##### Table of Contents

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

Amendment No. 1

(Mark One)

|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



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

For the transition period from                      to

Commission
file number: 000-51472

Coley Pharmaceutical Group, Inc.

(Exact name of registrant as specified in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 06-1506689                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|93 Worcester Street, Suite 101 Wellesley, MA                   |  | 02481                               
|(Address of principal executive offices)                       |  | (Zip Code)                          

Registrants telephone number, including area code: (781) 431-9000

Securities registered pursuant to Section 12(b) of the Exchange Act:



|                    |  |                                          
|------------------- |  | -----------------------------------------
|Title of each class |  | Name of each exchange on which registered
|None                |  |                                          

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

Common Stock, $.01 Par Value Per Share

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.    Yes ̈No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. ̈

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 ̈

Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.  x

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 larger accelerated filer in Rule 12b-2 of the Exchange Act.

Large accelerated filer ̈Accelerated filer ̈Non-accelerated filer  x

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

The aggregate market value of the registrants voting and non-voting common stock held by non-affiliates of the registrant (without admitting that any person whose shares are not included in such calculation is
an affiliate) computed by reference to the price at which the common stock was last sold on the Nasdaq National Market on March 17, 2006 was $268,082,365. The registrant has provided this information as of March 17, 2006 because its common equity
was not publicly traded as of the last business day of its most recently completed second fiscal quarter.

As of March 17, 2006, the
registrant had 26,174,870 shares of common stock outstanding.

APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

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.    Yes ̈No ̈

DOCUMENTS INCORPORATED BY REFERENCE

The following documents (or parts thereof) are incorporated by reference into the following parts of this Form 10-K: Certain information required in
Part III of this Annual Report on Form 10-K is incorporated from the Registrants Proxy Statement for the Annual Meeting of Stockholders to be held on June 21, 2006.



---



---

##### Table of Contents

Explanatory Note

This Amendment No. 1 on Form 10-K/A to the Registrants Annual Report on Form 10-K for the year ended December 31, 2005 is being filed by the Registrant solely to correct typographical errors in the
charts on pages 7 and 8 of Part I, Item 1.



---

##### Table of Contents

Coley Pharmaceutical Group, Inc. Form 10-K/A Table of Contents



|        |  |          |  |     
|------- |  | -------- |  | ----
|        |  |          |  | Page
|        |  | PART I   |  |     
|Item 1. |  | Business |  | 1   



---

##### Table of Contents

PART I



|Item 1. | BUSINESS
|------- | --------

Overview

We are a biopharmaceutical company focused on discovering and developing a novel class of drug candidates for cancers, infectious diseases and respiratory
disorders. Our proprietary TLR Therapeutics act on a specific class of targets, called Toll-like receptors, or TLRs, found in and on immune system cells which, in turn, direct the immune system to fight disease. We and our collaborators
currently have four drug candidates in clinical trials, including our lead product candidate, ProMune (CPG 7909 Injection, which is now referred to as PF-3512676 by our partner Pfizer Inc.) for cancers, which is currently in pivotal
international Phase III clinical trials, and Actilon (CPG 10101) for infectious diseases, which is currently in Phase Ib and Phase II clinical trials for chronic Hepatitis C Virus (HCV).1Our drug candidates in clinical trials target a specific TLR known as TLR9. We have entered into a license agreement with Pfizer for the development and
worldwide commercialization of ProMune. We have also entered into collaborations with sanofi-aventis, GlaxoSmithKline and Chiron Corporation to develop respiratory disease treatments and vaccine adjuvants.

In our randomized Phase II clinical trial of ProMune in combination with chemotherapy for first-line treatment of all of the major histologic subtypes of
non-small cell lung cancer, or NSCLC, which was completed in 2005, we observed a potentially meaningful survival benefit in patients receiving ProMune. In this 112-patient clinical trial, involving patients receiving ProMune in combination with
standard chemotherapy, we also observed a statistically significant improvement in tumor response rate. We have also observed ProMunes anti-cancer activity in a Phase II randomized clinical trial in advanced melanoma and in early clinical
studies in renal cell carcinoma; non-Hodgkins lymphoma; cutaneous T-cell lymphoma, or CTCL; and basal cell carcinoma.

In March 2005,
we entered into a series of related agreements with Pfizer under which we granted Pfizer development and worldwide marketing rights to ProMune for the treatment, control and prevention of multiple cancer indications, including NSCLC and breast
cancer. Under these agreements, we received a $50 million up-front payment, and may receive up to an additional $455 million in milestone payments, a significant majority of which relates to potential development and regulatory approval milestones,
and royalties on any future product sales. Pfizer also invested $10 million in Coley by purchasing 625,000 shares of our common stock in a private placement at $16.00 per share concurrent with our initial public offering. Under the terms of our
agreement, Pfizer will pay virtually all development, regulatory and commercialization costs for ProMune.

Pfizer has initiated two pivotal
Phase III clinical trials of PF-3512676 in advanced first-line NSCLC patients under the Special Protocol Assessment, or SPA, procedure of the U.S. Food and Drug Administration. We expect that Pfizer will explore ProMune as a therapy for breast
cancer and other cancer indications as well.

Actilon, our proprietary product candidate for the treatment of HCV, is currently in Phase Ib
and Phase II clinical studies. Based on our preclinical data, we believe that Actilons stimulation of the patients immune system to provide both an immediate and longer-term response will result in increased rates of sustained viral
response when used as part of an HCV infection drug treatment regimen. Results from our first Phase Ib trial of Actilon as a monotherapy, which was completed in 2005, demonstrated a dose-dependent reduction of HCV RNA levels over a wide dose range.

In the second half of 2005, we initiated a second randomized Phase Ib clinical trial of Actilon designed as a five-arm clinical study of
Actilon alone and in various combinations with current standard of care drugs, pegylated interferon and ribavirin, for the treatment of chronic HCV in subjects who have previously responded to, but subsequently relapsed from an adequate course of
pegylated interferon and ribavirin. In February 2006,

---

|1 | In this Annual Report on Form 10-K, when we refer to Coleys development efforts for CPG 7909, we refer to the molecule as ProMune. When we refer to
Pfizers development efforts for CPG 7909, we refer to the molecule as PF-3512676.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



---

##### Table of Contents

we initiated a Phase II clinical study of Actilon in HCV subjects who have failed previous therapy with the current standard of care. This trial is designed
to compare the safety and tolerability of two different drug dosing combinations against a third arm of retreatment with pegylated interferon and ribavirin as well as the activity of the regimens in both reducing the concentration of virus in the
blood over twelve weeks and in achieving a sustained virologic response, or a sustained reduction in viral load, for six months following the end of 48 weeks of treatment.

We and our collaborator, sanofi-aventis, have discovered and are developing several TLR Therapeutic product candidates for the treatment of certain
respiratory conditions. Sanofi-aventis has the right to develop up to four of our TLR Therapeutics for the treatment of asthma, allergic rhinitis and chronic obstructive pulmonary disease, or COPD.

We have partnered VaxImmune, our vaccine adjuvant, with vaccine companies to boost the immunologic response and potential efficacy of their vaccine
products. VaxImmune is being incorporated into vaccine products being developed by our licensees, GlaxoSmithKline and Chiron, to enhance the effectiveness of their vaccines in cancers and infectious diseases.

We also have been awarded three United States government contracts, one of which was completed during 2005. Under one of these contracts, we have
advanced VaxImmune into Phase I clinical trials to enhance the immunologic response of anthrax vaccines. These programs have allowed us to further develop and expand our research and development capabilities in areas of interest to us, with the
added advantage of reducing our financing needs. In addition, we have been able to leverage our experience gained in these programs by expanding our intellectual property portfolio, while retaining commercial rights to our discoveries.

Product Development Programs

We and our
collaborators currently have four TLR Therapeutics in human clinical trials to treat cancers, infectious diseases, asthma and allergy, and to enhance the effectiveness of vaccines. In addition to these clinical-stage programs, we have a number of
research programs in development both internally and with our collaborators.

We and our collaborators have the following product
candidates in clinical trials:



|                               |  |                                         |  |                 |  |                  
|------------------------------ |  | --------------------------------------- |  | --------------- |  | -----------------
|Product Candidate              |  | Target Indication                       |  | Clinical Status |  | Commercial Rights
|                               |  |                                         | 
|PF-3512676 (formerly CPG 7909) |  | Cancers                                 |  |                 |  |                  
|                               |  |      First-line NSCLC                  |  | Phase III       |  | Pfizer           
|                               |  |                                         | 
|Actilon                        |  | Infectious Diseases                     |  |                 |  |                  
|                               |  |      Hepatitis C                       |  | Phase Ib and II |  | Coley            
|                               |  |                                         | 
|AVE7279 and AVE0675            |  | Respiratory Diseases                    |  |                 |  |                  
|                               |  |      Asthma                            |  | Phase I*        |  | sanofi-aventis   
|                               |  |                                         | 
|VaxImmune Vaccine Adjuvant     |  | Various                                 |  |                 |  |                  
|                               |  |      Breast, Prostate and Lung Cancers |  | Phase I         |  | GlaxoSmithKline  
|                               |  |      Infectious Diseases               |  | Phase I         |  | Chiron           

---

|* | On June 17, 2005, the investigational new drug application, or IND, for AVE0675 was placed on a clinical hold by the United States Food and Drug Administration, or FDA, prior
to commencing enrollment pending the submission by our collaborator, sanofi-aventis, of additional preclinical data relating to the IND for this product candidate. Sanofi-aventis is working to provide the information requested by the FDA in order to
resolve the clinical hold.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



2



---

##### Table of Contents

Strategy

Our goal is to be a leading biopharmaceutical company focused on the discovery, development and commercialization of TLR Therapeutics that direct the immune system to fight disease. Our strategy to achieve this objective includes the
following elements:



| |  |  | We intend to maximize the value from our existing commercial collaborations which thus far have been a key component of our corporate strategy and have provided us with financial,
development and commercialization resources for our drug candidates, while allowing us to retain significant economic interests in our licensed product candidates.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We expect to advance the clinical development of our HCV program by directing our financial, research and development resources and TLR Therapeutic expertise previously focused on
the development of ProMune to the development of Actilon for HCV and potentially to other infectious diseases. We intend to develop Actilon for HCV independently through the end of Phase II clinical trials. We believe that we would be able to
commercialize Actilon for HCV effectively in North America utilizing a specialist-focused sales force. However, we will determine before starting Phase III clinical trials the commercialization path for Actilon that we believe has the greatest
potential to maximize our shareholders value.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We intend to leverage our research and discovery expertise to identify additional disease areas in which to apply our TLR expertise, and potentially to address these diseases with
new TLR Therapeutics that target TLRs other than TLR9, explore the application of TLR antagonists, and expand our clinical pipeline to include additional classes of molecules.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We will opportunistically seek to enter into additional partnerships that will enable us to expand the reach of TLR Therapeutics into other areas that require the resources of a
larger company to develop and provide us with funding for the development of our other programs. We believe that this strategy may yield a broader and even more diversified product pipeline of potential product candidates in our targeted therapeutic
areas.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We have developed and intend to maintain a leadership position in TLR-mediated disease intervention.
| | - |  | ----------------------------------------------------------------------------------------------------

TLR Therapeutics

The human immune system has ten Toll-like receptors, or TLRs, which enable immune
cells to sense threats from both intracellular and extracellular pathogens that can cause human disease. TLRs detect molecules that are unique to foreign invaders, or pathogens, and which distinguish intracellular pathogens, such as viruses,
including retroviruses, from extracellular pathogens, such as most bacteria and fungi. To fight off intracellular pathogens, which act by spreading infection inside a cell in the body, certain TLRs help the immune system to mount a type of response
that is called a Th1 response. In order to fight off extracellular pathogens, other TLRs help the immune system to mount a type of response that is called a Th2 response.

