**** ****

****UNITED STATESSECURITIES AND EXCHANGE COMMISSION****

****Washington, D.C. 20549****

----

****FORM 10-QSB****
| **(Mark One)** |   |                                                                                                                                                                                                                                                                                                                                                           |
|----------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|           |   |                                                                                                                                                                                                                                                                                                                                                           |
| **x**          |   | **QUARTERLY  REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                   |
|           |   |                                                                                                                                                                                                                                                                                                                                                           |
|           |   | **For the quarterly period ended July 31, 2006**                                                                                                                                                                                                                                                                                                               |
|           |   |                                                                                                                                                                                                                                                                                                                                                           |
| **o**          |   | **TRANSITION  REPORT UNDER SECTION 13 or 15(d) OF THE EXCHANGE ACT**                                                                                                                                                                                                                                                                                           |
|           |   |                                                                                                                                                                                                                                                                                                                                                           |
|           |   | **For the transition period from                            to                          ** |
|           |   | ** **                                                                                                                                                                                                                                                                                                                                                     |
|           |   | **Commission File  No.333-116480**                                                                                                                                                                                                                                                                                                                             |

**** ****

****FERMAVIR PHARMACEUTICALS,INC.****

(Exact name of small business issuer as specified in its charter)

| **Florida**                                                | ** ** | **16-1639902**                     |
|------------------------------------------------------------|------------|------------------------------------|
| (State or jurisdiction  of incorporation or  organization) |       | (IRS Employer  Identification No.) |

 

**420Lexington Avenue, Suite 445, New York, NY 10170**

(Address of Principal Executive Office)

**(212)413-0802**

(Issuer’s telephone number)

**N/A**

(Former name, former address and former fiscal year,if changed since last report)

Check whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for a shorter period that the registrant was requiredto file such reports), and (2) has been subject to such filing requirements forthe past 90 days. 

Yes x          No o

Indicate by check markwhether the registrant is a shell company (as defined by Rule 12b-2 of theExchange Act:Yes o         Nox

The number of shares outstanding of the Registrant’s Common Stock,$.0001 par value, as of September 14, 2006 was 17,575,884.

 

----

****INTRODUCTORY NOTE****

This Report onForm 10-QSB for FermaVir Pharmaceuticals, Inc. may contain forward-lookingstatements.  You can identify thesestatements by forward-looking words such as “may,” “will,” “expect,” “intend,” “anticipate,”believe,” “estimate” and “continue” or similar words.  Forward-looking statements includeinformation concerning possible or assumed future business success or financialresults.  You should read statements thatcontain these words carefully because they discuss future expectations andplans, which contain projections of future results of operations or financialcondition or state other forward-looking information.  We believe that it is important tocommunicate future expectations to investors. However, there may be events in the future that we are not able toaccurately predict or control. Accordingly, we do not undertake any obligation to update anyforward-looking statements for any reason, even if new information becomesavailable or other events occur in the future.

Theforward-looking statements included herein are based on current expectationsthat involve a number of risks and uncertainties set forth under “Risk Factors”in our Form 10-KSB filed with the SEC on August 16, 2006.  Accordingly, to the extent that this QuarterlyReport contains forward-looking statements regarding the financial condition,operating results, business prospects or any other aspect of the Company,please be advised that the Company’s actual financial condition, operatingresults and business performance may differ materially from that projected orestimated by the Company in forward-looking statements.

2

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****PART I - FINANCIAL INFORMATION****

****Item 1:          FinancialStatements****

**FermaVir Pharmaceuticals, Inc. andSubsidiary**

**(A Development Stage Company)**

**Condensed Consolidated Balance Sheets**

 

| ** **                                                                                          | ** ** | **July 31,** | ** ** | **April 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-------------------|------------|--------------------|------------|
| ** **                                                                                          | ** ** | **2006**          | ** ** | **2006**           | ** ** |
| ** **                                                                                          | ** ** | **(Unaudited)**   | ** ** | **(Note 2)**  | ** ** |
| **Assets**                                                                                          | ** ** | ** **        | ** ** | ** **         | ** ** |
| ** **                                                                                          | ** ** | ** **        | ** ** | ** **         | ** ** |
| Current assets:                                                                                     |       |              |       |               |       |
| Cash                                                                                                |       | $                 | 165,925    |               | $          | 127,121 |   |
| Prepaid expenses                                                                                    |       | 27,224            |       | 17,439             |       |
| Total current  assets                                                                               |       | 193,149           |       | 144,560            |       |
|                                                                                                |       |              |       |               |       |
| Property and equipment,  net                                                                        |       | 18,337            |       | 22,490             |       |
| Other assets                                                                                        |       | 43,890            |       | 43,890             |       |
|                                                                                                |       |              |       |               |       |
| Total assets                                                                                        |       | $                 | 255,376    |               | $          | 210,940 |   |
|                                                                                                |       |              |       |               |       |
| **Liabilities  and Stockholders’ Deficiency**                                                  | ** ** | ** **        | ** ** | ** **         | ** ** |
|                                                                                                |       |              |       |               |       |
| Current liabilities:                                                                                |       |              |       |               |       |
| Accounts payable  and accrued expenses                                                              |       | $                 | 570,831    |               | $          | 401,743 |   |
| Notes payable,  net of discount of $175,631                                                         |       | 149,369           |       | 0                  |       |
| Total current  liabilities                                                                          |       | 720,200           |       | 401,743            |       |
|                                                                                                |       |              |       |               |       |
| Non-current liability—deferred  rent                                                           |       | 13,972            |       | 12,157             |       |
|                                                                                                |       |              |       |               |       |
| Total  liabilities                                                                                  |       | 734,172           |       | 413,900            |       |
|                                                                                                |       |              |       |               |       |
| Commitments                                                                                         |       |              |       |               |       |
|                                                                                                |       |              |       |               |       |
| Stockholders’  deficiency:                                                                     |       |              |       |               |       |
| Preferred stock,  $0.001 par value, 20,000,000 shares authorized, no shares outstanding             |       | 0                 |       | 0                  |       |
| Common stock,  $0.0001 par value, 100,000,000 shares authorized, 17,575,884 issued and  outstanding |       | 1,757             |       | 1,757              |       |
| Additional  paid-in capital                                                                         |       | 5,594,628         |       | 5,685,785          |       |
| Deferred  stock-based compensation                                                                  |       | 0                 |       | (308,615           | )          |
| Deficit  accumulated during development stage                                                       |       | (6,075,181        | )          | (5,581,887         | )          |
| Total  stockholders’ deficiency                                                                |       | (478,796          | )          | (202,960           | )          |
|                                                                                                |       |              |       |               |       |
| Total liabilities and  stockholders’ deficiency                                                |       | $                 | 255,376    |               | $          | 210,940 |   |

 

The accompanying notes are an integral part of theseunaudited condensed consolidated financial statements

3

----

**FermaVir Pharmaceuticals, Inc. andSubsidiary**

**(A Development Stage Company)**

**Condensed Consolidated Statements ofOperations**

**(Unaudited)**

 

