any Italian taxes withheld therefrom)
      would generally be includible in the gross income of a US holder of an ADS
      (on
      the date of receipt by the depositary) as foreign source dividend income to
      the
      extent that such distributions are paid out of our current or accumulated
      earnings and profits, as determined for United States federal income tax
      purposes. If the amount of any distribution paid on our ordinary shares exceeds
      our current and accumulated earnings and profits, that excess will first reduce
      a holder’s basis in its ADSs and, to the extent the distribution is in excess of
      the holder’s basis, the excess will be treated as capital gain. Dividends paid
      to US holders that are corporations will not be eligible for the
      dividends-received deduction (which is generally applicable only to dividends
      paid by US corporations).




Legislation
      enacted in 2003 reduces the maximum tax rate for certain dividends received
      by
      individuals to 15 percent for taxable years beginning on or before
      December 31, 2008, subject to exceptions for certain short-term and hedged
      stock positions. Dividends received from a “qualified foreign corporation”
generally qualify for the reduced rate. In this regard, a foreign corporation
      that is not a passive foreign investment company (PFIC) in the year that the
      dividends are paid or in the preceding taxable year will generally constitute
      a
      qualified foreign corporation with respect to any dividends paid by it on its
      stock if the stock is readily tradable on an established securities market
      in
      the United States. Because the ADSs are readily




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tradable
      on an established securities market in the United States, we should constitute
      a
      qualified foreign corporation and dividends paid by us prior to 2009 on our
      ordinary shares and received by US holders of ADSs that are individuals should
      qualify for the reduced rate, subject to above-mentioned exception for certain
      short-term and hedged stock positions, so long as we are not a PFIC in the
      year
      the dividends are paid or in the preceding taxable year (and so long as the
      ADSs
      continue to be readily tradeable on an established securities market). While
      we
      do not believe that we are currently a PFIC, no assurances can be provided
      that
      we will not constitute a PFIC in any year during which we make a distribution
      on
      our ordinary shares (or in the taxable year preceding the year of distribution).




The
      amount of any cash distribution received in euro with respect to the ADSs will
      equal the US dollar value of the distribution, including the amount of any
      Italian taxes withheld therefrom, determined at the spot exchange rate in effect
      on the date that the distribution is received by the depositary (regardless
      of
      whether or not the distribution is in fact converted into US dollars), and
      a US
      holder will have a tax basis in the euro equal to that same value. Upon a
      subsequent sale or other disposition of the euro, any gain or loss recognized
      by
      the US holder will be ordinary income or loss for US federal income tax
      purposes.




Subject
      to general foreign tax credit limitations, a US holder may elect to credit
      any
      Italian income taxes withheld on dividends paid with respect to the ADSs against
      the holder’s US federal income tax liability (provided, *inter
      alia* ,
      that
      the US holder satisfies certain holding requirements with respect to the ADSs).
      Amounts withheld in excess of the applicable rate under the income tax
      convention in effect between the United States and Italy in respect of a US
      holder who qualifies for the benefits of the convention will not be eligible
      for
      this credit, but the US holder may claim a refund for this excess from the
      Italian tax authorities. See “Item 10, Additional Information, Taxation, Italian
      Taxation of US Holders, Income Tax Withholding on Dividends.” As an alternative
      to claiming a foreign tax credit, a US holder may claim a deduction for any
      withheld Italian income taxes, but only with respect to a year for which the
      US
      holder elects to do so with respect to all of its foreign income taxes. There
      are complex rules that limit the amount of foreign income taxes that may be
      credited against a US holder’s federal income tax liability, and US holders are
      strongly urged to consult their own tax advisors as to the applicability and
      effect of these limitations.




*Sales
      or other Disposition of the ADSs.* Subject
      to the discussion set forth below regarding PFICs, a US holder will recognize
      capital gain or loss for US federal income tax purposes on the sale or other
      disposition of the ADSs equal to the difference between the amount realized
      on
      the disposition and the holder’s basis in the ADSs. Such gain or loss will
      generally be long-term capital gain or loss if the US holder has owned the
      ADSs
      for more than one year at the time of the sale or other disposition.




*Back-up
      Withholding.* A
      US holder may be subject to back-up withholding at the applicable rate with
      respect to dividends paid on or proceeds from the sale or other disposition
      of
      the ADSs unless the US holder (a) is an exempt recipient or
      (b) provides a taxpayer identification number, certifies as to no loss of
      exemption from back-up withholding and otherwise complies with all applicable
      back-up withholding requirements.




*Special
      Rules Applicable to PFICs.* Special
      federal income tax rules apply to US holders who own stock in a PFIC. In this
      regard, a foreign corporation is generally considered a PFIC for any taxable
      year in which 75% or more of its gross income is passive income or in which
      50%
      or more of the average value of its assets are considered “passive assets”
(generally assets that generate passive income or assets held for the production
      of passive income). We believe that we currently are not a PFIC and do not
      anticipate that we will become a PFIC in the future.




However,
      if we were to be classified as a PFIC, a US holder would generally be subject
      to
      a special tax at ordinary income tax rates on so-called “excess
      distributions”—which include both certain distributions received on the ADSs and
      gain recognized on any sale or other disposition of the ADSs. The amount of
      income tax on these excess distributions will be increased by an interest charge
      to compensate for any tax deferral, calculated as if the excess distributions
      were earned ratably over the period the US holder held the ADSs. In addition,
      the tax on excess distributions treated as earned in prior years will be subject
      to tax at the maximum rate applicable in the year in which such income is deemed
      to have been earned. The harshness of the foregoing rules may be avoided if
      the
      US holder properly elects to include in its ordinary income each year such
      holder’s pro rata share of our ordinary earnings and to include in its long-term
      capital gain income each year such holder’s pro rata share of our net capital
      gain, whether or not distributed. However, we do not intend to provide US
      holders with the information that they would need in order to make this
      election. Alternatively, a holder of ADSs may avoid the tax consequences
      detailed above by making a mark-to-market election, but only if the ADSs are
      “regularly traded” for purposes of Section 1296 of the Code. No assurances
      can be made that the ADSs will be regularly traded and, in any event, a US
      holder should consult its own tax advisor before making any election under
      Section 1296 of the Code.




In
      addition, if we were to be classified as a PFIC, US holders would not qualify
      for the benefit of the reduced US federal tax rate applicable to certain
      dividends received by individuals through the end of 2008, as described above
      in
“United States Taxation of US Holders—Taxation of Distributions Made on the
      ADSs”.




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**DIVIDENDS
      AND PAYING AGENTS**





Not
      applicable.








**STATEMENTS
      BY EXPERTS**





Not
      applicable.








**DOCUMENTS
      ON DISPLAY**





We
      are
      subject to the periodic reporting and other informational requirements of the
      Exchange Act applicable to a foreign private issuer. Under the Exchange Act,
      we
      file annual reports on Form 20-F within six months of our fiscal year end,
      and we submit other reports and information under cover of Form 6-K with
      the SEC. Copies of the registration statements, their accompanying exhibits,
      as
      well as such reports and other information, when so filed, may be inspected
      without charge and may be obtained at prescribed rates at the SEC’s Public
      Reference Room located at 450 Fifth Street, N.W., Room 1200, Washington, D.C.
      20549. You may obtain information regarding the Washington, D.C. Public
      Reference Room by calling the SEC at 1-800-SEC-0330 or by contacting the SEC
      at
      its website at www.sec.gov.




As
      a
      foreign private issuer, we are exempt under the Exchange Act from, among other
      things, the rules prescribing the furnishing and content of proxy statements,
      and our executive officers, directors and principal shareholders are exempt
      from
      the reporting and short-swing profit recovery provisions contained in
      Section 16 of the Exchange Act. In addition, we will not be required under
      the Exchange Act to file periodic reports and financial statements with the
      SEC
      as frequently or as promptly as United States companies whose securities are
      registered under the Exchange Act.





**SUBSIDIARY
      INFORMATION**





Currently,
      we do not have any subsidiaries.




***ITEM
              11.***
            ***QUANTITATIVE
                AND QUALITATIVE DISCLOSURES ABOUT MARKET
                RISK***





Market
      risk represents the risk of loss arising from adverse changes in market rates
      and foreign exchange rates. The carrying amounts of cash and cash equivalents,
      accounts receivable and other receivables, and the interest rate on our debt
      with floating rates represents our principal exposure to credit risk in relation
      to our financial assets.




As
      of
      December 31, 2005, substantially all of our cash and cash equivalents were
      held
      in accounts at financial institutions located in the Republic of Italy and
      the
      United States that we believe are of acceptable credit quality. We use interest
      rate swaps on our floating rate mortgage debt to hedge the risk of rising rates.
      We do not believe we are exposed to material risks due to changes in interest
      rates, although our future interest income may fluctuate in line with changes
      in
      interest rates. The risk associated with fluctuating interest rates is
      principally confined to our cash deposits in banks and our floating rate debt
      (to the extent we are not protected by interest rate hedges) and, therefore,
      we
      believe that our current exposure to interest rate risk is minimal.




Substantially
      all of our current revenue generating operations are transacted in, and
      substantially all of our assets and liabilities are denominated in the euro.
      In
      the future, we expect to transact business in the United States dollar and
      other
      currencies. The value of the euro against the United States dollar and other
      currencies may fluctuate and is affected by, among other things, changes in
      political and economic conditions. Any change in the value of the euro relative
      to other currencies that we transact business with in the future could
      materially and adversely affect our cash flows, revenues and financial
      condition. To the extent we hold assets denominated in United States dollars,
      any appreciation of the euro against the United States dollar could result
      in a
      charge to our operating results and a reduction in the value of our United
      States dollar denominated assets upon remeasurement.




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***ITEM
              12.***
            ***DESCRIPTION
                OF SECURITIES OTHER THAN EQUITY
                SECURITIES.***





Not
      applicable.





**PART
      II**





***ITEM
              13.***
            ***DEFAULTS,
                DIVIDEND ARRANGEMENTS AND
                DELINQUENCIES***





None.





***ITEM
              14.***
            ***MATERIAL
                MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
                PROCEEDS***





On
      June
      21, 2005, the Company completed an initial public offering of 2,400,000 ADSs,
      at
      a price of $9.00 per ADS. The effective date of the Securities Act registration
      statement (Registration No. 333-122233) in connection with the offering was
      June
      16, 2005. The date of consummation of the offering was June 21, 2005. The
      managing underwriters were Maxim Group LLC and I-Bankers Securities
      Incorporated. In July 2005, the underwriters of our initial public offering
      exercised part of their over-allotment option by purchasing an additional
      300,000 of our ADSs generating additional gross proceeds of $2.7 million.




Our
      reasonable estimates of the expenses we incurred in connection with the issuance
      and distribution of the securities through December 31, 2005 are as
      follows:




**Amount
                paid**Underwriting
                discounts and commissions
            
            $
            1,822,500Finders’
                Fees
            
            
            0Expenses
                paid to or for Underwriters
            
            
            455,792SEC
                registration fee
            
            
            4,270NASD
                filing fee
            
            
            4,272American
                Stock Exchange listing fee
            
            
            22,500Legal
                fees and expenses
            
            
            889,543Accounting
                fees and expenses
            
            
            240,000Transfer
                agent fees
            
            
            10,000Depositary
                fee
            
            
            25,000Printing
                and engraving
            
            
            310,000Miscellaneous
            
            
            571,458Total
                Expenses
            
            $
            4,355,335





Through
      December 31, 2005, our expenses incurred in connection with the issuance and
      distribution of the registered securities for underwriting discounts and
      commissions were $1,822,500. We did not incur any finders fees. Through December
      31, 2005, our expenses paid to or for underwriters were $455,792. Other expenses
      through December 31, 2005 were $2,077,043, and total expenses were $4,355,335.
      Of these expenses, there were no direct or indirect payments to directors,
      officers, persons owning 10% or more of any class of our securities, or any
      of
      our affiliates, nor were there any direct or indirect payments to others. Our
      net proceeds of the offering after deduction of the total expenses listed above
      is $20,612,000.




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As
      of
      December 31, 2005, the net proceeds of the initial public offering and
      over-allotment option exercises have been used for the following purposes,
      in
      our reasonable estimate:




**(in
                thousands)**Repayment
                of Series A senior convertible promissory notes, including accrued
                interest of approximately $311 through July 21, 2005
            
            €
            4,221Research
                and development of defibrotide to treat and prevent VOD through Phase
                III
                clinical trials
            
            
            3,450Repayment
                of Sirton loans
            
            
            1,500Capital
                improvements to our facilities
            
            
            1,200Hire
                personnel to expand operations and decrease reliance on affiliates
            
            
            960Working
                capital and general corporate purposes
            
            
            1,000Repayment
                of short-term bank borrowings
            
            
            400€
            12,731


Our
        Series A senior convertible promissory notes were borrowed at a per annum
        interest rate of seven percent (7%) through March 31, 2005, ten percent
        (10%) per annum from April 1, 2005 until the maturity date and the
        one-month LIBOR rate plus twelve percent (12%) after maturity. The notes,
        if not
        earlier converted into our ordinary shares, were due and payable 30 days
        following the completion of the initial public offering. One holder of these
        notes elected to have its $2.912 million notes repaid with the proceeds of
        our
        initial public offering; that holder is also a shareholder of our
        company.
  As
        of
        December 31, 2004, we had inter-company outstanding debt in the amount of
€2.2 million to Sirton, a wholly-owned subsidiary of FinSirton. Sirton lent
        us €1.0 million in each of March 2004 and May 2004,
€400 thousand in June 2004 and €600 thousand in July 2004.
        All loans were borrowed at 3.5% interest per annum and each matures on
        October 1, 2008. We repaid €800 thousand of the loans in 2004,
€700 thousand in January 2005 with the net proceeds from the sale of
        our Series A senior convertible promissory notes, and the remaining
€1.5 million from the net proceeds of the IPO.




***ITEM
              15.***
            ***CONTROLS
                AND PROCEDURES***





Not
      applicable.




***ITEM
              16A.***
            ***AUDIT
                COMMITTEE FINANCIAL
                EXPERT***





We
      have
      both a Board of Statutory Auditors and an Audit Committee. Our Audit Committee
      has determined that Gigliola Bertoglio qualifies as an “audit committee
      financial expert” within the meaning of this Item 16A. Ms. Bertoglio has served
      as one of our directors since December 2004. Her current term as a director
      expires on the date of the ordinary shareholders’ meeting approving our 2006
      financial statements, which would normally be held in April 2007.
      Ms. Bertoglio has been a self-employed consultant since January 2003.
      From 1970 through 2002 she was employed by Reconta Ernst & Young (the
      Italian affiliate of Ernst & Young LLP) and its predecessors and was an
      audit partner beginning in 1977. From 1998 until leaving the firm, she was
      responsible for the firm’s Capital Market Group in Italy. From 1989 to 1998, she
      was responsible for directing the firm’s Professional Standards Group and member
      of the Accounting and Auditing Standards Group of Ernst & Young
      International and as a coordinating audit partner on clients with international
      operations. From 1977 to 1989, Ms. Bertoglio was a partner of the Italian
      firm of Arthur Young & Co. (the predecessor to Ernst & Young)
      where she was responsible for directing the firm’s Professional Standards Group
      and serving in an advisory role to the Accounting and Auditing Standards Group
      of Arthur Young International and as a coordinating audit partner on clients
      with international operations. From 1970 to 1977, she was an Audit Manager
      (1970
      to 1974) and an Audit Principal (1975 to 1977) with the Italian firm of Arthur
      Young & Co. in its Rome and Milan offices. Prior to 1970,
      Ms. Bertoglio was employed in the New York offices of Horwath &
Horwath and LKH&H, both of which were public accounting firms. She earned a
      degree in Public Accounting from New York University and a Diploma in Accounting
      from Economics Institution in Biella, Italy. She was a Certified Public
      Accountant (active license to August 31, 2002, inactive after that) in the
      United States and included in the Register of Authorized Auditors of Consob,
      the
      Italian Stock Exchanges regulatory agency of public companies.




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***ITEM
              16B.***
            ***CODE
                OF ETHICS***





We
      have
      adopted a code of ethics, as defined in Item 16B of Form 20-F under the
      Securities Exchange Act of 1934, as amended, that is applicable to, among
      others, our Chief Executive Officer and Chief Financial Officer. Copies of
      this
      code of ethics are available upon request by writing to us at the address on
      the
      cover page of this annual report; we have also posted the code of ethics on
      our
      website at www.gentium.com .
      Material appearing on this website is not incorporated by reference into this
      annual report. If we amend the provisions of this code of ethics, or if we
      grant
      any waiver of such provisions, we will disclose such amendment or waiver on
      our
      website at the same address.




***ITEM
              16C.***
            ***PRINCIPAL
                ACCOUNTANT FEES AND
                SERVICES***





The
      following table sets forth the aggregate fees billed to us by our independent
      auditors, Reconta Ernst & Young S.p.A. during the fiscal years ended
      December 31, 2004 and 2005:





*(in
                thousands of euro)*
            
            **Year
                ended December 31,****2004**
            
            **2005**Audit
                Fees
            
            €
            35
            
            €
            130Audit-Related
                Fees
            
            
            —
            
            
            30IPO
                Fees
            
            
            304
            
            
            —All
                Other Fees
            
            
            —
            
            
            —Total
                fees
            
            €
            339
            
            €
            160





Audit
      fees in the above table are the aggregate fees billed by Reconta Ernst &
Young S.p.A. in connection with the audit of our annual Italian GAAP statutory
      and U.S. GAAP financial statements, including the review services of interm
      financial statements. Our audit-related fees consisted of our accounting fees
      and expenses in connection with the offering of securities registered pursuant
      to the Registration Statement on Form F-1, Registration No. 333-130796,
      previously filed with the Securities and Exchange Commission on December 30,
      2005, which were in the amount of €30,000.





Reconta
      Ernst & Young S.p.A. did not provide any tax compliance services or advice
      on specific changes in tax regulations for the years ended on December 31,
      2003,
      2004 and 2005.





***ITEM
              16D.***
            ***EXEMPTION
                FROM THE LISTING STANDARDS FOR AUDIT
                COMMITTEES***





Under
      Italian law, our shareholders, not the audit committee, must be the party that
      appoints, terminates and determines the compensation for our independent
      accountants, although our audit committee does make recommendations on such
      matters to our board of directors, which in turn makes recommendations to our
      shareholders. As a result, our audit committee is not able to perform all of
      the
      duties required by Rule 10A-3 of the Securities Exchange Act of 1934, as
      amended. Our audit committee has established procedures for the receipt,
      retention and treatment of complaints regarding accounting, internal accounting
      controls and auditing matters, has authority to engage independent counsel
      and
      other advisors and determine the compensation of such advisors, as well as
      its
      ordinary administrative expenses, and also oversees, with the board of statutory
      auditors, our independent accountants (including resolution of disagreements
      between management and the independent accountants regarding financial
      reporting). Rule 10A-3 provides that foreign private issuers with a board
      of statutory auditors established in accordance with local law or listing
      requirements and meeting specified requirements with regard to independence
      and
      responsibilities (including the performance of most of the specific tasks
      assigned to audit committees by the rule, to the extent prohibited by local
      law)
      (“Statutory Auditor Requirements”) are exempt from the audit committee
      requirements established by the rule. Our board of directors has determined
      that, because of the existence and nature of our board of statutory auditors,
      together with the performance of other duties under Rule 10A-3 by our
      shareholders and the performance of the remaining duties by our audit committee,
      we either satisfy Rule 10A-3 or qualify for an exemption provided by
      Rule 10A-3 from the audit committee requirements of
      Rule 10A-3.




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***ITEM
              16E.***
            ***PURCHASES
                OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
                PURCHASERS***


Not
      applicable.




**PART
      III**





***ITEM
              17.***
            ***FINANCIAL
                STATEMENTS***





Not
      applicable.