To date, we have focused our development efforts primarily on compounds targeting one specific TLR, known as Toll-like receptor 9, or TLR9, for the treatment of cancers, infectious diseases and asthma and allergy.
TLR9 is found in certain human immune cells, known as plasmacytoid dendritic cells and B cells. TLR9 functions to detect a pattern that is present in the DNA of invading intracellular pathogens, but is not present in the bodys own DNA. When
TLR9 detects this pattern, which is called a CpG motif, it triggers a Th1 response.

Our TLR Therapeutics are synthetic compounds that
function as agonists, or stimulators, or as antagonists, or blockers, of one or more TLRs that are found in immune cells. TLR Therapeutics currently in clinical development are agonists of TLR9, and they stimulate a Th1 type of immune response. When
TLR9 is stimulated by our TLR Therapeutics, we believe it triggers both the innate, or short-term immune response, and adaptive, or sustained immune response. We believe that the highly specific, dual activation by our TLR Therapeutics of the



3



---

##### Table of Contents

bodys innate and adaptive immune systems differentiates us from many other immune therapy approaches. Other approaches are generally unable to create a
sustained effect on the adaptive immune system and non-specifically activate the innate immune system, which can lead to a lack of longer term efficacy and undesirable side effects.

When the immune system fails to be properly stimulated, it can become tolerant to chronic infections or cancer and fail to mount the proper Th1 response
that is needed to reject or expel the infection or tumor. By activating the bodys dendritic cells and B cells, TLR9 agonists may reverse the development of immune tolerance to pathogens and cancers, which can result in pathogens or cancerous
tumors being appropriately attacked and expelled by the immune system. Our TLR9 agonists also act to redirect the aberrant Th2 immune responses to Th1 immune responses which cause asthma and allergy, as well as potentially other diseases.

Our TLR9 agonists are synthetic oligodeoxynucleotides, comprising short, DNA-like molecules, or oligonucleotides which mimic the CpG
motifs found in some pathogens, thereby triggering the bodys immune response. Unlike antisense or gene therapy oligonucleotides, the sequences of our TLR9 agonists are not present in the human genome so they should avoid the negative genetic
side effects that have limited these other therapeutic approaches. Furthermore, our TLR Therapeutics are generally designed to be administered once-weekly by convenient subcutaneous injection with relatively low concentrations providing the intended
therapeutic effect. The chemical sequences of these product candidates were discovered and developed by our scientists based on the discovery by our scientific co-founder and Chief Scientific Officer, Dr. Arthur Krieg, of the immunostimulatory
properties of viral and bacterial DNA in 1994. This discovery and subsequent studies of the structure, activity and mechanism of these molecules by our scientists and collaborators constitute the basis of our broad intellectual property position.

ProMune/PF-3512676 for Cancer

Unmet Medical Need

In 2003, cancer was the second leading cause of death in the United States. The American Cancer Society estimated that in 2005, over
1.3 million people will be diagnosed with cancer in the United States and over 500,000 people will have died of cancer. Worldwide, lung cancer is the most commonly diagnosed cancer, and in the United States, it is the leading cause of cancer
deaths for both men and women. Lung cancers are comprised mainly of two types: small cell lung cancer and NSCLC. The American Cancer Society estimated that in 2005, there will be approximately 172,000 new cases of lung cancer in the United States,
and approximately 164,000 patients will have died of the disease. NSCLC accounts for approximately 80% of all lung cancer. There are two major histologic subtypes of NSCLC: squamous cell carcinomas, which comprise approximately 20-40% of all NSCLC
types, and adenocarcinomas, which comprise approximately 40-55% of all NSCLC types.

Limitations of Current Therapies

Current treatments for cancer include surgery, chemotherapy, and radiation, as well as small molecules, antibodies, hormone therapy, and other targeted
agents. Surgical and radiation treatments are limited in their effectiveness because they treat the tumor at a specific site, may not remove all the cancer cells, and are not effective if the cancer has spread beyond its initial site. Chemotherapy
can treat the cancer at multiple sites, but causes severe side effects because it destroys healthy cells and tissues as well as cancer cells. In many cases, chemotherapy can only reduce tumors in size and not eliminate them completely, resulting in
disease recurrence. Targeted molecular therapies, including antibody and small molecule therapies, have shown promise, but typically are most effective for only subsets of the patient population. Furthermore, all drug therapies, both new and old,
have been vulnerable to the emergence of tumor resistance and disease recurrence.

The current standard of care in the United States in
first-line, or initial treatment for Stages IIIb and IV NSCLC, is a combination of two chemotherapies, usually a taxane plus a platinum-based therapy, with a



4



---

##### Table of Contents

documented tumor response rate of approximately 20% and median survival of 7-11 months. This represents the most frequently used FDA-approved first-line
treatment option and this treatment has the well-documented and undesirable side effect profile of cytotoxic chemotherapies, relating to damage to normal proliferating cells, such as hair follicles, the lining of the gastrointestinal tract and skin
cells.

Numerous studies have been conducted with various chemotherapy regimens in patients with NSCLC. These studies suggest that:



| |  |  | First-line treatment of advanced stage patients with two chemotherapy agents is probably superior to treatment with a single agent chemotherapy, although the survival benefit may be
limited;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | With the exception of Genentechs Avastin, first-line treatment of advanced NSCLC stage patients with three chemotherapy agents has not been shown to be superior to treatment
with two agents; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Later-stage or second-line, treatment with chemotherapy is marginally superior to best supportive care.
| | - |  | -------------------------------------------------------------------------------------------------------

An article published in the Journal of the American Medical Association on July 28, 2004, which reviewed over 30 trials spanning the past 20 years,
concluded that adding a third chemotherapeutic agent to two agent chemotherapy had a weak effect on tumor response and no effect on survival. During the last three years, three cancer drugs, Targretin, Iressa and Tarceva, in combination with
standard chemotherapy, have failed to add a survival benefit for first-line NSCLC over standard of care chemotherapy. One agent, Erbitux, is currently in a Phase III clinical trial as an additional agent added to a two chemotherapy drug regimen in
first-line settings.

In 2005, Genentech reported results of its Phase III clinical trial for Avastin, involving 878 patients in which
Avastin was tested in combination with standard chemotherapy (carboplatin and paclitaxel). The results showed a 22.5% improvement in overall survival in first-line NSCLC patients with adenocarcinoma who were not at high risk of pulmonary bleeding.
However, while the Avastin data represented a significant improvement, that trial enrolled only a subset of the NSCLC patient population, excluding those with squamous cell carcinomas and certain cardiovascular diseases. We anticipate that Genentech
will file a supplemental Biologics License Application (sBLA) for Avastin in 2006 for the first-line treatment of non-squamous NSCLC. We believe there remains room for further improvement in the treatment of this patient population.

Immunotherapy and Cancer

William B. Coley, the
namesake of our company and a pioneer in the field of cancer immunotherapy, demonstrated anti-tumor effects using bacterial extracts that stimulated the immune system in the late 19th century. Although Dr. Coley achieved some success in
hundreds of cancer patients treated with his approach, the active ingredient of this extract was unknown, and the workings of the immune system were too poorly understood at the time for this approach to be developed and accepted. In the century
since William Coleys work, much has been learned about the immune system, making possible our application of immune activation to cancer therapy.

While it has been demonstrated in preclinical studies that the immune system can be activated to recognize and mount an attack against cancerous tissue, approaches to activate the human immune system against tumors
using vaccines, cytokines and antibodies have met with varying degrees of success. In general, currently available approaches have not stimulated both the innate and adaptive arms of the immune system in a coordinated way at safe and tolerable
doses.

Summary of Phase I/II Clinical Trial Development to Date of ProMune

Prior to licensing ProMune to Pfizer, we conducted 10 oncology clinical studies of this product candidate in both hematologic and solid tumors. These
studies were in NSCLC, melanoma, recurrent CTCL, renal cell



5



---

##### Table of Contents

carcinoma, non-Hodgkins lymphoma, refractory breast cancer and basal cell carcinoma, and evaluated ProMune as a single agent, in combination with
chemotherapy and in combination with monoclonal antibodies. In our clinical trials to date, ProMune has shown:



| |  |  | Biological activity across a wide dose range;
| | - |  | ---------------------------------------------



| |  |  | Dose-related levels of response after subcutaneous administration;
| | - |  | ------------------------------------------------------------------



| |  |  | A biologically active target dose of 0.2mg/kg per week that is relatively well tolerated;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | No significant dose-limiting organ side effects, or toxicities, at multiples of the biologically active target dose;
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | Observable anti-tumor activity in the early stage clinical trials of six human cancers we have assessed; and
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | Synergistic effects with chemotherapies and other cancer treatments.
| | - |  | --------------------------------------------------------------------

Anti-tumor activity has been demonstrated in Phase II studies with weekly doses of ProMune as a single agent in CTCL, melanoma and in renal cell carcinoma and with weekly doses of ProMune together with chemotherapy in
NSCLC and melanoma. In addition, in our Phase II NSCLC study, ProMune in combination with chemotherapy appeared to offer potential for survival benefit over chemotherapy alone. At the time we entered into our licensing agreement with Pfizer, we had
three Phase II cancer studies underway, all of which have been subsequently completed.

Under our Pfizer license agreements, Pfizer is now
responsible for the direction of PF-3512676s future clinical development. Based upon the results from our Phase II NSCLC clinical study, Pfizer has initiated two pivotal international Phase III clinical trials of PF-3512676 in NSCLC.

Non-Small Cell Lung Cancer Phase II Clinical Trial

We designed the NSCLC Phase II randomized clinical trial of ProMune to provide a proof of concept of efficacy for ProMune in combination with chemotherapy, to validate our preclinical and early clinical results, to
show ProMunes potential benefit in a patient population deemed to be substantially underserved and known to have rapidly progressing disease, and to provide information required to set the foundation for Phase III clinical trials. Our
inclusion criteria included patients with both of the major histologic types of NSCLC, the squamous cell subtype, which represents 20-40% of the overall NSCLC patient population, and the more common subtype, adenocarcinomas.