| ** **                                              | ** ** | **Three Months Ended** | ** ** | **For the period   November 15, 2002  ** | ** ** |
|---------------------------------------------------------|------------|----------------------------------|------------|-----------------------------------------------------------------------------|------------|
| ** **                                              | ** ** | **July 31**                 | ** ** | **(Inception) to July 31,**                                  | ** ** |
| ** **                                              | ** ** | **2006**                         | ** ** | **2005**                                                                    | ** ** | **2006** | ** ** |
| ** **                                              | ** ** | ** **                       | ** ** | ** **                                                                  | ** ** | ** ** | ** ** |
| Revenues                                                |       | $                                | 0          |                                                                        | $          | 0 |   | $ | 0 |   |
|                                                    |       |                             |       |                                                                        |       |   |   |
| Operating  expenses:                                    |       |                             |       |                                                                        |       |   |   |
|                                                    |       |                             |       |                                                                        |       |   |   |
| Research and development:                               |       |                             |       |                                                                        |       |   |   |
| Non-cash charge for stock-based compensation            |       | 14,220                           |       | 0                                                                           |       | 44,113 |   |
| Other                                                   |       | 147,728                          |       | 0                                                                           |       | 1,001,492 |   |
| Total research and development                          |       | 161,948                          |       | 0                                                                           |       | 1,045,605 |   |
|                                                    |       |                             |       |                                                                        |       |   |   |
| Charge for acquired in-process research and development |       | 0                                |       | 0                                                                           |       | 2,713,996 |   |
|                                                    |       |                             |       |                                                                        |       |   |   |
| General and administrative:                             |       |                             |       |                                                                        |       |   |   |
| Non-cash charges for:                                   |       |                             |       |                                                                        |       |   |   |
| Warrants issued for services                            |       | 0                                |       | 0                                                                           |       | 1,086,546 |   |
| Stock-based compensation                                |       | 30,496                           |       | 0                                                                           |       | 72,166 |   |
| Other                                                   |       | 274,890                          |       | 224                                                                         |       | 991,284 |   |
| Total general and administrative                        |       | 305,386                          |       | 224                                                                         |       | 2,149,996 |   |
|                                                    |       |                             |       |                                                                        |       |   |   |
| Total operating expenses                                |       | 467,334                          |       | 224                                                                         |       | 5,909,597 |   |
|                                                    |       |                             |       |                                                                        |       |   |   |
| Operating loss                                          |       | (467,334                         | )          | (224                                                                        | )          | (5,909,597 | ) |
|                                                    |       |                             |       |                                                                        |       |   |   |
| Other income  (expense):                                |       |                             |       |                                                                        |       |   |   |
| ** **                                              | ** ** | ** **                       | ** ** | ** **                                                                  | ** ** | ** ** | ** ** |
| Interest income                                         |       | 134                              |       | 0                                                                           |       | 8,766 |   |
| Interest expense                                        |       | (26,094                          | )          | 0                                                                           |       | (174,350 | ) |
| Total other expense, net                                |       | (25,960                          | )          | 0                                                                           |       | (165,584 | ) |
|                                                    |       |                             |       |                                                                        |       |   |   |
| Net loss                                                |       | $                                | (493,294   | )                                                                           | $          | (224 | ) | $ | (6,075,181 | ) |
|                                                    |       |                             |       |                                                                        |       |   |   |
| Net loss per common share:                              |       |                             |       |                                                                        |       |   |   |
| Basic and diluted                                       |       | $                                | (0.03      | )                                                                           | $          | (0.00 | ) |   |   |
|                                                    |       |                             |       |                                                                        |       |   |   |
| Weighted average shares of common stock outstanding:    |       |                             |       |                                                                        |       |   |   |
| Basic and  diluted                                      |       | 17,575,884                       |       | 79,380,000                                                                  |       |   |   |

 

The accompanying notes are an integral part of these unauditedcondensed consolidated financial statements.

4

----

**FermaVir Pharmaceuticals, Inc. andSubsidiary**

**(A Development Stage Company)**

**Condensed Consolidated Statements ofStockholders’ Equity (Deficiency)**

**Period from November 15, 2002(Inception) to July 31, 2006**

**(Unaudited)**

 

