**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

----

**FORM 10-Q**

----

| **(Mark One)**                                                                                 |
|------------------------------------------------------------------------------------------------|
| ** **                                                                                     |
| **x****   QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**  |
| **SECURITIES  EXCHANGE ACT OF 1934**                                                           |
| ** **                                                                                     |
| **For the  quarterly period ended June 30, 2007**                                              |
| ** **                                                                                     |
| **OR**                                                                                         |
| ** **                                                                                     |
| **o****   TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE** |
| **SECURITIES  EXCHANGE ACT OF 1934**                                                           |

 

**Forthe transition periodfrom              to              **

**CommissionFile Number 000-51134**

**Favrille, Inc.**

(Exact name ofregistrant as specified in its charter)

| **Delaware**                                     | **33-0892797**                        |
|--------------------------------------------------|---------------------------------------|
| (State or other jurisdiction of incorporation or | (I.R.S. Employer  Identification No.) |
| organization)                                    |                                  |
|                                             |                                  |
| **10445 Pacific Center Court, San Diego, CA**    | **92121**                             |
| (Address of principal executive offices)         | (Zip Code)                            |

 

**(858)526-8000**

(Registrant’stelephone number, including area code)

**N/A**

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

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15 (d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.   YES   x   NO   o

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, or a non-accelerated filer.  Seedefinition of ”accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act (Check one).
| Large  Accelerated Filer  o | Accelerated Filer  o | Non-Accelerated  Filer  x |
|---------------------------------------|--------------------------------|-------------------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

YES  o    NO  x

The number of shares of the Registrant’s common stock outstanding asof August 9, 2007 was 32,966,619.

 

----

**FAVRILLE,INC.**

**QUARTERLYREPORT ON FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 2007**

**TABLEOF CONTENTS**
| **PART I.**  | ** ** | **FINANCIAL  INFORMATION**                                                                                                                                              | ** ** |
|-------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Item 1.           |       | Financial  Statements                                                                                                                                                   |       |
|              |       | Balance  Sheets as of June 30, 2007 (Unaudited) and December 31, 2006                                                                                              |       |
|              |       | Statements of  Operations (Unaudited) for the three and six months ended June 30, 2007 and  2006 and the period from January 21, 2000 (inception) to June 30, 2007 |       |
|              |       | Statements of Cash  Flows (Unaudited) for the six months ended June 30, 2007 and 2006 and the  period from January 21, 2000 (inception) to June 30, 2007           |       |
|              |       | Notes to  Condensed Financial Statements (Unaudited)                                                                                                                    |       |
| Item 2.           |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                             |       |
| Item 3.           |       | Quantitative  and Qualitative Disclosures About Market Risk                                                                                                             |       |
| Item 4T.          |       | Controls and  Procedures                                                                                                                                                |       |
|              |       |                                                                                                                                                                    |       |
| **PART II.** | ** ** | **OTHER INFORMATION**                                                                                                                                                   | ** ** |
| Item 1.           |       | Legal Proceedings                                                                                                                                                       |       |
| Item  1A.         |       | Risk  Factors                                                                                                                                                           |       |
| Item  6.          |       | Exhibits                                                                                                                                                                |       |
|              |       |                                                                                                                                                                    |       |
| SIGNATURES        |       |

 