In the second quarter of 2003, we initiated a randomized, open-label, 23-center international clinical trial of ProMune plus chemotherapy versus
chemotherapy alone in patients with advanced Stage IIIb or IV NSCLC but who had not received chemotherapy previously. The trial originally enrolled 83 patients, randomized 2:1 to receive chemotherapy (a taxane and a platinum) plus ProMune, or
chemotherapy alone. Therapy was administered for 6 cycles, each of three weeks duration, or until patients experienced disease progression or intolerable toxicity. ProMune was administered subcutaneously at a dose of 0.2 mg/kg, on weeks 2 and 3 of
each three-week cycle of chemotherapy. Patients judged to be benefiting from ProMune therapy, could be offered extended treatment with ProMune as a monotherapy. The primary efficacy objective of the study was to compare tumor responses in the two
treatment arms based on the RECIST criteria. The secondary endpoint included overall survival for the two treatment groups. Enrollment was completed in the fourth quarter of 2004, and follow-up is on-going for the last patients remaining in the
study.

An interim safety and efficacy review of this open-label trial was prepared for discussion with investigators and experts at the
June 2004 meeting of the American Society of Clinical Oncology (ASCO). The planned objective tumor response assessments after each of two cycles of therapy indicated clinically meaningful improvements in the rate of tumor responses and overall
patient survival. In order to validate these initial



6



---

##### Table of Contents

findings further, in anticipation of moving forward into Phase III clinical trials, we amended the trial protocol to increase enrollment. In September 2004,
we conducted a second interim analysis of the trial after 112 patients were enrolled to prepare for a presentation and discussion with the FDA.

As the data from this second interim analysis supported our previous findings, after 83 patients were analyzed and based on our discussion with the FDA and in consultation with our panel of clinical experts we:



| |  |  | closed the study to further enrollment;
| | - |  | ---------------------------------------



| |  |  | completed an independent radiographic review of tumor responses; and
| | - |  | --------------------------------------------------------------------



| |  |  | collected the final response and survival data.
| | - |  | -----------------------------------------------

Study Demographics

The demographics and baseline disease characteristics reflect the study criteria and general population of patients with advanced NSCLC
who have received no prior chemotherapy. The majority of patients who participated in the study were Caucasian males, with a median age in the chemotherapy-alone arm of 67, and a median age in the chemotherapy plus ProMune arm of 65. The two groups
were balanced with a similar subtype of tumor, with equal representation of squamous cell carcinomas and adenocarcinomas in both arms of the trial. There was a higher percentage of patients with advanced (Stage IV) disease (85% versus 62%,
respectively) in the ProMune combination arm versus the chemotherapy-alone arm, which would have been expected to bias the results against the ProMune combination arm, because the patients participating in that arm had more advanced disease.

Primary Endpoint

Best overall
response assessments showed that 38% of all patients receiving ProMune and chemotherapy together achieved a response, compared to 19% of all patients receiving chemotherapy alone. The best overall response is the best response (complete and partial
responses) at any time during the study.

ProMune Objective Responses in NSCLC

Modified Intent To Treat Population: 111 Patients(3)



|                                       |  |                                  |  |                                     
|-------------------------------------- |  | -------------------------------- |  | ------------------------------------
|Best Overall Response                  |  | Chemotherapy Alone (37 patients) |  | Chemotherapy + ProMune (74 patients)
|Physician Assessment                   |  |                                  |  |                                     
|Complete Responses                     |  | 2 (5%)                           |  | 1 (1%)                              
|Partial Responses                      |  | 5 (14%)                          |  | 27 (36%)                            
|Stable Disease                         |  | 16 (43%)                         |  | 29 (39%)                            
|Progressive Disease                    |  | 9 (24%)                          |  | 13 (18%)                            
|Non-evaluable Patients                 |  | 5 (14%)                          |  | 4 (5%)                              
|Composite Endpoints                    |  |                                  |  |                                     
|Overall Response(1)(p-value: 0.048)(2) |  | 7 (19%)                          |  | 28 (38%)                            

---

|(1) | Overall Response represents the sum of complete and partial responses according to the RECIST criteria.
|--- | -------------------------------------------------------------------------------------------------------

|(2) | A p-value is a statistical measure of significance. A p-value of less than 0.05 indicates a statistically significant difference at the 95% confidence level, and accordingly these
results were statistically significant.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | One patient was removed from the intent to treat population due to ineligibility.
|--- | ---------------------------------------------------------------------------------

The differences in response rates between the two arms of the clinical trial were confirmed by an independent blinded radiologic review which was conducted after the completion of the trial on available radiologic
scans from 91 of the 111 patients.



7



---

##### Table of Contents

Survival Endpoints

Secondary endpoints of our Phase II trial of ProMune were overall survival and survival at one year. Interim data as of February 2006 from our Phase II trial of ProMune for these endpoints are shown in the table
below.

SurvivalModified Intent to Treat Population

111 Patients



|                                   |  |          |  |               |  |               
|---------------------------------- |  | -------- |  | ------------- |  | --------------
|                                   |  | Survival |  | P-Value(1)(2) |  | HazardRatio(3)
|Overall Survival(4)                |  |          |  |               |  |               
|Chemotherapy (Median)              |  | 208 days |  |               |  |               
|ProMune plus Chemotherapy (Median) |  | 373 days |  | 0.17          |  | 0.73          
|Improvement                        |  | 79%      |  |               |  |               
|Survival at One Year               |  |          |  |               |  |               
|Chemotherapy                       |  | 33%      |  |               |  |               
|ProMune plus Chemotherapy          |  | 50%      |  | 0.10          |  | 0.65          
|Improvement                        |  | 52%      |  |               |  |               

---

|(1) | P-values were calculated based on a comparison of Kaplan-Meier survival curves for the two treatment groups.
|--- | ------------------------------------------------------------------------------------------------------------

|(2) | A p-value of less than 0.05 indicates a statistically significant difference at the 95% confidence level, and accordingly, these results were not statistically significant.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | The hazard ratio is a statistical measure of the ratio of death rates between the study group and the control group. A hazard ratio of less than 1 indicates a reduction in the risk
of death or progression of disease relative to the control group.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | The above is an interim analysis of survival data from our Phase II clinical trial of ProMune. As a result, this clinical data may change, depending on the survival of the patients
remaining in the clinical trial.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Data from this NSCLC Phase II trial were last presented by Pfizer at the European Cancer
Conference (ECCO) in Paris, France in November 2005.

Safety

In all clinical trials to date, ProMune has been relatively well tolerated. Following the addition of ProMune to taxane and platinum chemotherapy, first-line NSCLC patients in this trial experienced an expected number
of chemotherapy and disease-related serious adverse events and hospitalizations. The addition of ProMune given as a 0.2 mg/kg subcutaneous injection on weeks 2 and 3 of the chemotherapy cycles did not complicate the full dose and schedule of
chemotherapy administration.

Except for one serious local reaction at the injection site and one case of acute anaphylactic
hypersensitivity, the ProMune side effects were as expected, including moderate fever and transient low levels of white cells in the blood. Local injection site reactions, moderate to severe in less than 10% of the patients, were common due to
ProMunes pro-inflammatory activity. Most patients had some pain, redness, warmth and tenderness at the injection site. There were a few study withdrawals associated with local injection site reactions. Mild systemic symptoms of fever,
headache, fatigue, joint pains and muscle pains were common, typically resembling the flu, and were dose related. In addition, approximately 1-2% of all patients receiving ProMune experienced apparent allergic reactions. While several patients
required treatment for such reactions, most reactions lasted only a few minutes and resolved without the need for treatment. Lastly, there have been no apparent cases of drug-related autoimmune disease.

Phase III NSCLC Clinical Trials

In November 2005,
Pfizer initiated two pivotal international Phase III clinical trials in first-line treatment of advanced NSCLC under the Special Protocol Assessment, or SPA, procedure of the FDA. The purpose of these



8



---

##### Table of Contents

randomized, open-label, active control studies is to assess the efficacy and safety of PF-3512676 administered in combination with standard of care
chemotherapy (paclitaxel/carboplatin or gemcitabine/cisplatin) as first-line treatment in patients with advanced NSCLC and to compare efficacy and safety to standard of care chemotherapy.

The primary endpoint for these Phase III clinical trials is overall survival, with secondary endpoints of overall confirmed objective response rate,
duration of response, progression free survival and time to tumor progression. Each of the two Phase III clinical trials are expected to enroll approximately 800 adult patients with Stage IIIb or IV disease who have not received prior chemotherapy
or immunotherapy treatment. These trials will include subjects with both of the major histologic subtypes of non-small cell lung cancer: squamous and non-squamous.

Actilon and Infectious Diseases Program

Disease Background and Market Opportunity

Infectious diseases are a significant and increasing threat to public health. We are currently developing Actilon to treat Hepatitis C and intend to
explore the potential applications of this product candidate to treat other serious infectious diseases.

There are at least five distinct
hepatitis viruses, Hepatitis A, B, C, D and E. Hepatitis C virus, or HCV, which infects the liver and certain immune cells, leads to serious liver diseases such as cirrhosis and liver cancer more frequently than any other form of hepatitis.
According to the World Health Organization, HCV infects approximately 170 million people worldwide, including at least 2.7 million in the United States. 10-20% of those chronically infected with HCV will ultimately develop liver cirrhosis,
making HCV the leading cause of liver transplants in the United States. The Hepatitis Foundation International estimates that between 8,000 and 10,000 people die in the United States annually from HCV-related cirrhosis or liver cancer. The market
for drugs prescribed to treat HCV is currently estimated at $2.5 billion per year and is expected to grow to $5 billion per year by 2007, according to Decision Resources, Inc. This market growth is primarily due to an increase in the number of
patients infected with HCV for more than 15 years who are now progressing to advanced liver disease, many of whom have not responded to conventional therapy.

HCV is an RNA virus known to undergo a high rate of mutation that may help it both to avoid control by the immune system and to develop resistance to direct antiviral medications. There are six major genotypes and
more than 50 known subtypes of HCV. Each genotype possesses a unique RNA signature in the form of a mutation in its underlying genetic structure. The most common form in the United States, genotype 1, is estimated to account for between 70 and 75%
of all HCV infections. Genotype 1 patients have demonstrated a lower response rate to currently available treatments.

Interferon and the Treatment of
HCV

Most viral infections in people are followed by a rapid immune response against the virus, and this cures the infection.
Unfortunately, for most people who are infected with HCV the immune system is unable to eliminate the virus from the body, and the person develops a chronic infection and then is at risk for serious liver diseases. Spontaneous recovery and clearance
of HCV infection is thought to occur only in people whose dendritic cells can respond to the infection by both secreting interferon and triggering a very strong Th1 response that includes the generation of diverse killer T cells against the virus.
However, in up to about 80% of persons infected with HCV, the immune system appears to make a Th2 immune response, or an insufficient Th1 response, and the infection becomes chronic.