| ** **                                                                                                                                | ** ** | ** **               | ** ** | ** **                                                                                   | ** ** | ** **  | ** ** | ** **                                       | ** ** | ** **     | ** ** | ** **                                                                                                                             | ** ** | ** **                                                                  | ** ** | **Deficit**                               | ** ** | ** **            | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|----------------------------------------------------------------------------------------------|------------|-------------|------------|--------------------------------------------------|------------|----------------|------------|----------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|-------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                | ** ** | ** **               | ** ** | ** **                                                                                   | ** ** | ** **  | ** ** | ** **                                       | ** ** | ** **     | ** ** | ** **                                                                                                                             | ** ** | **Deferred**                                                                | ** ** | **Accumulated**                           | ** ** | ** **            | ** ** |
| ** **                                                                                                                                | ** ** | ** **               | ** ** | ** **                                                                                   | ** ** | ** **  | ** ** | ** **                                       | ** ** | **Additional** | ** ** | ** **                                                                                                                             | ** ** | **Stock-**                                                                  | ** ** | **During**                                | ** ** | ** **            | ** ** |
| ** **                                                                                                                                | ** ** | **Preferred Stock** | ** ** | **Common Stock**                                                                        | ** ** | **Paid-In** | ** ** | **Subscription**                                 | ** ** | **Based**      | ** ** | **Development**                                                                                                                        | ** ** | ** **                                                                  | ** ** |
| ** **                                                                                                                                | ** ** | **Shares**               | ** ** | **Amount**                                                                                   | ** ** | **Shares**  | ** ** | **Amount**                                       | ** ** | **Capital**    | ** ** | **Receivable**                                                                                                                         | ** ** | **Compensation**                                                            | ** ** | **Stage**                                 | ** ** | **Total**             | ** ** |
|                                                                                                                                      |       |                     |       |                                                                                         |       |        |       |                                             |       |           |       |                                                                                                                                   |       |                                                                        |       |                                      |       |                  |       |
| Balance, November  15, 2002 (Inception)                                                                                                   |       | 0                        |       | $                                                                                            | 0          |        | 0          |                                             | $          | 0              |       | $                                                                                                                                      | 0          |                                                                        | $          | 0                                         |       | $                     | 0          |   | $ | 0 |   | $ | 0 |   |
|                                                                                                                                      |       |                     |       |                                                                                         |       |        |       |                                             |       |           |       |                                                                                                                                   |       |                                                                        |       |                                      |       |                  |       |
| Issuance of common stock to founders  for cash at $0.00003 per share                                                                 |       |                     |       |                                                                                         |       | 70,560,000  |       | 7,050                                            |       | (5,050         | )          | (2,000                                                                                                                                 | )          |                                                                        |       |                                      |       | 0                     |       |
|                                                                                                                                      |       |                     |       |                                                                                         |       |        |       |                                             |       |           |       |                                                                                                                                   |       |                                                                        |       |                                      |       |                  |       |
| Balance, April  30, 2003                                                                                                                  |       | 0                        |       | 0                                                                                            |       | 70,560,000  |       | 7,050                                            |       | (5,050         | )          | (2,000                                                                                                                                 | )          | 0                                                                           |       | 0                                         |       | 0                     |       |
|                                                                                                                                      |       |                     |       |                                                                                         |       |        |       |                                             |       |           |       |                                                                                                                                   |       |                                                                        |       |                                      |       |                  |       |
| Payment of subscription receivable                                                                                                        |       |                     |       |                                                                                         |       |        |       |                                             |       |           |       | 2,000                                                                                                                                  |       |                                                                        |       |                                      |       | 2,000                 |       |
|                                                                                                                                      |       |                     |       |                                                                                         |       |        |       |                                             |       |           |       |                                                                                                                                   |       |                                                                        |       |                                      |       |                  |       |
| Issuance of common stock for cash at $0.0014 per  share                                                                                   |       |                     |       |                                                                                         |       | 8,820,000   |       | 882                                              |       | 11,618         |       |                                                                                                                                   |       |                                                                        |       |                                      |       | 12,500                |       |
|                                                                                                                                      |       |                     |       |                                                                                         |       |        |       |                                             |       |           |       |                                                                                                                                   |       |                                                                        |       |                                      |       |                  |       |
| Net loss                                                                                                                                  |       |                     |       |                                                                                         |       |        |       |                                             |       |           |       |                                                                                                                                   |       |                                                                        |       | (159                                      | )          | (159                  | )          |
|                                                                                                                                      |       |                     |       |                                                                                         |       |        |       |                                             |       |           |       |                                                                                                                                   |       |                                                                        |       |                                      |       |                  |       |
| Balance, April  30, 2004                                                                                                                  |       | 0                        |       | 0                                                                                            |       | 79,380,000  |       | 7,932                                            |       | 6,568          |       | 0                                                                                                                                      |       | 0                                                                           |       | (159                                      | )          | 14,341                |       |
|                                                                                                                                      |       |                     |       |                                                                                         |       |        |       |                                             |       |           |       |                                                                                                                                   |       |                                                                        |       |                                      |       |                  |       |
| Net loss                                                                                                                                  |       |                     |       |                                                                                         |       |        |       |                                             |       |           |       |                                                                                                                                   |       |                                                                        |       | (24,117                                   | )          | (24,117               | )          |
|                                                                                                                                      |       |                     |       |                                                                                         |       |        |       |                                             |       |           |       |                                                                                                                                   |       |                                                                        |       |                                      |       |                  |       |
| Balance, April  30, 2005                                                                                                                  |       | 0                        |       | 0                                                                                            |       | 79,380,000  |       | 7,932                                            |       | 6,568          |       | 0                                                                                                                                      |       | 0                                                                           |       | (24,276                                   | )          | (9,776                | )          |
|                                                                                                                                      |       |                     |       |                                                                                         |       |        |       |                                             |       |           |       |                                                                                                                                   |       |                                                                        |       |                                      |       |                  |       |
| Acquisition of FermaVir Research, Inc:                                                                                                    |       |                     |       |                                                                                         |       |        |       |                                             |       |           |       |                                                                                                                                   |       |                                                                        |       |                                      |       |                  |       |
|                                                                                                                                      |       |                     |       |                                                                                         |       |        |       |                                             |       |           |       |                                                                                                                                   |       |                                                                        |       |                                      |       |                  |       |
| Stock issued valued at $0.70 per share                                                                                                    |       |                     |       |                                                                                         |       | 1,829,000   |       | 183                                              |       | 1,280,117      |       | (5,600                                                                                                                                 | )          |                                                                        |       |                                      |       | 1,274,700             |       |
| Issuance of stock options to consultants                                                                                                  |       |                     |       |                                                                                         |       |        |       |                                             |       | 504,835        |       |                                                                                                                                   |       |                                                                        |       |                                      |       | 504,835               |       |
| Issuance of stock options to employee                                                                                                     |       |                     |       |                                                                                         |       |        |       |                                             |       | 303,348        |       |                                                                                                                                   |       | (303,348                                                                    | )          |                                      |       | 0                     |       |
|                                                                                                                                      |       |                     |       |                                                                                         |       |        |       |                                             |       |           |       |                                                                                                                                   |       |                                                                        |       |                                      |       |                  |       |
| Issuance of common stock and warrants for cash at  $0.75 per share net of  expenses                                                  |       |                     |       |                                                                                         |       | 3,863,527   |       | 386                                              |       | 2,864,431      |       |                                                                                                                                   |       |                                                                        |       |                                      |       | 2,864,817             |       |
|                                                                                                                                      |       |                     |       |                                                                                         |       |        |       |                                             |       |           |       |                                                                                                                                   |       |                                                                        |       |                                      |       |                  |       |
| Issuance of common stock and warrants in exchange for  note payable with a fair value of $1.55 per share and $1.06 per warrant  ($23,865) |       |                     |       |                                                                                         |       | 150,000     |       | 15                                               |       | 256,350        |       |                                                                                                                                   |       |                                                                        |       |                                      |       | 256,365               |       |
|                                                                                                                                      |       |                     |       |                                                                                         |       |        |       |                                             |       |           |       |                                                                                                                                   |       |                                                                        |       |                                      |       |                  |       |
| Issuance of stock options to employee                                                                                                     |       |                     |       |                                                                                         |       |        |       |                                             |       | 64,348         |       |                                                                                                                                   |       | (64,348                                                                     | )          |                                      |       | 0                     |       |
|                                                                                                                                      |       |                     |       |                                                                                         |       |        |       |                                             |       |           |       |                                                                                                                                   |       |                                                                        |       |                                      |       |                  |       |
| Stock issued in connection with the exercise of  warrants at $1.50                                                                        |       |                     |       |                                                                                         |       | 33,334      |       | 3                                                |       | 49,998         |       |                                                                                                                                   |       |                                                                        |       |                                      |       | 50,001                |       |
|                                                                                                                                      |       |                     |       |                                                                                         |       |        |       |                                             |       |           |       |                                                                                                                                   |       |                                                                        |       |                                      |       |                  |       |
| Redemption and retirement of stock at $0.011 per  share                                                                                   |       |                     |       |                                                                                         |       | (67,679,977 | )          | (6,762                                           | )          | (743,238       | )          |                                                                                                                                   |       |                                                                        |       |                                      |       | (750,000              | )          |
|                                                                                                                                      |       |                     |       |                                                                                         |       |        |       |                                             |       |           |       |                                                                                                                                   |       |                                                                        |       |                                      |       |                  |       |
| Issuance of warrants to consultants                                                                                                       |       |                     |       |                                                                                         |       |        |       |                                             |       | 1,086,546      |       |                                                                                                                                   |       |                                                                        |       |                                      |       | 1,086,546             |       |
|                                                                                                                                      |       |                     |       |                                                                                         |       |        |       |                                             |       |           |       |                                                                                                                                   |       |                                                                        |       |                                      |       |                  |       |
| Amortization of deferred stock-based compensation for  employee and directors                                                             |       |                     |       |                                                                                         |       |        |       |                                             |       | 12,482    |       |                                                                                                                                   |       | 59,081                                                                 |       |                                      |       | 71,563           |       |
|                                                                                                                                      |       |                     |       |                                                                                         |       |        |       |                                             |       |           |       |                                                                                                                                   |       |                                                                        |       |                                      |       |                  |       |
| Collection of subscription receivable                                                                                                     |       |                     |       |                                                                                         |       |        |       |                                             |       |           |       | 5,600                                                                                                                                  |       |                                                                        |       |                                      |       | 5,600                 |       |
|                                                                                                                                      |       |                     |       |                                                                                         |       |        |       |                                             |       |           |       |                                                                                                                                   |       |                                                                        |       |                                      |       |                  |       |
| Net loss                                                                                                                                  |       |                     |       |                                                                                         |       |        |       |                                             |       |           |       |                                                                                                                                   |       |                                                                        |       | (5,557,611                                | )          | (5,557,611            | )          |
|                                                                                                                                      |       |                     |       |                                                                                         |       |        |       |                                             |       |           |       |                                                                                                                                   |       |                                                                        |       |                                      |       |                  |       |
| Balance, April  30, 2006                                                                                                                  |       | 0                        |       |                 0 |       | 17,575,884  |       |         1,757 |       | 5,685,785      |       |                        0 |       |             (308,615 | )          |       (5,581,887 | )          |    (202,960 | )          |
|                                                                                                                                      |       |                     |       |                                                                                         |       |        |       |                                             |       |           |       |                                                                                                                                   |       |                                                                        |       |                                      |       |                  |       |
| Reclassification of deferred stock-based compensation  upon adoption of SFAS 123R                                                         |       |                     |       |                                                                                         |       |        |       |                                             |       | (308,615       | )          |                                                                                                                                   |       | 308,615                                                                     |       |                                      |       | 0                     |       |
|                                                                                                                                      |       |                     |       |                                                                                         |       |        |       |                                             |       |           |       |                                                                                                                                   |       |                                                                        |       |                                      |       |                  |       |
| Stock-based compensation expense                                                                                                          |       |                     |       |                                                                                         |       |        |       |                                             |       | 44,716         |       |                                                                                                                                   |       |                                                                        |       |                                      |       | 44,716                |       |
|                                                                                                                                      |       |                     |       |                                                                                         |       |        |       |                                             |       |           |       |                                                                                                                                   |       |                                                                        |       |                                      |       |                  |       |
| Warrants issued in connection with notes                                                                                                  |       |                     |       |                                                                                         |       |        |       |                                             |       | 172,742        |       |                                                                                                                                   |       |                                                                        |       |                                      |       | 172,742               |       |
|                                                                                                                                      |       |                     |       |                                                                                         |       |        |       |                                             |       |           |       |                                                                                                                                   |       |                                                                        |       |                                      |       |                  |       |
| Net loss                                                                                                                                  |       |                     |       |                                                                                         |       |        |       |                                             |       |           |       |                                                                                                                                   |       |                                                                        |       | (493,294                                  | )          | (493,294              | )          |
|                                                                                                                                      |       |                     |       |                                                                                         |       |        |       |                                             |       |           |       |                                                                                                                                   |       |                                                                        |       |                                      |       |                  |       |
| Balance, July 31, 2006                                                                                                                    |       | 0                        |       | $                                                                                            | 0          |        | 17,575,884 |                                             | $          | 1,757          |       | $                                                                                                                                      | 5,594,628  |                                                                        | $          | 0                                         |       | $                     | 0          |   | $ | (6,075,181 | ) | $ | (478,796 | ) |

 

The accompanying notes are an integral part of these unauditedcondensed consolidated financial statements.