2

----

**PART I — FINANCIAL INFORMATION**

**Item1. Financial Statements.**

**FAVRILLE, INC.**

**(adevelopment stage company)**

**BALANCE SHEETS**

**(inthousands, except share and per share data)**
| ** **                                                                                                                                                                                             | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                             | ** ** | **(unaudited)**         | ** ** | ** **                  | ** ** |
| **Assets**                                                                                                                                                                                             | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Current assets:                                                                                                                                                                                        |       |                    |       |                        |       |
| Cash and cash  equivalents                                                                                                                                                                             |       | $                       | 16,577     |                        | $          | 14,249 |   |
| Short-term  investments                                                                                                                                                                                |       | 13,433                  |       | 28,160                      |       |
| Receivables                                                                                                                                                                                            |       | 219                     |       | 242                         |       |
| Prepaid expenses  and other current assets                                                                                                                                                             |       | 1,071                   |       | 608                         |       |
| Total current assets                                                                                                                                                                                   |       | 31,300                  |       | 43,259                      |       |
| Property and equipment,  net                                                                                                                                                                           |       | 34,057                  |       | 25,071                      |       |
| Restricted cash                                                                                                                                                                                        |       | 3,451                   |       | 3,451                       |       |
| Other assets                                                                                                                                                                                           |       | 492                     |       | 508                         |       |
| Total assets                                                                                                                                                                                           |       | $                       | 69,300     |                        | $          | 72,289 |   |
| **Liabilities and stockholders’  equity**                                                                                                                                                         | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Current liabilities:                                                                                                                                                                                   |       |                    |       |                        |       |
| Accounts payable  and accrued liabilities                                                                                                                                                              |       | $                       | 6,692      |                        | $          | 6,779 |   |
| Current portion  of debt                                                                                                                                                                               |       | 5,890                   |       | 4,976                       |       |
| Total current  liabilities                                                                                                                                                                             |       | 12,582                  |       | 11,755                      |       |
| Debt, less current  portion                                                                                                                                                                            |       | 7,870                   |       | 5,754                       |       |
| Deferred rent                                                                                                                                                                                          |       | 14,713                  |       | 10,145                      |       |
| Commitments and  contingencies                                                                                                                                                                         |       |                    |       |                        |       |
| Stockholders’ equity:                                                                                                                                                                             |       |                    |       |                        |       |
| Preferred stock,  $0.001 par value 5,000,000 shares authorized at June 30, 2007 and  December 31, 2006; no shares issued and outstanding at June 30, 2007 and  December 31, 2006             |       | —                  |       | —                      |       |
|                                                                                                                                                                                                   |       |                    |       |                        |       |
| Common stock,  $0.001 par value:                                                                                                                                                                       |       |                    |       |                        |       |
| Authorized  shares, 75,000,000 at June 30, 2007 and December 31, 2006; Issued and  outstanding shares — 32,505,002 and 29,060,081 at June 30, 2007 and  December 31, 2006, respectively |       | 33                      |       | 29                          |       |
| Additional  paid-in capital                                                                                                                                                                            |       | 212,912                 |       | 200,497                     |       |
| Accumulated  other comprehensive loss                                                                                                                                                                  |       | 3                       |       | 3                           |       |
| Deficit  accumulated during the development stage                                                                                                                                                      |       | (178,813                | )          | (155,894                    | )          |
| Total stockholders’  equity                                                                                                                                                                       |       | 34,135                  |       | 44,635                      |       |
| Total liabilities and stockholders’ equity                                                                                                                                                        |       | $                       | 69,300     |                        | $          | 72,289 |   |

 

See accompanyingnotes.