***ITEM
              18.***
            ***FINANCIAL
                STATEMENTS***





**GENTIUM
      S.p.A.**


**INDEX
      TO FINANCIAL STATEMENTS******




Report
                of Independent Registered Public Accountants as and
                for the three year period ended December 31, 2005
            F-1Balance
                Sheets as of December 31, 2004 and
                2005
            F-2Statements
                of Operations for the years ended December 31,
                2003, 2004 and 2005
            F-3Statements
                of Shareholders’ Equity (Deficit) for the years ended December 31, 2003,
                2004and 2005
            F-4Statements
                of Cash Flows for the years ended December 31, 2003, 2004 and
                2005
            F-5Notes
                to Financial Statements
            F-7




***ITEM
              19.***
            ***EXHIBITS***


**Exhibit**
              
              **Description**1(i)
              
              Articles
                    of Association of Gentium S.p.A., formerly known as Pharma Research
                    S.r.l.
                    dated November 11, 1993, incorporated by reference to Exhibit 3(i) to
                    the Registration Statement on Form F-1, Registration No. 333-122233,
                    previously filed with the Securities and Exchange Commission
                    on January
                    24, 2005.1(ii)
              
              Amended
                      and Restated Bylaws of Gentium S.p.A. dated April 28,
                      2006.2.1
              
              Underwriting
                    Agreement, dated June 16, 2005, between Gentium S.p.A. and Maxim
                    Group LLC
                    and I-Bankers Securities Inc., incorporated by reference to Exhibit
                    1.1 to Amendment No. 1 to the Registration Statement on Form
                    F-1,
                    Registration No. 333-130796, previously filed with the Securities
                    and
                    Exchange Commission on January 26, 2006.2.2
              
              Form
                    of Representatives’ Purchase Option between Gentium S.p.A. and Maxim Group
                    LLC and I-Bankers Securities Inc., incorporated by reference to
                    Exhibit 1.2 to Amendment No. 5 to the Registration Statement
                    on Form F-1,
                    Registration No. 333-122233, previously filed with the Securities
                    and
                    Exchange Commission on June 9, 2005.2.3
              
              Form
                    of Lock-Up Agreement, incorporated by reference to Exhibit 1.3
                    to
                    Amendment No. 4 to the Registration Statement on Form F-1, Registration
                    No. 333-122233, previously filed with the Securities and Exchange
                    Commission on May 31, 2005.2.2.1
              
              Form
                  of Series A senior convertible promissory note, incorporated by
                  reference to Exhibit 4.2.1 to the Registration Statement on Form
                  F-1,
                  Registration No. 333-122233, previously filed with the Securities
                  and
                  Exchange Commission on January 24, 2005.2.2.2
              
              Form
                  of warrant, incorporated by reference to Exhibit 4.2.2 to the Registration
                  Statement on Form F-1, Registration No. 333-122233, previously
                  filed with
                  the Securities and Exchange Commission on January 24,
                  2005.2.2.3
              
              Pledge
                  Agreement between FinSirton S.p.A. (previously known as Finanziaria
                  Sirton
                  S.p.A.) and I-Bankers Securities Inc. as representative of the
                  holders of the Series A senior convertible promissory notes dated
                  October 15, 2004, incorporated by reference to Exhibit 4.2.3 to
                  Amendment No. 1 to the Registration Statement on Form F-1, Registration
                  No. 333-130796, previously filed with the Securities and Exchange
                  Commission on January 26, 2006.2.2.4
              
              Form
                  of Investors’ Rights Agreement between Gentium S.p.A. and holders of the
                  Series A senior convertible promissory notes and warrants dated
                  October 15, 2004, incorporated by reference to Exhibit 4.2.4 to the
                  Registration Statement on Form F-1, Registration No. 333-122233,
                  previously filed with the Securities and Exchange Commission on
                  January
                  24, 2005.2.2.5
              
              Form
                  of subscription agreement for Series A senior convertible promissory
                  note and warrant, incorporated by reference to Exhibit 4.2.5 to
                  Amendment
                  No. 1 to the Registration Statement on Form F-1, Registration No.
                  333-122233, previously filed with the Securities and Exchange Commission
                  on April 7, 2005.
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  **Exhibit**
                
                **Description**2.2.6
                
                Amendment
                    No. 1 to Gentium S.p.A. Series A Senior Convertible Promissory
                    Notes, Warrants, Subscription Agreements and Investor Rights
                    Agreements
                    among Gentium S.p.A. and the other parties thereto dated May 27,
                    2005, incorporated by reference to Exhibit 4.2.6 to Amendment
                    No. 4 to the
                    Registration Statement on Form F-1, Registration No. 333-122233,
                    previously filed with the Securities and Exchange Commission
                    on May 31,
                    2005.2.3
                
                Investors’
                    Rights Agreement by and among Gentium S.p.A., Alexandra Global
                    Master
                    Fund Ltd. and Generation Capital Associates made as of
                    January 10, 2005, incorporated by reference to Exhibit 4.3 to the
                    Registration Statement on Form F-1, Registration No. 333-122233,
                    previously filed with the Securities and Exchange Commission
                    on January
                    24, 2005.2.4
                
                Intentionally
                    omitted.2.5
                
                Investors’
                    Rights Agreement by and among Gentium S.p.A. and Sigma Tau Finanziaria
                    S.p.A. made as of April 4, 2005, incorporated by reference to Exhibit
                    4.5 to Amendment No. 1 to the Registration Statement on Form
                    F-1,
                    Registration No. 333-122233, previously filed with the Securities
                    and
                    Exchange Commission on April 7, 2005.2.6
                
                Form
                    of Deposit Agreement among Gentium S.p.A., The Bank of New York
                    and the
                    owners and beneficial owners from time to time of American Depositary
                    Receipts (including as an exhibit the form of American Depositary
                    Receipt), incorporated by reference to Exhibit 4.6 to Amendment
                    No. 5 to
                    the Registration Statement on Form F-1, Registration No. 333-122233,
                    previously filed with the Securities and Exchange Commission
                    on June 9,
                    2005.2.7
                
                Form
                    of American Depositary Receipt (see Exhibit 4.6).2.8.1
                
                Securities
                    Subscription Agreement among Gentium S.p.A. and the other parties
                    thereto
                    dated as of October 3, 2005, incorporated by reference to Exhibit
                    4.8.1 to
                    the Registration Statement on Form F-1, Registration No. 333-130796,
                    previously filed with the Securities and Exchange Commission
                    on December
                    30, 2005.2.8.2
                
                Form
                    of American Depositary Shares Purchase Warrant by Gentium S.p.A.
                    dated
                    October 14, 2005, incorporated by reference to Exhibit 4.8.2
                    to the
                    Registration Statement on Form F-1, Registration No. 333-130796,
                    previously filed with the Securities and Exchange Commission
                    on December
                    30, 2005.2.8.3
                
                Registration
                    Rights Agreement among Gentium S.p.A. and the other parties thereto
                    made
                    and entered into as of October 14, 2005, incorporated by reference
                    to
                    Exhibit 4.8.3 to the Registration Statement on Form F-1, Registration
                    No.
                    333-130796, previously filed with the Securities and Exchange
                    Commission
                    on December 30, 2005.2.8.4
                
                Escrow
                    Agreement between Gentium S.p.A. and The Bank of New York dated
                    as of
                    October 14, 2005, incorporated by reference to Exhibit 4.8.4
                    to the
                    Registration Statement on Form F-1, Registration No. 333-130796,
                    previously filed with the Securities and Exchange Commission
                    on December
                    30, 2005.4.1
                
                2004
                    Equity Incentive Plan, incorporated by reference to Exhibit 10.1
                    to the
                    Registration Statement on Form F-1, Registration No. 333-122233,
                    previously filed with the Securities and Exchange Commission
                    on January
                    24, 2005.4.2
                
                Amended
                    and Restated Nonstatutory Share Option Plan and Agreement dated
                    March 23,
                    2006.
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  **Exhibit**
                  
                  **Description**4.3
                  
                  Loan
                      Agreement between Banca Nazionale del Lavoro S.p.A. and Gentium
                      S.p.A.,
                      successor in interest to Crinos Industria Farmacobiologica
                      S.p.A., dated
                      November 20, 1996, incorporated by reference to Exhibit 10.3 to the
                      Registration Statement on Form F-1, Registration No. 333-122233,
                      previously filed with the Securities and Exchange Commission
                      on January
                      24, 2005.4.4
                  
                  Loan
                      Agreement between Banca Nazionale del Lavoro S.p.A. and Gentium
                      S.p.A.,
                      successor in interest to Crinos Industria Farmacobiologica
                      S.p.A., dated
                      May 27, 1999, incorporated by reference to Exhibit 10.4 to the
                      Registration Statement on Form F-1, Registration No. 333-122233,
                      previously filed with the Securities and Exchange Commission
                      on January
                      24, 2005.4.5
                  
                  Deed
                      of Agreement of Assumption of Debts among Sirton Pharmaceuticals
                      S.p.A.,
                      Gentium S.p.A. and Banca Nazionale del Lavoro S.p.A. dated
                      February 14, 2003, regarding Loan Agreement between Banca Nazionale
                      del Lavoro S.p.A. and Gentium S.p.A., successor in interest
                      to Crinos
                      Industria Farmacobiologica S.p.A., dated November 20, 1996, and Loan
                      Agreement between Banca Nazionale del Lavoro S.p.A. and Gentium
                      S.p.A.,
                      successor in interest to Crinos Industria Farmacobiologica
                      S.p.A., dated
                      May 27, 1999, incorporated by reference to Exhibit 10.5 to the
                      Registration Statement on Form F-1, Registration No. 333-122233,
                      previously filed with the Securities and Exchange Commission
                      on January
                      24, 2005.4.6
                  
                  Ministry
                      for Universities, Scientific and Technological Research Loan
                      granted to
                      Gentium S.p.A., successor in interest to Crinos Industria Farmacobiologica
                      S.p.A., by Sanpaolo Imi S.p.A., dated September 27, 2000,
                      incorporated by reference to Exhibit 10.6 to the Registration
                      Statement on
                      Form F-1, Registration No. 333-122233, previously filed with
                      the
                      Securities and Exchange Commission on January 24, 2005.4.7.1
                  
                  Loan
                      Agreement between Banca Nazionale del Lavoro S.p.A. and Gentium
                      S.p.A.
                      dated July 20, 2004, incorporated by reference to Exhibit 10.7 to the
                      Registration Statement on Form F-1, Registration No. 333-122233,
                      previously filed with the Securities and Exchange Commission
                      on January
                      24, 2005.4.7.2
                  
                  Deed
                      of Pledge by Gentium S.p.A. in favor of Banca Nazionale del
                      Lavoro S.p.A.
                      dated May 16, 2006.4.8
                  
                  Loan
                      Agreement between Sirton Pharmaceuticals S.p.A. and Gentium
                      S.p.A. dated
                      March 2004, incorporated by reference to Exhibit 10.8 to the
                      Registration
                      Statement on Form F-1, Registration No. 333-122233, previously
                      filed with
                      the Securities and Exchange Commission on January 24,
                      2005.4.9
                  
                  Loan
                      Agreement between Sirton Pharmaceuticals S.p.A. and Gentium
                      S.p.A. dated
                      May 2004, incorporated by reference to Exhibit 10.9 to the
                      Registration Statement on Form F-1, Registration No. 333-122233,
                      previously filed with the Securities and Exchange Commission
                      on January
                      24, 2005.4.10
                  
                  Loan
                      Agreement between Sirton Pharmaceuticals S.p.A. and Gentium
                      S.p.A. dated
                      June 2004, incorporated by reference to Exhibit 10.10 to the
                      Registration Statement on Form F-1, Registration No. 333-122233,
                      previously filed with the Securities and Exchange Commission
                      on January
                      24, 2005.4.11
                  
                  Loan
                      Agreement between Sirton Pharmaceuticals S.p.A. and Gentium
                      S.p.A. dated
                      July 2004, incorporated by reference to Exhibit 10.11 to the
                      Registration Statement on Form F-1, Registration No. 333-122233,
                      previously filed with the Securities and Exchange Commission
                      on January
                      24, 2005.
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  **Exhibit**
                    
                    **Description**4.12.1
                    
                    Clinical
                        Trial Agreement between Gentium S.p.A., successor in interest
                        to Crinos
                        Industria Farmacobiologica S.p.A., and Dana-Faber/Partners
                        Cancer
                        Care, Inc. dated December 27, 1999, incorporated by reference to
                        Exhibit 10.12.1 to the Registration Statement on Form F-1,
                        Registration
                        No. 333-122233, previously filed with the Securities and
                        Exchange
                        Commission on January 24, 2005.4.12.2
                    
                    Amendment
                        No. 1 to Clinical Trial Agreement between Gentium S.p.A. and
                        Dana-Farber/Partners Cancer Care, Inc. dated October 19, 2000,
                        incorporated by reference to Exhibit 10.12.2 to the Registration
                        Statement
                        on Form F-1, Registration No. 333-122233, previously filed
                        with the
                        Securities and Exchange Commission on January 24, 2005.4.12.3
                    
                    Amendment
                        No. 2 to Clinical Trial Agreement between Gentium S.p.A. and
                        Dana-Farber/Partners Cancer Care, Inc. dated January 28, 2004,
                        incorporated by reference to Exhibit 10.12.3 to the Registration
                        Statement
                        on Form F-1, Registration No. 333-122233, previously filed
                        with the
                        Securities and Exchange Commission on January 24, 2005.4.13
                    
                    Trial
                        Agreement between the European Blood and Marrow Transplantation
                        Group and
                        Gentium S.p.A. dated February 26, 2004, incorporated by reference to
                        Exhibit 10.13 to the Registration Statement on Form F-1,
                        Registration No.
                        333-122233, previously filed with the Securities and Exchange
                        Commission
                        on January 24, 2005.4.14.1
                    
                    Research
                        Agreement between Gentium S.p.A., successor in interest to
                        Crinos
                        Industria Farmacobiologica S.p.A., and Consorzio Mario Negri
                        Sud dated
                        June 14, 2000, incorporated by reference to Exhibit 10.14.1 to
                        the
                        Registration Statement on Form F-1, Registration No. 333-122233,
                        previously filed with the Securities and Exchange Commission
                        on January
                        24, 2005.4.14.2
                    
                    Letter
                        from Gentium S.p.A. to Consorzio Mario Negri Sud dated February 23,
                        2004 extending Research Agreement between Gentium S.p.A.,
                        successor in
                        interest to Crinos Industria Farmacobiologica S.p.A., and
                        Consorzio Mario
                        Negri Sud dated June 14, 2000, incorporated by reference to Exhibit
                        10.14.2 to the Registration Statement on Form F-1, Registration
                        No.
                        333-122233, previously filed with the Securities and Exchange
                        Commission
                        on January 24, 2005.4.15
                    
                    License
                        and Supply Agreement by and between Gentium S.p.A. and Sigma-Tau
                        Pharmaceuticals, Inc. (assignee of Sigma Tau Industrie Farmaceutiche
                        Riunite S.p.A.) dated December 7, 2001, incorporated by reference to
                        Exhibit 10.15 to the Registration Statement on Form F-1,
                        Registration No.
                        333-122233, previously filed with the Securities and Exchange
                        Commission
                        on January 24, 2005.4.16
                    
                    Umbrella
                        Agreement among Sirton Pharmaceuticals S.p.A. (formerly known
                        as Crinos
                        Industria Farmacobiologica S.p.A.), Gentium S.p.A., Crinos
                        S.p.A. and SFS
                        Stada Financial Services Ltd dated May 17, 2002, incorporated by
                        reference to Exhibit 10.16 to the Registration Statement
                        on Form F-1,
                        Registration No. 333-122233, previously filed with the Securities
                        and
                        Exchange Commission on January 24, 2005.4.17
                    
                    License
                        Agreement between Crinos S.p.A. and Gentium S.p.A. dated
                        July 15,
                        2004, incorporated by reference to Exhibit 10.17 to the Registration
                        Statement on Form F-1, Registration No. 333-122233, previously
                        filed with
                        the Securities and Exchange Commission on January 24,
                        2005.4.18
                    
                    Purchase
                        Agreement by and among Sirton Pharmaceuticals S.p.A., Gentium
                        S.p.A. and
                        Axcan Pharma Inc. dated October 9, 2002, incorporated by
                        reference to Exhibit 10.18 to the Registration Statement
                        on Form F-1,
                        Registration No. 333-122233, previously filed with the Securities
                        and
                        Exchange Commission on January 24,
                        2005.
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  **Exhibit**
                      
                      **Description**4.19
                      
                      Agreement
                          between Sirton Pharmaceuticals S.p.A. and Gentium S.p.A.
                          dated
                          October 9, 2002, regarding the Purchase Agreement with Axcan
                          Pharma Inc., incorporated by reference to Exhibit 10.19 to the
                          Registration Statement on Form F-1, Registration No. 333-122233,
                          previously filed with the Securities and Exchange Commission
                          on January
                          24, 2005.4.20
                      
                      License
                          and Supply Agreement between Gentium S.p.A. and Abbott
                          S.p.A. dated
                          June 11, 2002, incorporated by reference to Exhibit 10.20 to
                          the
                          Registration Statement on Form F-1, Registration No. 333-122233,
                          previously filed with the Securities and Exchange Commission
                          on January
                          24, 2005.4.21
                      
                      Supply
                          Agreement between Gentium S.p.A. and La.bu.nat. S.r.l.
                          dated
                          January 12, 2004, incorporated by reference to Exhibit 10.21 to
                          the
                          Registration Statement on Form F-1, Registration No. 333-122233,
                          previously filed with the Securities and Exchange Commission
                          on January
                          24, 2005.4.22
                      
                      Supply
                          Agreement between Gentium S.p.A. and La.bu.nat. S.r.l.
                          dated
                          January 12, 2004, incorporated by reference to Exhibit 10.22 to
                          the
                          Registration Statement on Form F-1, Registration No. 333-122233,
                          previously filed with the Securities and Exchange Commission
                          on January
                          24, 2005.4.23
                      
                      Supply
                          Agreement between Gentium S.p.A. and Samil Pharm. Co. Ltd. dated
                          November 11, 2003, incorporated by reference to Exhibit 10.23 to
                          the
                          Registration Statement on Form F-1, Registration No. 333-122233,
                          previously filed with the Securities and Exchange Commission
                          on January
                          24, 2005.4.24.1
                      
                      Active
                          Pharmaceutical Ingredient Agreement between Sirton Pharmaceuticals
                          S.p.A.
                          and Gentium S.p.A. dated January 2, 2004, incorporated by reference
                          to Exhibit 10.24 to the Registration Statement on Form
                          F-1, Registration
                          No. 333-122233, previously filed with the Securities and
                          Exchange
                          Commission on January 24, 2005.4.24.2
                      
                      Contract
                          to Supply Active Ingredients between Sirton Pharmaceuticals
                          S.p.A. and
                          Gentium S.p.A. dated January 2, 2006.4.25.1
                      
                      Agreement
                          for the Supply of Services between FinSirton S.p.A. and
                          Gentium S.p.A.
                          dated January 2, 2004, incorporated by reference to Exhibit 10.25 to
                          the Registration Statement on Form F-1, Registration No.
                          333-122233,
                          previously filed with the Securities and Exchange Commission
                          on January
                          24, 2005.4.25.2
                      
                      Service
                          Agreement between FinSirton S.p.A. and Gentium S.p.A. dated
                          January 2, 2006.4.26.1
                      
                      Agreement
                          for the Supply of Servicesbetween
                          Sirton Pharmaceuticals S.p.A. and Gentium S.p.A. dated
                          January 2,
                          2004,
                          incorporated by reference to Exhibit 10.26 to the Registration
                          Statement
                          on Form F-1, Registration No. 333-122233, previously filed
                          with the
                          Securities and Exchange Commission on January 24, 2005.4.26.2
                      
                      Service
                          Agreement between Sirton Pharmaceuticals S.p.A. and Gentium
                          S.p.A. dated
                          January 2, 2006.4.27
                      
                      Service
                          Agreement between Sirton Pharmaceuticals S.p.A. and Gentium
                          S.p.A. dated
                          January 2, 2004, incorporated by reference to Exhibit 10.27 to
                          the
                          Registration Statement on Form F-1, Registration No. 333-122233,
                          previously filed with the Securities and Exchange Commission
                          on January
                          24, 2005.
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  **Exhibit**
                        
                        **Description**4.28
                        
                        Lease
                            Agreement between Sirton Pharmaceuticals S.p.A. (formerly
                            known as Crinos
                            Industria Farmacobiologica S.p.A.) and Gentium S.p.A.
                            (formerly known as
                            Pharma Research S.r.L.) dated January 2, 2001, incorporated by
                            reference to Exhibit 10.28 to the Registration Statement
                            on Form F-1,
                            Registration No. 333-122233, previously filed with the
                            Securities and
                            Exchange Commission on January 24, 2005.4.29
                        
                        8%
                            Promissory Note in the amount of €106,000 issued by Gentium S.p.A. to
                            Alexandra Global Master Fund Ltd. dated March 29, 2005,
                            incorporated by reference to Exhibit 10.29 to Amendment
                            No. 1 to the
                            Registration Statement on Form F-1, Registration No.
                            333-122233,
                            previously filed with the Securities and Exchange Commission
                            on April 7,
                            2005.4.30
                        
                        General
                            Consulting Agreement between Gentium S.p.A. and Bradstreet
                            Clinical
                            Research & Associates, Inc., dated March 19, 2004,
                            incorporated by reference to Exhibit 10.30 to Amendment
                            No. 1 to the
                            Registration Statement on Form F-1, Registration No.
                            333-122233,
                            previously filed with the Securities and Exchange Commission
                            on April 7,
                            2005.4.31
                        
                        Consulting
                            Agreement between Gentium S.p.A. and KKS-UKT, GmbH, dated
                            April 20,
                            2004, incorporated by reference to Exhibit 10.31 to Amendment
                            No. 1 to the
                            Registration Statement on Form F-1, Registration No.
                            333-122233,
                            previously filed with the Securities and Exchange Commission
                            on April 7,
                            2005.4.32
                        
                        Commercial
                            Lease Agreement between Gentium S.p.A. and FinSirton
                            S.p.A. dated
                            January 1, 2005, incorporated by reference to Exhibit 10.32 to
                            Amendment No. 2 to the Registration Statement on Form
                            F-1, Registration
                            No. 333-122233, previously filed with the Securities
                            and Exchange
                            Commission on May 10, 2005.4.33
                        
                        Commercial
                            Lease Agreement between Gentium S.p.A. and Sirton Pharmaceuticals
                            S.p.A.
                            dated January 1, 2005, incorporated by reference to Exhibit 10.33 to
                            Amendment No. 2 to the Registration Statement on Form
                            F-1, Registration
                            No. 333-122233, previously filed with the Securities
                            and Exchange
                            Commission on May 10, 2005.4.34
                        
                        Form
                            of indemnification agreement between Gentium S.p.A. and
                            each officer and
                            director, incorporated by reference to Exhibit 10.34
                            to Amendment No. 2 to
                            the Registration Statement on Form F-1, Registration
                            No. 333-122233,
                            previously filed with the Securities and Exchange Commission
                            on May 10,
                            2005.4.35
                        
                        Services
                            Agreement between MDS Pharma Services s.r.l. and Gentium
                            S.p.A. dated
                            October 24, 2005.4.36
                        
                        Financing
                            Contract between Banca Intesa Mediocredito S.p.A. and
                            Gentium S.p.A. dated
                            April 20, 2006.12.1
                        
                        Chief
                            Executive Officer Certification pursuant to Section 302
                            of the
                            Sarbanes-Oxley Act of 2002.12.2
                        
                        Chief
                            Financial Officer Certification pursuant to Section 302
                            of the
                            Sarbanes-Oxley Act of 2002.13.1
                        
                        Chief
                            Executive Officer Certification pursuant to Section 906
                            of the
                            Sarbanes-Oxley Act of 2002.13.2
                        
                        Chief
                            Financial Officer Certification pursuant to Section 906
                            of the
                            Sarbanes-Oxley Act of 2002.15(a)
                        
                        Consent
                            of Reconta Ernst & Young S.p.A. dated May 30,
                            2006.