5

----

**FermaVir Pharmaceuticals, Inc. andSubsidiary**

**(A Development Stage Company)**

**Condensed Consolidated Statement ofCash Flows**

**(Unaudited)**

 

| ** **                                                                                                                   | ** ** | ** **                       | ** ** | **For the period **      | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                                                   | ** ** | **Three Months Ended** | ** ** | **November 15, 2002 **   | ** ** |
| ** **                                                                                                                   | ** ** | **July 31**                 | ** ** | **(Inception) to July ** | ** ** |
| ** **                                                                                                                   | ** ** | **2006**                         | ** ** | **2005**                                | ** ** | **31, 2006** | ** ** |
| ** **                                                                                                                   | ** ** | ** **                       | ** ** | ** **                              | ** ** | **(Unaudited)** | ** ** |
| ** **                                                                                                                   | ** ** | ** **                       | ** ** | ** **                              | ** ** | ** ** | ** ** |
| Operating  activities:                                                                                                       | ** ** | ** **                       | ** ** | ** **                              | ** ** | ** ** | ** ** |
| ** **                                                                                                                   | ** ** | ** **                       | ** ** | ** **                              | ** ** | ** ** | ** ** |
| Net loss                                                                                                                     |       | $                                | (493,294   | )                                       | $          | (224 | ) | $ | (6,075,181 | ) |
|                                                                                                                         |       |                             |       |                                    |       |   |   |
| Adjustments to reconcile net loss to net cash used in  operating activities:                                                 |       |                             |       |                                    |       |   |   |
| Non-cash charges for:                                                                                                        |       |                             |       |                                    |       |   |   |
| Write-off of acquired in-process research and  development                                                                   |       | 0                                |       | 0                                       |       | 2,713,996 |   |
| Issuance of warrants for services                                                                                            |       | 0                                |       | 0                                       |       | 1,086,546 |   |
| Value of shares and warrants issued in excess of the  principal amount repaid in connection with a note due to related party |       | 0                                |       | 0                                       |       | 143,865 |   |
| Stock-based compensation                                                                                                     |       | 44,716                           |       | 0                                       |       | 116,279 |   |
| Depreciation                                                                                                                 |       | 4,153                            |       | 0                                       |       | 8,715 |   |
| Amortization of debt discount to interest expense                                                                            |       | 23,611                           |       | 0                                       |       | 23,611 |   |
| Changes in operating assets and liabilities:                                                                                 |       |                             |       |                                    |       |   |   |
| (Increase) decrease in prepaid expenses                                                                                      |       | (9,785                           | )          | 0                                       |       | 25,046 |   |
| Increase in other assets                                                                                                     |       | 0                                |       | 0                                       |       | (43,890 | ) |
| Increase in accounts payable and accrued expenses                                                                            |       | 179,088                          |       | 0                                       |       | 415,189 |   |
| Increase in non-current liabilities                                                                                          |       | 1,815                            |       | 0                                       |       | 13,972 |   |
|                                                                                                                         |       |                             |       |                                    |       |   |   |
| Net cash used in operating activities                                                                                        |       | (249,696                         | )          | (224                                    | )          | (1,571,852 | ) |
|                                                                                                                         |       |                             |       |                                    |       |   |   |
| Investing  activities:                                                                                                       |       |                             |       |                                    |       |   |   |
|                                                                                                                         |       |                             |       |                                    |       |   |   |
| Purchase of property and equipment                                                                                           |       | 0                                |       | 0                                       |       | (27,052 | ) |
| Cash acquired in acquisition                                                                                                 |       | 0                                |       | 0                                       |       | 27,156 |   |
| Cash paid in connection with acquisition transaction  costs                                                                  |       | (10,000                          | )          | 0                                       |       | (155,025 | ) |
|                                                                                                                         |       |                             |       |                                    |       |   |   |
| Net cash used in investing activities                                                                                        |       | (10,000                          | )          | 0                                       |       | (154,921 | ) |
|                                                                                                                         |       |                             |       |                                    |       |   |   |
| Financing  activities:                                                                                                       |       |                             |       |                                    |       |   |   |
|                                                                                                                         |       |                             |       |                                    |       |   |   |
| Proceeds from issuance of notes payable net of  expenses                                                                     |       | 298,500                          |       | 0                                       |       | 298,500 |   |
| Proceeds from sale of common stock net of expenses                                                                           |       | 0                                |       | 0                                       |       | 2,929,318 |   |
| Redemption of common stock                                                                                                   |       | 0                                |       | 0                                       |       | (400,000 | ) |
| Repayment of notes payable to related party                                                                                  |       | 0                                |       | 0                                       |       | (940,720 | ) |
| Collection of subscription receivable                                                                                        |       | 0                                |       | 0                                       |       | 5,600 |   |
|                                                                                                                         |       |                             |       |                                    |       |   |   |
| Net cash provided by financing activities                                                                                    |       | 298,500                          |       | 0                                       |       | 1,892,698 |   |
|                                                                                                                         |       |                             |       |                                    |       |   |   |
| Net change in  cash                                                                                                          |       | 38,804                           |       | (224                                    | )          | 165,925 |   |
|                                                                                                                         |       |                             |       |                                    |       |   |   |
| Cash - Beginning  of period                                                                                                  |       | 127,121                          |       | 224                                     |       | 0 |   |
|                                                                                                                         |       |                             |       |                                    |       |   |   |
| Cash - End of  period                                                                                                        |       | $                                | 165,925    |                                    | $          | — |   | $ | 165,925 |   |
|                                                                                                                         |       |                             |       |                                    |       |   |   |
| Supplemental  disclosure of non-cash investing and financing activities:                                                     |       |                             |       |                                    |       |   |   |
|                                                                                                                         |       |                             |       |                                    |       |   |   |
| Issuance of common stock in business combination                                                                             |       | $                                | 0          |                                    | $          | 0 |   | $ | 1,280,300 |   |
| Assumption of consultants’ options in connection  with business combination                                             |       | 0                                |       | 0                                       |       | 504,835 |   |
| Assumption of employee options in connection with  business combination                                                      |       | 0                                |       | 0                                       |       | 303,348 |   |
| Net liabilities assumed in business combination                                                                              |       | 0                                |       | 0                                       |       | 785,992 |   |
| Note payable issued in connection with redemption of  shares                                                                 |       | 0                                |       | 0                                       |       | 350,000 |   |
| Shares and warrants issued in connection with  repayment of note payable                                                     |       | 0                                |       | 0                                       |       | 112,500 |   |
| Value attributed  to warrants in connection with the issuance of notes payable                                               |       | 172,742                          |       | 0                                       |       | 172,742 |   |

 

The accompanying notes are an integral part of these unauditedcondensed consolidated financial statements

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**FermaVir Pharmaceuticals, Inc.and Subsidiary**

**(A Development Stage Company)**

**Notes to Condensed ConsolidatedFinancial Statements**

**For the Three Months Ended July31, 2005 and 2006**

**(Unaudited)**

**1)            Business**

****FermaVirPharmaceuticals, Inc. (t****he “Company”) was organizedunder the laws of the State of Florida on November 15, 2002 as Venus BeautySupply, Inc.  The Company had nooperations through August 16, 2005.  Onthat date, it acquired 100% of the outstanding common shares of FermaVirResearch, Inc. (“FermaVir”), raised funds through the sale of common stock, andchanged its name to FermaVir Pharmaceuticals, Inc.

Through its whollyowned subsidiary, the Company has licensed patents on a series of compounds forthe treatment of viral diseases including compounds for the treatment ofvaricella zoster virus (“VZV”), the causative agent for shingles and chickenpoxand human cytomegalovirus (“CMV”), a member of the herpes virus group whichincludes the viruses that cause chicken pox, mononucleosis, herpes labialis (coldsores) and genitalis (genital herpes).

Additionally,through its wholly owned subsidiary, the Company has performed preclinicalstudies on its compounds and has selected a clinical candidate for developmentfor the treatment of shingles.  TheCompany’s clinical candidate will undergo extensive preclinical testing.  The Company is conducting pharmacology andsafety studies of its clinical candidate in order to file an InvestigationalNew Drug Application (“IND”) with the Food and Drug Administration.

Upon acceptance ofthe IND, the Company intends to commence Phase I safety studies of its clinicalcandidate for the treatment of shingles in humans.  In addition, the Company intends to identifyfrom its proprietary anti-viral compounds, a clinical candidate for thetreatment of CMV infections in transplant patients.  The Company is also currently seeking otheropportunities and technologies for in-licensing from academic, researchinstitutions, and commercial sources which would complement and enhance its business.

The Company’sprimary activities have been organizational in nature, including recruitingpersonnel, establishing office facilities, licensing patents, conductingresearch and development, performing business and financial planning, andraising capital.  Since inception, theCompany has not generated any revenues and, accordingly, is considered to be inthe development stage.