3

----

**FAVRILLE, INC.**

**(adevelopment stage company)**

**STATEMENTS OF OPERATIONS**

**(inthousands, except per share data)**

**Unaudited**
| ** **                                                                                               | ** ** | **Three Months ended  June 30,** | ** ** | **Six Months ended  June 30,** | ** ** | **Period from January 21,  2000 (inception) to  June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|
| ** **                                                                                               | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007**                                                                                 | ** ** | **2006** | ** ** | **2007** | ** ** |
| Operating  expenses:                                                                                     |       |                                            |       |                                          |       |                                                                                     |       |   |   |   |   |
| Research and development                                                                                 |       | $                                               | 9,623      |                                          | $          | 7,462                                                                                    |       | $ | 17,620 |   | $ | 15,883 |   | $ | 117,526 |   |
| Marketing, general and administrative                                                                    |       | 2,948                                           |       | 2,919                                         |       | 5,860                                                                                    |       | 5,620 |   | 35,523 |   |
| Total operating  expenses                                                                                |       | 12,571                                          |       | 10,381                                        |       | 23,480                                                                                   |       | 21,503 |   | 153,049 |   |
| Interest income                                                                                          |       | 497                                             |       | 798                                           |       | 1,062                                                                                    |       | 1,231 |   | 6,119 |   |
| Interest expense                                                                                         |       | (314                                            | )          | (213                                          | )          | (501                                                                                     | )          | (379 | ) | (3,342 | ) |
| Other income  (expense)                                                                                  |       | —                                          |       | (29                                           | )          | —                                                                                   |       | (29 | ) | (381 | ) |
| Total other  income, net                                                                                 |       | 183                                             |       | 556                                           |       | 561                                                                                      |       | 823 |   | 2,396 |   |
| Net loss                                                                                                 |       | (12,388                                         | )          | (9,825                                        | )          | (22,919                                                                                  | )          | (20,680 | ) | (150,653 | ) |
|                                                                                                     |       |                                            |       |                                          |       |                                                                                     |       |   |   |   |   |
| Deemed  dividend-beneficial conversion feature for Series C redeemable  convertible preferred stock |       | —                                          |       | —                                        |       | —                                                                                   |       | — |   | (28,103 | ) |
|                                                                                                     |       |                                            |       |                                          |       |                                                                                     |       |   |   |   |   |
| Accretion of  Series C redeemable convertible preferred stock issuance costs                        |       | —                                          |       | —                                        |       | —                                                                                   |       | — |   | (57 | ) |
| Net loss  applicable to common stockholders                                                              |       | $                                               | (12,388    | )                                             | $          | (9,825                                                                                   | )          | $ | (22,919 | ) | $ | (20,680 | ) | $ | (178,813 | ) |
| Historical net  loss per share:                                                                          |       |                                            |       |                                          |       |                                                                                     |       |   |   |   |   |
| Basic and  diluted                                                                                       |       | $                                               | (0.38      | )                                             | $          | (0.34                                                                                    | )          | $ | (0.73 | ) | $ | (0.81 | ) |   |   |
| Weighted-average  shares-basic and diluted                                                               |       | 32,435                                          |       | 28,709                                        |       | 31,598                                                                                   |       | 25,598 |   |   |   |

 

See accompanyingnotes.