The standard first-line treatment for HCV is a combination regimen consisting of 24-48 weekly injections of pegylated, or long-acting, interferon and
ribavirin. Interferon is believed to block the viral life cycle of HCV at



9



---

##### Table of Contents

several stages, but the antiviral activity of ribavirin is not completely understood. Interferon treatment replaces what should otherwise have been produced
by the body in order to direct an individuals antiviral defense mechanisms and temporarily reduce the viral levels. When it is effective, the antiviral effects of combination interferon and ribavirin therapy cause a rapid decrease in HCV
levels in the blood, even after a single dose. This rapid decrease in viral level during the first 12 weeks of treatment with interferon has been identified as an early virologic response, or EVR, and probably results from the direct antiviral
effects of interferon, as well as from the ability of the interferon to activate the innate or short-acting arm of the immune system. Patients that do not achieve an EVR are unlikely to respond to treatment and their treatment is often discontinued.

Virologic responses which are clinically therapeutic must be sustained, and an SVR, or sustained virologic response, is defined as
continued suppression of the HCV six months after the completion of therapy. Some patients who achieve an SVR following interferon therapy have been reported to develop a Th1 response against the virus, and it is thought that this adaptive killer T
cell response is required for the on-going suppression of the HCV. This sustained anti-HCV response, which involves Th1, appears to be similar to the immune response that occurs spontaneously in the minority of people who recover from the infection
on their own. In order to maximize the likelihood of achieving a sustained virologic response with current standard therapy, a 24- or 48-week treatment course of combined interferon and ribavirin is typically required.

Limitations of Current Therapies

Conventional
interferon treatment for HCV has several limitations. While it can provide a short-term antiviral effect in many people, this treatment is not efficient at inducing the adaptive immune response that we believe is important for an SVR, perhaps
because of the relative lack of dendritic cell activation. Viral RNA level is known to rebound rapidly when interferon therapy is stopped after a few weeks or even after several months of continuous treatment. Currently, genotype 1 HCV patients have
only an approximate 50% chance of achieving an SVR, even after 48 weeks of pegylated interferon and ribavirin treatments. In addition, this therapy is associated with serious side effects, including reduced red or white cell counts, bone marrow
suppression, neuropsychiatric effects, particularly depression, anemia and flu-like symptoms. Finally, patient adherence to treatment is critical to the success of treatments for all forms of HCV. However, many chronically infected patients are
dissuaded from undergoing or continuing this treatment due to the combination of the therapys relatively low efficacy and its toxicity, which necessitates frequent monitoring. These significant side effects and compliance challenges are
important disadvantages to this current therapy and to successful patient treatment outcomes.

Most of the new HCV treatment approaches
that are currently in clinical trials focus on the inhibition of viral proteins and also may have limitations. Such approaches can reduce HCV levels while the patient is on the drug, but may not by themselves elicit a sustained clearing of virus
from the blood. Furthermore, given the high rate of viral mutation, the virus may develop resistance to these direct antiviral agents. The antiviral activity of Actilon does not depend on blocking of a specific viral protein, and therefore we
believe it is not as likely to be subject to genetic resistance.

Given the limitations of current and experimental therapies for HCV,
there is an unmet need for therapies that have an improved side effect profile and show equivalent or superior efficacy, especially in the difficult-to-treat population of genotype 1 patients, and those who have failed to achieve an SVR following
interferon and ribavirin therapy.

Actilon and its Advantages

We believe the natural history of HCV provides clues to its treatment. In the genotype 1 infected population, the immune system of approximately 15% to 20% of infected patients spontaneously eliminates acute HCV
infection. This recovery is associated with a competent immune response characterized by the bodys own endogenous interferon secretion and NK (natural killer) cell activation, which is, indicative of innate immune system activation and a
strong and diverse anti-HCV T cell response, which is indicative of adaptive immune system activation.



10



---

##### Table of Contents

Actilon is a synthetic oligodeoxynucleotide and a selective TLR9 agonist which strongly activates
interferon production by the plasmacytoid dendritic cells and enhances their ability to activate killer T cells against invaders. Specifically, we believe that Actilon operates through a dual method of action consisting of both innate and
adaptive immune antiviral mechanisms. Actilon was designed not only to induce the early short-term innate immune effects that temporarily control the virus, but also to trigger adaptive immunity, with a strong killer T cell response, that we believe
may provide sustained anti-infective effects. We believe that Actilon could induce this killer T cell response against HCV more rapidly and more frequently than what occurs using other therapies. We believe Actilon therapy may allow the duration of
HCV therapy to be reduced significantly from the current standard 24 weeks for genotypes 2 and 3, and 48 weeks for genotype 1, thereby resulting in reduced toxicity and improved patient acceptance.

Based on results observed in our early clinical trials, we believe that Actilon, like interferon and ribavirin treatment, triggers an innate immune
response early in the course of administration in many people. In contrast to conventional interferon therapy, however, we believe that Actilon may cause faster and more effective dendritic cell maturation in the patients, followed by more rapid
enhancement of the adaptive immune response that is thought to be required for controlling difficult-to-treat chronic viral diseases, such as HCV. Thus, in HCV, we expect that Actilon therapy may lead to more rapid and more frequent development of a
sustained viral response, even in treatment-experienced non-responder patients and in the difficult to treat and most common genotype 1 patients.

We believe that Actilon will be capable of inducing and amplifying potent and natural antiviral mechanisms at relatively well tolerated doses. Based on the preclinical tests we have conducted in infection models, we believe that synthetic
TLR9 agonists, such as Actilon, may have broad utility in the treatment and prevention of many types of infections because of their ability to activate both the short-term innate and sustained adaptive responses of the immune system.

Summary of Phase I/II Clinical Development of Actilon

As in our oncology program, our aim in our HCV trials is to answer key clinical development questions on drug dose and schedule, both as a monotherapy and as part of combination regimens, in randomized, controlled trials. Our objective is
for clinical data to drive developmentfirst establishing strong results in safety and tolerability, and then systematically and rigorously testing drug activity in various settings to ascertain the potential efficacy as well as any potential
limits of the therapeutic program. In this way, we may be able to more fully exploit the mechanism of action and pharmacological properties of Actilon to restore and/or leverage the immune systems ability to fight or resist disease.

To date, we have undertaken four randomized, controlled studies with Actilon, involving over 150 subjects. The first two studies have been
completed. The two on-going studies are designed to determine the safety, tolerability and ability of Actilon to induce antiviral response alone or in combinations with the current standard of care in two difficult to treat patient populations
comprised of genotype 1 patients that have either responded to standard of care therapy and then relapsed (relapsed responders) or patients that did not respond to standard of care therapy (non-responders).



| |  |  | The first study was a conventional dose-escalation study to establish the compounds safety in healthy volunteers. This trial met our objectives, which were to demonstrate
generally good tolerability and induction of the expected immune response markers.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The second Actilon clinical study was a four-week Phase Ib monotherapy trial in chronic HCV patients in which we compared escalating dose levels as well as twice- and once-weekly
administration. In this dose-finding study, we observed meaningful reduction of viral RNA with Actilon administered just once weekly at well-tolerated dose levels.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



11



---

##### Table of Contents

| |  |  | The third Actilon clinical study is an on-going 12-week Phase Ib study that has enrolled more than 70 relapsed-responder HCV patients in order to assess Actilons safety and
activity in various combinations relative to pegylated interferon and ribavirin.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The fourth study was initiated in 2006 and is a 48-week Phase II clinical study in a non-responder population of HCV infected patients. This study is designed to assess the activity
of two dose levels of Actilon with pegylated interferon and ribavirin against pegylated interferon and ribavirin alone.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We
believe that Actilon has the potential to become a component of combination regimens for the treatment of HCV. Our clinical development strategy for Actilon draws on the following four key clinical and scientific observations:



| |  |  | Actilon has a unique and complementary dual mechanism of action. Actilon given just once weekly appears to induce both the innate and the adaptive arms of the immune
response, whereas interferon stimulates primarily the innate short-term response. Interferon fails to strongly induce a long-term adaptive immune response, which Actilon is designed to accomplish. Since this adaptive response is associated with the
occasional spontaneous clearing of acute HCV infection, we believe its induction by Actilon may help to clear chronic HCV infectionespecially among patients where interferon treatment has failed.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Actilon appears to be synergistic with interferon. Specifically, our in vitro studies have shown that exogenous interferon introduced as a therapy primes blood
cells from HCV patients to respond much better to Actilon. We believe adding Actilon to interferon and ribavirin may, therefore, result in a higher sustained virologic response (SVR) rate than treatment with pegylated interferon and ribavirin alone.
This suggests to us the strategy of combining Actilon on top of the standard of care, leveraging the synergy between these two forms of treatment, instead of trying to develop Actilon just as a replacement to pegylated interferon.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We have observed that TLR agonists can impart clinically relevant activity on top of standard of care without adding treatment-limiting toxicities, based on our experience in
developing ProMune. Further, with ProMune, we have shown that we can meaningfully improve the activity of conventional therapies in advanced disease. We hope, in clinical trials with Actilon, also to be able to demonstrate safety and efficacy
benefits in our on-going combination therapy Phase Ib and Phase II clinical trials.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Focusing on unmet patient needandefficient clinical development,we decided we would test the possibility of establishing an improvement in sustained
virologic response or SVR, the gold standard in terms of clinical endpoints for HCVand in the most difficult to treat patient population treatment-experienced, non-responders. This population is estimated at more than 400,000 people in the US
alone. If we can achieve our goal of improving SVR outcomes in this challenging population, we believe that this would be a significant positive factor in the process towards registration and regulatory approval. Beyond this treatment-experienced
non-responder population, we also see opportunity in the longer term to evaluate Actilon in HCV treatment naïve populations. If Actilon can improve therapy for difficult to treat non-responders, we believe it is likely to improve current or
future therapy for treatment naïve patients as well.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



12



---

##### Table of Contents

We completed a Phase Ia study of Actilon in healthy volunteers during 2004, in order to establish a
profile for dosing in HCV patients for future clinical trials of Actilon. The results of our Phase Ia study follow:

Actilon Phase Ia
Clinical Trial



|               |  |                                                                                                                                                                                                                                                                                                                        
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Overview       |  | Designed to assess safety, dose tolerability and immunological activity                                                                                                                                                                                                                                                
|               | 
|Design         |  | Healthy volunteers randomized to receive placebo or Actilon in each of five sequentially higher doses, 8 subjects in each cohort (0.25, 1, 4, 10 or 20 mg). Subsequently amended to include an
additional cohort of 8 subjects who received Actilon, 4mg, twice weekly for 4 weeks (6 subjects) or placebo (2 subjects)
|               | 
|Administration |  | Two subcutaneous injections were administered 14 days apart (group 1) and subcutaneous injection twice weekly for 4 weeks (group 2) Patients evaluated double-blind for 29 days                                                                                                                                        
|               | 
|Safety Results |  | No drug-related serious adverse events or dose-limiting toxicities Mild injection site reactions and mild-to-moderate flu-like symptoms, consistent with Actilons mechanism                                                                                                                                           
|               | 
|Results        |  | Dose-related increases in interferon levels and other markers indicative of innate immune response and potential antiviral activity                                                                                                                                                                                    

Data from this Phase I trial were presented at the Annual Interscience Conference on Antimicrobial
Agents and Chemotherapy (ICAAC) meeting in Washington, DC in November 2004 and at the American Association for the Study of Liver Disease (AASLD) meeting in San Francisco in November 2005.