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**REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
        FIRM**
  To
        the
        Board of Directors and Shareholders of
  Gentium
        S.p.A.
  We
        have
        audited the accompanying balance sheets of Gentium S.p.A. as of
        December 31, 2005 and 2004, and the related statements of operations,
        shareholders’ equity (deficit), and cash flows for each of the three years in
        the period ended December 31, 2005. These financial statements are the
        responsibility of the Company’s management. Our responsibility is to express an
        opinion on these financial statements based on our audits.
  We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. We were not engaged to perform
        an
        audit of the Company’s internal control over financial reporting. Our audits
        included consideration of internal control over financial reporting as a
        basis
        for designing audit procedures that are appropriate in the circumstances,
        but
        not for the purpose of expressing an opinion on the effectiveness of the
        Company’s internal control over financial reporting. Accordingly, we express no
        such opinion. An audit also includes examining, on a test basis, evidence
        supporting the amounts and disclosures in the financial statements, assessing
        the accounting principles used and significant estimates made by management,
        and
        evaluating the overall financial statement presentation. We believe that
        our
        audits provide a reasonable basis for our opinion.
  In
        our
        opinion, the financial statements referred to above present fairly, in all
        material respects, the financial position of Gentium S.p.A. as of
        December 31, 2005 and 2004, and the results of its operations and its cash
        flows for each of the three years in the period ended December 31, 2005, in
        conformity with U.S. generally accepted accounting principles.
   Reconta
        Ernst & Young S.p.A.
  Milan,
        Italy
 May
        26,
        2006
  F-1
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  **GENTIUM
        S.p.A.**
 **BALANCE
        SHEETS**
 
 ***Amounts
                  in thousands except share and per share data***
              
              **As
                  of December 31,****2004**
              
              **2005****ASSETS**Cash
                  and cash equivalents
              
              €
              2,461
              
              €
              12,785Accounts
                  receivable
              
              
              9
              
              
              8Accounts
                  receivable from related parties
              
              
              1,490
              
              
              1,867Inventories,
                  net
              
              
              886
              
              
              1,628Prepaid
                  expenses and other current assets
              
              
              1,617
              
              
              918Total
                  Current Assets
              
              
              6,463
              
              
              17,206Property,
                  manufacturing facility and equipment, at cost
              
              
              16,152
              
              
              17,456Less:
                  Accumulated depreciation
              
              
              7,609
              
              
              8,825Property,
                  manufacturing facility and equipment, net
              
              
              8,543
              
              
              8,631Intangible
                  assets, net of amortization
              
              
              243
              
              
              267Other
                  non-current assets
              
              
              660
              
              
              9**Total
                  Assets**
              
              €
              15,909
              
              €
              26,113**LIABILITIES
                  AND SHAREHOLDERS’ EQUITY (DEFICIT)**Bank
                  overdraft
              
              €
              100
              
              €
              —Accounts
                  payable
              
              
              3,927
              
              
              2,644Payables
                  to related parties
              
              
              1,498
              
              
              542Short-term
                  bank borrowings
              
              
              2,690
              
              
              —Accrued
                  expenses and other current liabilities
              
              
              432
              
              
              1,063Current
                  maturities of long-term debt
              
              
              2,781
              
              
              916Convertible
                  Notes payable, net of discounts
              
              
              2,082
              
              
              —Deferred
                  income
              
              
              564
              
              
              283Total
                  Current Liabilities
              
              
              14,074
              
              
              5,448Long-term
                  debt, net of current maturities
              
              
              3,361
              
              
              2,485Termination
                  indemnities
              
              
              548
              
              
              706Total
                  Liabilities
              
              
              17,983
              
              
              8,639Share
                  capital (par value: €1.00; 13,330,000 and 12,690,321 authorized, 5,000,000
                  and 9,610,630 shares issued and outstanding at December 31, 2004
                  and 2005,
                  respectively)
              
              
              5,000
              
              
              9,611Additional
                  paid in capital
              
              
              5,834
              
              
              33,090Accumulated
                  deficit
              
              
              (12,908
              )
              
              (25,227
              )Total
                  Shareholders’ Equity (Deficit)
              
              
              (2,074
              )
              
              17,474**Total
                  Liabilities and Shareholders’ Equity (Deficit)**
              
              €
              15,909
              
              €
              26,113
   The
        accompanying notes are an integral part of these financial statements.
  F-2
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            to Table of Contents**
  **GENTIUM
        S.p.A.**
 **STATEMENTS
        OF OPERATIONS**
  **For
                  the Year Ended December 31,*****Amounts
                  in thousands except share and per share data*****
              
              **2003**
              
              **2004**
              
              **2005**Revenues:Sales
                  to affiliates
              
              €
              6,532
              
              €
              2,870
              
              €
              3,260Third
                  party product sales
              
              
              —
              
              
              243
              
              
              101Total
                  product sales
              
              
              6,532
              
              
              3,113
              
              
              3,361Other
                  income and revenues
              
              
              1,843
              
              
              583
              
              
              280Total
                  Revenues
              
              
              8,375
              
              
              3,696
              
              
              3,641Operating
                  costs and expenses:Cost
                  of goods sold
              
              
              2,435
              
              
              2,579
              
              
              2,911Charges
                  from affiliates
              
              
              1,485
              
              
              1,665
              
              
              1,047Research
                  and development
              
              
              2,253
              
              
              2,922
              
              
              4,557General
                  and administrative
              
              
              854
              
              
              1,194
              
              
              2,284Depreciation
                  and amortization
              
              
              67
              
              
              89
              
              
              1187,094
              
              
              8,449
              
              
              10,917Operating
                  income (loss)
              
              
              1,281
              
              
              (4,753
              )
              
              (7,276
              )Interest
                  income
              
              
              —
              
              
              11
              
              
              156Foreign
                  currency exchange gain (loss), net
              
              
              156
              
              
              (55
              )
              
              (249
              )Interest
                  expense
              
              
              (71
              )
              
              (2,203
              )
              
              (4,304
              )Pre-tax
                  income (loss)
              
              
              1,366
              
              
              (7,000
              )
              
              (11,673
              )Income
                  tax expense (benefit):Current
              
              
              243
              
              
              65
              
              
              —Deferred
              
              
              (84
              )
              
              (37
              )
              
              646Total
                  tax expense
              
              
              159
              
              
              28
              
              
              646Net
                  income (loss)
              
              €
              1,207
              
              €
              (7,028
              )
              €
              (12,319
              )Net
                  income (loss) per share:Basic
                  and diluted net income (loss) per share
              
              €
              0.24
              
              €
              (1.41
              )
              €
              (1.78
              )Weighted
                  average shares used to compute basic and diluted net income (loss)
                  per
                  share
              
              
              5,000,000
              
              
              5,000,000
              
              
              6,933,104
   The
        accompanying notes are an integral part of these financial
        statements.
  F-3
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            to Table of Contents**
  **GENTIUM
        S.p.A.**
 **STATEMENTS
        OF SHAREHOLDERS’ EQUITY (DEFICIT)**
 **FOR
        THE YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005**
  *(000’s
                omitted, including Shares))*
              
              **Ordinary
                  Shares****Shares**
              
              **Amount**
              
              **Additional**
                **Paid-in
                  Capital**
              
              **Accumulated
                  Deficit**
              
              **Total
                  Shareholders’ Equity (Deficit)**Balance
                  at December 31, 2002
              
              
              5,000
              
              €
              5,000
              
              €
              1,072
              
              €
              (7,087
              )
              €
              (1,015
              )Parent
                  company investment
              
              
              
              
              
              
              
              
              25
              
              
              
              
              
              25Net
                  Income for 2002
              
              
              
              
              
              
              
              
              
              
              
              1,207
              
              
              1,207Balance
                  at December 31, 2003
              
              
              5,000
              
              
              5,000
              
              
              1,097
              
              
              (5,880
              )
              
              217Warrants
                  issued in connection with Series A convertible Notes, net of issuance
                  costs
              
              
              
              
              
              
              
              
              393
              
              
              
              
              
              393Beneficial
                  conversion feature on warrants issued in conjunction with the Series
                  A
                  Convertible Notes
              
              
              
              
              
              
              
              
              459
              
              
              
              
              
              459Accretion
                  of warrants
              
              
              
              
              
              
              
              
              (182
              )
              
              
              
              
              (182
              )Beneficial
                  conversion feature on Series A Convertible Notes
              
              
              
              
              
              
              
              
              3,688
              
              
              
              
              
              3,688Share
                  based compensation
              
              
              
              
              
              
              
              
              379
              
              
              
              
              
              379Net
                  loss for 2004
              
              
              
              
              
              
              
              
              
              
              
              (7,028
              )
              
              (7,028
              )Balance
                  at December 31, 2004
              
              
              5,000
              
              
              5,000
              
              
              5,834
              
              
              (12,908
              )
              
              (2,074
              )Capital
                  contribution
              
              
              
              
              
              
              
              
              3,900
              
              
              
              
              
              3,900Warrants
                  issued in connection with Series A convertible Notes
              
              
              
              
              
              
              
              
              138
              
              
              
              
              
              138Beneficial
                  conversion feature on Warrants issued in conjunction with the Series
                  A
                  convertible Notes
              
              
              
              
              
              
              
              
              138
              
              
              
              
              
              138Accretion
                  of Warrants
              
              
              
              
              
              
              
              
              (388
              )
              
              
              
              
              (388
              )Beneficial
                  conversion feature on Series A convertible Notes
              
              
              
              
              
              
              
              
              1,111
              
              
              
              
              
              1,111Issuance
                  of common stock in initial public offering, net
              
              
              2,700
              
              
              2,700
              
              
              13,501
              
              
              
              
              
              16,201Share
                  based compensation
              
              
              
              
              
              
              
              
              474
              
              
              
              
              
              474Conversion
                  of Series A Notes into ordinary shares, net
              
              
              360
              
              
              360
              
              
              1,886
              
              
              
              
              
              2,246Issuance
                  of common stock in private placement, net
              
              
              1,551
              
              
              1,551
              
              
              6,496
              
              
              
              
              
              8,047Net
                  loss for 2005
              
              
              
              
              
              
              
              
              
              
              
              (12,319
              )
              
              (12,319
              )Balance
                  at December 31, 2005
              
              
              9,611
              
              €
              9,611
              
              €
              33,090
              
              €
              (25,227
              )
              €
              17,474
   The
        accompanying notes are an integral part of these financial
        statements.
  F-4
 **Back
            to Table of Contents**
  **GENTIUM
        S.p.A.**
 **STATEMENTS
        OF CASH FLOWS**
  *(000’s
                  omitted)*
              
              **For
                  the Year Ended December 31,****2003**
              
              **2004**
              
              **2005**Cash
                  Flows From Operating Activities:Net
                  income (loss)
              
              €
              1,207
              
              €
              (7,028
              )
              €
              (12,319
              )Adjustments
                  to reconcile net income to net cash provided by (used in) operating
                  activities:Unrealized
                  foreign exchange loss
              
              
              —
              
              
              55
              
              
              249Depreciation
                  and amortization
              
              
              313
              
              
              743
              
              
              1,315Non
                  cash interest expense
              
              
              —
              
              
              1,972
              
              
              3,837Deferred
                  income tax (benefit)
              
              
              (84
              )
              
              (37
              )
              
              646Goods
                  and services received from parent
              
              
              25
              
              
              —
              
              
              —Adjustment
                  of inventory to net realizable value
              
              
              —
              
              
              50
              
              
              291Share
                  based compensation
              
              
              —
              
              
              379
              
              
              474Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              (1,471
              )
              
              981
              
              
              (376
              )Inventories
              
              
              835
              
              
              534
              
              
              (1,033
              )Prepaid
                  expenses and other current assets
              
              
              280
              
              
              (1,747
              )
              
              (150
              )Accounts
                  payable and accrued expenses
              
              
              1,666
              
              
              359
              
              
              (1,794
              )Deferred
                  income
              
              
              (542
              )
              
              (353
              )
              
              (281
              )Termination
                  indemnities
              
              
              22
              
              
              19
              
              
              158Income
                  taxes payable
              
              
              204
              
              
              (304
              )
              
              —Net
                  cash provided by (used in) operating activities
              
              
              2,455
              
              
              (4,377
              )
              
              (8,983
              )Cash
                  Flows From Investing Activities:Capital
                  expenditures by affiliate
              
              
              (2,568
              )
              
              (5,178
              )
              
              (1,263
              )Intangible
                  expenditures
              
              
              (86
              )
              
              (163
              )
              
              (124
              )Net
                  cash used in investing activities
              
              
              (2,654
              )
              
              (5,341
              )
              
              (1,387
              )Cash
                  Flows From Financing Activities:Capital
                  contribution
              
              
              —
              
              
              —
              
              
              3,900Proceeds
                  from long-term debt
              
              
              250
              
              
              5,205
              
              
              -Repayments
                  of long-term debt
              
              
              (374
              )
              
              (374
              )
              
              (581
              )Proceeds
                  from Series A convertible Notes
              
              
              —
              
              
              4,477
              
              
              1,459Repayment
                  of Series A convertible Notes
              
              
              —
              
              
              —
              
              
              (4,221
              )Proceeds
                  (repayment) of affiliate’s loan
              
              
              —
              
              
              2,200
              
              
              (2,200
              )Proceeds
                  (repayment) of bank overdrafts and short term borrowings
              
              
              —
              
              
              390
              
              
              (2,790
              )Proceeds
                  from initial public offering and private placement, net of offering
                  expenses
              
              
              —
              
              
              —
              
              
              24,801Net
                  cash provided by (used in) financing activities
              
              
              (124
              )
              
              11,898
              
              
              20,368Increase
                  (decrease) in cash and cash equivalents
              
              
              (323
              )
              
              2,180
              
              
              9,998Effect
                of exchange rate on cash and cash equivalent
              
              
              —
              
              
              258
              
              
              326Cash
                  and cash equivalents, beginning of period
              
              
              346
              
              
              23
              
              
              2,461Cash
                  and cash equivalents, end of period
              
              €
              23
              
              €
              2,461
              
              
              12,785**Supplemental
                  disclosure of cash flow information:**Cash
                  paid for interest, net of capitalized amount
              
              €
              64
              
              €
              91
              
              
              504Income
                  taxes paid
              
              €
              89
              
              €
              99
              
              
              —
 
 **Supplemental
                disclosure of non cash investing and financing
                activities:**Assets
                  acquired under lease obligations
              
              
              127
              
              
              127
              
              
              127Computer
                  equipment acquired under a facility loan
              
              
              —
              
              
              —
              
              
              40Conversion
                  of notes payable into ordinary shares
              
              €
              —
              
              €
              —
              
              €
              2,408Fair
                  value of warrants issued with convertible notes
              
              €
              —
              
              €
              459
              
              €
              597Fair
                  value of options issued to underwriters
              
              
              
              
              
              
              
              
              190Value
                  of beneficial conversion feature of convertible notes and
                  warrants
              
              €
              —
              
              €
              3,833
              
              €
              5,369
   The
        accompanying notes are an integral part of these financial
        statements.
  F-5
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            to Table of Contents**
  **GENTIUM
        S.p.A.**
 **NOTES
        TO FINANCIAL STATEMENTS**
  **For
        the Three Years Ended December 31, 2005**
 **(All
        amounts in thousands of euro or U.S. dollars unless specified otherwise)**
  **1.    BUSINESS
        AND BASIS OF PRESENTATION**
  *Basis
        of Presentation:* Gentium
        S.p.A. (“Gentium,” the “ **Company** ”
or
        “ **we** ”)
        is a
        biopharmaceutical company focused on the discovery, research and development
        of
        drugs to treat and prevent a variety of vascular diseases and conditions
        related
        to cancer and cancer treatments. The Company’s core areas of focus are: i) drugs
        derived from DNA extracted from natural sources and ii) drugs which are
        synthetic oligonucleotides (molecules chemically similar to natural DNA).
  In
        particular, we are developing our most advanced product candidates to treat
        and
        prevent Veno-Occlusive Disease (“ **VOD** ”)
        and to
        treat multiple myeloma. Our most advanced product candidates utilize
        defibrotide, a drug that we discovered and currently manufacture and license
        to
        pharmaceutical companies for sale in Italy. In addition to defibrotide, we
        manufacture and sell urokinase and calcium heparin, which are active
        pharmaceutical ingredients used to make other drugs, sulglicotide, which
        is
        intended to be used to treat peptic ulcers, and other miscellaneous
        pharmaceutical products. We have also developed a formulation of the drug
        mesalazine to treat inflammatory bowel disease. All of the Company’s operating
        assets are located in Italy, and more than 95% of product revenue are to
        one
        affiliated customer in Italy.
  The
        Company is domiciled in the Republic of Italy and was part of a family-owned
        group of pharmaceutical businesses founded in Italy in 1944. The original
        business was Crinos Industria Farmacobiologica S.p.A. Crinos Industria
        Farmacobiologica sold part of its business, including the rights to the name
        “Crinos” to Crinos S.p.A., a subsidiary of Stada, after which Crinos Industria
        Farmacobiologica then changed its name to Sirton Pharmaceutical S.p.A.
        (“ **Sirton** ”).
        Gentium’s largest shareholder is FinSirton S.p.A. (“ **FinSirton** ”)
        and
        Sirton is a wholly-owned subsidiary of FinSirton.
  FinSirton
        formed the Company in 1993 as Pharma Research S.r.l., a private Italian limited
        liability company, to pursue research and development activities of prospective
        pharmaceutical specialty products. In December 2000 **,** Sirton
        contributed certain assets, including research facilities, equipment and
        intellectual property, to the Company in return for 98% of the Company’s shares
        (the “ **Separation** ”).
        At
        that time, the Company was incorporated and in July 2001 changed its name
        to Gentium S.p.A. The Separation and transfer of assets was recorded at
        historical cost in the accompanying financial statements. The accompanying
        financial statements reflect the historical operations that comprised the
        business of research and development and manufacture of defibrotide and certain
        other pharmaceutical ingredients.
  The
        financial statements include allocations of certain expenses, including
        centralized legal, accounting, treasury, information-technology, purchasing
        and
        logistics, controlling and reporting and other corporate services and
        infrastructure costs provided by the Company’s largest shareholder, FinSirton,
        and its affiliate, Sirton. Starting in April 2005, the Company began to
        implement functions and activities that were previously provided by FinSirton
        and Sirton. As of December 31, 2005, we are providing own purchasing, logistics,
        quality assurance, accounting, controlling and reporting services and continue
        to obtain corporate services, payroll services, information technology services,
        infrastructure costs and quality control services from these affiliates.
        As of
        February 2006, we established our own treasury, regulatory and information
        technology departments, but we are still relying on the IT infrastructure
        provided by Sirton.
  The
        charges received from our affiliates for goods and services are allocated
        such
        that: (i) cost of goods sold includes allocations based on direct costs related
        to inventory production and related support activities, (ii) research and
        development was recorded based upon actual costs associated with research
        and
        development activities, (iii) there was no allocation for selling and marketing
        expenses during the periods presented since substantially all sales were
        to the
        Company’s affiliate, Sirton, and (iv) general and administrative costs were
        generally allocated based on the nature of the activities. The expense
        allocations were determined on bases that management considered to be a
        reasonable reflection of the utilization of services
        provided or the benefits received by Gentium.
  The
        Company derives the majority of its revenues from its affiliate, Sirton.
        Despite
        the fact that Sirton has experienced financial difficulties which could impact
        the Company, management believes that the Company can
  F-6
 **Back
            to Table of Contents**
  continue
        to operate without a significant change in operations or disposal of assets.
        Although the Company’s business plan foresees a substantial investment in
        research and development and continuing losses, the Company has demonstrated
        the
        ability to raise substantial third party funding based on the prospects of
        the
        Company’s product candidates. The Company also has opportunities to raise
        capital by licensing its technology and proprietary knowledge as it has in
        the
        past. However, there can be no assurance that the Company will be able to
        raise
        additional funds in the future.
  The
        accompanying financial statements have been prepared in accordance with
        accounting principles generally accepted in the United States of America.
        These
        financial statements are denominated in the currency of the European Union
        (the
        euro or €). Unless otherwise indicated, all amounts are reported in thousands of
        Euro or US$, except share and per share data.
  **2.**  **SUMMARY
        OF SIGNIFICANT ACCOUNTING POLICIES**
  *Use
        of Estimates and Reclassification:* The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States requires management to make judgments,
        estimates and assumptions that affect the reported amounts of assets and
        liabilities and disclosure of contingent assets and liabilities at the date
        of
        the financial statements and the reported amounts of revenues and expenses
        during the reporting period. Actual results could differ from those estimates.
  Certain
        reclassification of prior period amounts have been made to the Company’s
        financial statements to conform to the current period presentation.
  As
        a
        result of the temporary cessation of operations from February through August
        of
        2004 in connection with the upgrade of the Company’s manufacturing facility,
        comparison of operating results in 2004 and 2005 may not be
        meaningful.
  *Segment
        information:* Statement
        of Financial Accounting Standards (“ **SFAS** ”)
        No. 131 *,
        “Disclosure about Segments of an Enterprise and Related
        Information* ”
        (“ **SFAS 131** ”),
        establishes standards for reporting information on operating segments in
        interim
        and annual financial statements. The Company’s chief operating decision makers
        review the profit and loss of the Company on an aggregate basis and manage
        the
        operations of the Company as a single operating segment. Accordingly, the
        Company operates in one segment, which is the biopharmaceutical industry.
  *Cash
        and Cash Equivalents:* Cash
        and cash equivalents include highly liquid, temporary cash investments having
        original maturity dates of three months or less. For reporting purposes,
        cash
        equivalents are stated at cost plus accrued interest, which approximates
        fair
        value. Bank overdrafts, which represent negative cash balances, are classified
        as a current liability. The Company’s bank overdrafts amounted to €100 and nil
        for the years ended December 31, 2004 and 2005, respectively.
  *Accounts
        Receivable:* The
        Company extends credit to its customers in the ordinary course of business.
        Accounts receivable are reported net of an allowance for uncollectible accounts.
        Since the majority of the sales by the Company have been to its affiliate,
        no
        bad debt provision has been recorded for the periods presented. Collateral
        or
        other types of guarantees are not required by the Company from customers.
  *Inventories:* Inventories
        consist of raw materials, semi-finished and completed products and from time
        to
        time includes products used in clinical trials, which are charged to research
        and development expense when consumed. The Company capitalizes inventory
        costs
        associated with certain by-products, based on management’s judgment of probable
        future commercial use and net realizable value. Inventories are stated at
        the
        lower of cost or market, cost being determined on an average cost basis.
        The
        Company periodically reviews its inventories and items that are considered
        outdated or obsolete are reduced to their estimated net realizable value.
        The
        Company estimates reserves for excess and obsolete inventories based on
        inventory levels on hand, future purchase commitments, and current and
        forecasted product demand. If an estimate of future product demand suggests
        that
        inventory levels are excessive, then inventories are reduced to their estimated
        net realizable value.
  F-7
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            to Table of Contents**
  *Property,
          Manufacturing Facility and Equipment:* Property
          and equipment are stated at cost. Repairs and maintenance are charged to
          operations as incurred, and significant expenditures for additions and
          improvements are capitalized if they extend the useful life or capacity
          of the
          asset. Leasehold improvements are amortized over the economic life of the
          asset
          or the lease term, whichever is shorter. Depreciation and amortization
          of
          property and equipment are computed using the straight-line method.
  In
          October 2005, an external party with recognized expertise in our industry
          performed a detailed valuation of the remaining useful life of the Company’s
          manufacturing facility, industrial and laboratories equipments. Based on
          the
          result of the external valuation, the Company reviewed the estimated useful
          life
          of the manufacturing facility, industrial and laboratories equipments and
          decided to extend their useful lives. In accordance with SFAS 154 “ *Accounting
          Changes and Error Corrections* ”
such
          change has been accounted for prospectively as a change in estimate, with
          the
          effect being such that the estimated useful lives were increased as of
          October
          1, 2005, and therefore decreased our 2005 operating loss by €239.
 Before
                  October
                    1, 2005
                