4

----

**FAVRILLE, INC.**

**(adevelopment stage company)**

**STATEMENTS OF CASH FLOWS**

**(inthousands)**

**Unaudited**
| ** **                                                                              | ** ** | ** **                     | ** ** | ** **              | ** ** | **Period from** | ** ** |
|-----------------------------------------------------------------------------------------|------------|--------------------------------|------------|-------------------------|------------|----------------------|------------|
| ** **                                                                              | ** ** | ** **                     | ** ** | ** **              | ** ** | **January 21,** | ** ** |
| ** **                                                                              | ** ** | ** **                     | ** ** | ** **              | ** ** | **2000**             | ** ** |
| ** **                                                                              | ** ** | **Six Months ended** | ** ** | **(inception) to** | ** ** |
| ** **                                                                              | ** ** | **June 30,**              | ** ** | **June 30,**       | ** ** |
| ** **                                                                              | ** ** | **2007**                       | ** ** | **2006**                | ** ** | **2007**             | ** ** |
| **Operating  activities**                                                               | ** ** | ** **                     | ** ** | ** **              | ** ** | ** **           | ** ** |
| Net loss                                                                                |       | $                              | (22,919    | )                       | $          | (20,680              | )          | $ | (150,653 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities:            |       |                           |       |                    |       |                 |       |
| Depreciation and amortization                                                           |       | 1,484                          |       | 1,010                   |       | 7,975                |       |
| Stock-based compensation                                                                |       | 2,259                          |       | 1,864                   |       | 11,719               |       |
| Amortization of premium/discount on short-term  investments                             |       | (334                           | )          | (162                    | )          | (969                 | )          |
| Other                                                                                   |       | 64                             |       | 269                     |       | 215                  |       |
| Changes in operating assets and liabilities:                                            |       |                           |       |                    |       |                 |       |
| Other assets                                                                            |       | (435                           | )          | (333                    | )          | (1,253               | )          |
| Accounts payable and accrued liabilities                                                |       | (317                           | )          | 1,551                   |       | 4,643                |       |
| Deferred rent                                                                           |       | 873                            |       | 693                     |       | 3,636                |       |
| Net cash used in  operating activities                                                  |       | (19,325                        | )          | (15,788                 | )          | (124,687             | )          |
| **Investing  activities**                                                               | ** ** | ** **                     | ** ** | ** **              | ** ** | ** **           | ** ** |
| Purchases of  property and equipment                                                    |       | (6,535                         | )          | (2,595                  | )          | (28,970              | )          |
| Purchases of  short-term investments                                                    |       | (11,337                        | )          | (32,055                 | )          | (109,211             | )          |
| Maturities of  short-term investments                                                   |       | 26,400                         |       | 21,848                  |       | 96,751               |       |
| Other assets                                                                            |       | —                         |       | —                  |       | (70                  | )          |
| Restricted cash                                                                         |       | —                         |       | (1,901                  | )          | (3,451               | )          |
| Net cash  provided by (used in) investing activities                                    |       | 8,528                          |       | (14,703                 | )          | (44,951              | )          |
| **Financing  activities**                                                               | ** ** | ** **                     | ** ** | ** **              | ** ** | ** **           | ** ** |
| Proceeds from  debt                                                                     |       | 5,623                          |       | 3,315                   |       | 28,593               |       |
| Payments on debt                                                                        |       | (2,659                         | )          | (1,249                  | )          | (14,855              | )          |
| Issuance of  preferred stock, net                                                       |       | —                         |       | —                  |       | 76,144               |       |
| Proceeds from  issuance of convertible promissory note                                  |       | —                         |       | —                  |       | 650                  |       |
| Issuance of  common stock and warrants                                                  |       | 10,161                         |       | 45,183                  |       | 95,725               |       |
| Repurchase of  restricted common stock                                                  |       | —                         |       | (6                      | )          | (42                  | )          |
| Net cash  provided by financing activities                                              |       | 13,125                         |       | 47,243                  |       | 186,215              |       |
| Net increase in  cash and cash equivalents                                              |       | 2,328                          |       | 16,752                  |       | 16,577               |       |
| Cash and cash  equivalents at beginning of period                                       |       | 14,249                         |       | 12,065                  |       | —               |       |
| Cash and cash  equivalents at end of period                                             |       | $                              | 16,577     |                    | $          | 28,817               |       | $ | 16,577 |   |
|                                                                                    |       |                           |       |                    |       |                 |       |
| **Supplemental  schedule of non-cash investing and financing activities:**         | ** ** | ** **                     | ** ** | ** **              | ** ** | ** **           | ** ** |
| Capitalized  interest recorded as property and equipment                                |       | $                              | 231        |                    | $          | —               |       | $ | 322 |   |
| Accrued property  and equipment acquisitions                                            |       | $                              | 232        |                    | $          | —               |       | $ | 2,050 |   |
| Leasehold  improvements acquired under tenant improvement allowance                     |       | $                              | 3,696      |                    | $          | —               |       | $ | 11,077 |   |
| Conversion of  convertible preferred stock to common stock upon initial public offering |       | $                              | —     |                    | $          | —               |       | $ | 43,678 |   |

 

See accompanyingnotes.

5

----

**FAVRILLE,INC.**

**NOTES TO CONDENSED FINANCIALSTATEMENTS**

**JUNE30, 2007**

**UNAUDITED**

**1. Basisof Presentation**

The accompanyingunaudited interim financial statements have been prepared in accordance withU.S. generally accepted accounting principles and with the rules andregulations of the Securities and Exchange Commission related to a quarterlyreport on Form 10-Q. Accordingly, they do not include all of theinformation and disclosures required by U.S. generally accepted accountingprinciples for complete financial statements. The balance sheet atDecember 31, 2006 has been derived from the audited financial statementsat that date but does not include all information and footnotes required byU.S. generally accepted accounting principles for complete financialstatements. The interim financial statements reflect all adjustments which, inthe opinion of management, are necessary for a fair presentation of thefinancial condition and results of operations for the periods presented. Exceptas otherwise disclosed, all such adjustments are of a normal recurring nature.

Operating results for thethree and six months ended June 30, 2007 are not necessarily indicative of theresults that may be expected for the year ending December 31, 2007. Thesefinancial statements should be read in conjunction with the financialstatements included in the Company’s Annual Report on Form 10-K for theyear ended December 31, 2006 and management’s discussion and analysis offinancial condition and results of operations included elsewhere herein.

The preparation offinancial statements in conformity with U.S. generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities as well as expenses during thereporting period. Actual results could differ from those estimates.  On anongoing basis, we review our estimates based on information currentlyavailable, and changes in facts and circumstances may cause us to revise theseestimates.