In 2005, we completed a monotherapy Phase Ib trial of Actilon in predominantly genotype 1 HCV infected patients. The results of this Phase Ib study
follow:

Actilon Monotherapy Phase Ib HCV Clinical Trial



|               |  |                                                                                                                                                                                                                                                                                                               
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Overview       |  | Designed to assess antiviral responses as well as safety and tolerability in patients with chronic HCV, predominantly genotype 1                                                                                                                                                                              
|               | 
|Design         |  | Adult patients, who had relapsed after or were intolerant of prior interferon, were randomized to receive placebo or Actilon two times weekly or once weekly for 4 weeks with monitoring for up
to 4 additional weeks (8 weeks total)                                                                         
|               | 
|Administration |  | Eight subjects in each of 5 cohorts received, twice weekly, subcutaneous injections randomized to receive placebo or Actilon in each of 5 sequentially higher doses (0.25, 1, 4, 10 and 20 mg).
In two additional cohorts subjects, 8 per cohort, received Actilon, 0.5 or 0.75 mg/kg, or placebo, once weekly
|               | 
|Safety Results |  | Dose tolerance and laboratory safety were the same in HCV patients as in the normal healthy volunteers observed in our Phase Ia clinical trial                                                                                                                                                                



13



---

##### Table of Contents

Initial results from the monotherapy Phase Ib clinical trial demonstrated the following dose-related mean
log changes in viral load. Safety results were also encouraging, with no dose-limiting toxicities.



|        |  |          |  |                                                     |  |                         |  |           
|------- |  | -------- |  | --------------------------------------------------- |  | ----------------------- |  | ----------
|Dose(1) |  | Patients |  | Number of Patients with Greater than1 Log Reduction |  | MeanMaximumLog(2)Change |  | P-Value(3)
|Placebo |  | 13       |  | 0                                                   |  | -0.27                   |  |          
|0.25    |  | 6        |  | 0                                                   |  | -0.31                   |  | NS        
|1       |  | 6        |  | 1                                                   |  | -0.95                   |  | NS        
|4       |  | 7        |  | 2                                                   |  | -0.88                   |  | NS        
|10      |  | 7        |  | 4                                                   |  | -1.01                   |  | <0.05     
|20      |  | 6        |  | 5                                                   |  | -1.42                   |  | <0.05     
|0.5     |  | 7        |  | 4                                                   |  | -1.14                   |  | <0.01     
|0.75    |  | 7        |  | 6                                                   |  | -1.64                   |  | <0.01     

---

|(1) | Patients received placebo or 0.25, 1.0, 4.0, 10 or 20 mg Actilon twice weekly, or placebo or 0.5 or 0.75 mg/kg Actilon or placebo once weekly by subcutaneous injection.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Changes in the presence of a virus in the blood, or viral load reduction, are measured in logs, a measure of overall change. For example, a two-fold decrease in virus corresponds to
a 0.3 log viral load change, while a ten-fold decrease in virus corresponds to a 1.0 log viral load change. Mean log change reflects the average of the maximum reduction in HCV RNA observed in subjects during the treatment period.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | A p-value is a statistical measure of significance. A p-value of less than 0.05 indicates a statistically significant difference at the 95% confidence level. Accordingly, these
results were statistically significant at dose levels of 10 and 20 mg Actilon administered twice weekly, and 0.5 and 0.75 mg/kg administered once weekly versus placebo. NS= Not Significant (P>0.05)
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Data from this monotherapy Phase Ib trial were last presented at the American Association for the Study of Liver Disease (AASLD) meeting in San Francisco
in November 2005.

We started a combination Phase Ib clinical trial of Actilon in chronic HCV patients in the third quarter of 2005. This
trial is fully enrolled. This trial is designed to investigate the safety, tolerability and antiviral activity of Actilon when administered in combination with pegylated interferon and ribavirin in chronic HCV patients who have previously been
treated with pegylated interferon and ribavirin, who achieved a virological response at the end of treatment (ETR) but who subsequently relapsed and did not achieve a sustained virological response. A summary of this trial follows:

Actilon Combination Therapy Phase Ib HCV Clinical Trial



|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Overview       |  | Designed to assess safety, tolerability and antiviral activity of Actilon in combination with pegylated interferon and ribavirin in patients with chronic HCV, genotype 1                                                                                                                                                                                                                                                                                                                                                                           
|               | 
|Design         |  | Adult patients, who relapse after prior treatment with pegylated interferon and ribavirin, are being randomized to receive Actilon either alone or in combination with pegylated interferon, or
with ribavirin, or pegylated interferon plus ribavirin. Patients in a control treatment arm receive pegylated interferon plus ribavirin. Patients are being treated for 12 weeks. Patients who have an EVR, at least a 2 log reduction in viral RNA after
12 weeks, will be offered the opportunity to continue treatment for an additional 36 weeks
|               | 
|Administration |  | Twelve patients are planned for each cohort. Actilon is being administered subcutaneously at a dose of 0.2 mg/kg, once weekly. Pegylated interferon is administered at a dose of 1.5μg/kg
once weekly and ribavirin at 800-1400 mg daily                                                                                                                                                                                                                                                                                                            



14



---

##### Table of Contents

Preliminary data from this Phase lb combination study indicate that 12 out of 14 patients (86 percent)
receiving a combination of Actilon with pegylated interferon and ribavirin achieved an Early Viral Response (greater than a 2 log reduction in serum HCV RNA at 12 weeks) compared to 8 out of 14 patients (57 percent) who received a control
combination of pegylated interferon and ribavirin. At twelve weeks, the Actilon combination therapy resulted in a 3.3 mean log reduction in HCV RNA levels compared to a 2.2 mean log reduction among patients receiving the control combination. The
addition of Actilon to current therapies did not have a notable impact on tolerability.

Further analysis of the interim Phase lb
combination study data will be presented at the European Association for the Study of the Liver (EASL) meeting in Vienna, Austria in April 2006.

In 2006, we have started a Phase II trial of Actilon in combination with pegylated interferon plus ribavirin in chronic HCV treatment-experienced patients who were previously treated with pegylated interferon plus ribavirin but failed to
achieve an EVR. For this patient population other treatment options are very limited, if available at all. Initial results from this trial are expected in the second half of 2006. A summary of this trial follows:

Actilon Phase II HCV Clinical Trial



|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Overview       |  | Designed to assess the antiviral activity, safety and tolerability of, and the immunological response to, Actilon in combination with pegylated interferon and ribavirin in patients with
chronic HCV, genotype 1                                                                                                                                                                                                                                                                                    
|               | 
|Design         |  | Adult patients, who have failed to achieve an EVR after 12 weeks of prior treatment with pegylated interferon and ribavirin, are being randomized to receive Actilon, at one of two doses, in
combination with pegylated interferon plus ribavirin. Patients in a control arm are receiving pegylated interferon plus ribavirin. Patients are being treated for 12 weeks. Patients who have at least a 1.5 log decrease in HCV RNA will be permitted to
continue treatment for an additional 36 weeks
|               | 
|Administration |  | Thirty patients are planned for each cohort. Actilon is being administered subcutaneously at a dose of 0.2 or 0.5 mg/kg, once weekly. Pegylated interferon is administered at a dose of
1.5μg/kg once weekly and ribavirin at 800-1400 mg daily                                                                                                                                                                                                                                                      

We intend to use information gained from our completed and on-going clinical trials to design and
carry out a randomized Phase IIb clinical trial of Actilon beginning in 2006/2007, which will be designed to determine the clinical benefit of treatment with Actilon in treatment-experienced patients with chronic HCV infection. We also plan to
characterize the safety of, and response to, different combination treatment regimens involving Actilon, to compare alternative doses of Actilon, and to characterize the activity of Actilon in different HCV patient populations. Our clinical trials
of Actilon will also be designed to determine the effects of Actilon on patients adaptive killer T cell immune responses to HCV.

Asthma and
Allergic Rhinitis Program

Two of our TLR Therapeutics are being developed for asthma and allergic rhinitis in collaboration with
sanofi-aventis. In 2001, we granted to Aventis Pharmaceuticals, now sanofi-aventis, exclusive worldwide rights to certain TLR Therapeutics for the treatment of asthma, allergic rhinitis and chronic obstructive pulmonary disease. Preclinical studies,
including systematic safety assessments, have been conducted on two compounds that we discovered, AVE7279 and AVE0675, using the inhalation route of administration, and development is continuing under sanofi-aventis management. Dosing of volunteers
using an aerosol delivery administration in a Phase I clinical trial of AVE7279 was generally well tolerated, and sanofi-aventis observed pharmacological biomarker responses that were consistent with the Th1-promoting mechanism of action of the drug
candidate. Based on these results, sanofi-aventis intends to move forward into clinical trials in patients with asthma using AVE0675.



15



---

##### Table of Contents

On June 17, 2005, the IND for AVE0675 was placed on a clinical hold by the FDA prior to commencing
enrollment pending the submission by our collaborator, sanofi-aventis, of additional preclinical data relating to the IND for this product candidate. Our collaborator sanofi-aventis is working to provide the information requested by the FDA in order
to resolve the clinical hold.

VaxImmune Vaccine Adjuvant Program

VaxImmune, a vaccine adjuvant, was designed to boost the bodys immune response to vaccines with a goal of improving the performance and efficacy of existing and future vaccines for various indications, including
cancer and infectious diseases. Our experimental vaccine adjuvant, VaxImmune, is being tested by our collaborators for use with their vaccines.

VaxImmune consists of the same DNA-like compound as ProMune (CPG 7909). When used as a vaccine adjuvant, VaxImmune is co-formulated with an antigen. In addition, the VaxImmune dose level is considerably lower and the administration schedule
less frequent than ProMune.

The following is a summary of the clinical status of our VaxImmune adjuvant programs:



|                                         |  |                                  |  |              |  |                    |  |                         
|---------------------------------------- |  | -------------------------------- |  | ------------ |  | ------------------ |  | ------------------------
|Program                                  |  | Indication                       |  | Status       |  | Collaborator       |  | Commercialization Rights
|                                         |  |                                  |  |             
|VaxImmune in cancer therapeutic vaccines |  | Breast, Prostate and Lung Cancer |  | Phase I      |  | GlaxoSmithKline(1) |  | GlaxoSmithKline(1)      
|                                         |  |                                  |  |             
|VaxImmune in HCV prophylactic vaccine    |  | Hepatitis C                      |  | IND Accepted |  | Chiron             |  | Chiron                  

---

|(1) | Except for the rights granted to GlaxoSmithKline, we have granted an exclusive license to Pfizer to develop and use VaxImmune in cancer vaccines.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------

We have capitalized on the broad applicability of our TLR9 agonist technology by developing our adjuvant technology with the United States government,
and licensing use of VaxImmune to multiple companies, either on a co-exclusive or non-exclusive basis to be used solely as a vaccine adjuvant in infectious disease or cancer vaccines. Through this approach, we have generated approximately $20
million in revenues that we have invested in developing ProMune and Actilon.