                After
                  October
                    1, 2005Buildings
                
                
                18
                    years
                
                
                20
                    yearsPlant
                    and Machinery
                
                
                10
                    years
                
                
                14
                    yearsIndustrial
                    Equipment
                
                
                8
                    years
                
                
                10
                    years
  The
          cost
          of property, manufacturing facility and equipment also includes a proportionate
          share of the Company’s financing costs, as required by SFAS No. 34,
“ *Capitalization
          of Interest Cost* ”.
          The
          amount of interest cost to be capitalized for qualifying assets is that
          portion
          of the interest cost incurred during the assets’ acquisition periods that could
          have been avoided if expenditures for the assets had not been made. Interest
          expense capitalized is amortized over the same life as the underlying
          constructed asset.
  *Computer
          Software* :
          The
          Company accounts for computer software costs in accordance with AICPA Statement
          of Position (“ **SOP** ”)
          98-1, *“Accounting
          for the Costs of Computer Software Developed or Obtained for Internal
          Use”.* SOP 98-1
          requires the capitalization of costs relating to certain activities of
          developing and obtaining internal use software that incurred during the
          application development stage. As of December 31, 2005 the costs incurred
          during
          the development stage amounted to €123, and include external direct costs of
          material and services consumed in obtaining internal-use software and our
          internal payroll and payroll related costs for employees who were directly
          associated with and who devote time to the internal-use software project.
          Capitalized costs of computer software obtained for internal use are amortized
          over the estimated useful life of the software. As of December 31, 2005,
          the
          project was not complete therefore the Company did not record amortization
          costs.
  *Intangibles:* Intangible
          assets are stated at cost and amortized on a straight-line basis over their
          expected useful life, estimated to be five years for patent rights and
          ten years
          for licenses and trademarks.
  *Impairment
          of Long-lived Assets, including Intangibles:* The
          Company’s long-lived assets consist primarily of product rights and property and
          equipment. In accordance with SFAS No. 144, “ *Accounting
          for the Impairment or Disposal of Long-Lived Assets,”* the
          Company evaluates its ability to recover the carrying value of long-lived
          assets
          used in its business, considering changes in the business environment or
          other
          facts and circumstances that suggest their value may be impaired. If this
          evaluation indicates the carrying value will not be recoverable, based
          on the
          undiscounted expected future cash flows estimated to be generated by these
          assets, the Company will reduce the carrying amount to the estimated fair
          value.
  *Concentration
          of Risk:* Financial
          instruments which potentially subject the Company to concentrations of
          credit
          risk are primarily cash and cash equivalents, short-term investments and
          accounts receivable. The Company maintains its cash balances in the form
          of
          deposits with financial institutions that management believes are creditworthy.
          The Company has no financial instruments with off-balance-sheet risk of
          accounting loss. The Company’s products are sold mainly to its affiliate,
          Sirton. In addition, the Company obtains most of its organic raw material
          from
          one supplier on a non-exclusive basis, however, the Company believes that
          there
          are other readily available sources of supply for this material.
  F-8
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              to Table of Contents**
  For
          the
          years ended December 31, 2003, 2004 and 2005, revenues generated from its
          main customer and affiliate were approximately 100%, 92% and 97%, respectively,
          of product revenues. The Company’s affiliate and most significant customer also
          has limited customers, with a significant amount of its sales also concentrated
          in one customer.
  *Revenue
          Recognition:* The
          Company mainly sells its products to its affiliate, Sirton. The Company
          also
          recognizes revenue from the sale of products to third parties and from
          contractual arrangements. Revenues from product sales are recognized at
          the time
          of product shipment. The Company also has revenue arrangements with multiple
          deliverables, which are divided into separate units of accounting if certain
          criteria are met, including whether the delivered element has stand-alone
          value
          to the customer and whether there is objective and reliable evidence of
          the fair
          value of the undelivered items. The consideration received from these contracts
          is allocated among the separate units based on their respective fair value,
          and
          the applicable revenue recognition criteria are applied to each separate
          unit.
          Advance payments received in excess of amounts earned are classified as
          deferred
          revenue until earned. The Company’s revenue recognition policies for its various
          types of revenue streams are as follows:
  The
          Company recognizes revenue from product sales when there is persuasive
          evidence
          that an arrangement exists, delivery has occurred and title passes to the
          customer, the price is fixed and determinable, collectibility is reasonably
          assured, and the Company has no further obligations. Costs incurred by
          the
          Company for shipping and handling are included in cost of goods sold.
  The
          Company recognizes revenue from royalties based on the licensees’ sales of the
          Company’s products or technologies. Royalties are recognized as earned in
          accordance with the contract terms when royalties from licensees can be
          reliably
          measured and collectibility is reasonably assured.
  Revenues
          from contractual arrangements with customers generally includes upfront
          fees,
          performance milestone payments, reimbursements of development costs and
          continuing license and
          manufacturing fee arrangements if the research and development efforts
          ever
          reach the commercialization phase.
  Sales
          of
          licensing rights for which no further performance obligations exist are
          recognized as revenues on the earlier of when the payment is received or
          collection is assured. Nonrefundable upfront licensing fees and certain
          guaranteed time based payments that require the Company’s continuing involvement
          in the form of research and development or manufacturing efforts are recognized
          as revenues:
 ·
                  ratably
                      over the development period if the development risk is significant,
  ·
                  ratably
                      over the manufacturing period or estimated product useful life
                      if
                      development risk has been substantially eliminated, or
  ·
                  based
                      upon the level of research services performed during the period
                      of the
                      research contract.
  Performance
            based milestone payments are recognized as revenue when the performance
            obligation, as defined in the contract, is achieved. Performance obligations
            typically consist of significant milestones in the development life cycle
            of the
            related technology, such as initiation of clinical trials, filing for
            approval
            with regulatory agencies and approvals by regulatory agencies. See additional
            discussion under Note 3 regarding the nature of the performance milestone
            arrangements for the Company’s significant collaborative agreements.
  *Government
            Grants:* Government
            grants are related to the reimbursement of qualifying research and development
            expenses. As the research and development expenses submitted by the Company
            are
            first subject to audit and revision by the competent governmental authority
            and
            final payments are discretionary, no amount of grant reimbursement is
            recognized
            until the cash is received. Grant reimbursement costs are treated as
            a reduction
            of the qualifying expense in the accompanying financial statements.
  *Research
            and Development:* Research
            and development expenditures are charged to operations as incurred. For
            the
            years ended December 31, 2003, 2004 and 2005, research and development
            expenses amounted to €2,253, €2,922 and **** €4,557, **** respectively.
            Research and development expenses consist of costs incurred for proprietary
            and
            collaborative research and development, including activities such as
            product
            registration and investigator-sponsored trials. Research and development
            expenses include salaries, benefits and other personnel related costs,
            clinical
            trial and related trial product manufacturing costs, contract and other
            outside
            service fees, and allocated facilities and overhead costs.
  F-9
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                to Table of Contents**
  *Clinical
            Trial Accruals:* The
            Company records accruals for estimated clinical study costs. These costs
            can be
            significant component of research and development expenses. The Company
            accrues
            for the costs of clinical studies conducted by contract research organizations
            based on the estimated costs and contractual progress over the life of
            the
            individual study.
  *Income
            Taxes:* The
            Company files a separate tax return in Italy on an annual basis. The
            Company
            uses the liability method of accounting for income taxes, as set forth
            in SFAS
            No. 109 *,
            “Accounting for Income Taxes.”* Under
            this method, deferred tax assets and liabilities are recognized for the
            expected
            future tax consequences related to the temporary differences between
            the
            carrying amounts and the tax basis of assets and liabilities and net
            operating
            loss carry-forwards, all calculated using presently enacted tax rates.
            Valuation
            allowances are established when necessary to reduce deferred tax assets
            when it
            is not considered more likely than not that tax assets will be recoverable.
  *Foreign
            currency transactions:* The
            Company has no foreign subsidiaries and, therefore, has no translation
            adjustment in the financial statements. However, net realized and unrealized
            gains and losses resulting from foreign currency transactions that are
            denominated in a currency other than the Company’s functional currency, the
            euro, are included in the statements of operations. In particular, the
            Company
            completed its IPO in the United States in 2005. A substantial amount
            of the
            proceeds from the IPO are still located in the U.S. in US dollars, therefore
            requiring remeasurement every period.
  *Interest
            rate swaps:* The
            Company uses the provisions of SFAS No. 133, *“Accounting
            for Derivative Instruments and Hedging Activities”* .
            SFAS 133 requires the recognition of all derivative instruments as either
            assets or liabilities in the balance sheet at fair value. The accounting
            for
            changes in the fair value of a derivative instrument depends on whether
            it has
            been designated and qualifies as part of a hedging relationship and further,
            on
            the type of hedging relationship. For those derivative instruments that
            are
            designated and qualify as hedging instruments, the Company must designate
            the
            hedging instrument, based upon the exposure being hedged, as a fair value
            hedge
            or a cash flow hedge. The Company’s only derivative instruments to date have
            been interest rate swaps used to manage its interest rate exposure, none
            of
            which have qualified for hedge accounting treatment; therefore, the gain
            or loss
            is recognized in current earnings during the period of change. The total
            amount
            of expense recognized during the years ended December 31, 2003, 2004 and
            2005 was €17, €21 and €6, respectively. The fair value of the derivative is
            included in other non-current assets in the balance sheets.
  *Share
            Based Compensation:* Effective
            September 30, 2004, the Company adopted an equity incentive plan and a
            non-statutory share option plan (the “ **Plans** ”)
            for
            officers, employees, consultants, directors and non-employee directors.
            Options
            to purchase an aggregate of 85,000 and 992,000 ordinary shares were outstanding
            under the Plans at December 31, 2004 and December 31, 2005, respectively.
            The Company has always accounted for share based compensation on the
            basis of
            fair value, previously under SFAS 123 and as of July 1, 2005, under
            SFAS 123(R), *“Share
            Based Payments”* .
            The
            adoption of SFAS 123R did not have a significant impact on the Company
            as the
            fair valuations previously used to estimate the fair value of share based
            compensation were unchanged. The fair value of the equity compensation
            for
            employees is determined using a single estimated expected life. Compensation
            expense for awards that have a vesting provision is recognized on a
            straight-line basis over the service period of the equity compensation
            award.
            Stock based compensation expense was nil, €379 and €474 **** for
            the
            years ended December 31, 2003, 2004 and 2005, respectively. The Company
            expects to incur significant non-cash share based compensation expense
            in the
            future. No share based compensation was recorded in years prior to 2004
            because
            the Company had no equity compensation plans prior to 2004.
  From
            time
            to time, the Company grants options to non-employees. Grants of equity
            instruments to non-employees, and non-directors such as consultants are
            also
            accounted for under SFAS 123(R) and EITF 96-18, *“Accounting
            for Equity Instruments That Are Issued to Other Than Employees
            for* *Acquiring, or in Conjunction with Selling, Goods or Services* ”.
            Under
            the EITF, equity instruments granted to non-employees requires the measuring
            of
            the fair value of that instrument at the earlier of either i) the date
            at which
            a commitment for performance by the counterparty to earn the equity instruments
            is reached (a “performance commitment”); or ii) the date at which the
            counterparty’s performance is complete. Fair value of the option grant is
            estimated on the grant date using the Black-Scholes option-pricing model.
            The
            Black-Scholes model takes into account volatility in the price of the
            Company’s
            stock, the risk-free interest rate, the estimated life of the option,
            the
            closing market price of the Company’s stock and the exercise price. For the
            years ended December 31, 2004 and 2005, the Company has recorded non-cash
            compensation expenses for options granted to non employees and non directors
            of
            approximately €379 and €148, respectively.
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 *Fair
                    Value of Financial Instruments:* The
                    carrying amounts of receivables, prepaid expenses and accounts
                    payable
                    approximate fair values due to the short-term maturities of these
                    instruments.
                    Substantially all of the Company’s debt is floating rate debt or callable loans
                    due to an affiliate, and therefore, the stated amount approximates
                    fair value.
 *Stock
                      purchase warrants issued with Series A Senior Convertible Promissory
                      Notes:* The
                      Company granted warrants (the “ **Warrants** ”)
                      in
                      connection with the issuance of certain notes payable (the
“ **Notes** ”,
                      see
                      also Note 10). Under Accounting Principles Board Opinion No. 14, *“Accounting
                      for Convertible Debt and Debt Issued With Stock Purchase
                      Warrants”,* the
                      estimated fair value of such Warrants represents original issue
                      discount (“OID”)
                      from the face amount of the Notes payable. Accordingly, the
                      related estimated
                      fair value of the warrants was recorded in the financial statements
                      as a
                      discount from the face amount of the Notes. The discount on
                      the Notes was being
                      amortized and included in interest expense over the period
                      to the earliest put
                      option date using the effective interest method. Upon completion
                      of the
                      Company’s IPO, convertible Note holders elected to either receive cash
                      for their
                      Notes or convert the Notes into equity. At that time, the remaining
                      balance of
                      the discount related to redeemed Notes was charged to interest
                      expense and, for
                      Notes converted into ordinary shares, the remaining balance
                      was charged to
                      additional paid-in capital.
  *Beneficial
                        Conversion Feature of Series A Senior Convertible Promissory
                        Notes:* The
                        convertible feature of certain Notes payable (see Note 10)
                        and share purchase
                        Warrants provided for a rate of conversion of the instrument
                        into Gentium’s
                        shares that was below fair value at the time of issuance.
                        This feature is
                        normally characterized as a “beneficial conversion feature” (“BCF”), which
                        represents the “intrinsic value” of the difference between the conversion price
                        of the instrument and the underlying fair value of the Company’s shares at that
                        date. Pursuant to EITF Issue No. 98-5 “Accounting for Convertible Securities
                        with Beneficial Conversion Features or Contingently Adjustable
                        Conversion Ratio”
and EITF No. 00-27, “Application of EITF Issue No. 98-5 to Certain Convertible
                        Instruments”, the Company determined the value of the BCF for the convertible
                        Notes payable and stock purchase Warrants issued in 2004
                        to be approximately
€3,688 ($4,643) and €459 ($578), respectively. In conjunction with additional
                        convertible Notes issued in January 2005, the Company determined
                        the value of
                        the BCF to be approximately €1,111 ($1,456) and €138 ($181), for the convertible
                        Notes payable and stock purchase Warrants, respectively.
                        Accordingly, the
                        relative fair value of the BCF related to the convertible
                        Notes payable and
                        stock purchase Warrants was recorded in the financial statements
                        as a discount
                        from the face amount of the Notes. The discounts were being
                        amortized to
                        interest expense and accreted to additional paid in capital,
                        respectively, using
                        the effective interest method, through the earliest put option
                        date. As of
                        December 31, 2005 the convertible Notes were either converted
                        or redeemed. The
                        balance of the discount related to Notes redeemed was charged
                        to expense and for
                        Notes converted into ordinary shares, was charged to additional
                        paid-in
                        capital.
 *Comprehensive
                        Income or Loss:* The
                        Company’s comprehensive income or loss is solely comprised of its
                        net income or
                        loss.
  *Recently
                        Issued Accounting Standards:* In
                        May 2005, the FASB issued SFAS No.154, *“Accounting
                        Changes and Error Corrections”* ,
                        which
                        replaces APB Opinion No. 20, *“Accounting
                        Changes,”* and
                        supersedes FASB Statement No. 3 *,
                        “Reporting Accounting Changes in Interim Financial Statements—an amendment of
                        APB Opinion No. 28.”* SFAS 154
                        requires retrospective application to prior periods’ financial statements of
                        changes in accounting principle, unless it is impracticable
                        to determine either
                        the period-specific effects or the cumulative effect of the
                        change. When it is
                        impracticable to determine the period-specific effects of
                        an accounting change
                        on one or more individual prior periods presented, SFAS 154
                        requires that the
                        new accounting principle be applied to the balances of assets
                        and liabilities as
                        of the beginning of the earliest period for which retrospective
                        application is
                        practicable and that a corresponding adjustment be made to
                        the opening balance
                        of retained earnings for that period rather than being reported
                        in an income
                        statement. When it is impracticable to determine the cumulative
                        effect of
                        applying a change in accounting principle to all prior periods,
                        SFAS 154
                        requires that the new accounting principle be applied as
                        if it were adopted
                        prospectively from the earliest date practicable. SFAS 154
                        is effective for
                        accounting changes and corrections of errors made in fiscal
                        years beginning
                        after December 15, 2005. The Company has adopted the provisions of SFAS
                        154, which did not have an impact on its results of operations.
  In
                        July 2005, the FASB published an Exposure Draft of a proposed
                        Interpretation, *“Accounting
                        for Uncertain Tax Positions* ”.
                        The
                        Exposure Draft seeks to reduce the significant diversity
                        in practice associated
                        with recognition and measurement in the accounting for income
                        taxes. It would
                        apply to all tax positions accounted for in accordance with
                        SFAS 109,
“Accounting for Income Taxes.” The Exposure Draft requires that a tax position
                        meet a “probable recognition threshold” for the benefit of the uncertain tax
                        position to be recognized in the financial statements. This
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  threshold
                          is to be met assuming that the tax authorities will examine
                          the uncertain tax
                          position. The Exposure Draft contains guidance with respect
                          to the measurement
                          of the benefit that is recognized for an uncertain tax
                          position, when that
                          benefit should be recognized, and other matters. This proposed
                          Interpretation
                          would clarify the accounting for uncertain tax positions
                          in accordance with SFAS
                          109. The FASB staff is considering the comment letters
                          that have been received
                          and is determining the plan for deliberations. The Board
                          expects to issue a
                          final Interpretation, which would include amendments to
                          SFAS 109, in the first
                          quarter of 2006. The Company is currently evaluating the
                          impact this proposed
                          Interpretation would have on its results of operations.
  **3.    COLLABORATIVE
                          AGREEMENTS**
  In
                          December 2001, the Company entered into a license and supply agreement
                          with
                          Sigma-Tau Pharmaceuticals Inc. (as assignee of Sigma-Tau Industrie
                          Farmaceutiche Riunite S.p.A., hereinafter referred to as
“ **Sigma
                          Tau** ”).
                          Under
                          the multi-year agreement, Sigma Tau obtained exclusive
                          rights to distribute,
                          market and sell defibrotide to treat VOD in the United
                          States. In 2005, the
                          Company expanded Sigma-Tau’s current license territory to all of North America,
                          Central America and South America. In return for the license,
                          Sigma-Tau agreed
                          to pay the Company an aggregate of $4,900, of which €3,826 ($4,000) has been
                          received to date, based on the exchange rate in effect
                          on the date of receipt.
                          Sigma-Tau will owe the Company an additional $350 performance
                          milestone payment
                          within 30 days of the end of a Phase III pivotal study, and a $550
                          performance milestone payment within 30 days of obtaining an FDA New Drug
                          Application or Biologic License Application and other approvals
                          necessary for
                          the marketing of defibrotide in the United States.
  The
                          amounts due for the aforementioned performance criteria
                          will not be recognized
                          as revenue until the performance obligations are fully
                          satisfied. If the Company
                          unilaterally discontinues development of defibrotide to
                          treat VOD (after written
                          notice to Sigma-Tau) and then resumes the development,
                          substantially availing
                          itself of the stages previously completed, either independently
                          or with a third
                          party, within 36 months of the discontinuation, then the Company will be
                          required to promptly reimburse Sigma-Tau for the amounts
                          received. The Company
                          has no intention to discontinue the development of the
                          product.
  If
                          during
                          the drug development stages the Company realizes that the
                          activities to bring
                          the product to completion would require a material increase
                          of expenditures,
                          either party can terminate the agreement. If the Company
                          or Sigma-Tau terminates
                          the agreement for that reason and the Company then resumes
                          the development,
                          substantially availing itself of the stages previously
                          completed, either
                          independently or with a third party, within 36 months of the termination,
                          the Company will be required to
                          promptly reimburse Sigma-Tau for the amounts received.
                          Currently, the Company is
                          not aware of any factors that would require a material
                          unexpected increase of
                          expenditures for the remaining development activities.
  The
                          Company’s accounting for its performance based milestone payments
                          is based on
                          the guidance in SAB 104 which states that each of the following four
                          criteria must be met prior to revenue being recognized:
  ·
                                persuasive
                                    evidence that an arrangement exists,
  ·
                                delivery
                                    has occurred or services have been rendered,
  ·
                                the
                                    seller’s price to the buyer is fixed or determinable,
                                    and
  ·
                                collectibility
                                    is reasonably assured.
  The
                          Company believes that once it has met the performance milestone
                          as described in
                          the collaborative agreement, then all of the criteria have
                          been met and that the
                          revenue should be recognized at that date. The Company
                          believes that the
                          performance milestones are substantive and have a risk
                          of non-performance;
                          therefore successful completion on the Company’s part allows it to recognize the
                          payments due for the performance based obligation. As such,
                          the Company
                          recognized €1,462 and €273 in revenue in 2003 and 2004, respectively. The
                          Company recognized in the financial statements €171 in 2003 for completing the
                          dose-finding study of defibrotide to treat VOD, which was
                          its first milestone
                          under its collaborative agreement with Sigma-Tau. The Company
                          also recognized
€1,291 in 2003 for completing and successfully obtaining
                          the investigational new
                          drug application number for defibrotide to treat VOD, which
                          was its second
                          performance milestone under its collaborative agreement.
                          The combination of
                          these two items equals the €1,462 of revenue recognized in 2003, based in each
                          case upon the exchange rate in effect on the date of receipt.
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 The
                          Company received the milestone of $350 (€273) in 2004 due to the investigational
                          new drug application issuing of the Phase III pivotal study of defibrotide
                          to treat VOD, which was the third milestone under the Company’s collaborative
                          agreement with Sigma-Tau, based upon the exchange rate
                          in effect on the date of
                          receipt.
  The
                          Company received up-front payments under the collaborative
                          agreement of €1,130
                          ($1,000) and €961 ($850) in 2001 and 2002, respectively. The Company
                          is
                          recognizing the up-front payments as income over the expected
                          life of the
                          research period which is estimated to be 5 years from the year of the
                          agreement. This license expires on the earlier of the eighth
                          year of the
                          Company’s launch of the product or the expiration of the U.S. patent
                          regarding
                          the product, which expires in 2010. The Company recognized
                          income of €365, €305
                          and €280 for the years ended December 31, 2003, 2004 and 2005, respectively
                          from the deferred up-front payments. The agreement also
                          envisions that the
                          Company will produce and supply defibrotide to Sigma Tau
                          for marketing and
                          distribution in the United States if and when the drug
                          is approved by the FDA.
  The
                          following table outlines the nature and amount of the upfront
                          and performance
                          based milestone payments recognized as other income and
                          revenue in the
                          accompanying financial statements:
  **For
                                    the Year Ended**
                                  **December
                                    31,****2003**
                                