***Stock-Based Compensation***

Total stock-basedcompensation expense recognized for the three and six months ended June 30,2007 and 2006 were as follows (in thousands):
| ** **                       | ** ** | **Three Months**

**ended  June 30,** | ** ** | **Three Months**

**ended  June 30,** | ** ** | **Six Months  ended  June 30,** | ** ** | **Six Months  ended  June 30,** | ** ** |
|----------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
| ** **                       | ** ** | **2007**                                        | ** ** | **2006**                                        | ** ** | **2007**                                  | ** ** | **2006**                                  | ** ** |
| Research and  development        |       | $                                               | 610        |                                            | $          | 485                                       |       | $                                         | 1,027      |   | $ | 918 |   |
| General and  administrative      |       | 594                                             |       | 499                                             |       | 1,231                                     |       | 946                                       |       |
| Stock-based compensation expense |       | $                                               | 1,204      |                                            | $          | 984                                       |       | $                                         | 2,258      |   | $ | 1,864 |   |

 

The Company recordedapproximately $1.2 million and $2.3 million of stock-based compensation expensein our Statement of Operations for the three and six months ended June 30,2007.  At June 30, 2007, the total compensation cost related to unvestedstock-based awards granted to employees with standard four year vesting underthe Company’s stock award plans but not yet recognized was approximately $6.3million, net of estimated forfeitures of approximately $596,000. This cost willbe amortized on a straight-line basis over a weighted-average period of approximately2.6 years and will be adjusted for subsequent changes in estimated forfeitures.

In the second quarter of2007 the Company granted 778,875 performance-based stock option awards underthe Favrille, Inc. Amended and Restated 2001 Equity Incentive Plan. Vesting istied to achievement of certain milestones. For purposes of measuringcompensation expense, the amount of awards ultimately expected to vest isestimated at each reporting date based on management’s expectations regardingthe relevant performance criteria. 

6

----

The recognition ofcompensation expense associated with performance-based grants requires judgmentin assessing the probability of meeting the performance milestones, as well asdefined criteria for assessing achievement of the performance relatedmilestones. This may result in significant expense recognition in the period inwhich the performance goals are met or when achievement of the goals is deemedprobable.

Of the performance-basedstock awards granted in the second quarter of 2007, the vesting of 438,875 ofthe options is contingent upon multiple performance conditions as follows: 1)**Options Group A:** 40% of the options will vest monthly over24 months from the completion of certain milestones related to the preparationfor the commercialization of FavId and 2) **Options Group B:**theremaining 60% of the options will vest monthly over 24 months from thecompletion of certain other milestones.

The total unrecognizedcompensation costs related to the **Options Group A**at the date of grant was approximately $370,000, net of estimated forfeituresof approximately $44,000. Management has deemed the completion of themilestones to be probable. Therefore, the stock-based compensation related to **Options Group A** is being expensed ratably from May 2007through January 2010. Management has determined that it cannot assess thelikelihood of certain other milestones at this time. Therefore, theachievements of such milestones are not currently deemed probable. Thecompensation cost related to the **Options Group B**ofapproximately $621,000 will be recognized when achievement of the milestonesare deemed probable.

Of the performance-basedstock option awards granted in the second quarter of 2007, the 340,000 of theseoptions will fully vest upon the FDA’s approval to market FavId. Managementcannot assess the likelihood of the FDA’s approval of FavId as it is dependentupon many factors including the outcome of pivotal Phase 3 data analysis. Thecompensation costs related to these options of approximately $783,000 will berecognized upon achievement of the milestone.

***Net Loss per Common Share***

Net loss per share iscalculated in accordance with SFAS No. 128,*Earnings Per Share,* and SAB No. 98. Basic loss pershare is calculated using the weighted average number of common sharesoutstanding during each period, without consideration for common stockequivalents. Diluted loss per share includes the dilutive effect of commonequivalent shares outstanding for the period determined using thetreasury-stock method. For purposes of this calculation, common stock subjectto repurchase by the Company, preferred stock, options and warrants areconsidered to be common stock equivalents and are only included in thecalculation of diluted earnings per share when their effect is dilutive.
| ** **                                                                                                    | ** ** | **As of June 30** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                    | ** ** | **(in thousands)**          | ** ** |
| ** **                                                                                                    | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| **Historical  outstanding anti-dilutive securities not included in diluted net loss per  share calculation:** | ** ** | ** **                       | ** ** | ** ** | ** ** |
| ** **                                                                                                    | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Common stock  equivalents:                                                                                    |       |                             |       |   |   |
| Stock warrants                                                                                                |       | 3,372                            |       | 3,122 |   |
| Options to purchase common stock                                                                              |       | 4,338                            |       | 2,388 |   |
| Common stock  subject to repurchase                                                                           |       | 58                               |       | 185 |   |
|                                                                                                          |       | 7,768                            |       | 5,695 |   |