**2)            Basis of Presentation andSignificant Accounting Policies**

***Basis of Presentation***

The accompanyingunaudited condensed consolidated financial statements include the accounts of theCompany and FermaVir Research, Inc., a 100% owned subsidiary, and have beenprepared in accordance with accounting principles generally accepted in theUnited States of America for interim 

7

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financialinformation and the rules and regulations of the Securities and ExchangeCommission.  Accordingly, the condensed consolidatedfinancial statements do not include all information and footnotes required byaccounting principles generally accepted in the United States of America forcomplete annual financial statements.  Inthe opinion of management, the accompanying unaudited condensed consolidatedfinancial statements reflect all adjustments, consisting of only normalrecurring adjustments, considered necessary for a fair presentation.  Interim operating results are not necessarilyindicative of results that may be expected for the fiscal year ending April 30,2007 or for any other interim period. These unaudited condensed consolidated financial statements should beread in conjunction with the Company’s audited financial statements as of andfor the year ended April 30, 2006, which are included in the Company’s AnnualReport on Form 10-KSB for such year.  Thecondensed consolidated balance sheet as of April 30, 2006 has been derived fromthe audited consolidated financial statements included in the Form 10-KSB forthat year.

The accompanyingunaudited condensed consolidated financial statements have been prepared on agoing concern basis which contemplates the realization of assets and thesettlement of liabilities and commitments in the normal course ofbusiness.  The Company has incurredlosses totaling $6,075,181 from November 15, 2002 (Inception) to July 31, 2006and has limited working capital.  Thesefactors, among others, raise substantial doubt that the Company will be able tocontinue as a going concern.  Thefinancial statements do not include any adjustments that might result from theoutcome of this uncertainty.

The Company hassustained operating losses since its inception and expects such losses tocontinue over the next several years. Management plans to continue financing the operations with a combinationof equity issuances and debt arrangements. If adequate funds are not available, the Company may be required todelay, reduce the scope of, or eliminate its research or development programs,or cease operations.

***Use of Estimates***

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities andthe disclosure of contingent liabilities at the date of the financialstatements as well as the reported expenses during the reporting periods.  On an ongoing basis, management evaluates itsestimates and judgments.  Managementbases estimates on its historical experience and on various other factors thatit believes are reasonable under the circumstances, the results of which formthe basis for making judgments about the carrying value of assets andliabilities that are not readily apparent from other sources.  Actual results may differ from theseestimates under different assumptions or conditions.

8

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***Propertyand Equipment***

Property andequipment are recorded at cost. Depreciation is provided for furniture and equipment on a straight-linebasis over their estimated useful lives of five and three years, respectively.

***Research and Development***

Research anddevelopment expenses consist of costs incurred to further the Company’sresearch and development activities and include salaries and related employeebenefits, costs associated with clinical trials, non-clinical activities suchas testing, regulatory activities, and fees paid to external service providersand contract research organizations who conduct certain research anddevelopment activities on behalf of the Company.  Research and development costs are expensedas incurred.

***Computation of Net Loss per Common Share***

Basic net loss percommon share is calculated by dividing net loss applicable to common shares bythe weighted-average number of common shares outstanding for the period.  Diluted net loss per common share is the sameas basic net loss per common share, since potentially dilutive securities fromstock options and stock warrants would have an anti-dilutive effect because theCompany incurred a net loss during each period presented.  The number of potentially dilutive securitiesexcluded from the calculation were 4,002,695 and zero at July 31, 2006 and2005, respectively.

***Stock-Based Compensation***

EffectiveMay 1, 2006, the Company adopted Financial Accounting Standards Board issuedStatement of Financial Accounting Standard No. 123 (Revised 2004), *Share-Based Payments* (“SFAS 123R”).  SFAS 123R requires a public entity to measurethe cost of employee services received in exchange for the award of equityinstruments based on the fair value of the award at the date of grant.  The expense is to be recognized over theperiod during which an employee is required to provide services in exchange forthe award.  See Note 7, “Adoption ofStatement of Financial Accounting Standard No. 123 (Revised 2004), *Share-Based Payments”*, for additional disclosuresregarding the adoption of SFAS 123R and the Company’s accounting forstock-based compensation expense.

9

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**3)            Acquisition of FermaVir Research,Inc.**

On August 16,2005, the Company issued 1,829,000 common shares in exchange for alloutstanding common shares of FermaVir Research, Inc (“FermaVir”).  Additionally, the Company exchanged 1,850,000options to purchase common stock of the Company with the holders of alloutstanding options to purchase common stock of FermaVir as of that date.

After thecompletion of this transaction and the additional related simultaneoustransactions described in Note 5, “Stockholders’ Equity”, the shareholders ofthe Company owned approximately 70% of the combined company.  The acquisition of FermaVir has beenaccounted for by the Company under the purchase method of accounting inaccordance with Statement of Financial Accounting Standards No. 141 *Business Combinations*. Under the purchase method, assets acquired and liabilities assumed bythe Company are recorded at their estimated fair values as of the date ofacquisition and the results of operations of the acquired company areconsolidated with those of the Company from the date of acquisition.

The followingunaudited pro forma financial information presents the consolidated results ofoperations of the Company and FermaVir, as if the acquisition had occurred onMay 1, 2005 instead of August 16, 2005 and includes the charge for thewrite-off of acquired in-process research and development of $2,713,996.  The pro forma information does not necessarilyreflect the results of operations that would have occurred had the entitiesbeen a single company during those periods.
|                                                       | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                            | ** ** | **July 31, 2005**      | ** ** |
| Net loss                                              |       | $                                | (2,719,470 | ) |
|                                                  |       |                             |       |
| Weighted average  number of common shares outstanding |       | 18,214,696                       |       |
|                                                  |       |                             |       |
| Loss per common share -  Basic and fully diluted      |       | $                                | (0.15      | ) |

 

**4)            Licensing Agreement and Commitments**

On February 2,2005, FermaVir entered into a Patent and Technology License Agreement (the “LicenseAgreement”) with University College Cardiff Consultants Limited (“Cardiff”), anaffiliate of Cardiff University located in the United Kingdom, for a series ofpharmaceutical compounds for the treatment of viral diseases.

10

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Under the terms ofthis License Agreement, the Company, through its wholly owned subsidiary, hasthe exclusive, worldwide rights to research, develop, and commercially exploitsuch technology during the period of existing patent protection which extendsfrom fifteen to twenty years in targeted markets in North America, WesternEuropean nations, Japan, Australia, and New Zealand and any new relatedpatents.  Remaining obligations underthis License Agreement consist of milestone payments aggregating $550,000during the clinical trial phase of development for each product, and royaltypayments based upon net sales of such products as defined in theAgreement.  Additionally, the Company isobligated to make good faith expenditures of at least $2,000,000 for theclinical development of at least one pharmaceutical compound during the initialthree years of the License Agreement.  Asof July 31, 2006, no milestone payments were due to Cardiff.

See Note 8, “RepurchaseAgreements With Founders”, for additional information concerning this licensedtechnology.

**5)            Stockholders’ Equity**

***StockSplit***

On August 16,2005, the Company initiated a 35.28 for one stock split effective August 22,2005 resulting in authorized capital stock of 120,000,000 shares consisting of100,000,000 shares of common stock with $0.0001 par value and 20,000,000 sharesof preferred stock with $0.001 par value. All share and per share data have been restated for this stock split.

***FinancingActivities***

On June 16, 2006and July 28, 2006, the Company issued promissory notes in the aggregateprincipal amount of $325,000 together with warrants and received net proceedsof $298,500.  The notes bear interest at12% and mature on January 1, 2007.

Proceeds from theissuance of these instruments were allocated to notes payable and warrantsbased upon the relative amounts of the face value of the notes and theestimated fair value of the warrants. This resulted in the recording of a discount related to the notes of$199,242.  This discount is beingamortized to interest expense ratably through the scheduled maturity date ofthe notes.  The Company recorded non-cashexpense for the amortization of this discount of $23,611 during the threemonths ended July 31, 2006 and the period from November 15, 2002 (Inception) toJuly 31, 2006.

11

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If prior to thematurity date the Company receives gross proceeds from the sales of securitieswherein the aggregate proceeds exceeds two times the then outstanding principalbalance of the promissory notes, the promissory notes become immediately dueand payable within six days.  The Companymay repay, in whole or in part, the promissory notes at any time forconsideration equal to 106% of the then outstanding principal balance.

In conjunctionwith the issuance of these notes, the Company issued warrants to purchase325,000 shares of common stock at a price of $1.00 per share.  The warrants expire on June 30, 2012.  As previously indicated, proceeds from theissuance of these instruments was allocated to notes payable and warrants basedupon the relative amounts of the face value of the notes and the estimated fairvalue of the warrants.  This resulted inthe allocation of $172,742 to the warrants and this amount was accounted for asan increase to Additional Paid-In Capital during the three months ended July31, 2006.