                                **2004**
                                
                                **2005**Upfront
                                    payments recognized ratably
                                
                                €
                                365
                                
                                €
                                305
                                
                                €
                                280Performance
                                    milestone payments
                                
                                
                                1,462
                                
                                
                                273
                                
                                
                                —€
                                1,827
                                
                                €
                                578
                                
                                €
                                280
  **4** **.    INVENTORIES**
  The
                          Company’s inventories consisted of:
  **December
                                    31,****2004**
                                
                                **2005**Raw
                                    materials
                                
                                €
                                205
                                
                                €
                                199Semi-finished
                                    goods
                                
                                
                                681
                                
                                
                                1,414Finished
                                    goods
                                
                                
                                —
                                
                                
                                15Total
                                
                                €
                                886
                                
                                €
                                1,628
  For
                          the
                          years ended December 31, 2004 and 2005, respectively, the
                          Company wrote down €50
                          and €291, of the carrying value of inventory which was charged
                          to cost of goods
                          sold. The write-downs consisted of €144 related to inventory that failed to meet
                          quality specifications, €50 to adjust a by-product cost to its net realizable
                          value and an additional €96 related to excess inventory compared with 2006
                          forecasted sales.
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  **5.    PREPAID
                          EXPENSES AND OTHER CURRENT ASSETS**
  The
                          Company’s prepaid expenses and other current assets consisted of:
  **December
                                    31,****2004**
                                
                                **2005**VAT
                                    receivables
                                
                                €
                                679
                                
                                €
                                675Withholding
                                    tax
                                
                                
                                18
                                
                                
                                32Debt
                                    issue costs
                                
                                
                                355
                                
                                
                                —Prepaid
                                    interest
                                
                                
                                88
                                
                                
                                57Deferred
                                    offering costs
                                
                                
                                360
                                
                                
                                —D&O
                                    insurance
                                
                                
                                —
                                
                                
                                59Prepaid
                                    expenses and other current assets
                                
                                
                                117
                                
                                
                                95Total
                                
                                €
                                1,617
                                
                                €
                                918
  The
                          debt
                          issue costs were related to the Company’s private placement of Series A
                          senior convertible promissory Notes and Warrants. As of
                          December 31, 2005, all
                          the Notes have been redeemed or converted and the debt
                          issue costs have been
                          charged to interest expense or additional paid in capital.
                          Deferred offering
                          costs represented costs incurred as of December 31, 2004 in connection with
                          the Company’s planned IPO. The IPO was consummated on June 21, 2005;
                          subsequently, those costs have been offset against the
                          additional paid-in
                          capital from the proceeds of the IPO. The value added tax
                          (or “ **VAT** ”)
                          amounts represent a tax on the value of consumption. The
                          VAT has no effect on
                          the Company’s operating results, as payments and receipts are allowed
                          to be
                          netted against each other in periodic filings with the
                          taxing authorities. The
                          VAT payment system is a “custodial” relationship. VAT liabilities are generated
                          when the Company invoices customers, including the VAT
                          amount, and VAT
                          receivables are created when the Company purchases goods
                          and services subject to
                          VAT. D&O insurance is a director and officers liability insurance
                          policy
                          contracted in June 2005, which expires in May 2006. Insurance
                          policies are
                          charged to expense based on the contractual life of the
                          policy.
  **6** **.    PROPERTY,
                          MANUFACTURING FACILITY AND EQUIPMENT**
  The
                          Company’s property, manufacturing facility and equipment consisted
                          of:
  **December
                                    31,****2004**
                                
                                **2005****Cost**
                                
                                **Acc.**
                                  **Deprec.**
                                
                                **Net**
                                  **book
                                    value**
                                
                                **Cost**
                                
                                **Acc.**
                                  **Deprec.**
                                
                                **Net**
                                  **book
                                    value**Land
                                    and building
                                
                                €
                                2,508
                                
                                €
                                1,018
                                
                                €
                                1,490
                                
                                €
                                2,617
                                
                                €
                                1,109
                                
                                €
                                1,508Plant
                                    and machinery
                                
                                
                                12,643
                                
                                
                                5,799
                                
                                
                                6,844
                                
                                
                                13,285
                                
                                
                                6,843
                                
                                
                                6,442Industrial
                                    equipment
                                
                                
                                659
                                
                                
                                515
                                
                                
                                144
                                
                                
                                709
                                
                                
                                579
                                
                                
                                130Other
                                
                                
                                342
                                
                                
                                277
                                
                                
                                65
                                
                                
                                430
                                
                                
                                294
                                
                                
                                136Internally
                                    Developed Software
                                
                                
                                —
                                
                                
                                —
                                
                                
                                —
                                
                                
                                123
                                
                                
                                —
                                
                                
                                123Construction
                                    in progress
                                
                                
                                —
                                
                                
                                —
                                
                                
                                —
                                
                                
                                292
                                
                                
                                —
                                
                                
                                292€
                                16,152
                                
                                €
                                7,609
                                
                                €
                                8,543
                                
                                €
                                17,456
                                
                                €
                                8,825
                                
                                €
                                8,631
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  The
                          amount of depreciation expense for the years ended December 31, 2003, 2004
                          and 2005 was €259, €668 and €1,215, respectively. For the years ended December
                          31, 2004 and 2005, €95 and €54, respectively, of interest expense was
                          capitalized.
  As
                          of
                          December 31, 2004 and 2005 the Company had €127 of equipment acquired under
                          capital lease agreements. The related accumulated depreciation
                          at
                          December 31, 2004 and 2005 was €116 and €127, respectively. The equipment
                          was fully depreciated as of December 31, 2005.
  In
                          connection with the implementation of a new information
                          technology (IT) system,
                          in 2005 the Company acquired under a loan facility computer
                          equipment and
                          software licenses. The IT implementation was not completed
                          as of December 31,
                          2005 therefore the Company did not record any depreciation
                          expense.
  Construction
                          in progress represents the additions during the Company’s manufacturing facility
                          overhaul. When the work was completed, the cost was transferred
                          to the
                          appropriate asset category.
  **7.    INTANGIBLE
                          ASSETS**
  The
                          Company’s intangible assets consisted of:
  **December
                                    31,****2004**
                                
                                **2005****Cost**
                                
                                **Accumulated
                                    amortization**
                                
                                **Net**
                                  **book
                                    value**
                                
                                **Cost**
                                
                                **Accumulated
                                    amortization**
                                
                                **Net**
                                  **book
                                    value**Patent
                                    rights
                                
                                €
                                369
                                
                                €
                                141
                                
                                €
                                228
                                
                                €
                                463
                                
                                €
                                234
                                
                                €
                                229Licenses
                                    and trademarks
                                
                                
                                23
                                
                                
                                8
                                
                                
                                15
                                
                                
                                53
                                
                                
                                15
                                
                                
                                38Total
                                
                                €
                                392
                                
                                €
                                149
                                
                                €
                                243
                                
                                €
                                516
                                
                                €
                                249
                                
                                €
                                267
  The
                          amount of amortization expense for the years ended December 31, 2003, 2004
                          and 2005 was €54, €75 and €100, respectively. We estimate that we will incur
                          amortization for the years ended December 31, 2006, 2007,
                          2008, 2009 and 2010 of
€101 **,** €101 **,** €53 **,** €8 **** and
€6,
                          respectively.
  **8.    ACCRUED
                          EXPENSES AND OTHER CURRENT LIABILITIES**
  Accrued
                          expenses and other current liabilities consist of:
  **December
                                    31,****2004**
                                
                                **2005**Due
                                    to employees
                                
                                €
                                86
                                
                                €
                                157Due
                                    to social security
                                
                                
                                88
                                
                                
                                132Withholding
                                    tax due
                                
                                
                                58
                                
                                
                                91Accrued
                                    Interest
                                
                                
                                93
                                
                                
                                36POSI
                                    Insurance
                                
                                
                                —
                                
                                
                                300Other
                                    payables
                                
                                
                                107
                                
                                
                                347Total
                                
                                €
                                432
                                
                                €
                                1,063
   F-15
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                              to Table of Contents**
  **9.    TERMINATION
                          INDEMNITIES**
  The
                          liability for termination indemnities relates to the employees
                          of the Company in
                          Italy. In accordance with Italian severance pay statutes,
                          an employee benefit is
                          accrued for service to date and is payable immediately
                          upon separation. The
                          termination indemnity is calculated in accordance with
                          local, civil and labor
                          laws based on each employee’s length of service, employment category and
                          remuneration. The termination liability is adjusted annually
                          by a cost-of-living
                          index provided by the Italian Government. There is no vesting
                          period or funding
                          requirement associated with the liability. The liability
                          recorded in the balance
                          sheet is the amount that the Company’s employees would be entitled to receive
                          immediately upon separation. In accordance with EITF 88-1,
“ *Determination
                          of Vested Benefit Obligation for a Defined Benefit Pension
                          Plan”* ,
                          we
                          record the obligation under the plan at the amount of the
                          vested benefit
                          obligation which is defined as the actuarial present value
                          of the vested benefit
                          to which the employee is entitled if the employee separates
                          immediately.
                          Benefits of approximately €41, €59 and €61 were paid to employees who separated
                          from the Company for the years ended December 31, 2003,
                          2004 and 2005,
                          respectively. The related charge to earnings was €69, €84 and €115 for the years
                          ended December 31, 2003, 2004 and 2005, respectively.
  As
                          of
                          December 31, 2005, the balance includes €121 from the assumption of termination
                          indemnities by Gentium for certain retirement benefits
                          of employees that have
                          been transferred to Gentium from Sirton and FinSirton.
                          Receivables from related
                          parties as of December 31, 2005 includes the amount due
                          from the assumption of
                          this liability.
  **10.    DEFERRED
                          INCOME**
  As
                          discussed in Note 3, the Company entered into a license and supply
                          agreement with Sigma Tau and, in partial consideration
                          for certain future
                          distribution rights, has received from Sigma Tau the cumulative
                          amount of €3,002
                          in upfront payments. These payments are being recognized
                          as income over the
                          expected life of the research period, which is currently
                          five years. The amounts
                          received but not yet recognized as revenue are included
                          in deferred income. The
                          amount of deferred income recognized as revenue for the
                          years ended
                          December 31, 2003, 2004 and 2005 was €365, €305 and €280,
                          respectively.
  The
                          amounts due for performance based payments will not be
                          recognized as revenue
                          until the performance obligations are fully satisfied.
                          If the Company
                          unilaterally discontinues development of defibrotide to
                          treat VOD (after written
                          notice to Sigma-Tau) and then resumes the development,
                          substantially availing
                          itself of the stages previously completed, either independently
                          or with a third
                          party, within 36 months of the discontinuation, then the Company will be
                          required to promptly reimburse Sigma-Tau for the amounts
                          received. The Company
                          has no intention to discontinue the development of the
                          product.
  If
                          during
                          the drug development stages the Company realizes that the
                          activities to bring
                          the product to completion would require a material increase
                          of expenditures,
                          either party can terminate the agreement. If the Company
                          or Sigma-Tau terminates
                          the agreement for that reason and the Company then resumes
                          the development,
                          substantially availing itself of the stages previously
                          completed, either
                          independently or with a third party, within 36 months of the termination,
                          the Company will be required to promptly reimburse Sigma-Tau
                          for the amounts
                          received. Currently, the Company is currently not aware
                          of any factors that
                          would require a material increase of expenditures for the
                          remaining development
                          activities.
  F-16
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                              to Table of Contents**
  **11.    CREDIT
                          FACILITY, LONG-TERM DEBT AND LEASES**
  Long
                          term
                          debt, net of current maturities consists of:
  **December
                                    31,****2004**
                                
                                **2005**a)
                                
                                
                                Mortgage
                                    loan bearing interest at the Euribor 6 month
                                    rate plus 1.0%, due February,
                                    2006 (3.22%% and 3.63%, at December 31, 2004
                                    and 2005,
                                    respectively)
                                
                                €
                                357
                                
                                €
                                119b)
                                
                                
                                Mortgage
                                    loan bearing interest at the Euribor 6 month
                                    rate plus 1.75%, due October,
                                    2006 (3.97% and 4.38% at December 31, 2004 and
                                    2005,
                                    respectively)
                                
                                
                                272
                                
                                
                                136c)
                                
                                
                                Research
                                    loan from the Italian Ministry for University
                                    and Research, interest at 1%
                                    per annum, due January 2012
                                
                                
                                482
                                
                                
                                450d)
                                
                                
                                Loans
                                    from affiliate, Sirton, bearing interest at 3.5%
                                    per annum, due October
                                    2008, however classified as current due to the
                                    callable nature of the
                                    debt
                                
                                
                                2,200
                                
                                
                                —e)
                                
                                
                                Equipment
                                    loans secured by the underlying equipment pursuant
                                    to the Sabitini Law,
                                    interest at 2.1%
                                
                                
                                831
                                
                                
                                656f)
                                
                                
                                Mortgage
                                    loan bearing interest at the Euribor 6 month
                                    rate plus 1.4%, due August
                                    2010 (3.62% and 4.03% at December 31, 2004 and
                                    2005,
                                    respectively)
                                
                                
                                2,000
                                
                                
                                2,000g)
                                
                                
                                Series
                                    A senior convertible promissory notes bearing
                                    interest at 7% as of
                                    December 31, 2004, net of unamortized discount
€2,395
                                    ($3,185)
                                
                                
                                2,082
                                
                                
                                —h)
                                
                                
                                Computer
                                    equipment loan
                                
                                
                                —
                                
                                
                                408,224
                                
                                
                                3,401Less
                                    current maturities
                                
                                
                                4,863
                                
                                
                                916Total
                                
                                €
                                3,361
                                
                                €
                                2,485
  Long-term
                          debt is presented on our balance sheets as follows:
  **December
                                    31,****2004**
                                
                                **2005**Current
                                    maturities of long-term debt
                                
                                €
                                2,781
                                
                                €
                                916Convertible
                                    notes payable, net of discount
                                
                                
                                2,082
                                
                                
                                —Long-term
                                    debt, net of current maturities
                                
                                
                                3,361
                                
                                
                                2,485€
                                8,224
                                
                                €
                                3,401
 a)    The
                          Company has a mortgage loan with Banca Nazionale del Lavoro
                          (“ **BNL** ”)
                          that
                          was originally granted for €1,549 in May 1999 and bears interest at the
                          six-month Euribor rate plus 1.0%. The loan is secured by
                          the Company’s real
                          property and was originally granted to its affiliate, Sirton,
                          but was assumed by
                          Gentium in 2002 as part of the Separation. This loan was
                          repaid in full in
                          February 2006.
  F-17
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  b)    The
                          Company has another mortgage loan with BNL originally granted
                          for €1,291 in
                          November 1996 that bears interest at the six month Euribor rate
                          plus 1.75%.
                          The loan is secured by a mortgage on the Company’s real property and was
                          originally granted to its affiliate, Sirton, but was assumed
                          by Gentium in 2002
                          as part of the Separation. The Company makes installment
                          payments on the loan
                          every six months until the final maturity in October 2006.
  c)     The
                          Company received a loan commitment from the Italian Ministry
                          for University and
                          Research granted through San Paolo-IMI bank. The initial
                          advance was €123 as of
                          December 31, 2002. The loan is for financing research and development
                          activities and bears interest at 1.0% per annum. The loan
                          was increased to €482
                          as of December 31, 2003. The loan is payable in installments every six
                          months beginning six months after the completion of the
                          related research and
                          development, but no later than January 2012. The balance
                          is reflected in the
                          table below as maturing in equal installments throughout
                          the period until
                          January 2012.
  d)    During
                          2004, the Company received a series of loans from its affiliate,
                          Sirton, in the
                          aggregate amount of €3,000 to finance the overhaul of the manufacturing
                          facility. These loans bear interest at 3.5% per annum and
                          were to mature on
                          October 1, 2008. In 2004 the Company repaid €800 of the loans and in 2005
                          repaid the balance of €2,200.
  e)    On
                          July 9, 2004, the Company obtained a loan in the approximate
                          amount of €487
                          from Cassa di Risparmio di Parma e Piacenza. The loan was
                          obtained pursuant to
                          Law No. 1329 of 28 November 1965 (Legge Sabatini), a law that
                          facilitates the purchase and lease of new production equipment.
                          The loan is
                          secured by a lien on the Company’s related equipment and machinery. On
                          August 4, 2004, the Company obtained an additional loan in the
                          amount of
€388 from Cassa di Risparmio di Parma e Piacenza under the
                          same terms and
                          conditions. Interest is payable quarterly at the rate of
                          2.1%. The principal is
                          payable in quarterly installments of €19 and €24 thousand respectively. The
                          principal is scheduled to be paid in full by June 2008 and July 2009,
                          respectively.
  f)     On
                          July 20, 2004, the Company obtained a third mortgage loan in
                          the amount of
€2.0 million from BNL. The mortgage loan is secured by real
                          estate owned by
                          the Company and its affiliate, Sirton, and by a guarantee
                          by the Company’s
                          largest shareholder, FinSirton. BNL released Sirton from
                          its mortgage and
                          FinSirton from its guarantee in April 2006. We deposited
€550,000 with BNL to
                          secure repayment of the loan. In addition, payment of up
                          to €1.0 million of
                          our trade payables to Sirton is subordinated and made junior
                          in right of payment
                          to the full repayment of the mortgage loan. No payment
                          or prepayment of
                          principal or interest on up to €1.0 million of the Company’s trade payables
                          to Sirton may be made until all obligations under the mortgage
                          loan are
                          performed in full. Amounts under the mortgage loan bear
                          interest at the six
                          month Euribor rate plus 1.4%. The Company makes installment
                          payments on the loan
                          every six months until the final maturity in August 2010.
  The
                          Company had an interest rate swap for each of the mortgage
                          loans listed above,
                          which partially limits the Company’s exposure to variable interest rate risks by
                          providing a fixed rate of interest. With respect to the
€1,549 variable rate
                          note, the Company had an interest rate swap with a notional
                          amount of €953
                          initiated on March 18, 2002 with a maturity of March 18, 2006 under
                          which the Company received the 6 month Euribor rate plus 1.0% and paid a
                          fixed rate of 3.70%. With respect to the €1,291 variable rate note, the Company
                          has an interest rate swap with a notional amount of €680 initiated on
                          October 31, 2001 with a maturity of October 31, 2006 under which the
                          Company receives the 6 month Euribor rate plus 1.25% and pays a fixed rate
                          of 3.70%. The change in the fair value of the interest
                          rate swaps is accounted
                          for in the statement of operations.
  g) *Convertible
                          Notes and Warrants*
  From
                          October 2004 through December 2004, the Company issued, in a private
                          placement, $6,098 (€4,843 based on the exchange rate at the date of
                          subscription) of Series A senior convertible promissory Notes. An
                          additional $1,912 (€1,459 based on the exchange rate on that date of
                          subscription) in Notes were issued in January 2005. These Notes were issued
                          with Warrants to purchase additional ordinary shares at
                          110% of the price per
                          share of the Company’s ordinary shares to be sold in its IPO. The Notes could
                          be
                          converted into ordinary shares at 90% of the price per
                          share of the shares sold
                          during the Company’s IPO (but not less than $6.00 per share). The number of
                          Warrants issued with the Notes was determined by a formula
                          that included the
                          price per share of the shares sold in the Company’s IPO. Based on the formula,
                          the Warrants are exercisable to purchase 503,298 ordinary
                          shares at an exercise
                          price of $9.90 per share. The exercise price of the Warrants
                          can change if we
                          issue certain securities at a
  F-18
 **Back
                              to Table of Contents**
  price
                          per
                          share less than the initial exercise price. In October
                          2005 we completed a
                          private placement which resulted in a redetermination of
                          the exercise price of
                          these Warrants to $9.52 per share. The Warrants became
                          exercisable upon the
                          closing of the IPO and expire five years and three months
                          after
                          issuance.
  On
                          June
                          21, 2005, the closing date of the Company’s IPO, the holders of Notes with a
                          face amount of $2,912 (€2,408 based on the exchange rate on June 21, 2005)
                          elected to convert their Notes into 359,505 of the Company’s ordinary shares. In
                          June and July 2005, the remaining balance of the Notes,
                          with a face amount of
                          $5,098, was redeemed for cash. The Notes bore interest
                          at a per annum rate of 7%
                          through March 31, 2005, 10% from April 2005 until maturity. Cash
                          interest expense accrued on the Notes for the year ended
                          December 31, 2004
                          and 2005 was €53 and €258, respectively. All of the accrued interest was paid
                          in
                          June and July of 2005.
  In
                          accordance with APB No. 14, “ *Accounting
                          for Convertible Debt and Debt Issued with Stock Purchase
                          Warrants* ”,
                          the
                          Company separated the Notes and Warrants, based on the
                          relative fair value of
                          the bifurcated debt and equity instruments. Based on the
                          assessment of the
                          relative fair value, €5,612 ($7,251) of the principal amount was allocated to
                          the convertible debt and €597 ($759) to the Warrants. The value of the Warrants
                          was recorded as additional paid in capital, with a corresponding
                          amount recorded
                          as OID on the Notes. The OID was being amortized as interest
                          expense over the
                          period to the earliest put option date using the effective
                          interest method. All
                          of the Notes were either converted or redeemed in June
                          and July of 2005.
                          Unamortized OID related to the converted Notes was charged
                          to additional paid in
                          capital upon conversion and the balance was charged to
                          expense upon redemption
                          of the balance of the Notes. Interest expense includes
€197 and €389 of OID
                          amortization for the years ended December 31, 2004 and 2005,
                          respectively.
  Both
                          the
                          Notes and the accompanying Warrants were issued with variable
                          conversion prices.
                          The Company has applied the requirements of EITF 00-27
“ *Application
                          of Issue No.98-5 to Certain Convertible Instruments* ”
to
                          account for the BCF represented by the intrinsic value
                          difference between the
                          estimated fair value of the underlying equity (estimated
                          to be $10.00 at the
                          time the Notes and Warrants were issued) and the effective
                          conversion price of
                          the instrument. The effective conversion price is not the
                          same as the stated
                          contractual conversion price, it represents the fair value
                          of the Notes divided
                          by the number of common shares into which the Notes are
                          convertible. The BCF
                          embedded in the Notes and Warrants issued in 2004 was determined
                          to be $4,643
                          and $578, respectively. The BCF embedded in the Notes and
                          Warrants issued in
                          2005 was determined to be $1,456 and $181, respectively.
                          These amounts were
                          being amortized as interest expense and accreted to additional
                          paid in capital
                          through the date of the earliest put option using the effective
                          interest method.
                          All of the Notes were either converted or redeemed in June
                          and July of 2005
                          after the IPO. Unamortized BCF related to the converted
                          Notes was charged to
                          additional paid in capital upon conversion and the remaining
                          balance related to
                          the redeemed Notes was charged to expense upon redemption.
                          Interest expense
                          includes €1,700 and €3,123 of amortization of the BCF for the years ended
                          December 31, 2004 and 2005, respectively. The carrying value of
                          the Notes
                          in the accompanying financial statements is composed of
                          the following
                          components:
  Face
                                    value of the Notes
                                