Research Programs

In addition to our pipeline of clinical stage product candidates, we also have the following preclinical stage programs:



|                                                                                 |  |                           |  |         |  |                         
|-------------------------------------------------------------------------------- |  | ------------------------- |  | ------- |  | ------------------------
|Target                                                                           |  | Drug Candidates           |  | Funding |  | Commercialization Rights
|                                                                                 |  |                           | 
|Inhaled pathogens (including bio-terror agents) and upper respiratory infections |  | TLR9 agonists             |  | NIAID   |  | Coley                   
|                                                                                 |  |                           | 
|Bio-terror vaccine adjuvants                                                     |  | TLR3, 7, 8 and 9 agonists |  | NIAID   |  | Coley                   

Our research spans the development of drug candidates that agonize or antagonize TLRs. All of our
product candidates to date are synthetic agonists for TLR9. Our scientists have produced several different classes of TLR9 agonists by combining CpG motifs in different structures that we believe stimulate TLR9 in different



16



---

##### Table of Contents

ways, leading to distinct immune effects. By slightly altering the structure of our molecules, we have designed them to have different levels of stability in
the body, which allows us a certain amount of control over where the molecules go, and their stability after administration to patients. We believe that our understanding of the biology of TLR9 agonists makes it possible for us to design different
molecules for treating different diseases.

Recent discoveries made by our scientists and some of our collaborators have revealed that
certain RNA molecules are agonists for TLR7 and TLR8, which are related to TLR9. RNA differs from DNA only by the presence or absence of an oxygen atom in the sugar of the nucleic acid. Therefore, much of our knowledge and experience in working to
stimulate TLR9 may be applied to our development of new RNA-like drugs to stimulate TLR7 or TLR8. TLR7 activation seems to trigger many of the same effects as are seen with our TLR9 agonists, but TLR8 activation causes a very different pattern of
immune activation. We believe that RNA molecules designed to stimulate TLR7 or TLR8 could become useful drugs for treating infectious and other diseases, and we intend to conduct further research in this area.

Commercial Collaborations and United States Government Grants and Contracts

We have entered into collaboration agreements to supplement our own resources in the development and commercialization of our product candidates, contribute to and capitalize on applications outside of our primary
therapeutic focus, and to fund the continued development of our technology. Through December 31, 2005, we have received approximately $100 million in proceeds from our commercial collaborations and United States government contracts, and we may
receive payments of up to an additional $840 million.

The following is a summary of our current collaborations:

Commercial

Pfizer Collaboration

In March 2005, we entered into a series of agreements with Pfizer under which we have granted Pfizer development and worldwide marketing rights to
ProMune. Under the license agreement, we have received a $50 million upfront license fee, and may receive up to $455 million in milestone payments, a significant majority of which relates to potential development and regulatory approval milestones,
as well as royalties on any future product sales. Pfizer also purchased $10 million of our common stock in a private placement concurrent with our initial public offering.

A primary focus of the agreements with Pfizer is the development and commercialization of ProMune for the treatment, control and prevention of multiple
cancers, including first-line treatment of advanced NSCLC and treatment of breast cancer. Pfizer will fund virtually all future development of ProMune including Phase III clinical trials for the first-line treatment of NSCLC, breast cancer and other
cancer indications. Pfizer has initiated two pivotal international Phase III clinical trials of ProMune in first-line NSCLC patients.

Pursuant to a separate screening agreement, Pfizer will provide us with funding for the discovery and development of next-generation TLR9 agonists for cancer, which, if successful, would be licensed to Pfizer and could result in additional
milestone payments and additional royalties to us.

Under the terms of the license agreement, the license extends until the later to occur
of the expiration of the last of the licensed patents which covers the sale of ProMune or any next generation TLR9 agonist licensed by us to Pfizer and the emergence of generic competition for such products, in each case, as determined on a
country-by-country basis. Currently, the latest to expire of our patents covering ProMune is scheduled to expire in 2014. We have patent applications pending which, if issued, may provide patent protection for ProMune through 2017.



17



---

##### Table of Contents

Pfizer may terminate the collaboration relationship without cause upon not less than 120 days prior
written notice. Either party may terminate the collaboration relationship upon the bankruptcy of the other party or the commitment by the other party of an uncured material default, as defined in the license agreement.

Upon a change of control of us, as defined in the license agreement, the agreement would remain in effect, although Pfizer would have the right to
terminate certain provisions.

Under our license agreements with Pfizer, we had the option to participate in the Phase III development and
commercialization of PF-3512676 to treat CTCL. In 2005, we informed Pfizer of our intention not to exercise this option. Although we continue to see promising anti-cancer activity in CTCL, we made a strategic decision to focus our resources on the
development of our HCV product candidate, Actilon.

sanofi-aventis Collaboration

We have granted sanofi-aventis a worldwide, exclusive license to certain of our TLR Therapeutics for the treatment of asthma, allergic rhinitis and
chronic obstructive pulmonary disease. We are entitled to receive up to an aggregate of approximately $256 million in payments upon the achievement of certain regulatory and commercial milestones by sanofi-aventis, as well as royalties based on net
product sales from the selected TLR Therapeutic product candidates that we designed specifically for them. To date, we have received $14 million in payments from sanofi-aventis under this agreement.

This collaboration included a drug discovery program to screen and evaluate TLR Therapeutic product candidates for the indications noted above. In 2003,
we completed our efforts, begun in 2001, under the drug discovery program, and sanofi-aventis has selected two candidates from this program for clinical development. Sanofi-aventis completed a Phase I study of one of our TLR Therapeutics in 2004. On
June 17, 2005, the planned Phase I clinical trial of AVE0675 was placed on a clinical hold by the FDA prior to commencing enrollment pending the submission by our collaborator, sanofi-aventis, of additional preclinical data relating to the IND
for this product candidate. Our collaborator sanofi-aventis is working to provide the information requested by the FDA in order to resolve the clinical hold and commence the clinical trial as promptly as possible.

Sanofi-aventis may terminate the collaboration relationship upon 120 days written notice to us due to material, scientific, regulatory, legal,
medical or commercial considerations that make it commercially unreasonable for sanofi-aventis to develop or commercialize the products. In addition, sanofi-aventis may terminate the collaboration relationship without cause upon 180 days
written notice to us; however, sanofi-aventis is required to pay any milestone payments that occur within such 180-day period. Either of us may terminate the collaboration relationship under customary terms included in the agreement, including if
the other party commits an uncured material default, as defined in the license agreement, or if the other party is unable to obtain a necessary third-party license on commercially reasonable terms.

This license extends until the later to occur of the expiration of the last of the licensed patents which covers the sale of the TLR Therapeutics
licensed by us to sanofi-aventis (currently 2023) or ten years after the first commercial sale of a product covered by such patent rights.

Other
Commercial Collaborations

Our other collaboration agreements include the following:

GlaxoSmithKline. Pursuant to two agreements, we have licensed the use of TLR9 agonists to GlaxoSmithKline to be used in the fields of certain
cancer and infectious disease vaccines. We have a co-exclusive license agreement with GlaxoSmithKline, pursuant to which we granted GlaxoSmithKline a license to develop and commercialize several prophylactic and therapeutic infectious disease
vaccines, as well as a



18



---

##### Table of Contents

non-exclusive agreement to develop and commercialize vaccines for three cancer indications. Under the terms of these agreements, we are entitled to receive
up to $121 million in payments ($77 million for infectious disease vaccines and $44 million for cancer vaccines) representing up-front and various option payments, development and regulatory milestones and royalties based on any future product
sales. We have received payments aggregating $19 million ($11 million for infectious disease vaccines and $8 million for cancer vaccines) related to upfront license fees, option fees and patent milestones. GlaxoSmithKline has initiated four clinical
studies combining TLR9 agonists with their vaccines.

GlaxoSmithKline may terminate the collaboration relationship without cause upon 90
days written notice to us and upon payment of all accrued research and development funding and milestones. Either of us may terminate the collaboration relationship under customary terms included in the agreement, including if the other party
commits an uncured material default, as defined in the license agreements.

The cancer vaccine license agreement extends until December
2021. The infectious disease vaccine license agreement extends until December 2018.

Chiron. We have a non-exclusive worldwide
license agreement with Chiron to incorporate VaxImmune into multiple prophylactic vaccine candidates for use in multiple infectious disease fields. The agreement provides for potential future payments of up to an aggregate of $12 million upon
achievement of development and regulatory milestones and royalties from sales of vaccine products developed. To date, we have received $1 million in payments from Chiron under this agreement. Either of us may terminate the collaboration relationship
upon customary terms included in the agreement, including upon an uncured material default by the other party, as defined in the license agreement. This license extends until 2017.

Merial. We originally granted Qiagen, our corporate co-founder and a shareholder, a worldwide exclusive license to certain development and
commercialization rights in the field of veterinary products. In 2003, this agreement was amended and assigned by Qiagen to Merial Limited, which is a joint venture between Merck & Co. and sanofi-aventis. Under the terms of the license
agreement, Merial is required to pay us royalty payments on product sales and a milestone payment upon Merials first regulatory approval of a licensed product in the United States. Merial may terminate the collaboration relationship without
cause upon 90 days written notice to us and upon termination, any royalty payments due to us become immediately payable. Either of us may terminate the collaboration relationship upon customary terms included in the agreement, including upon
an uncured material default by the other party, as defined in the license agreement.

To date, we have received $250,000 in payments from
Qiagen (now Merial Limited). We are entitled to receive up to $100,000 in milestone payments upon the first commercial sale of the first four products covered by the patents licensed by us to Qiagen. We are also entitled to receive a royalty on
sales of products covered by such patents and, if Qiagen grants a sublicense to these patent rights, a royalty on sublicensing revenue received by Qiagen. The Qiagen license extends until 2023.

Government Contracts and Grants

In 2005, we
completed a $12 million, as amended, cost reimbursement contract with the Defense Advance Research Projects Agency, or DARPA, for the development of enhanced vaccines against bio-terror agents, including anthrax. This contract culminated with a
Phase I trial which combined our product candidate VaxImmune with our collaborators anthrax vaccine. Results from this trial were presented in December 2005 at the Interscience Conference on Antimicrobial Agents and Chemotherapy (ICAAC)
meeting by the principal investigator.

We have a $6.3 million grant from the National Institute of Allergy and Infectious Disease, or
NIAID, to perform research and preclinical development in the area of pulmonary innate immune activation for bio-terror defense. We have received $4.3 million to date under this grant. In 2005, this grant was extended for one year, through February
2007.