See Note 8, “RepurchaseAgreements With Founders”, for additional information concerning outstandingcommon stock.

**6)            Stock Options and Warrants**

On August 16, 2005,the Company adopted the FermaVir Pharmaceuticals, Inc. 2005 Equity CompensationIncentive Plan (the “Equity Plan”).  TheEquity Plan authorizes the granting of incentive stock options within themeaning of Section 422 of the Internal Revenue Code of 1986, as amended,non-statutory options and restricted stock awards with respect to up to7,500,000 shares of common stock.

On August 16,2005, the Company exchanged 1,050,000 options to purchase common stock of theCompany with the holders of outstanding options to purchase common stock ofFermaVir as of that date.  These optionsare 100% vested, expire in 2016, and have exercise price of $0.75 pershare.  The estimated fair value of thesewarrants of $504,835 was included in the purchase price of FermaVir.

On August 16,2005, the Company exchanged 800,000 options to purchase common stock of theCompany with the holder of outstanding options to purchase common stock ofFermaVir as of that date.  These optionsvest in varying amounts through 2010, expire in 2016, and have exercise priceof $1.10 per share.  The Companyestimated the estimated fair value of these warrants to be $303,348 andincluded that amount in the purchase price of FermaVir.  The Company recorded non-cash expense forstock based compensation related to these options of zero, $18,960, and $72,679during the three months ended July 31, 2005 and 2006 and the period fromNovember 15, 2002 (Inception) to July 31, 2006, respectively.

12

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On September 1,2005 the Company, in connection with a professional services agreement, grantedwarrants to purchase 36,000 shares of common stock at an exercise price of$0.85 for a period of five years.  TheCompany estimated the fair value of the warrants as of the grant date to be$3,863 and, reflecting the terms of the agreement, recorded non-cash expense ofzero, zero, and $3,863 during the three months ended July 31, 2005 and 2006 andthe period from November 15, 2002 (Inception) to July 31, 2006, respectively.

On September 24,2005 the Company granted options to members of the Board of Directors topurchase 300,000 shares of common stock at an exercise price of $1.25 for aperiod of ten years.  Such options vestratably on the first, second, and third anniversary dates of the grant.  The Company estimated the fair value of theoptions as of the grant date to be $33,200 and recorded non-cash expense forstock based compensation of zero, $2,766, and $9,218 during the three monthsended July 31, 2005 and 2006 and the period from November 15, 2002 (Inception)to July 31, 2006, respectively.

On September 24,2005 the Company, in connection with a professional services agreement, grantedto a member of the Board of Directors warrants to purchase 20,000 shares ofcommon stock at an exercise price of $1.25 for a period of five years.  The Company estimated the fair value of thewarrants as of the grant date to be $1,453 and recorded non-cash expense ofzero, zero, and $1,453 during the three months ended July 31, 2005 and 2006 andthe period from November 15, 2002 (Inception) to July 31, 2006, respectively.

On November 1,2005 the Company, in connection with a professional services agreement, grantedwarrants to purchase 150,000 shares of common stock at an exercise price of$1.10 for a period of five years.  TheCompany has estimated the fair value of these warrants as of the grant date tobe $170,795 and, reflecting the terms of the agreement, recorded non-cashexpense of zero, zero, and $170,795 during the three months ended July 31, 2005and 2006 and the period from November 15, 2002 (Inception) to July 31, 2006,respectively.

On December 12,2005 the Company, in connection with a professional services agreement, grantedwarrants to purchase 1,000,000 shares of common stock at an exercise price of$1.50 for a period of three years.  TheCompany has estimated the fair value of these warrants as of the grant date tobe $910,435 and, reflecting the terms of the agreement, recorded non-cashexpense of zero, zero, and $910,435 during the three months ended July 31, 2005and 2006 and the period from November 15, 2002 (Inception) to July 31, 2006,respectively.

On December 27,2005 the Company granted options to members of the Board of Directors topurchase 18,000 shares of common stock at an exercise price of $1.25 for aperiod of ten years.  Such options vestratably on the first, second, and third anniversary dates of the grant.  The 

13

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Company estimatedthe fair value of these options as of the grant date to be $26,889 and recordednon-cash expense for stock based compensation of zero, $6,904, and $12,934during the three months ended July 31, 2005 and 2006 and the period fromNovember 15, 2002 (Inception) to July 31, 2006, respectively.

On March 28, 2006the Company granted options to a member of management to purchase 60,000 sharesof common stock at an exercise price of $1.60 for a period of ten years.  Such options vest ratably over the firsttwelve months of the grant.  The Companyestimated the estimated fair value of these warrants as of the date of thegrant to be $64,348 and recorded non-cash expense for stock based compensationof zero, $16,087, and $16,087 during the three months ended July 31, 2005 and2006 and the period from November 15, 2002 (Inception) to July 31, 2006,respectively.

See Note 8, “RepurchaseAgreements with Founders”, for additional information concerning outstandingwarrants to purchase the Company’s shares.

**7)****                                     Adoptionof Statement of Financial Accounting Standard No. 123 (Revised 2004), *Share-Based Payments***

InDecember 2004, the Financial Accounting Standards Board issued Statement of FinancialAccounting Standard No. 123 (Revised 2004), *Share-BasedPayments* (“SFAS 123R”).  SFAS123R requires a public entity to measure the cost of employee services receivedin exchange for the award of equity instruments based on the fair value of theaward at the date of grant.  The expenseis to be recognized over the period during which an employee is required toprovide services in exchange for the award. SFAS 123R is effective as of the beginning of the first interim orannual reporting period that begins after December 15, 2005 and, accordingly,the Company adopted this standard on May 1, 2006.

Forall awards granted prior to May 1, 2006, the unrecognized portion of stockbased compensation is being recognized as an expense on a straight line basisover the remaining requisite service period. The Company has chosen the modified prospective method for 

14

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transitioningto SFAS 123R and, accordingly, the financial results for prior periods have notbeen restated.  There was no effect uponthe results of operations for the three months ended July 31, 2006 for theadoption of SFAS 123R.  The remainingunrecognized compensation cost related to non-vested share-based compensationarrangements for all employee stock options outstanding at July 31, 2006, asmeasured at the date of grant, was $263,899. This amount is being expensed over the remaining requisite serviceperiod of the related options, which ranges from eight months to three years.

Inconnection with the adoption of SFAS 123R on May 1, 2006, the balance ofdeferred unamortized stock based compensation of $308,615 as of April 30, 2006has been eliminated against the appropriate equity accounts during the threemonths ended July 31, 2006.

Therisk-free interest rate assumption is based upon observed interest ratesappropriate for the expected term of the Company’s employee stock options.  The expected volatility is based on thehistorical volatility of the stock of comparable companies.  The Company has not paid any dividends oncommon stock since its inception and does not anticipate paying dividends onits common stock in the foreseeable future. The computation of the expected option term is based on expectations regardingfuture exercises of options which generally vest over three years and have aten year life.

SFAS 123R requiresforfeitures to be estimated at the time of grant and revised, if necessary, insubsequent periods if actual forfeitures differ from those estimates.  Based on very limited historical experience,the Company has assumed no forfeitures in the determination of stock-basedcompensation expense under SFAS 123R.