                                €
                                4,477Less:
                                    Fair value allocated to Warrants
                                
                                
                                (459
                                )Less:
                                    Beneficial conversion related to Notes
                                
                                
                                (3,409
                                )Less:
                                    Beneficial conversion feature related to Warrants
                                
                                
                                (424
                                )Plus:
                                    accretion in 2004
                                
                                
                                1,897Carrying
                                    value of Notes as of December 31, 2004
                                
                                €
                                2,082
 
 As
                          of
                          December 31, 2005, all of the Notes had been either converted
                          to equity or
                          repaid, therefore no debt is reflected in the accompanying
                          financial statements
                          for these Notes.
  h)
                                Computer
                                    equipment loan
  In
                          2005,
                          the Company obtained a loan from IBM Financial Services
                          in the amount of €40 to
                          finance the acquisition of computers and software equipment.
                          The loan is due in
                          quarterly installment starting from January 2006 until
                          the final maturity in
                          October 2007.
  F-19
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  The
                          maturities of long-term debt over the next five years as
                          of December 31, 2005
                          are as follows:
  **December
                                    31,**
                                  **2005**2006
                                
                                €
                                9162007
                                
                                
                                6622008
                                
                                
                                6432009
                                
                                
                                5992010
                                
                                
                                581Thereafter
                                
                                
                                —**Total**
                                
                                €
                                3,401
  **12.**  **INCOME TAXES**
  The
                          Company’s income tax expense (benefit) consisted of the following:
  **For
                                    the Year Ended December 31,**Provision
                                    for income taxes:
                                
                                **2003**
                                
                                **2004**
                                
                                **2005**Current
                                    expense
                                
                                €
                                243
                                
                                €
                                65
                                
                                €
                                —Deferred
                                    expense (benefit)
                                
                                
                                (84
                                )
                                
                                (37
                                )
                                
                                646Total
                                    income tax expense
                                
                                €
                                159
                                
                                €
                                28
                                
                                €
                                646
 
 
 The
                          components of the Company’s deferred tax assets and liabilities are as
                          follows:
 
 **As
                                    of December 31,****2004**
                                
                                **2005****Deferred
                                    tax assets:**Net
                                    operating losses
                                
                                €
                                1,071
                                
                                €
                                3,689Capitalization
                                    of research & development costs
                                
                                
                                1,230
                                
                                
                                1,892Deferred
                                    revenue
                                
                                
                                185
                                
                                
                                92Inventory
                                    costing
                                
                                
                                31Deferred
                                    tax assets
                                
                                
                                2,517
                                
                                
                                5,673**Deferred
                                    tax liabilities:**Other
                                
                                
                                11
                                
                                
                                12Deferred
                                    tax liabilities
                                
                                
                                11
                                
                                
                                12Net
                                    deferred tax assets
                                
                                
                                2,506
                                
                                
                                5,661Valuation
                                    Allowance
                                
                                
                                (2,506
                                )
                                
                                (5,661
                                )Net
                                    deferred taxes
                                
                                €
                                —
                                
                                €
                                —
   F-20
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                              to Table of Contents**
  The
                          Italian statutory tax rate for 2002 was 40.25% consisting
                          of a 36% national
                          corporate income tax (“IRPEG”) and a 4.25% Regional Tax on Productive Activities
                          which is computed on a taxable income base which is higher
                          than the pre-tax
                          income reported in the statements of operations. In 2003,
                          the Italian statutory
                          tax rate decreased to 38.25 % due to the effect of reducing
                          the IRPEG tax rate
                          from 36% to 34%. Beginning in 2004 the IRPEG was replaced
                          by a new tax, IRES,
                          with a further rate reduction from 34% to 33%, effective
                          January 1,
                          2004.
  Under
                          the
                          Italian tax system, operating losses cannot be carried
                          back to claim refunds.
                          Instead, losses are carried forward five years, and any
                          overpayments that may
                          have been made can be credited against future amounts due
                          for income tax or
                          employee social security payments. The Company has reviewed
its deferred tax
                          assets in light of the cumulative loss that has been incurred
                          in the periods
                          presented. Although the Company has paid some income taxes
                          in the past, the
                          Company believes that with its expected future investments
                          in research and
                          development and other initiatives, it is more likely than
                          not that the Company
                          will not be able to generate sufficient taxable income
                          to utilize the deferred
                          tax assets prior to their expiration. Accordingly, reserves
                          have been
                          established against these deferred tax assets.
  A
                          reconciliation between income taxes computed on pre-tax
                          income and income taxes
                          computed at the statutory rates is as follows:
  **Year
                                    Ended December 31****2003**
                                
                                **2004**
                                
                                **2005**Pre-tax
                                    income (loss)
                                
                                €
                                1,366
                                
                                €
                                (7,000
                                )
                                €
                                (11,673
                                )Tax
                                    expense (benefit) at statutory rates
                                
                                €
                                464
                                
                                €
                                (2,311
                                )
                                €
                                (3,852
                                )Effect
                                    of permanent book/tax differences
                                
                                
                                81
                                
                                
                                37
                                
                                
                                249Non-deductible
                                    expenses
                                
                                
                                32
                                
                                
                                527
                                
                                
                                743Asset
                                    basis differences
                                
                                
                                (39
                                )
                                
                                (16
                                )
                                
                                351Valuation
                                    allowances
                                
                                
                                (357
                                )
                                
                                1,791
                                
                                
                                3,155Net
                                    operating losses
                                
                                
                                37
                                
                                
                                —
                                
                                
                                —Impact
                                    of change in tax rates
                                
                                
                                (59
                                )
                                
                                —
                                
                                
                                —Total
                                    income tax expense
                                
                                €
                                159
                                
                                €
                                28
                                
                                €
                                646
 
 The
                          increase in the non-deductible expenses in 2004 and 2005
                          is related to the
                          charges taken by the Company for the beneficial conversion
                          feature of the Notes.
                          The beneficial conversion feature does not exist for Italian
                          tax purposes
                          therefore the entire amount is reported as debt with no
                          tax impact. Other
                          non-current assets included a prepaid tax balance related
                          to the Separation and
                          contribution of the manufacturing facility and equipment
                          by Sirton to the
                          Company in 2000, reflected above in the rate reconciliation
                          as an asset basis
                          difference. These assets were transferred at market value
                          for Italian tax
                          purposes but have not been revalued for financial statement
                          purposes. Sirton
                          paid an upfront tax on the gain from the transfer at a
                          lower tax rate than the
                          normal Italian statutory rate, as is allowed for this type
                          of transaction in
                          Italy. As of December 31, 2005, the Company updated the
                          assumptions underlying
                          the future benefits related to this pre-paid asset. As
                          the recoverability of the
                          asset is no longer available through deductions from employee
                          contributions or
                          future VAT filings, the asset was written off.
  F-21
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                              to Table of Contents**
 
 **13.**  **SHAREHOLDERS’
                          EQUITY**
  The
                          Company had 5,000,000 and 9,610,630 ordinary shares of
€1.00 par value per share
                          issued and outstanding as of December 31, 2004 and December
                          31, 2005,
                          respectively. On December 31, 2005, the authorized shares
                          were 12,690,321.
                          Authorized capital is as follows:
 
 **December
                                    31****2004**
                                
                                **2005**Issued
                                    and outstanding
                                
                                
                                5,000,000
                                
                                
                                9,610,630Reserved
                                    for conversion of Notes
                                
                                
                                1,335,000
                                
                                
                                —Reserved
                                    for exercise of warrants
                                
                                
                                881,100
                                
                                
                                1,216,816Reserved
                                    for underwriters purchase option
                                
                                
                                
                                
                                
                                151,200Reserved
                                    for future planned offerings
                                
                                
                                4,554,000
                                
                                
                                151,675Reserved
                                    for share option plans
                                
                                
                                1,560,000
                                
                                
                                1,560,00013,330,100
                                
                                
                                12,690,321
  Un-issued
                          shares reserved for conversion of the Series A senior convertible
                          promissory
                          Notes and the related Warrants expire upon the maturity
                          date of the Notes and
                          expiration date of the Warrants. Un-issued shares reserved
                          for the future
                          offerings and share option plans expire on September 30,
                          2009.
  Gentium’s
                          largest shareholder, FinSirton and its related company,
                          Sirton, have made
                          periodic investments in Gentium in the past. These investments
                          occurred via the
                          transfer of goods or services to Gentium from one or the
                          other of the companies.
                          The investing company did not receive compensating goods,
                          services or cash in
                          return from Gentium. As such, these additional non-cash
                          investments have been
                          recorded in equity as it is considered to be additional
                          paid in capital to
                          Gentium.
  In
                          January 2005, the Company’s largest shareholder, FinSirton, sold 450,000 of its
                          Gentium ordinary shares to private investors and subsequently
                          contributed
€1,600, the approximate amount of the net proceeds, to the
                          Company’s capital. In
                          April 2005, FinSirton sold an additional 800,000 of its
                          Gentium ordinary shares
                          to a private investor and subsequently contributed €2,300, the approximate
                          amount of the net proceeds, to the Company’s capital.
  On
                          June
                          21, 2005, the Company completed an IPO of 2,400,000 American
                          Depositary Shares
                          (ADSs), each representing one (1) of its ordinary shares
                          at a price of $9.00 per
                          ADS, generating gross proceeds of $21,600, and on July
                          27, 2005, the
                          underwriters exercised part of their over-allotment option
                          by purchasing an
                          additional 300,000 ADSs generating additional gross proceeds
                          of $2,700. The IPO
                          underwriting discount and other offering costs amounted
                          to €3,919 and were
                          charged against additional paid-in capital. In connection
                          with the IPO the
                          Company granted purchase options to purchase 151,200 ADSs
                          to the underwriters
                          for services rendered during the IPO. All equity instruments
                          issued to
                          non-employees are accounted for at the estimated fair value
                          of the equity
                          instruments. The values of these options has been estimated
                          using the
                          Black-Scholes model. The assumption used in the calculation
                          of the fair value
                          were a weighted average expected life of 5 years, an expected
                          volatility rate of
                          34.97% and a risk-free interest rate of 3.83%. At the time
                          of grant, the fair
                          market value of each option was $1.53. The fair value of
                          the instruments was
                          estimated to be €190, and was included with other offering costs.
  On
                          October 14, 2005, the Company completed a private placement
                          of 1,551,125 ADSs at
                          $7.05 per ADS. Gross proceeds from the offering were $10.9
                          million (€9.1
                          million). The private placement offering cost amounted
                          to €1,066 and was charged
                          against additional paid in capital. As part of the private
                          placement, the
                          Company issued warrants for the purchase of an aggregate
                          of 620,450 ADSs at an
                          exercise price of $9.69 per ADS. The warrants have a term
                          of exercise of five
                          years. In addition, the Company issued to one of the placement
                          agents a five
                          year warrant for the purchase of 93,068 ADSs at an exercise
                          price of $9.69 per
                          ADS.
  Italian
                          law restricts the amount of dividends that can be paid
                          out on an annual basis.
                          Before dividends can be paid out of net income in any year,
                          an amount equal to
                          5% of such net income must be allocated to the statutory
                          legal
  F-22
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                              to Table of Contents**
  reserve
                          until such reserve is at least equal to one-fifth of the
                          par value of the issued
                          shares. The net income and capital amounts are based on
                          our statutory Italian
                          GAAP financial statements. If the capital account is reduced
                          as a result of
                          statutory losses, no amounts can be paid until the capital
                          account is restored.
                          Dividends can only be declared on the basis of the statutory
                          equity available,
                          which can be substantially different from the US GAAP equity
                          reported herein. In
                          addition to restrictions on the amount of dividends, Italian
                          law also prescribes
                          the procedures required if a company’s aggregate par value falls below a certain
                          level. The law states that if the aggregate par value is
                          reduced by more than
                          one third, then the shareholders must take action, which
                          could include a
                          recapitalization of the company. Based on our statutory
                          equity at December 31,
                          2005, no amounts are eligible to be paid as dividends and
                          the Company has no
                          intention to pay a dividend in the future given its research
                          activities.
  In
                          order
                          to issue new equity, our board must meet and resolve to
                          recommend to our
                          shareholders that they approve an amendment to our bylaws
                          to increase our
                          capital. Our shareholders must then meet and approve that
                          amendment to our
                          bylaws. These meetings take time to call. Also, our shareholders
                          can authorize
                          an increase to our capital for only five years. If authorized
                          capital is not
                          issued by the end of those five years, the authorized capital
                          expires, and our
                          board and shareholders would need to meet again to authorize
                          a new capital
                          increase. Finally, Italian law provides that if the shareholders
                          vote to
                          increase our capital, any interested person may, during
                          the period of 180 days
                          following the filing of the shareholders' approval with
                          the Register of
                          Companies, challenge such capital increase if the increase
                          was not in compliance
                          with Italian law. These restrictions could limit our ability
                          to issue new equity
                          on a timely basis.
  **14.      EQUITY
                          INCENTIVE PLANS**
  On
                          September 30, 2004, the Company adopted the Gentium S.p.A
                          2004 Equity Incentive
                          Plan and Italy Stock Award Plan. The Plans provide for
                          the issue of incentives
                          awards for up to 1.5 million ordinary shares to employees,
                          consultants,
                          directors, and non-employee directors. Awards may be in
                          the form of either
                          incentive and non-qualified options, restricted share grants,
                          share appreciate
                          rights and share bonuses.
  On
                          September 30, 2004, the Company adopted a Non-Qualified
                          Stock Option Plan for
                          60,000 shares of its ordinary shares and on October 1,
                          2004, granted to an
                          officer of the Company a non-qualified option to purchase
                          60,000 shares. The
                          option vested in full on December 15, 2004 and was exercisable
                          for a period of
                          five years at the lesser of $5.50 per share or 50% of the
                          per share price of the
                          Company’s initial public offering. This option was amended as explained
                          in Note
                          18 - Subsequent Transactions.
  On
                          December 15, 2004, the Company granted an option to purchase
                          an aggregate of
                          25,000 ordinary shares pursuant to the plan. The option
                          vests over a three month
                          period ending on May 15, 2005, was exercisable until December
                          15, 2004, and the
                          exercise price is the price per share of stock sold in
                          the Company’s initial
                          public offering, but not less than $6.00 per share. This
                          option was amended as
                          explained in Note 18 - Subsequent Transactions.
  In
                          July
                          2005, the Company granted options to purchase an aggregate
                          of 832,000 ordinary
                          shares to the Company’s officers and directors. The options vests over three
                          years, are exercisable up to September 30, 2009 and the
                          exercise price of the
                          options granted was $9.00 per share and equaled the market
                          value on the date of
                          grant.
  In
                          October 2005, the Company granted options to purchase an
                          aggregate of 50,000
                          ordinary shares to an officer. The options vest over three
                          years, are
                          exercisable up to September 30, 2009 and the exercise price
                          of the options
                          granted was $8.00 per share. The market value on the date
                          of grant was $7.08. On
                          the same date the Company granted options to purchase an
                          aggregate of 15,000
                          ordinary shares to an employee. The options vest over three
                          years, are
                          exercisable up to September 30, 2009 and the exercise price
                          of the options
                          granted was $7.08 per share and equaled the market value
                          on the date of
                          grant.
  In
                          November 2005, in connection with the election of a Gentium
                          director, the
                          Company granted him options to purchase an aggregate of
                          10,000 ordinary shares.
                          The options vests over a three years, are exercisable up
                          to September 30, 2009
                          and the exercise price of the options granted was $7.90
                          per share and equaled
                          the market value on the data of grant.
  F-23
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                              to Table of Contents**
  In
                          accordance with the provision of SFAS No. 123R, stock-based
                          compensation cost is
                          measured at the grant date based on the fair value of the
                          award and is
                          recognized as expense over the service period. During 2005,
                          the compensation
                          committee of the Company’s board of directors granted options to purchase
                          907,000 shares of the Company’s ordinary shares to the Company’s officers,
                          directors and consultants. The Company recorded non cash
                          compensation expense of
€379 and €474  for
                          the
                          years ended December 31, 2004 and 2005, respectively. The
                          Company expects to
                          incur significant non-cash compensation expense for option
                          grants in the
                          future.
  The
                          fair
                          value of each option grant is estimated on the grant date
                          using the
                          Black-Scholes option-pricing model. The weighted average
                          fair market value of
                          options granted to officers, directors and consultants
                          for the years ended
                          December 31, 2004 and 2005, as of the date of the grants,
                          was $4.55 and $2.74,
                          respectively. The assumptions used in the calculation of
                          the fair value of
                          options granted during the years ended December 31, 2004
                          and 2005, were a
                          weighted average expected term of 2.0 and 3.0 years, respectively,
                          a weighted
                          average expected volatility rate of 60% and 40%, respectively
                          , and a weighted
                          average risk-free interest rate of 3.19% and 3.94%, respectively.
  The
                          Black-Scholes model takes into account volatility in the
                          price of the Company’s
                          stock, the risk-free interest rate, the estimated life
                          of the option, the
                          closing market price of the Company’s stock and the exercise price. Some of
                          these inputs are highly subjective assumptions and these
                          assumptions can vary
                          over time. Additionally the Company has limited historical
                          information available
                          to support its estimate of certain assumptions required
                          to value employee stock
                          options. In developing its estimate of expected term, due
                          to the limited
                          history, the historical share option exercise experience
                          is not a particularly
                          relevant indicator of future exercise patterns. The Company
                          has assumed for
                          purposes of the Black-Scholes calculation that an option
                          will be exercised after
                          it fully vests for officers and directors and based on
                          contractual terms for
                          options granted to consultants. Additionally, due to the
                          limited period that
                          there has been a public market for the Company’s securities, the implied
                          volatility of the Company’s ordinary shares may not be representative of the
                          expected volatility. Implied volatility is the volatility
                          assumption inherent in
                          the market price of a company’s traded options. Therefore, since the Company has
                          no publicly traded options, in determining the expected
                          volatility the Company
                          took into account other available information, including
                          the historical
                          experience of a group of stocks in the Company’s industry having similar traits.
                          For purposes of the calculation, the Company assumed that
                          no dividends would be
                          paid during the expected term of the options.
  The
                          Company applies EITF 96-18 in accounting for options granted
                          to consultants. For
                          the years ended December 31, 2004 and 2005, the Company
                          recorded non-cash
                          compensation expense of approximately €379 and €148, respectively. As of
                          December 31, 2004 and 2005, options issued to consultants
                          amounted to 85,000 and
                          50,000, respectively.
  A
                            summary
                            of the Company’s stock option activity and related information is as
                            follows,
                            based on the exchange rate in effect on the grant date
                            and applicable other date
                            below:
 **Shares
                                    Available for Grant**
                                
                                **Shares**
                                
                                **Weighted
                                    Average**
                                  **Exercise
                                    Price**Options
                                    available upon plan adoption
                                
                                
                                1,560,000
                                
                                
                                —Granted
                                
                                
                                (85,000
                                )
                                
                                85,000
                                
                                €
                                5.12
                                
                                $
                                6.82Exercised
                                
                                
                                —
                                
                                
                                —
                                
                                
                                —
                                
                                
                                —Cancellations
                                
                                
                                —
                                
                                
                                —
                                
                                
                                —
                                
                                
                                —Options
                                    outstanding at December 31, 2004
                                
                                
                                1,475,000
                                
                                
                                85,000
                                
                                €
                                5.12
                                
                                $
                                6.82Granted
                                
                                
                                (907,000
                                )
                                
                                907,000
                                
                                €
                                7.51
                                
                                $
                                8.90Exercised
                                
                                
                                —
                                
                                
                                —
                                
                                
                                —
                                
                                
                                —Cancellations
                                
                                
                                —
                                
                                
                                —
                                
                                
                                —
                                
                                
                                —Additional
                                    Shares reserved
                                
                                
                                —
                                
                                
                                —
                                
                                
                                —
                                
                                
                                —Options
                                    outstanding at December 31, 2005
                                
                                
                                568,000
                                
                                
                                992,000
                                
                                €
                                7.36
                                
                                $
                                8.72
   F-24
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                              to Table of Contents**
  The
                          following table summarizes information concerning currently
                          outstanding and
                          exercisable options as of December 31, 2005, based on the
                          exchange rate in
                          effect on December 31, 2005:
  **Options
                                    Outstanding**
                                
                                **Options
                                    Exercisable****Exercise
                                    Price**
                                
                                **Number**
                                  **Outstanding**
                                
                                **Weighted-
                                    Average Years Remaining on Contractual Life**
                                
                                **Weighted
                                    Average Exercise Price**
                                
                                **Number
                                    Exercisable**
                                
                                **Weighted
                                    Average Exercise Price**€4.64
                                    ($5.50)
                                
                                
                                60,000
                                
                                
                                3.50
                                
                                €
                                4.64
                                    ($5.50
                                )
                                
                                60,000
                                
                                €
                                4.64
                                    ($5.50
                                )€5.98
                                    ($7.08)
                                
                                
                                15,000
                                
                                
                                3.82
                                
                                €
                                5.98
                                    ($7.08
                                )
                                
                                833
                                
                                €
                                5.98
                                    ($7.08
                                )€6.67
                                    ($7.90)
                                
                                
                                10,000
                                
                                
                                3.91
                                
                                €
                                6.67
                                    ($7.90
                                )
                                
                                278
                                
                                €
                                6.67
                                    ($7.90
                                )€6.76
                                    ($8.00)
                                
                                
                                50,000
                                
                                
                                3.95
                                
                                €
                                6.76
                                    ($8.00
                                )
                                
                                20,000
                                
                                €
                                6.76
                                    ($8.00
                                )€7.60
                                    (€9.00)
                                
                                
                                832,000
                                
                                
                                3.51
                                
                                €
                                7.60
                                    ($9.00
                                )
                                
                                138,667
                                
                                €
                                7.60
                                    ($9.00
                                )€8.44
                                    ($10.00)
                                
                                
                                25,000
                                
                                
                                3.96
                                
                                €
                                8.44
                                    ($10.00
                                )
                                
                                25,000
                                
                                €
                                8.44
                                    ($10.00
                                )992,000
                                
                                
                                
                                
                                
                                
                                
                                
                                244,778
 
 **Warrants**
 
 A
                          summary
                          of the status of the Company’s warrants issued as of December 31, 2004 and 2005
                          and changes during the years then ended is presented below.
 