 

**IncomeTaxes**

On July 13, 2006, theFASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes –An Interpretation of FASB Statement No. 109” (“FIN 48”).  FIN 48 clarifiesthe accounting for uncertainty in income taxes recognized in an entity’sfinancial statements in accordance with FASB Statement No. 109, “Accounting forIncome Taxes” and prescribes a recognition threshold and measurement attributesfor financial statement disclosure of tax positions taken or expected to betaken on a tax return.  Under FIN 48, the impact of an uncertain incometax position on the income tax return must be recognized at the largest amountthat is more-likely-than-not to be sustained upon audit by the relevant taxingauthority.  An uncertain income tax position will not be recognized if ithas less than a 50% likelihood of being sustained.  Additionally, FIN 48provides guidance on derecognition, classification, interest and penalties,accounting in interim periods, disclosure and transition.  FIN 48 iseffective for fiscal years beginning after December 15, 2006.

7

----

The Company’s practice isto recognize interest and/or penalties related to income tax matters in incometax expense. During the years ended December 31, 2006, 2005 and 2004, theCompany has not recognized any interest or penalties.  Upon adoption ofFIN 48 on January 1, 2007, the Company did not record any interest orpenalties.

The Company is subject totaxation in the US and various state jurisdictions.  The Company’s taxyears for 2000 and forward are subject to examination by the US and Californiatax authorities due to the carryforward of unutilized net operating losses andresearch and development credits.

The adoption of FIN 48did not impact our financial condition, results of operations or cashflows.  At January 1, 2007, we had net deferred tax assets of $53.8million.  The deferred tax assets are primarily composed of federal andstate tax net operating loss (“NOL”) carryforwards and federal and stateresearch and development (“R&D”) credit carryforwards.  Due touncertainties surrounding our ability to generate future taxable income torealize these assets, a full valuation has been established to offset our netdeferred tax asset. Additionally, the future utilization of our NOL and R&Dcredit carryforwards to offset future taxable income may be subject to asubstantial annual limitation as a result of ownership changes that may have occurredpreviously or that could occur in the future.  We have not yet determinedwhether such an ownership change has occurred. However, the Company plans tocomplete a Section 382 analysis regarding the limitation of the net operatinglosses and research and development credits. When this project is completed,the Company plans to update the unrecognized tax benefits under FIN 48.Therefore, the Company expects that the unrecognized tax benefits may changewithin 12 months of this reporting date.  At this time, the Company cannotestimate how much the unrecognized tax benefits may change.  Anycarryforwards that will expire prior to utilization as a result of suchlimitations will be removed from deferred tax assets with a correspondingreduction of the valuation allowance.  Due to the existence ofthe valuation allowance, future changes in our unrecognized tax benefitswill not impact our effective tax rate.

**2.Comprehensive Loss**

Components ofcomprehensive loss were as follows (in thousands):
| ** **                                                  | ** ** | **Three Months ended June 30,** | ** ** | **Six Months ended June 30,** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                  | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                        |       |                                                |       |                                              |       |   |   |   |   |
| Net loss                                                    |       | $                                                   | (12,388    | )                                                 | $          | (9,825 | ) | $ | (22,919 | ) | $ | (20,680 | ) |
| Change in  unrealized gain/(loss) on short-term investments |       | 2                                                   |       | (9                                                | )          | — |   | 38 |   |
| Comprehensive  loss                                         |       | $                                                   | (12,386    | )                                                 | $          | (9,834 | ) | $ | (22,919 | ) | $ | (20,642 | ) |

 

Accumulated othercomprehensive gain totaled $2,737 and $2,715 at June 30, 2007 andDecember 31, 2006, respectively, and was attributed to unrealized gains onshort-term investments.