19



---

##### Table of Contents

In 2004, we were awarded a $16.9 million, five-year contract by NIAID to perform research in the area of
innate immune receptors and vaccine adjuvant discovery for defense against bio-terror agents. We have received $3.6 million to date under this contract.

Technology In-Licenses

We have an exclusive worldwide license agreement with the Loeb Health Research Institute at the
Ottawa Hospital, or OHRI, to develop and commercialize products covered by OHRI technology, including VaxImmune. The agreement requires royalty payments on the sale of products covered by the licensed technology. We have the right to grant
sublicenses to third parties, and are required to pay OHRI part of any sublicense revenue received. The term of this license agreement extends until the later to occur of the expiration of the last to expire of the licensed patents which covers the
sale of a product (currently 2023) or ten years after the first commercial sale of a product covered by the licensed patents. Either OHRI or we may terminate the license agreement for an uncured material breach of the agreement.

We were not required to make any upfront payments to OHRI with respect to the license agreement, although we did make a stock grant of 8,734 shares of
common stock to OHRI and OHRI personnel when the license was amended in September 2001. We have made payments of $431,000 to OHRI, excluding $150,000 related to the $50.0 million received from Pfizer as an upfront license fee payment. Our potential
royalties payable to OHRI on sublicenses we have made to Pfizer, sanofi-aventis, GlaxoSmithKline and Merial total $17.1 million related to potential milestone payments under these sublicenses, excluding royalties on future product sales.

We have an exclusive worldwide license agreement with the University of Iowa Research Foundation, or UIRF, to develop and commercialize products
covered by certain patented technology of UIRF, including ProMune, Actilon, AVE7279 and AVE0675. This technology was developed by our Chief Scientific Officer and scientific co-founder, while he was at the University of Iowa, among others. We are
obligated to pay UIRF royalty payments on net sales of our products incorporating the licensed technology. We have the right to grant sublicenses to third parties and are required to pay UIRF a royalty on any sublicense proceeds. The term of this
license agreement extends until the expiration of the last of the licensed patents which covers the sale of a product (currently 2018). UIRF may terminate the license agreement if we are bankrupt or for an uncured material breach of the agreement.

Our license agreement requires us to pay annual license maintenance fees of $150,000 through the date of the last licensed patent to
expire (as a result of pending patents, we are currently unable to determine the length of this period). As of December 31, 2005, we have made payments to UIRF of $10.7 million.

Our potential royalties payable to UIRF on sublicenses we have made to Pfizer, sanofi-aventis, GlaxoSmithKline and Merial total $105.4 million related to
potential milestone payments under these sublicenses, excluding royalties on future product sales.

We expect to continue to establish new
collaborations in order to develop products in indications outside of our therapeutic focus. We believe these relationships will provide us with the ability to capitalize on diseases and markets that represent significant commercial opportunities
without the extensive time and costs associated with developing products that require access to additional technologies.

Intellectual Property

We actively seek to protect the proprietary technology that we consider important to our business, including chemical species,
compositions and forms, their methods of use and processes for their manufacture. In addition to seeking patent protection in the United States, we generally file patent applications in Australia, Canada, Japan, Western European countries and
additional foreign countries on a selective basis in order to further protect



20



---

##### Table of Contents

the inventions that we or our partners consider important to the development of our foreign business. We also rely upon trade secrets and contracts to
protect our proprietary information.

As of the date of this annual report, our patent estate, on a worldwide basis, includes 79 issued
patents and approximately 375 pending patent applications, with claims covering all of our current clinical stage product candidates. Of the 79 issued patents, 16 are issued in the United States, one in Japan, two in Germany and 60 in countries
outside of the United States, Europe and Japan. Three of the issued United States patents, expiring in 2014, relate to ProMune and have claims covering the use of certain oligonucleotides for treating cancer. We also have pending United States
applications relating to ProMune which, if issued as patents, would be expected to expire between 2014 and 2017. These applications include claims covering the specific sequence of ProMune, and its use to treat cancer.

One of the issued United States patents, expiring in 2014, relates to Actilon and covers the use of certain oligonucleotides for treating a patient with
an infection. We also have pending United States applications relating to Actilon which, if issued as patents, would expire between 2014 and 2023 and would include claims covering the specific sequence of Actilon and its use in treating infection.

Five of the issued United States patents, expiring between 2014 and 2018, relate to VaxImmune and have claims covering the use of certain
oligonucleotides for treating cancer and combinations of oligonucleotides and antigens. We also have pending United States patent applications relating to VaxImmune which, if issued as patents, would expire between 2014 and 2023 and would include
claims covering specific sequences and their use in treating infection.

We also have patent applications relating to our asthma and
allergy product candidates. These patent applications, if issued as patents, would expire between 2014 and 2023. We also have nine other issued United States patents that relate to other potential TLR Therapeutics. We do not currently have any
product candidates that rely on these nine patents.

Individual patents extend for varying periods depending on the date of filing of the
patent application or the date of patent issuance and the legal term of patents in the countries in which they are obtained. Generally, patents issued in the United States are effective for



| |  |  | the longer of 17 years from the issue date or 20 years from the earliest effective filing date, if the patent application was filed prior to June 8, 1995; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 20 years from the earliest effective filing date, if the patent application was filed on or after June 8, 1995.
| | - |  | ---------------------------------------------------------------------------------------------------------------

In addition, in certain instances, a patent term can be extended to recapture a portion of the term effectively lost as a result of the FDA regulatory
review period. The duration of foreign patents varies in accordance with provisions of applicable local law, but typically is 20 years from the earliest effective filing date. Our patent estate, based on patents existing now and expected by us to
issue based on pending applications, will expire on dates ranging from 2014 to 2024.

The actual protection afforded by a patent varies on
a product-by-product basis, from country-to-country and depends upon many factors, including the type of patent, the scope of its coverage, the availability of regulatory related extensions, the availability of legal remedies in a particular
country, and the validity and enforceability of the patents.

In addition to patents, we rely upon unpatented trade secrets and know-how
and continuing technological innovation to develop and maintain our competitive position. We seek to protect our proprietary information, in part, using confidentiality agreements with our commercial partners, collaborators, employees and
consultants and invention assignment agreements with our employees. We also have confidentiality agreements or invention



21



---

##### Table of Contents

assignment agreements with some of our commercial partners and consultants. These agreements are designed to protect our proprietary information and, in the
case of the invention assignment agreements, to grant us ownership of technologies that are developed through a relationship with a third-party. These agreements may be breached, and we may not have adequate remedies for any breach. In addition, our
trade secrets may otherwise become known or be independently discovered by competitors. To the extent that our commercial partners, collaborators, employees and consultants use intellectual property owned by others in their work for us, disputes may
arise as to the rights in related or resulting know-how and inventions.

Competition

Our major competitors are pharmaceutical and biotechnology companies, both in the United States and abroad, which are actively engaged in the discovery
and development of products that could compete directly with our TLR Therapeutic product candidates in the fields of cancer, infectious diseases, and asthma and allergies. Any product candidates that we successfully develop and commercialize will
compete with existing therapies and new therapies that are likely to become available in the future.

Some competitors, including Dynavax
Technologies Corporation, Idera Pharmaceuticals, Inc., Intercell AG, and Cytos Biotechnology AG, are pursuing the development of novel drug therapies that are agonists, that target, among other things, TLR9. We are also aware of other companies that
are conducting clinical trials in possible therapeutic applications for compounds that interact with TLR7, such as Anadys Pharmaceuticals, Inc.

There are hundreds of cancer products in the pipeline of numerous pharmaceutical and biotechnology companies, and it is likely that other competitors will emerge. Products which treat lung cancer are currently marketed or in development by
Genentech, Inc., Bristol-Myers Squibb Company, sanofi-aventis, AstraZeneca Pharmaceuticals LP, Hoffmann-La Roche, Inc. and OSI Pharmaceuticals, Inc.

In infectious disease products or products under development, specifically for the treatment of HCV, competitors include Hoffmann-La Roche, Inc., Schering-Plough Corporation, Anadys Pharmaceuticals, Inc., Idenix
Pharmaceuticals, Inc., Human Genome Sciences, Inc. and Vertex Pharmaceuticals Incorporated.

In asthma and allergy, competitors include
sanofi-aventis, GlaxoSmithKline, AstraZeneca and Dynavax.

In vaccine adjuvants, potential competitors include Dynavax, GlaxoSmithKline,
Antigenics, Inc. and Idera.

Many of the entities developing and marketing potentially competing products may have significantly greater
financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing than we do. These entities also compete with us in recruiting and retaining
qualified scientific and management personnel, as well as in acquiring technologies complementary to, or necessary for, our programs.

Our
ability to compete effectively will depend on our ability to identify and develop viable product candidates and to exploit these products and compounds commercially before others are able to develop competitive products. In addition, our ability to
compete may be affected because in some cases insurers and other third-party payors seek to encourage the use of generic products. This may have the effect of making branded products less attractive, from a cost perspective, to buyers.

Government Regulation

Government authorities in
the United States, at the federal, state and local level, and other countries extensively regulate, among other things, the research, development, testing, manufacture, labeling, promotion, advertising, distribution, marketing and export and import
of pharmaceutical products such as those we are developing. We are not responsible for regulatory matters with respect to the product candidates that we have licensed to others.



22



---

##### Table of Contents

United States Government Regulation

In the United States, the information that must be submitted to the FDA in order to obtain approval to market a new drug will vary depending on whether
the drug is a new product whose safety and effectiveness has not previously been demonstrated in humans or a drug whose active ingredient(s) and certain other properties are the same as those of a previously approved drug. A new drug will follow the
NDA route for approval, a new biologic will follow the Biologics License Application, or BLA, route for approval, and a drug that claims to be the same as an already approved drug may be able to follow the Abbreviated New Drug Approval, or ANDA,
route for approval.

NDA and BLA Approval Process

In the United States, the FDA regulates drugs and biologics under the Federal Food, Drug, and Cosmetic Act, and, in the case of biologics, also under the Public Health Service Act, and implementing regulations. If we
fail to comply with the applicable United States requirements at any time during the product development process, approval process or after approval, we may become subject to administrative or judicial sanctions. These sanctions could include the
FDAs refusal to approve pending applications, license suspension or revocation, withdrawal of an approval, a clinical hold, warning letters, product recalls, product seizures, total or partial suspension of production or distribution,
injunctions, fines, civil penalties or criminal prosecution. Any agency or judicial enforcement action could have a material adverse effect on us.