15

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The Company’s determination of fair value is affectedby the Company’ stock price as well as the assumptions discussed above whichrequire judgment.  A summary of thechanges in options outstanding during the three months ended July 31, 2006 isas follows:
|                                                                                             | ** ** | ** **         | ** ** | ** **             | ** ** | **Weighted**          | ** ** | ** **    | ** ** |
|---------------------------------------------------------------------------------------------|------------|--------------------|------------|------------------------|------------|-----------------------|------------|---------------|------------|
| ** **                                                                                  | ** ** | ** **         | ** ** | ** **             | ** ** | **Average**           | ** ** | ** **    | ** ** |
| ** **                                                                                  | ** ** | ** **         | ** ** | **Weighted**           | ** ** | **Remaining**         | ** ** | **Aggregate** | ** ** |
| ** **                                                                                  | ** ** | **Number of** | ** ** | **Average Price** | ** ** | **Contractual**       | ** ** | **Intrinsic** | ** ** |
| ** **                                                                                  | ** ** | **Shares**         | ** ** | **Per Share**     | ** ** | **Term (Years)** | ** ** | **Value**     | ** ** |
| Outstanding at April  30, 2006                                                              |       | 2,248,000          |       | $                      | 0.97       |                  |       |          |       |   |
| Granted                                                                                     |       | —             |       | —                 |       |                  |       |          |       |
| Exercised                                                                                   |       | —             |       | —                 |       |                  |       |          |       |
| Terminated                                                                                  |       | —             |       | —                 |       |                  |       |          |       |
| Outstanding at July 31,  2006                                                               |       | 2,248,000          |       | $                      | 0.97       |                  | 4.6        |          | $          | 1,748,000 |   |
|                                                                                        |       |               |       |                   |       |                  |       |          |       |
| Options exercisable at  July 31, 2006                                                       |       | 1,225,000          |       | $                      | 0.81       |                  | 3.7        |          | $          | 1,151,250 |   |
|                                                                                        |       |               |       |                   |       |                  |       |          |       |
| Weighted-average fair value of options granted during the three  months ended July 31, 2006 |       | n/a                |       |                   |       |                  |       |          |       |

 

Priorto May 1, 2006, the Company had employed the principles of Statement ofFinancial Accounting Standard No. 123, *Accounting for Stock-BasedCompensation* (“SFAS 123”).  Asprovided by SFAS 123, the Company had elected to record compensation expense tothe extent of employee or director services rendered based on the fair value ofstock options granted under the plan. The Company estimated the fair value of stock options and warrantsutilizing the Black-Scholes option-pricing model and common stock utilizing itsmarket value.

The Companyaccounts for common stock, stock options, and warrants granted to non-employeesbased on the fair market value of the instrument, using the Black-Scholesoption pricing model based on assumptions for expected stock price volatility,term of the option, risk-free interest rate and expected dividend yield at thegrant date.  For options granted tonon-employees, such fair value is measured as of an appropriate date pursuantto the guidance in the consensus of the Emerging Issues Task Force of theFinancial Accounting Standards Board for Issue No. 96-18, *Accounting for Equity Instruments That Are Issued toOther Than Employees for Acquiring, or in Conjunction with Selling, Goods orServices* (generally, the earlier of the date the other party becomescommitted to provide goods or services or the date performance by 

16

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the other party iscomplete) and capitalized or expensed as if the Company had paid cash for thegoods or services.

**8)            Repurchase Agreements With Founders**

Effective March16, 2006, a founder of FermaVir Research, Inc. who owns 1,029,100 shares of theCompany, granted to the Company an irrevocable, exclusive option to repurchase926,100 of those shares for $114,000 for a period of one hundred twenty days(the “Company Option”) after the sooner of:

a)                                      TheCompany’s abandonment of the development of the technology licensed fromUniversity College Cardiff Consultants Limited on February 2, 2005 as describedin Note 5 to these financial statements (the “Licensed Subject Matter”), or

b)                                     December31, 2006, unless on or before such date, Phase I Clinical Trials have commencedfor a product utilizing the Licensed Subject Matter.

Effective March16, 2006, two additional founders of FermaVir Research, Inc. who collectivelyown fully-vested options to purchase 1,050,100 shares of the Company at $0.75per share, have entered into agreements with the Company whereby upon exerciseof the Company Option, the Company may cancel options to purchase 945,000shares upon payment of $100,000.

Additionally,effective March 16, 2006, the three founders referred to in the precedingparagraphs, entered into an agreement with the Company pursuant to which, uponexercise of the Company Option, the founders have the option to acquire fornominal consideration for a period of thirty days all the rights related to theLicensed Subject Matter.

As of September 19,2006, the Company Option has not been triggered.

**9)            Commitments**

In connection withan agreement with a vendor for the manufacture of pharmaceutical product foruse in research and development activities, the Company has made severalprogress payments to-date and will be obligated to pay approximately $50,000upon completion of such manufacturing services.

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****Item 2:          Management’sDiscussion and Analysis or Plan of Operation****

The followingdiscussion should be read in conjunction with our condensed consolidatedfinancial statements and notes to those statements included elsewhere in thisreport. In addition to historical information, the following discussion andother parts of this report contain forward-looking information that involvesrisks and uncertainties.

****Overview****

Since inception onNovember 15, 2002 through July 31, 2006, we have sustained cumulative netlosses of $6,075,181.  Our losses haveresulted primarily from research and development expenses, patent costs andlegal and accounting expenses.  Frominception through July 31, 2006, we have not generated any revenue fromoperations.  We expect to incuradditional losses to perform further research and development activities.  We do not currently have any commercialproducts and we do not expect to have any for the foreseeable future.  Our product development efforts are in theirearly stages and we cannot make estimates of the costs or the time it will taketo complete.  The risk of completion ofany program is high because of the long duration of clinical testing,regulatory approval and review cycles and uncertainty of the costs.  Net cash inflows from any products developedmay take several years to achieve.

Management plansto continue financing the operations with a combination of equity issuances anddebt arrangements.  If adequate funds arenot available, we may be required to delay, reduce the scope of, or eliminateour research or development programs, or cease operations.  In light of these factors, among others, ourindependent registered public accounting firm has stated that there issubstantial doubt about our ability to continue as a going concern.  The financial statements do not include anyadjustments that might result from the outcome of this uncertainty.

****Plan of Operation****

We are adevelopment stage biotechnology company that has licensed patents for a seriesof compounds for the treatment of viral diseases including compounds for thetreatment of varicella zoster virus, or VZV, the causative agent for shinglesand chickenpox and human cytomegalovirus, or CMV, a member of the herpes virusgroup which includes the viruses that cause chickenpox, mononucleosis, herpeslabialis (cold sores) and genitalis (genital herpes).

We have performedpreclinical studies on a series of our compounds and have selected FV-100,prodrug of CF-1743 for development for the treatment of shingles.  A prodrug is a drug which is administered ina form which enhances the pharmacology of the active compound and onceadministered, is metabolized in the body into an active compound.  Our clinical candidate, FV-100, is currentlyundergoing extensive preclinical testing. We are contracting and supervising the pharmacology and safety studiesof our clinical candidate in order to file an Investigational New DrugApplication (IND) with the Food and Drug Administration (FDA).

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Upon acceptance ofthe IND, we intend to commence Phase I safety studies of our clinical candidatefor the treatment of shingles in humans. In addition, we intend to identify a clinical candidate for thetreatment of CMV infections in transplant patients from our proprietaryanti-viral compounds.  We are alsocurrently seeking other opportunities and technologies for in-licensing fromacademia, research institutions and commercial sources which would complementand enhance our business.

On November 30,2005, we submitted a pre-IND submission to the FDA requesting a consultation onour proposed plan for development of CF-1743 for the treatment ofshingles.  In January 2006, we received aresponse from the FDA on our pre-IND submission.  The FDA provided guidance on our preclinicaland early stage clinical plans.  We alsofiled a pre-IND submission to the FDA for FV-100 in April 2006 and received aresponse from the FDA in June.  We areusing the FDA’s guidance from both pre-IND responses in preparing an IND forour shingles drug candidate, FV-100.

On December 12,2005, we entered into a marketing and public relations service agreement withTrilogy Capital Partners, Inc.  Under theterms of the agreement, Trilogy will be paid $12,500 per month and was issuedwarrants to purchase 1,000,000 shares of our common stock at an exercise priceof $1.50 per share which are exercisable for a period of three years.  This agreement was terminated effective June3, 2006

****Results of Operations****

****Three Months Ended July 31, 2006 Compared To The ThreeMonths Ended July 31, 2005****

During the threemonths ended July 31, 2006 and 2005, we had no revenue.  We do not expect to have revenues relating toour product candidates in development for several years, if at all.

Research anddevelopment expense for the three months ended July 31, 2006 was $161,948 ascompared to zero for the comparable period in 2005.  This increase is due to the performance ofpreclinical studies with three specific compounds for development of atreatment for shingles.

General andadministrative expense for the three months ended July 31, 2006 was $305,386 ascompared to $224 for the comparable period in 2005.  This increase is due to the establishment ofoperations and consists of payroll and benefits, marketing expenses, legal andaccounting fees, occupancy expenses, directors’ fees, and general operatingexpenses.

Other expense, netfor the three months ended July 31, 2006 was $25,960 as compared to zero forthe comparable period in 2005.  Thisincrease is attributable to interest expense related to the note payable issuedduring the quarter ended July 31, 2006.

Net loss for thethree months ended July 31, 2006 was $493,294 as compared to a net loss of $224for the comparable period in 2005.  Thisincrease in net loss is attributable to increases in research and developmentexpenses of $161,948, general and administrative expenses of $305,162, and otherexpense, net of $25,960.