**3. Stockholders’ Equity**

*RegistrationStatement*

On June 20, 2006, theCompany filed a shelf registration statement on Form S-3 with the SecuritiesExchange Commission (the “SEC”). The shelf registration statement on Form S-3permits the Company to sell, in one or more public offerings, shares of itscommon stock, debt securities or warrants, or any combination of suchsecurities, for proceeds in an aggregate amount of up to $60 million. The shelfregistration statement was declared effective by the SEC on July 11, 2006.

On February 12,2007, the Company entered into common stock purchase agreements with certaininvestors relating to a registered direct offering of an aggregate3,333,334 shares of our common stock at $3.00 per share to the investorsfor gross proceeds of approximately $10 million.  The common stockwas issued pursuant to a prospectus supplement filed with the SEC onFebruary 13, 2007, in connection with a shelf takedown from our shelfregistration statement.

8

----

*PrivatePlacement of Common Stock and Warrants*

On March 6, 2006, theCompany entered into a securities purchase agreement relating to a privateplacement in which the Company issued and sold to certain investors, for anaggregate purchase price of approximately $45.4 million, 8.6million shares of its common stock and warrants to purchase up to 3million shares of its common stock at an exercise price of $5.26 pershare.  At the closing, investors in the private placement paid $5.26 pershare of common stock and an additional purchase price equal to $0.125 perwarrant.

Certain of the Company’sexisting stockholders, including two members of our board of directors, IvorRoyston, M.D. and Fred Middleton, and funds affiliated with Forward Ventures,Sanderling Ventures, Alloy Ventures and William Blair Capital Partners,invested in the private placement.  Dr. Royston, Mr. Middleton, DougKelly, M.D. and Arda Minocherhomjee, Ph.D., members of our board of directorson March 6, 2006, are associated with Forward Ventures, Sanderling Ventures,Alloy Ventures and William Blair Capital Partners, respectively.

The Company filed aregistration statement with the Securities and Exchange Commission on March 31,2006 covering the resale of the shares of common stock issued in the privateplacement and the shares of common stock issuable upon exercise of the warrantsissued in the private placement.

**4.  Subsequent Event**

In accordance with our committed equity financingfacility with Kingsbridge Capital Limited (Kingsbridge), on July 17, 2007 and July 23, 2007, weissued an aggregate of 462,195 shares of our common stock to Kingsbridge at anaggregate purchase price of $1.4 million. The common stock was issuedpursuant to a prospectus supplement filed with the SEC on July 24, 2007.

**Item 2. Management’s Discussion andAnalysis of Financial Condition and Results of Operations.**

**CautionaryNote Regarding Forward-Looking Statements**

*ThisForm 10-Q contains certain forward-looking statements includingexpectations of market conditions, challenges and plans, within the meaning ofSection 21E of the Securities Exchange Act of 1934, as amended, and issubject to the Safe Harbor provisions created by that statute. The words “anticipate”,“expect”, “believe”, “plan”, “intend”, and similar expressions are intended toidentify such statements. Although the forward-looking statements in thisForm 10-Q reflect the good faith judgment of our management, suchstatements are subject to various risks and uncertainties, including but notlimited to those discussed herein and, in particular, the risks described inItem 1A of Part II  and throughout our Annual Report onForm 10-K for the year ended December 31, 2006. Actual results andthe timing of selected events may differ materially from those anticipated inthese forward-looking statements. Except as required by applicable law, wedisclaim any duty to update any forward-looking statement to reflect events orcircumstances that occur after the date on which such statement is made.*

**Overview**

We are abiopharmaceutical company focused on the development and commercialization of targetedimmunotherapies for the treatment of cancer and other diseases of the immunesystem. We have developed a proprietary technology that enables us tomanufacture active immunotherapy products that are designed to stimulate apatient’s immune system to mount a specific and sustained response to disease.Our lead product candidate, FavId, is an active immunotherapy for the treatmentof B-cell non-Hodgkin’s lymphoma, or NHL. We initiated a pivotal Phase 3clinical trial of FavId in patients with follicular B-cell NHL inJuly 2004 and completed patient enrollment in January 2006 with 349patients randomized into the trial. The primary endpoint for the trial is timeto disease progression, or TTP. According to our Special ProtocolAssessment with the Food and Drug Administration, the triggers for thisanalysis are either a specified number of progressions or a predeterminedpatient observation time. Our primary focus has been on the pre-specifiednumber of progressions. However, as previously communicated, we haveexperienced a slowing in the rate of progressions over the past several months.The consequence of this is that we are now evaluating use of the other option,patient observation time, for triggering the analysis. The analysis of ourprimary endpoint is now projected to occur in the first half of 2008.