The steps required before a drug or biologic may be marketed in the United States include:



| |  |  | completion of preclinical laboratory tests, animal studies and formulation studies under FDAs good laboratory practices regulations;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  |  | submission to the FDA of an Investigational New Drug application, or IND, for human clinical testing, which must become effective before human clinical trials may begin;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | performance of adequate and well-controlled clinical trials consistent with good clinical practice to establish the safety and efficacy of the product for each indication;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | submission to the FDA of a New Drug Application, or NDA, or BLA;
| | - |  | ----------------------------------------------------------------



| |  |  | satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the product is produced to assess compliance with current good manufacturing
practice, or cGMP; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | FDA review and approval of the NDA or BLA.
| | - |  | ------------------------------------------

Preclinical
tests include laboratory evaluations of product chemistry, toxicity, and formulation, as well as animal studies. An IND sponsor must submit the results of the preclinical tests, together with manufacturing information and analytical data, to the FDA
as part of the IND. The IND must become effective before human clinical trials may begin. An IND will automatically become effective 30 days after receipt by the FDA, unless before that time the FDA raises concerns or questions about issues such as
the conduct of the trials as outlined in the IND. In that case, the IND sponsor and the FDA must resolve any outstanding FDA concerns or questions before clinical trials can proceed. Submission of an IND may not result in the FDA allowing clinical
trials to commence.

Clinical trials involve the administration of the investigational product to human subjects under the supervision of
qualified investigators. Clinical trials are conducted under protocols detailing, among other things, the objectives of the study, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated. Each clinical protocol
must be submitted to the FDA as part of the IND.

Clinical trials typically are conducted in three sequential phases, but the phases may
overlap or be combined. Each trial must be reviewed and approved by an independent institutional review board at each site where the trial will be conducted before it can begin at that site. Phase I clinical trials usually involve the initial



23



---

##### Table of Contents

introduction of the investigational drug into humans to evaluate the products safety, dosage tolerance and pharmacodynamics and, if possible, to gain
an early indication of its effectiveness.

Phase II clinical trials usually involve controlled trials in a limited patient population to:



| |  |  | evaluate dosage tolerance and appropriate dosage;
| | - |  | -------------------------------------------------



| |  |  | identify possible adverse effects and safety risks; and
| | - |  | -------------------------------------------------------



| |  |  | evaluate preliminarily the efficacy of the drug for specific indications.
| | - |  | -------------------------------------------------------------------------

Phase III clinical trials usually further evaluate clinical efficacy and test further for safety in an expanded patient population. Phase I, Phase II and Phase III testing may not be completed successfully within any
specified period, if at all. Furthermore, the FDA or we may suspend or terminate clinical trials at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk.

Assuming successful completion of the required clinical testing, the results of the preclinical studies and of the clinical studies, together with other
detailed information, including information on the chemistry, manufacture and control criteria of the product, are submitted to the FDA in the form of an NDA or BLA requesting approval to market the product for one or more indications. The FDA
reviews an NDA to determine, among other things, whether a product is safe and effective for its intended use. The FDA reviews a BLA to determine, among other things, whether the product is safe, pure and potent and the facility in which it is
manufactured, processed, packed or held meets standards designed to assure the products continued safety, purity and potency. In connection with the submission of an NDA, an applicant may seek a Special Protocol Assessment or SPA, which is an
agreement between an applicant and the FDA on the design and size of clinical trials that is intended to form the basis of an NDA.

Before
approving an application, the FDA will inspect the facility or the facilities at which the product is manufactured. The FDA will not approve the product unless cGMP compliance is satisfactory. If the FDA determines the application, manufacturing
process or manufacturing facilities are not acceptable, it will outline the deficiencies in the submission and often will request additional testing or information. Notwithstanding the submission of any requested additional information, the FDA
ultimately may decide that the application does not satisfy the regulatory criteria for approval.

The testing and approval process
requires substantial time, effort and financial resources, and each may take several years to complete. The FDA may not grant approval on a timely basis, or at all. We may encounter difficulties or unanticipated costs in our efforts to secure
necessary governmental approvals, which could delay or preclude us from marketing our products. The FDA may limit the indications for use or place other conditions on any approvals that could restrict the commercial application of the products.
After approval, some types of changes to the approved product, such as adding new indications, manufacturing changes and additional labeling claims, are subject to further FDA review and approval.

Priority Review

The FDA has established
priority and standard review classifications for original NDAs and efficacy supplements. Priority review applies to the time frame for FDA review of completed marketing applications and is separate from and independent of orphan drug status and the
FDAs fast track and accelerated approval mechanisms. The classification system, which does not preclude the FDA from doing work on other projects, provides a way of prioritizing NDAs upon receipt and throughout the FDA application review
process.

Priority designation applies to new drugs that have the potential for providing significant improvement compared to marketed
products in the treatment or prevention of a disease. Hence, even if an NDA is initially classified as a priority application, this status can change during the FDA review process, such as in the situation where another product is approved for the
same disease for which previously there was no available therapy.



24



---

##### Table of Contents

Post-Approval Requirements

After regulatory approval of a product is obtained, we are required to comply with a number of post-approval requirements. For example, as a condition of approval of an NDA or BLA, the FDA may require post-marketing
testing and surveillance to monitor the products safety or efficacy.

In addition, holders of an approved NDA or BLA are required to
report certain adverse reactions and production problems to the FDA, to provide updated safety and efficacy information and to comply with requirements concerning advertising and promotional labeling for their products. Also, quality control and
manufacturing procedures must continue to conform to cGMP after approval. The FDA periodically inspects manufacturing facilities to assess compliance with cGMP, which imposes certain procedural, substantive and recordkeeping requirements.
Accordingly, manufacturers must continue to expend time, money and effort in the area of production and quality control to maintain compliance with cGMP and other aspects of regulatory compliance.

We and our collaborators use, and will continue to use in at least the near term, third-party manufacturers to produce our products in clinical and
commercial quantities. Future FDA inspections may identify compliance issues at our facilities or at the facilities of our contract manufacturers that may disrupt production or distribution, or require substantial resources to correct. In addition,
discovery of problems with a product or the failure to comply with applicable requirements may result in restrictions on a product, manufacturer or holder of an approved NDA or BLA, including withdrawal or recall of the product from the market or
other voluntary, FDA-initiated or judicial action that could delay or prohibit further marketing. Also, new government requirements may be established that could delay or prevent regulatory approval of our products under development.

Foreign Regulation

In addition to regulations
in the United States, we will be subject to a variety of foreign regulations governing clinical trials and commercial sales and distribution of our products. Whether or not we obtain FDA approval for a product, we must obtain approval of a product
by the comparable regulatory authorities of foreign countries before we can commence clinical trials or marketing of the product in those countries. The approval process varies from country-to-country, and the time may be longer or shorter than that
required for FDA approval. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from country-to-country.

Under European Union regulatory systems, we may submit marketing authorizations either under a centralized or decentralized procedure. The centralized procedure 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 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.

Reimbursement

Sales of biopharmaceutical products depend in significant part on the availability of
third-party reimbursement. Each third-party payor may have its own policy regarding what products it will cover, the conditions under which it will cover such products, and how much it will pay for such products. It is time consuming and expensive
for us to seek reimbursement from third-party payors. Reimbursement may not be available or sufficient to allow us to sell our products on a competitive and profitable basis. The passage of the Medicare Prescription Drug and Modernization Act of
2003, or the MMA, imposes requirements for the distribution and pricing of prescription drugs for Medicare beneficiaries, which may affect the marketing of our products. The MMA also introduced a new reimbursement methodology, part of which went
into effect in 2004. At this point, it is not clear what effect the MMA will have on the prices paid for currently approved drugs and



25



---

##### Table of Contents

the pricing options for new drugs approved after January 1, 2006. Moreover, while the MMA applies only to drug benefits for Medicare beneficiaries,
private payors often follow Medicare coverage policy and payment limitations in setting their own payment rates. Any reduction in payment that results from the MMA may result in a similar reduction in payments from non-governmental payors.

In addition, in some foreign countries, the proposed pricing for a drug must be approved before it may be lawfully marketed. The
requirements governing drug pricing vary widely from country-to-country. For example, the European Union provides options for its member states to restrict the range of medicinal products for which their national health insurance systems provide
reimbursement and to control the prices of medicinal products for human use. A member state may approve a specific price for the medicinal product or it may instead adopt a system of direct or indirect controls on the profitability of the company
placing the medicinal product on the market.

We expect that there will continue to be a number of federal and state proposals to implement
governmental pricing controls. While we cannot predict whether such legislative or regulatory proposals will be adopted, the adoption of such proposals could have a material adverse effect on our business, financial condition and profitability.

Manufacturing

Our current product
candidates are manufactured in a simple synthetic process from readily available starting materials. We expect to continue to develop drug candidates that can be produced cost-effectively at contract manufacturing facilities.

We are able to manufacture the quantities of our product candidates necessary for relatively short preclinical toxicology studies ourselves. We believe
that this allows us to accelerate the drug development process by not having to rely on a third-party for all of our manufacturing needs. However, we do rely and expect to continue to rely on a number of contract manufacturers to produce enough of
our product candidates for use in more lengthy preclinical research. We also depend on these contract manufacturers to manufacture our product candidates in accordance with current good manufacturing practices, or cGMP, for use in clinical trials.
We will ultimately depend on contract manufacturers for the manufacture of our products for commercial sale, as well as for process development. Contract manufacturers are subject to extensive governmental regulation. We have multiple potential
sources for the manufacturing of Actilon.

Employees

As of December 31, 2005, we had 136 full-time employees, 35 of whom are Ph.D.s, M.D.s or both, and 3 part-time employees. Our management believes that relations with our employees are good. None of our employees
is represented under a collective bargaining agreement.

Insurance

We have liability insurance for our clinical trials. We currently intend to expand our insurance coverage to include the sale of additional commercial products if marketing approval is obtained for any of our drug
candidates. Insurance coverage is becoming increasingly expensive, and we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against product liabilities.

The Companys Internet address is www.coleypharma.com. The Companys annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and all amendments to those reports, are available to you free of charge through the Investor Relations section of our website as soon as reasonably practicable after such materials have been electronically filed with,
or furnished to, the Securities and Exchange Commission.



26



---

##### Table of Contents

PART IV



|Item 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES
|-------- | ---------------------------------------



|              |  |                                                                                      
|------------- |  | -------------------------------------------------------------------------------------
|              | 
|Item 15(a)(3) |  | Exhibits                                                                             
|              | 
|              |  | The following is a list of exhibits filed as part of this Annual Report on Form 10-K.



|               |  |                                                                              
|-------------- |  | -----------------------------------------------------------------------------
|Exhibit Number |  | Description of Exhibit                                                       
|               | 
|31.1           |  | Certifications of Principal Executive Officer under Rule 13a-14(a)/15d-14(a).
|               | 
|31.2           |  | Certifications of Principal Financial Officer under Rule 13a-14(a)/15d-14(a).



27



---

##### Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.



|                      |  |  |  |                                  |  |                           |  |                                                                
|--------------------- |  |  |  | -------------------------------- |  | ------------------------- |  | ---------------------------------------------------------------
|                      |  |  |  | Coley Pharmaceutical Group, Inc.
|                      |  |  | 
|Date:  March 29, 2006 |  |  |  | By:                              |  | /S/    ROBERT L.
BRATZLER
|                      |  |  |  |                                  |  |                           |  | Robert L. Bratzler, Ph.D. President and Chief Executive Officer



28