 **Warrants**
                                
                                **Weighted
                                    Average**
                                  **Exercise
                                    Price**Balance,
                                    December 31, 2003
                                
                                
                                —Granted
                                
                                
                                503,298
                                
                                €
                                7.15
                                
                                
                                $9.52Exercised
                                
                                
                                —
                                
                                
                                —
                                
                                
                                —Cancellations
                                
                                
                                —
                                
                                
                                —
                                
                                
                                —Balance,
                                    December 31, 2004
                                
                                
                                503,298
                                
                                €
                                7.15
                                
                                
                                $9.52Granted
                                
                                
                                713,518
                                
                                €
                                8.21
                                
                                
                                $9.69Exercised
                                
                                
                                —
                                
                                
                                —
                                
                                
                                —Cancellations
                                
                                
                                —
                                
                                
                                —
                                
                                
                                —Balance,
                                    December 31 2005
                                
                                
                                —
                                
                                
                                —
                                
                                
                                —1,216,816
                                
                                €
                                8.14
                                
                                
                                $9.61
  **15.**  **NET
                          INCOME (LOSS) PER SHARE**
  Basic
                          earnings per share is based upon the weighted average number
                          of ordinary shares
                          outstanding. Diluted earnings per share is based upon the
                          weighted average
                          number of ordinary shares and dilutive potential ordinary
                          shares outstanding.
                          Dilutive potential ordinary shares could result from (i)
                          the assumed exercise of
                          outstanding stock options and equivalents, which are included
                          under the treasury
                          stock method; (ii) performance based share rights awards
                          to the extent that
                          dilutive shares are assumed issuable; (iii) the assumed
                          exercise of outstanding
                          put options, which are included under the reverse treasury
                          stock method; and
                          (iv) convertible notes and debentures, which are included
                          under the if-converted
                          method, if applicable.
  As
                          of
                          December 31, 2003, 2004 and 2005, options, warrants and
                          convertible debt
                          aggregating nil, 1,872,000 and 2,719,521 **** actual
                          common equivalent shares **,** respectively, prior to the application of the treasury
                          stock method for options
                          and warrants, were not included in the calculation of diluted
                          net income/(loss)
                          per share as they are anti-dilutive.
  In
                          2005,
                          Notes that have been converted into equity were excluded
                          from the computation of
                          diluted earning per share as the inclusion of these Notes,
                          at the beginning of
                          the period, would be anti-dilutive. Ordinary share equivalents
                          (options and
                          warrants) to purchase 2,360,016 ordinary shares at prices
                          ranging from $5.50 to
                          $11.25 **** per
  F-25
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                              to Table of Contents**
  share,
                          were outstanding as of December 31, 2005, of which only
                          135,000 options were
                          included in the computation of diluted share in 2005, because
                          the exercise of
                          the other options and warrants exceeded the average market
                          price.
  The
                          following is a reconciliation of the numerators and denominators
                          of the diluted
                          EPS computations (in thousands):
  **For
                                    the Years Ended December 31,****2003**
                                
                                **2004**
                                
                                **2005**Numerator:Net
                                    income/(loss) for basic EPS
                                
                                €
                                1,207
                                
                                €
                                (7,028
                                )
                                €
                                (12,319
                                )Adjustment
                                    for interest, net of tax
                                
                                
                                —
                                
                                
                                —Income/(loss)
                                    for diluted EPS
                                
                                €
                                1,207
                                
                                €
                                (7,028
                                )
                                €
                                (12,319
                                )Denominator:Weighted
                                    average shares for basic EPS
                                
                                
                                5,000,000
                                
                                
                                5,000,000
                                
                                
                                6,933,104Effect
                                    of dilutive securities:Stock
                                    options
                                
                                
                                —Convertible
                                    Notes
                                
                                
                                —
                                
                                
                                —Weighted
                                    average shares for diluted EPS
                                
                                
                                5,000,000
                                
                                
                                5,000,000
                                
                                
                                6,933,104
 
 
 The
                          following table sets forth the computation of basic and
                          diluted net loss per
                          share:
 
 **For
                                    the Years Ended December 31,****2003**
                                
                                **2004**
                                
                                **2005**Numerator:Net
                                    income/(loss) for basic EPS
                                
                                €
                                1,207
                                
                                €
                                (7,028
                                )
                                €
                                (12,319
                                )Net
                                    income/(loss) for diluted EPS
                                
                                
                                1,207
                                
                                
                                (7,028
                                )
                                
                                (12,319
                                )Denominator:Basic
                                    calculation
                                
                                
                                5,000,000
                                
                                
                                5,000,000
                                
                                
                                6,933,104Diluted
                                    calculation
                                
                                
                                5,000,000
                                
                                
                                5,000,000
                                
                                
                                6,933,104Basic
                                    and diluted net income/(loss) per share
                                
                                €
                                0.24
                                
                                €
                                (1.41
                                )
                                €
                                (1.78
                                )
 
 **16.**  **COMMITMENTS AND CONTINGENCIES**
  *Legal*
  The
                          Company is not involved in any legal proceedings.
  *Operating
                          information by geography.*
  During
                          2003 and 2005, the Company only had sales in Italy. In
                          2004, the Company had
                          sales to a company in Korea. For year ended December 31,
                          2004, the Company sold
€243 or 7.8% of its product sales in Korea; the remaining
                          sales occurred in
                          Italy. All the long-lived assets held by the Company are
                          located in
                          Italy.
  F-26
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                              to Table of Contents**
  Raw
                          material contracts
  We
                          extract many of our products and product candidates from
                          the DNA of pig
                          intestines through well-established processes used by others
                          to manufacture many
                          other drugs. In particular, we extract defibrotide and
                          calcium heparin from
                          swine intestinal mucosa and sulglicotide from swine duodenum.
                          In 2004, we
                          entered into supply agreements with La.bu.nat. S.r.l. for
                          La.bu.nat. to supply
                          us with the swine intestinal mucosa and swine duodenom
                          we need to produce
                          defibrotide, calcium heparin and sulglicotide. We believe
                          La.bu.nat can meet our
                          current and near-term supply needs.
  The
                          initial contract term of the swine intestinal mucosa supply
                          agreement expires on
                          December 31, 2007, with automatically renewable three year
                          periods, unless
                          either party notifies the other party in writing six months
                          prior to the annual
                          date of termination. We must give written purchase orders
                          to La.bu.nat at least
                          two months in advance of the date of delivery. The purchase
                          price is fixed at
€0.1677 per kilogram until December 31, 2005 (plus an additional
€0.0135 for the
                          first 2,400,000 kilograms), at which time the price will
                          increase 5% until
                          December 31, 2006. After December 31, 2006, both parties
                          may request
                          renegotiation of the price with reference to market trends
                          and manufacturing
                          costs. In the event that the parties cannot agree on a
                          renegotiated price, an
                          arbitrator will determine the new price.
  The
                          initial contract term of the swine duodenum supply agreement
                          expires on
                          December 31, 2007, with automatically renewable three year periods,
                          unless
                          either party notifies the other party in writing six months
                          prior to the annual
                          date of termination. We must give written purchase orders
                          to La.bu.nat at least
                          four months in advance of the date of delivery. The purchase
                          price was fixed at
€1.1286 per kilogram until December 31, 2005. In 2006, the purchase price
                          was reduced to €1.01574 per kilogram pursuant to a verbal agreement between
                          us
                          and La.bu.nat in which we obtained a 10% discount on the
                          purchase price as an
                          incentive to increase the purchase volume. The discount
                          is not linked with any
                          purchase objectives or commitments.
  While
                          we
                          have no current arrangements with any other supplier of
                          our critical raw
                          material, we believe there are suitable alternative sources
                          of pig intestine.
                          The FDA and other regulatory bodies may evaluate La.bu.nat.’s or any other
                          supplier’s processing centers as part of approving our product candidates
                          and
                          the ongoing production of our products.
  **17.**  **RELATED PARTY TRANSACTIONS**
  The
                          Company’s largest shareholder is FinSirton. Historically, FinSirton
                          has provided
                          the Company with office space, personnel, administrative
                          services, information
                          technology systems and accounting services. Sirton, which
                          is a wholly owned
                          subsidiary of FinSirton, purchases products from the Company.
                          Sales to Sirton
                          account for most of the Company’s existing product sales. Sirton has also
                          historically provided the Company with a number of business
                          services such as
                          purchasing, logistics, quality assurance, quality control,
                          analytical assistance
                          for research and development, and regulatory services.
                          Beginning in April 2005,
                          the Company started to build-up internal functions and
                          activities that were
                          previously provided by FinSirton and Sirton. As of December
                          31, 2005, the
                          Company had established purchasing, logistics, quality
                          assurance, accounting,
                          controlling and reporting departments. The Company still
                          depends on FinSirton
                          for corporate services, payroll and information technology
                          systems; and on
                          Sirton for infrastructure costs and quality control. As
                          of February 2006, the
                          Company established its own treasury, regulatory and information
                          technology
                          departments however it is still relying on the IT infrastructure
                          provided by
                          Sirton.
  Substantially
                          all of the Company’s sales in 2003, and approximately 92% and 97% of its sales
                          for the years ended December 31, 2004 and 2005, respectively,
                          have been to
                          Sirton. Sirton manufactures finished products from, in
                          part, our products, and
                          sells those products primarily to one customer, Crinos.
                          Sirton’s demand for the
                          Company’s products has decreased over the past several years, and
                          may continue
                          to decrease over the next several years, due to decreased
                          demand for Sirton’s
                          products from Crinos.
  F-27
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  For
                          the
                          years ended December 31, 2003, 2004 and 2005, the Company
                          had the following
                          transactions with its affiliates:
  **For
                                    the Year Ended**
                                  **December
                                    31,****2003**
                                
                                **2004**
                                
                                **2005**Revenues
                                
                                €
                                6,532
                                
                                €
                                2,870
                                
                                €
                                3,260Expenses
                                
                                
                                1,485
                                
                                
                                1,665
                                
                                
                                1,047
 
 As
                          of
                          December 31, 2004 and 2005 the Company had the following
                          balances with its
                          affiliates:
  **December
                                    31,****2004**
                                
                                **2005**Receivables
                                
                                €
                                1,490
                                
                                €
                                1,867Payables
                                    and debt
                                
                                
                                3,698
                                
                                
                                542
 
 The
                          receivable from related parties relates to the sales by
                          the Company of
                          defibrotide and other pharmaceutical ingredients to Sirton.
                          As of December 31,
                          2005, receivable from related party includes a receivable
                          of €121 due to the
                          assumption of debt by Gentium for certain retirement benefits
                          of certain
                          employees that have been transferred to Gentium. As of
                          December 31, 2004,
                          payables included €2,200 loans from affiliate, Sirton. As of December 31,
                          2005,
                          the loans had been repaid. The payables relate to services
                          provided to the
                          Company by Sirton and FinSirton according to agreements
                          with these affiliates.
                          These agreements involve a range of services, such as general
                          management, human
                          resources, payroll and quality monitoring services. The
                          agreements each have
                          recurring one year terms, and may be terminated by either
                          party upon written
                          notice to the other party at least one month prior to the
                          expiration of the
                          term. The accounting policies applied to transactions with
                          affiliates are
                          consistent with those applied in transactions with independent
                          third parties and
                          management believes that all related party agreements are
                          negotiated on an arm’s
                          length basis. The Company’s inter-company contracts with FinSirton and Sirton
                          are described below.
  *Organizational
                          consulting contracts*
  The
                          Company has an agreement with Sirton pursuant to which
                          Sirton provides the
                          Company with organizational consulting services related
                          to implementation of
                          strategic plans and the coordination of internal resources.
                          The most recent
                          contract was signed in 2004 and it was renewed in 2005.
                          Fees incurred pursuant
                          to the agreements for the years ended December 31, 2003,
                          2004 and 2005 amounted
                          to €78, €201 and €58, respectively.
  *Regulatory
                          consulting contracts*
  The
                          Company has an agreement with Sirton pursuant to which
                          Sirton provides the
                          Company with its “Internal Regulatory Department,” which furnishes all the
                          services necessary to comply with the requirements of pharmaceutical
                          industry
                          rules. The Company’s fees incurred pursuant to the agreement for the years
                          ended
                          December 31, 2003, 2004 and 2005 amounted to €26, €26 and €12 ,
                          respectively.
  *Quality
                          monitoring contract*
  The
                          Company has agreement with Sirton pursuant to which Sirton
                          provides the Company
                          with quality monitoring services related to its production
                          process. The
                          Company’s fees are based on the number of hours of the monitoring
                          services
                          provided or on the costs associated with performing batch
                          analysis.
                          Additionally, in 2005 Sirton provided Gentium with two
                          of its employees in order
                          to perform quality monitoring services on the Company’s production
  F-28
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                              to Table of Contents**
  and
                          business processes. The Company’s incurred fees pursuant to the agreement for
                          the years ended December 31, 2003, 2004 and 2005 of €353, €408 and €450,
                          respectively.
  *Quality
                          assurance contract*
  The
                          Company has an agreement with Sirton pursuant to which
                          Sirton provides the
                          Company with quality monitoring services related to its
                          production process. The
                          Company’s fees are based on the hours of the monitoring services
                          provided and
                          for the year ended December 31, 2003, 2004 and 2005 amounted
                          to nil, €106 and
€11, respectively.
  *Other
                          services contracts*
  The
                          Company has an agreement with Sirton pursuant to which
                          Sirton provides Gentium
                          with a range of services relating to purchasing and logistics,
                          technical
                          services for manufacturing facility revamping, utilities,
                          consulting services,
                          maintenance and general services. The Company incurred
                          fees pursuant to the
                          agreement for the years ended December 31, 2003, 2004 and
                          2005 of €669, €563 and
€166, respectively.
  The
                          Company had an agreement with Sirton pursuant to which
                          Sirton provides various scientific
                          material and information to the Company. For the year ended
                          December 31, 2004,
                          the Company incurred fees pursuant to the agreement of €51.
                          The
                          agreement expired on December 31, 2004 and was not renewed.
  The
                          Company has an agreement with FinSirton to provide the
                          Company with accounting
                          and information technology services relating to invoicing,
                          payments and
                          collections and payroll processes. The Company incurred
                          fees pursuant to the
                          agreement for the years ended December 31, 2003, 2004 and 2005 of €192,
€227 and €186, respectively.
  *Leases*
  The
                          Company has a recurring one-year lease for its office facilities
                          with Sirton.
                          Total expenses under operating leases for the years ended
                          December 31, 2003 and
                          2004 amount to €83 and €83 , **** respectively.
                          On January 1, 2005, the Company entered into a lease agreement
                          with Sirton for
                          manufacturing space. This agreement expires on December
                          31, 2010. Total expenses
                          under this operating lease for 2005 amounted to €8.
  On
                          January 1, 2005, the Company entered into a lease agreement
                          with FinSirton to
                          lease space for offices, laboratories and storage facilities.
                          This agreement
                          expires on December 31, 2010. Total expenses under this
                          operating lease for 2005
                          amounted to €156.
 
 Future
                          minimum lease payment under operating leases as of December
                          31, 2005
                          are:
 Operating
                                  Leases2006
                                
                                €
                                1632007
                                
                                
                                1632008
                                
                                
                                1632009
                                
                                
                                1632010
                                
                                
                                163Total
                                    minimum lease payments
                                
                                €
                                815
 
 **18.**  **SUBSEQUENT TRANSACTIONS**
 
 On
                          March
                          23, 2006, the Compensation Committee agreed with an officer
                          to increase the
                          exercise price of an option to purchase 60,000 ordinary
                          shares granted to him in
                          October 2004 from $4.50 to $5.58 to comply with an Italian
                          law requirement, and
                          amend the term of the option from October 2009 to September
                          30, 2009. We agreed
                          to pay
  F-29
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  him
                          $64,800 (the amount of the aggregate increase in the exercise
                          price), subject to
                          certain conditions, in return for amending the exercise
                          price and the
                          term.
 
 On
                          March
                          23, 2006, the Compensation Committee agreed with an officer
                          to amend the term of
                          an option to purchase 25,000 ordinary shares granted to
                          him in December 2005
                          from December 2015 to September 30, 2009.
 
 In
                          April
                          2006, the Company issued 100,858 American Depositary Shares
                          due to the exercise
                          of warrants. Proceeds from the exercise of the warrants
                          amounted approximately
                          to $976 thousand.
 
 The
                          Company applied to a national banking institution, Intesa-Mediocredito,
                          for a
                          medium/long-term financing facility of up to €1 million to finance the Company’s
                          purchase and installation of two reactors in our manufacturing
                          facility. In
                          February 2006, Intesa-Mediocredito notified the Company
                          that it would grant the
                          financing facility, and in April 2006, Intesa-Mediocredito
                          granted the financing
                          facility. The financing facility has a five-year term and
                          bears interest at the
                          three-month Euribor rate plus 1.7%. It is secured by Banca
                          Intesa debt
                          securities in the aggregate amount of €525 thousand that the Company purchased
                          and which expire on May 10, 2011. The Company makes installment
                          payments on the
                          financing facility of €131 thousand every six months until its final maturity
                          in
                          April 2011.
  Under
                          Italian law, a local authority, the Lombardy Regional Authority,
                          provided
                          various incentives to the Company to purchase the new reactors,
                          on the theory
                          that the reactors improve the working conditions for the
                          Company’s employees and
                          constitute an investment in innovation. These incentives
                          were in the form of the
                          agreement by the Lombardy Regional Authority to pay (i)
                          up to €75 thousand of
                          certain social securities contributions that the Company
                          is obligated to pay to
                          the national government and (ii) up to €80 thousand of interest due on the
                          financing facility.
  F-30
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 **SIGNATURES**
  The
                          registrant hereby certifies that it meets all of the requirements
                          for filing on
                          Form 20-F and that it has duly caused and authorized the
                          undersigned to sign
                          this annual report on its behalf.
  **GENTIUM
                                    S.P.A**
                                  *(Registrant)*Date: 
May
                                  30,
                                  2006
                                By:
                                /s/ LAURA
                                  FERRO,
                                  M.D.Name: 
Dr.
                                    Laura
                                    Ferro
                                  Title:   
                                    President and Chief Executive
                                    Officer
   **Back
                              to Table of Contents**
 
 **INDEX
                          OF EXHIBITS**
  **Exhibit**
                                
                                **Description**1(i)
                                
                                Articles
                                      of Association of Gentium S.p.A., formerly
                                      known as Pharma Research S.r.l.
                                      dated November 11, 1993, incorporated by reference to Exhibit
                                      3(i) to
                                      the Registration Statement on Form F-1, Registration
                                      No. 333-122233,
                                      previously filed with the Securities and Exchange
                                      Commission on January
                                      24, 2005.1(ii)
                                
                                Amended
                                        and Restated Bylaws of Gentium S.p.A. dated
                                        April 28,
                                        2006.2.1
                                
                                Underwriting
                                      Agreement, dated June 16, 2005, between Gentium
                                      S.p.A. and Maxim Group LLC
                                      and I-Bankers Securities Inc., incorporated by reference to Exhibit
                                      1.1 to Amendment No. 1 to the Registration
                                      Statement on Form F-1,
                                      Registration No. 333-130796, previously filed
                                      with the Securities and
                                      Exchange Commission on January 26, 2006.2.2
                                
                                Form
                                      of Representatives’ Purchase Option between Gentium S.p.A. and
                                      Maxim Group
                                      LLC and I-Bankers Securities Inc., incorporated by reference to
                                      Exhibit 1.2 to Amendment No. 5 to the Registration
                                      Statement on Form F-1,
                                      Registration No. 333-122233, previously filed
                                      with the Securities and
                                      Exchange Commission on June 9, 2005.2.3
                                
                                Form
                                      of Lock-Up Agreement, incorporated by reference
                                      to Exhibit 1.3 to
                                      Amendment No. 4 to the Registration Statement
                                      on Form F-1, Registration
                                      No. 333-122233, previously filed with the Securities
                                      and Exchange
                                      Commission on May 31, 2005.2.2.1
                                
                                Form
                                    of Series A senior convertible promissory note, incorporated
                                    by
                                    reference to Exhibit 4.2.1 to the Registration
                                    Statement on Form F-1,
                                    Registration No. 333-122233, previously filed
                                    with the Securities and
                                    Exchange Commission on January 24, 2005.2.2.2
                                
                                Form
                                    of warrant, incorporated by reference to Exhibit
                                    4.2.2 to the Registration
                                    Statement on Form F-1, Registration No. 333-122233,
                                    previously filed with
                                    the Securities and Exchange Commission on January
                                    24,
                                    2005.2.2.3
                                
                                Pledge
                                    Agreement between FinSirton S.p.A. (previously
                                    known as Finanziaria Sirton
                                    S.p.A.) and I-Bankers Securities Inc. as representative of the
                                    holders of the Series A senior convertible promissory notes dated
                                    October 15, 2004, incorporated by reference to Exhibit
                                    4.2.3 to
                                    Amendment No. 1 to the Registration Statement
                                    on Form F-1, Registration
                                    No. 333-130796, previously filed with the Securities
                                    and Exchange
                                    Commission on January 26, 2006.2.2.4
                                
                                Form
                                    of Investors’ Rights Agreement between Gentium S.p.A. and holders
                                    of the
                                    Series A senior convertible promissory notes and warrants
                                    dated
                                    October 15, 2004, incorporated by reference to Exhibit
                                    4.2.4 to the
                                    Registration Statement on Form F-1, Registration
                                    No. 333-122233,
                                    previously filed with the Securities and Exchange
                                    Commission on January
                                    24, 2005.2.2.5
                                