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****Liquidity and Capital Resources****

From November 15,2002 (Inception) to July 31, 2006, our operations have been financed throughthe sale of common stock and we have incurred a deficit during the developmentstage of $6,075,181.  This loss wasincurred through a combination of research and development activities, expensessupporting those activities, and a charge to expense for acquired in processresearch and development.  We expect tocontinue to incur additional losses and negative cash flows from operatingactivities for the foreseeable future.

From May 1, 2005through July 31, 2006, we completed the following financing transactions:

a)                                      OnAugust 16, 2005, we issued 2,825,000 shares of common stock and warrants topurchase 423,750 shares of common stock to new investors and received netproceeds of $2,092,486.  The warrantsexpire on August 16, 2010 and have an exercise price of $1.50 per share;

b)                                     OnAugust 16, 2005, we redeemed and cancelled 67,679,977 common shares held by a relatedparty for total consideration of $750,000 consisting of $400,000 in cash andthe issuance of a $350,000 promissory note to that related party.  On October 24, 2005, we repaid principal of$234,655. On November 4, 2005, $112,500 of the remaining principal amount dueunder this note was repaid by us through the issuance of common stock andwarrants as described below;

c)                                      OnOctober 24, 2005, we issued 699,193 shares of common stock and warrants topurchase 104,879 shares of common stock and received net proceeds of $520,831;

d)                                     OnNovember 4, 2005, we issued 153,334 shares and warrants to purchase 23,000shares of common stock and received net proceeds of $125,000.  Additionally, on November 4, 2005, we issued150,000 shares and warrants to purchase 22,500 shares of common stock toPanetta Partners in payment of $112,500 due to Panetta Partners under a notepayable; and

e)                                      OnDecember 1, 2005, we issued 186,000 shares of common stock and warrants topurchase 27,900 shares of common stock and received net proceeds of $137,500.

f)                                        OnJune 16, 2006 and July 28, 2006, we issued promissory notes in the aggregateprincipal amount of $325,000 together with warrants and received net proceedsof $298,500.  The notes bear interest at12% and mature on January 1, 2007.

If prior to the maturity date we receives grossproceeds from the sales of securities wherein the aggregate proceeds exceedstwo times the then outstanding principal balance of the promissory notes, thepromissory notes become immediately due and payable within six days. We mayrepay, in whole or in part, the 

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promissory notes at any time for consideration equalto 106% of the then outstanding principal balance.

The October,November, and December transactions described above were on the same basis asthe shares and warrants privately placed on August 16, 2005.

Our cash positionwas $165,925 as of July 31, 2006 compared to $127,121 as of July 31, 2005.  The net increase during that period of$38,804 is attributable to:
| Proceeds from the sale of  common stock net of expenses      |   | $          | 2,929,318 |   |
|--------------------------------------------------------------|--------|------------|-----------|--------|
| Proceeds from the  issuance of notes payable net of expenses |   | 298,500    |      |
| Redemption of common  stock                                  |   | (400,000   | )         |
| Net reduction in notes  payable to a related party           |   | (940,720   | )         |
| Cash paid in connection  with acquisition transaction costs  |   | (155,025   | )         |
| Operating activities  and other                              |   | (1,693,269 | )         |
|                                                         |   | $          | 38,804    |   |

 

Our currentliabilities totaled $734,172 as of July 31, 2006 compared to $413,900 as ofJuly 31, 2005.  The increase of $320,272during that period consists of $170,903 related to the increase in ouroperating activities and $149,369 related to the issuance of notes payableduring the three months ended July 31, 2006.

We had a workingcapital deficit of $527,051 as of July 31, 2006 compared to a working capitaldeficit of $10,000 as of July 31, 2005.

Our availableworking capital and capital requirements will depend upon numerous factors,including progress of our research and development programs, our progress in andthe cost of pre-clinical and clinical testing, the timing and cost of obtainingregulatory approvals, the cost of filing and prosecuting patent claims andother intellectual property rights, competing technological and marketdevelopments, current and future licensing relationships, the status of ourcompetitors, and our ability to establish collaborative arrangements with otherorganizations.

Our continuedoperations will depend on whether we are able to raise additional funds throughvarious potential sources, such as equity and debt financing, collaborative andlicensing agreements, strategic alliances, and our ability to realize the fullpotential of our technology in development. Such additional funds may not become available on acceptable terms, if atall, and there can be no assurance that any additional funding that we doobtain will be sufficient to meet our needs in the long term.  Through July 31, 2006, virtually all of ourfinancing has been through private placements of common stock and warrants.  We intend to continue to fund operationsfrom cash on-hand and through the similar sources of capital previouslydescribed for the foreseeable future.  Wecan give no assurances that any additional capital that we are able to obtainwill be sufficient to meet our needs.  Webelieve that we will continue to incur net losses and negative cash flows fromoperating activities for the foreseeable future.  Based on the resources available to us atJuly 31, 2006, we will need additional equity or debt financing to sustain ouroperations through the balance of 2006 and we will need additional financing 

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thereafter untilwe can achieve profitability, if ever. These matters raise substantial doubt about our ability to continue as agoing concern.

****Critical Accounting Policies****

Our financialstatements are prepared in accordance with accounting principles generallyaccepted in the United States of America, which requires management to makeestimates and assumptions that affect the reported amounts of assets and liabilitiesand disclosure of contingent assets and liabilities at the date of thefinancial statements and the reported amounts of revenues and expenses duringthe reporting period. Actual results could differ from those estimates.

The followingaccounting policies are critical in fully understanding and evaluating ourreported financial results:

a)                                      ****Accounting forResearch and Developments Costs****

We account for ourresearch and development costs in accordance with Statement of FinancialAccounting Standards No. 2 “Accounting for Research and Development Costs”.  Accordingly, research and development costsare expensed as incurred.

b)                                     ****Accounting forAcquisitions****

We account for ouracquisitions utilizing the purchase method in accordance with Statement ofFinancial Accounting Standards No. 141 “Business Combinations”.  Under the purchase method, assets acquiredand liabilities assumed by us are recorded at their estimated fair values as ofthe date of acquisition and the results of operations of the acquired companyare consolidated with ours from the date of acquisition.

c)                                      ****Accounting forStock-Based Compensation****

We account for our stockoptions and warrants using the fair value method promulgated by Statement ofFinancial Accounting Standards No. 123R “Share-Based Payment” which addressesthe accounting for transactions in which an entity exchanges its equityinstruments for goods or services. Therefore, our results include non-cash compensation expense as a resultof the issuance of stock options and warrants and we expect to recordadditional non-cash compensation expense in the future.

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****Item 3:          Controlsand Procedures****

Our ChiefExecutive Officer and Chief Financial Officer, based on evaluation of ourdisclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)of the Securities Exchange Act of 1934, as amended) required by paragraph (b)of Rule 13a-15 or Rule 15d-15, as of July 31, 2006, have concluded that ourdisclosure controls and procedures were effective in ensuring that informationrequired to be disclosed by us in the reports that we file or submit under theExchange Act is recorded, processed, summarized and reported within the timeperiods specified in the Commission’s rules and forms.

Our Chief ExecutiveOfficer and Chief Financial Officer also concluded that, as of July 31, 2006,our disclosure controls and procedures are effective in ensuring thatinformation required to be disclosed by us in the reports that we file orsubmit under the Exchange Act is accumulated and communicated to ourmanagement, including our Chief Executive Officer and Chief Financial Officer,to allow timely decisions regarding required disclosure.

There were nochanges in our internal controls over financial reporting during the mostrecent fiscal quarter that have materially affected or are reasonably likely tomaterially affect our internal control over financial reporting.

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****PART II - OTHER INFORMATION****

**Item 6:****   Exhibits**

31.1         Certificationof Chief Executive Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a) underthe Exchange Act.

31.2         Certificationof Chief Financial Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a) underthe Exchange Act.

32.1         Certificationof Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2         Certificationof Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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****SIGNATURE****

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has causedthis report to be signed on its behalf by the undersigned thereunto dulyauthorized.
| Dated: September 19, 2006 | FERMAVIR PHARMACEUTICALS, INC.               |
|---------------------------|----------------------------------------------|
|                      |                                         |
|                      | By:                                          | /s/ Geoffrey W. Henson |   |
|                      |                                         | Geoffrey W. Henson, Chief Executive Officer |
|                      |                                         |   |
|                      | By:                                          | /s/ Frederick Larcombe |   |
|                      | Frederick Larcombe, Chief Financial Officer  |
|                      | (Principal Financial and Accounting Officer) |

 

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