                                Form
                                    of subscription agreement for Series A senior convertible promissory
                                    note and warrant, incorporated by reference to
                                    Exhibit 4.2.5 to Amendment
                                    No. 1 to the Registration Statement on Form F-1,
                                    Registration No.
                                    333-122233, previously filed with the Securities
                                    and Exchange Commission
                                    on April 7, 2005.
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  **Exhibit**
                                  
                                  **Description**2.2.6
                                  
                                  Amendment
                                      No. 1 to Gentium S.p.A. Series A Senior Convertible Promissory
                                      Notes, Warrants, Subscription Agreements and
                                      Investor Rights Agreements
                                      among Gentium S.p.A. and the other parties
                                      thereto dated May 27,
                                      2005, incorporated by reference to Exhibit
                                      4.2.6 to Amendment No. 4 to the
                                      Registration Statement on Form F-1, Registration
                                      No. 333-122233,
                                      previously filed with the Securities and Exchange
                                      Commission on May 31,
                                      2005.2.3
                                  
                                  Investors’
                                      Rights Agreement by and among Gentium S.p.A.,
                                      Alexandra Global Master
                                      Fund Ltd. and Generation Capital Associates made
                                      as of
                                      January 10, 2005, incorporated by reference to Exhibit
                                      4.3 to the
                                      Registration Statement on Form F-1, Registration
                                      No. 333-122233,
                                      previously filed with the Securities and Exchange
                                      Commission on January
                                      24, 2005.2.4
                                  
                                  Intentionally
                                      omitted.2.5
                                  
                                  Investors’
                                      Rights Agreement by and among Gentium S.p.A.
                                      and Sigma Tau Finanziaria
                                      S.p.A. made as of April 4, 2005, incorporated by reference to Exhibit
                                      4.5 to Amendment No. 1 to the Registration
                                      Statement on Form F-1,
                                      Registration No. 333-122233, previously filed
                                      with the Securities and
                                      Exchange Commission on April 7, 2005.2.6
                                  
                                  Form
                                      of Deposit Agreement among Gentium S.p.A.,
                                      The Bank of New York and the
                                      owners and beneficial owners from time to time
                                      of American Depositary
                                      Receipts (including as an exhibit the form
                                      of American Depositary
                                      Receipt), incorporated by reference to Exhibit
                                      4.6 to Amendment No. 5 to
                                      the Registration Statement on Form F-1, Registration
                                      No. 333-122233,
                                      previously filed with the Securities and Exchange
                                      Commission on June 9,
                                      2005.2.7
                                  
                                  Form
                                      of American Depositary Receipt (see Exhibit 4.6).2.8.1
                                  
                                  Securities
                                      Subscription Agreement among Gentium S.p.A.
                                      and the other parties thereto
                                      dated as of October 3, 2005, incorporated by
                                      reference to Exhibit 4.8.1 to
                                      the Registration Statement on Form F-1, Registration
                                      No. 333-130796,
                                      previously filed with the Securities and Exchange
                                      Commission on December
                                      30, 2005.2.8.2
                                  
                                  Form
                                      of American Depositary Shares Purchase Warrant
                                      by Gentium S.p.A. dated
                                      October 14, 2005, incorporated by reference
                                      to Exhibit 4.8.2 to the
                                      Registration Statement on Form F-1, Registration
                                      No. 333-130796,
                                      previously filed with the Securities and Exchange
                                      Commission on December
                                      30, 2005.2.8.3
                                  
                                  Registration
                                      Rights Agreement among Gentium S.p.A. and the
                                      other parties thereto made
                                      and entered into as of October 14, 2005, incorporated
                                      by reference to
                                      Exhibit 4.8.3 to the Registration Statement
                                      on Form F-1, Registration No.
                                      333-130796, previously filed with the Securities
                                      and Exchange Commission
                                      on December 30, 2005.2.8.4
                                  
                                  Escrow
                                      Agreement between Gentium S.p.A. and The Bank
                                      of New York dated as of
                                      October 14, 2005, incorporated by reference
                                      to Exhibit 4.8.4 to the
                                      Registration Statement on Form F-1, Registration
                                      No. 333-130796,
                                      previously filed with the Securities and Exchange
                                      Commission on December
                                      30, 2005.4.1
                                  
                                  2004
                                      Equity Incentive Plan, incorporated by reference
                                      to Exhibit 10.1 to the
                                      Registration Statement on Form F-1, Registration
                                      No. 333-122233,
                                      previously filed with the Securities and Exchange
                                      Commission on January
                                      24, 2005.4.2
                                  
                                  Amended
                                      and Restated Nonstatutory Share Option Plan
                                      and Agreement dated March 23,
                                      2006.
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  **Exhibit**
                                    
                                    **Description**4.3
                                    
                                    Loan
                                        Agreement between Banca Nazionale del Lavoro
                                        S.p.A. and Gentium S.p.A.,
                                        successor in interest to Crinos Industria
                                        Farmacobiologica S.p.A., dated
                                        November 20, 1996, incorporated by reference to Exhibit
                                        10.3 to the
                                        Registration Statement on Form F-1, Registration
                                        No. 333-122233,
                                        previously filed with the Securities and
                                        Exchange Commission on January
                                        24, 2005.4.4
                                    
                                    Loan
                                        Agreement between Banca Nazionale del Lavoro
                                        S.p.A. and Gentium S.p.A.,
                                        successor in interest to Crinos Industria
                                        Farmacobiologica S.p.A., dated
                                        May 27, 1999, incorporated by reference to Exhibit
                                        10.4 to the
                                        Registration Statement on Form F-1, Registration
                                        No. 333-122233,
                                        previously filed with the Securities and
                                        Exchange Commission on January
                                        24, 2005.4.5
                                    
                                    Deed
                                        of Agreement of Assumption of Debts among
                                        Sirton Pharmaceuticals S.p.A.,
                                        Gentium S.p.A. and Banca Nazionale del Lavoro
                                        S.p.A. dated
                                        February 14, 2003, regarding Loan Agreement between
                                        Banca Nazionale
                                        del Lavoro S.p.A. and Gentium S.p.A., successor
                                        in interest to Crinos
                                        Industria Farmacobiologica S.p.A., dated
                                        November 20, 1996, and Loan
                                        Agreement between Banca Nazionale del Lavoro
                                        S.p.A. and Gentium S.p.A.,
                                        successor in interest to Crinos Industria
                                        Farmacobiologica S.p.A., dated
                                        May 27, 1999, incorporated by reference to Exhibit
                                        10.5 to the
                                        Registration Statement on Form F-1, Registration
                                        No. 333-122233,
                                        previously filed with the Securities and
                                        Exchange Commission on January
                                        24, 2005.4.6
                                    
                                    Ministry
                                        for Universities, Scientific and Technological
                                        Research Loan granted to
                                        Gentium S.p.A., successor in interest to
                                        Crinos Industria Farmacobiologica
                                        S.p.A., by Sanpaolo Imi S.p.A., dated September 27, 2000,
                                        incorporated by reference to Exhibit 10.6
                                        to the Registration Statement on
                                        Form F-1, Registration No. 333-122233, previously
                                        filed with the
                                        Securities and Exchange Commission on January
                                        24, 2005.4.7.1
                                    
                                    Loan
                                        Agreement between Banca Nazionale del Lavoro
                                        S.p.A. and Gentium S.p.A.
                                        dated July 20, 2004, incorporated by reference to Exhibit
                                        10.7 to the
                                        Registration Statement on Form F-1, Registration
                                        No. 333-122233,
                                        previously filed with the Securities and
                                        Exchange Commission on January
                                        24, 2005.4.7.2
                                    
                                    Deed
                                        of Pledge by Gentium S.p.A. in favor of Banca
                                        Nazionale del Lavoro S.p.A.
                                        dated May 16, 2006.4.8
                                    
                                    Loan
                                        Agreement between Sirton Pharmaceuticals
                                        S.p.A. and Gentium S.p.A. dated
                                        March 2004, incorporated by reference to
                                        Exhibit 10.8 to the Registration
                                        Statement on Form F-1, Registration No. 333-122233,
                                        previously filed with
                                        the Securities and Exchange Commission on
                                        January 24,
                                        2005.4.9
                                    
                                    Loan
                                        Agreement between Sirton Pharmaceuticals
                                        S.p.A. and Gentium S.p.A. dated
                                        May 2004, incorporated by reference to Exhibit
                                        10.9 to the
                                        Registration Statement on Form F-1, Registration
                                        No. 333-122233,
                                        previously filed with the Securities and
                                        Exchange Commission on January
                                        24, 2005.4.10
                                    
                                    Loan
                                        Agreement between Sirton Pharmaceuticals
                                        S.p.A. and Gentium S.p.A. dated
                                        June 2004, incorporated by reference to Exhibit
                                        10.10 to the
                                        Registration Statement on Form F-1, Registration
                                        No. 333-122233,
                                        previously filed with the Securities and
                                        Exchange Commission on January
                                        24, 2005.4.11
                                    
                                    Loan
                                        Agreement between Sirton Pharmaceuticals
                                        S.p.A. and Gentium S.p.A. dated
                                        July 2004, incorporated by reference to Exhibit
                                        10.11 to the
                                        Registration Statement on Form F-1, Registration
                                        No. 333-122233,
                                        previously filed with the Securities and
                                        Exchange Commission on January
                                        24, 2005.
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  **Exhibit**
                                      
                                      **Description**4.12.1
                                      
                                      Clinical
                                          Trial Agreement between Gentium S.p.A.,
                                          successor in interest to Crinos
                                          Industria Farmacobiologica S.p.A., and
                                          Dana-Faber/Partners Cancer
                                          Care, Inc. dated December 27, 1999, incorporated by reference to
                                          Exhibit 10.12.1 to the Registration Statement
                                          on Form F-1, Registration
                                          No. 333-122233, previously filed with the
                                          Securities and Exchange
                                          Commission on January 24, 2005.4.12.2
                                      
                                      Amendment
                                          No. 1 to Clinical Trial Agreement between Gentium
                                          S.p.A. and
                                          Dana-Farber/Partners Cancer Care, Inc. dated October 19, 2000,
                                          incorporated by reference to Exhibit 10.12.2
                                          to the Registration Statement
                                          on Form F-1, Registration No. 333-122233,
                                          previously filed with the
                                          Securities and Exchange Commission on January
                                          24, 2005.4.12.3
                                      
                                      Amendment
                                          No. 2 to Clinical Trial Agreement between Gentium
                                          S.p.A. and
                                          Dana-Farber/Partners Cancer Care, Inc. dated January 28, 2004,
                                          incorporated by reference to Exhibit 10.12.3
                                          to the Registration Statement
                                          on Form F-1, Registration No. 333-122233,
                                          previously filed with the
                                          Securities and Exchange Commission on January
                                          24, 2005.4.13
                                      
                                      Trial
                                          Agreement between the European Blood and
                                          Marrow Transplantation Group and
                                          Gentium S.p.A. dated February 26, 2004, incorporated by reference to
                                          Exhibit 10.13 to the Registration Statement
                                          on Form F-1, Registration No.
                                          333-122233, previously filed with the Securities
                                          and Exchange Commission
                                          on January 24, 2005.4.14.1
                                      
                                      Research
                                          Agreement between Gentium S.p.A., successor
                                          in interest to Crinos
                                          Industria Farmacobiologica S.p.A., and
                                          Consorzio Mario Negri Sud dated
                                          June 14, 2000, incorporated by reference to
                                          Exhibit 10.14.1 to the
                                          Registration Statement on Form F-1, Registration
                                          No. 333-122233,
                                          previously filed with the Securities and
                                          Exchange Commission on January
                                          24, 2005.4.14.2
                                      
                                      Letter
                                          from Gentium S.p.A. to Consorzio Mario
                                          Negri Sud dated February 23,
                                          2004 extending Research Agreement between
                                          Gentium S.p.A., successor in
                                          interest to Crinos Industria Farmacobiologica
                                          S.p.A., and Consorzio Mario
                                          Negri Sud dated June 14, 2000, incorporated by reference to
                                          Exhibit
                                          10.14.2 to the Registration Statement on
                                          Form F-1, Registration No.
                                          333-122233, previously filed with the Securities
                                          and Exchange Commission
                                          on January 24, 2005.4.15
                                      
                                      License
                                          and Supply Agreement by and between Gentium
                                          S.p.A. and Sigma-Tau
                                          Pharmaceuticals, Inc. (assignee of Sigma Tau Industrie Farmaceutiche
                                          Riunite S.p.A.) dated December 7, 2001, incorporated by reference to
                                          Exhibit 10.15 to the Registration Statement
                                          on Form F-1, Registration No.
                                          333-122233, previously filed with the Securities
                                          and Exchange Commission
                                          on January 24, 2005.4.16
                                      
                                      Umbrella
                                          Agreement among Sirton Pharmaceuticals
                                          S.p.A. (formerly known as Crinos
                                          Industria Farmacobiologica S.p.A.), Gentium
                                          S.p.A., Crinos S.p.A. and SFS
                                          Stada Financial Services Ltd dated May 17, 2002, incorporated by
                                          reference to Exhibit 10.16 to the Registration
                                          Statement on Form F-1,
                                          Registration No. 333-122233, previously
                                          filed with the Securities and
                                          Exchange Commission on January 24, 2005.4.17
                                      
                                      License
                                          Agreement between Crinos S.p.A. and Gentium
                                          S.p.A. dated July 15,
                                          2004, incorporated by reference to Exhibit
                                          10.17 to the Registration
                                          Statement on Form F-1, Registration No.
                                          333-122233, previously filed with
                                          the Securities and Exchange Commission
                                          on January 24,
                                          2005.4.18
                                      
                                      Purchase
                                          Agreement by and among Sirton Pharmaceuticals
                                          S.p.A., Gentium S.p.A. and
                                          Axcan Pharma Inc. dated October 9, 2002, incorporated by
                                          reference to Exhibit 10.18 to the Registration
                                          Statement on Form F-1,
                                          Registration No. 333-122233, previously
                                          filed with the Securities and
                                          Exchange Commission on January 24,
                                          2005.
   **Back
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  **Exhibit**
                                        
                                        **Description**4.19
                                        
                                        Agreement
                                            between Sirton Pharmaceuticals S.p.A.
                                            and Gentium S.p.A. dated
                                            October 9, 2002, regarding the Purchase Agreement
                                            with Axcan
                                            Pharma Inc., incorporated by reference to Exhibit
                                            10.19 to the
                                            Registration Statement on Form F-1, Registration
                                            No. 333-122233,
                                            previously filed with the Securities
                                            and Exchange Commission on January
                                            24, 2005.4.20
                                        
                                        License
                                            and Supply Agreement between Gentium
                                            S.p.A. and Abbott S.p.A. dated
                                            June 11, 2002, incorporated by reference to
                                            Exhibit 10.20 to the
                                            Registration Statement on Form F-1, Registration
                                            No. 333-122233,
                                            previously filed with the Securities
                                            and Exchange Commission on January
                                            24, 2005.4.21
                                        
                                        Supply
                                            Agreement between Gentium S.p.A. and
                                            La.bu.nat. S.r.l. dated
                                            January 12, 2004, incorporated by reference to
                                            Exhibit 10.21 to the
                                            Registration Statement on Form F-1, Registration
                                            No. 333-122233,
                                            previously filed with the Securities
                                            and Exchange Commission on January
                                            24, 2005.4.22
                                        
                                        Supply
                                            Agreement between Gentium S.p.A. and
                                            La.bu.nat. S.r.l. dated
                                            January 12, 2004, incorporated by reference to
                                            Exhibit 10.22 to the
                                            Registration Statement on Form F-1, Registration
                                            No. 333-122233,
                                            previously filed with the Securities
                                            and Exchange Commission on January
                                            24, 2005.4.23
                                        
                                        Supply
                                            Agreement between Gentium S.p.A. and
                                            Samil Pharm. Co. Ltd. dated
                                            November 11, 2003, incorporated by reference to
                                            Exhibit 10.23 to the
                                            Registration Statement on Form F-1, Registration
                                            No. 333-122233,
                                            previously filed with the Securities
                                            and Exchange Commission on January
                                            24, 2005.4.24.1
                                        
                                        Active
                                            Pharmaceutical Ingredient Agreement between
                                            Sirton Pharmaceuticals S.p.A.
                                            and Gentium S.p.A. dated January 2, 2004, incorporated by reference
                                            to Exhibit 10.24 to the Registration
                                            Statement on Form F-1, Registration
                                            No. 333-122233, previously filed with
                                            the Securities and Exchange
                                            Commission on January 24, 2005.4.24.2
                                        
                                        Contract
                                            to Supply Active Ingredients between
                                            Sirton Pharmaceuticals S.p.A. and
                                            Gentium S.p.A. dated January 2, 2006.4.25.1
                                        
                                        Agreement
                                            for the Supply of Services between FinSirton
                                            S.p.A. and Gentium S.p.A.
                                            dated January 2, 2004, incorporated by reference to
                                            Exhibit 10.25 to
                                            the Registration Statement on Form F-1,
                                            Registration No. 333-122233,
                                            previously filed with the Securities
                                            and Exchange Commission on January
                                            24, 2005.4.25.2
                                        
                                        Service
                                            Agreement between FinSirton S.p.A. and
                                            Gentium S.p.A. dated
                                            January 2, 2006.4.26.1
                                        
                                        Agreement
                                            for the Supply of Servicesbetween
                                            Sirton Pharmaceuticals S.p.A. and Gentium
                                            S.p.A. dated January 2,
                                            2004,
                                            incorporated by reference to Exhibit
                                            10.26 to the Registration Statement
                                            on Form F-1, Registration No. 333-122233,
                                            previously filed with the
                                            Securities and Exchange Commission on
                                            January 24, 2005.4.26.2
                                        
                                        Service
                                            Agreement between Sirton Pharmaceuticals
                                            S.p.A. and Gentium S.p.A. dated
                                            January 2, 2006.4.27
                                        
                                        Service
                                            Agreement between Sirton Pharmaceuticals
                                            S.p.A. and Gentium S.p.A. dated
                                            January 2, 2004, incorporated by reference to
                                            Exhibit 10.27 to the
                                            Registration Statement on Form F-1, Registration
                                            No. 333-122233,
                                            previously filed with the Securities
                                            and Exchange Commission on January
                                            24, 2005.
   **Back
                                      to Table of Contents**
  **Exhibit**
                                          
                                          **Description**4.28
                                          
                                          Lease
                                              Agreement between Sirton Pharmaceuticals
                                              S.p.A. (formerly known as Crinos
                                              Industria Farmacobiologica S.p.A.)
                                              and Gentium S.p.A. (formerly known
                                              as
                                              Pharma Research S.r.L.) dated January 2, 2001, incorporated by
                                              reference to Exhibit 10.28 to the Registration
                                              Statement on Form F-1,
                                              Registration No. 333-122233, previously
                                              filed with the Securities and
                                              Exchange Commission on January 24,
                                              2005.4.29
                                          
                                          8%
                                              Promissory Note in the amount of €106,000 issued by Gentium S.p.A. to
                                              Alexandra Global Master Fund Ltd. dated March 29, 2005,
                                              incorporated by reference to Exhibit
                                              10.29 to Amendment No. 1 to the
                                              Registration Statement on Form F-1,
                                              Registration No. 333-122233,
                                              previously filed with the Securities
                                              and Exchange Commission on April 7,
                                              2005.4.30
                                          
                                          General
                                              Consulting Agreement between Gentium
                                              S.p.A. and Bradstreet Clinical
                                              Research & Associates, Inc., dated March 19, 2004,
                                              incorporated by reference to Exhibit
                                              10.30 to Amendment No. 1 to the
                                              Registration Statement on Form F-1,
                                              Registration No. 333-122233,
                                              previously filed with the Securities
                                              and Exchange Commission on April 7,
                                              2005.4.31
                                          
                                          Consulting
                                              Agreement between Gentium S.p.A. and
                                              KKS-UKT, GmbH, dated April 20,
                                              2004, incorporated by reference to
                                              Exhibit 10.31 to Amendment No. 1 to
                                              the
                                              Registration Statement on Form F-1,
                                              Registration No. 333-122233,
                                              previously filed with the Securities
                                              and Exchange Commission on April 7,
                                              2005.4.32
                                          
                                          Commercial
                                              Lease Agreement between Gentium S.p.A.
                                              and FinSirton S.p.A. dated
                                              January 1, 2005, incorporated by reference
                                              to Exhibit 10.32 to
                                              Amendment No. 2 to the Registration
                                              Statement on Form F-1, Registration
                                              No. 333-122233, previously filed with
                                              the Securities and Exchange
                                              Commission on May 10, 2005.4.33
                                          
                                          Commercial
                                              Lease Agreement between Gentium S.p.A.
                                              and Sirton Pharmaceuticals S.p.A.
                                              dated January 1, 2005, incorporated by reference
                                              to Exhibit 10.33 to
                                              Amendment No. 2 to the Registration
                                              Statement on Form F-1, Registration
                                              No. 333-122233, previously filed with
                                              the Securities and Exchange
                                              Commission on May 10, 2005.4.34
                                          
                                          Form
                                              of indemnification agreement between
                                              Gentium S.p.A. and each officer and
                                              director, incorporated by reference
                                              to Exhibit 10.34 to Amendment No. 2
                                              to
                                              the Registration Statement on Form
                                              F-1, Registration No. 333-122233,
                                              previously filed with the Securities
                                              and Exchange Commission on May 10,
                                              2005.4.35
                                          
                                          Services
                                              Agreement between MDS Pharma Services
                                              s.r.l. and Gentium S.p.A. dated
                                              October 24, 2005.4.36
                                          
                                          Financing
                                              Contract between Banca Intesa Mediocredito
                                              S.p.A. and Gentium S.p.A. dated
                                              April 20, 2006.12.1
                                          
                                          Chief
                                              Executive Officer Certification pursuant
                                              to Section 302 of the
                                              Sarbanes-Oxley Act of 2002.12.2
                                          
                                          Chief
                                              Financial Officer Certification pursuant
                                              to Section 302 of the
                                              Sarbanes-Oxley Act of 2002.13.1
                                          
                                          Chief
                                              Executive Officer Certification pursuant
                                              to Section 906 of the
                                              Sarbanes-Oxley Act of 2002.13.2
                                          
                                          Chief
                                              Financial Officer Certification pursuant
                                              to Section 906 of the
                                              Sarbanes-Oxley Act of 2002.15(a)
                                          
                                          Consent
                                              of Reconta Ernst & Young S.p.A. dated May 30,
                                              2006.