9

----

We believe FavId may beeffective in treating other types of B-cell NHL. Four additional Phase 2clinical trials of FavId are ongoing. One of these clinical trials is beingconducted under a separate physician-sponsored Investigational New Drug, orIND, application in the United States. Moreover, we believe our activeimmunotherapy expertise and proprietary manufacturing technology may enable usto develop additional product candidates for other oncology indications, suchas T-cell lymphoma, and for autoimmune diseases.  In June 2006, wereceived an allowance from the FDA for an IND for our second product candidate,FAV-201, for the treatment of cutaneous T-cell lymphoma.

In addition, we acquireda panel of optimized anti-CD20 antibodies along with corresponding patents andan exclusive, royalty-free license to selected pending patents forcommercialization of the panel from Diversa Corporation (now VereniumCorporation) in June 2007. The acquisition of these anti-CD20 antibodies is anextension of our commitment to developing next generation treatment approachesfor B-cell NHL. Access to this panel may also allow us to explore the use ofthese products alone or in combination in therapeutic areas outside theoncology market. We are currently initiating a plan to select a preferredcandidate for preclinical studies.

We have exclusiveworldwide commercialization rights to all of our product candidates.

We were incorporated inDelaware in January 2000. As of June 30, 2007, we had not generated anyrevenues, and we had financed our operations and internal growth through thesale of our equity securities and equipment and leasehold debt financings. Weare a development stage company and have incurred significant losses since ourinception in 2000, as we have devoted substantially all of our efforts toresearch and development activities, including clinical trials. As of June 30,2007, our deficit accumulated during the development stage was approximately$178.8 million. We expect to incur substantial and increasing losses for thenext several years as we:

·     continue to develop andprepare for the commercialization of our lead product candidate, FavId;

·     expand our research anddevelopment programs;

·     expand our currentmanufacturing capabilities to support commercial manufacturing of FavId; and

·     acquire or in-licenseoncology products that are complementary to our own.

**FinancialOperations Overview**

***Research and Development Expense. ***Research and development expense consists primarily of costs associated withclinical trials of our product candidates, including the costs of manufacturingour product candidates, compensation and other expenses related to research anddevelopment personnel, facilities costs and depreciation. We charge allresearch and development expenses to operations as they are incurred. Ourresearch and development activities are primarily focused on the development ofFavId. We have completed enrollment in two Phase 2 clinical trials and continueto evaluate the results. We initiated our pivotal Phase 3 clinical trial ofFavId following Rituxan in patients with follicular B-cell NHL inJuly 2004 and completed patient enrollment in the trial in January 2006. Inaddition, four additional Phase 2 clinical trials of FavId are ongoing.

From inception throughJune 30, 2007, we incurred costs of approximately $117.5 million associatedwith the research and development of FavId, which represents substantially allof our research and development costs to date. We expect our research anddevelopment costs to increase as we advance FavId and new product candidatesinto later stages of clinical development. While difficult to predict, weestimate that research and development costs required to complete thedevelopment of and file a Biologics Licensing Application, or BLA, for FavId bythe second quarter of 2008 will be an additional $40 million**. **  Any delay in the analysis ofthe TTP data from our pivotal Phase 3 trial will cause a delay in the BLA filingdate and, therefore, could increase these additional costs. We are unable toestimate with any certainty the costs we will incur in the continueddevelopment of other product candidates for commercialization. On an ongoingbasis, we expect to expand our research and development activities to includeclinical development of FAV-201, preclinical research of treatments forautoimmune diseases, initially multiple sclerosis, and preclinical research ofour series of optimized anti-CD20 antibodies.

10

----

Clinical developmenttimelines, likelihood of success and total costs vary widely. Although we arecurrently focused primarily on FavId, we anticipate that we will makedeterminations as to which research and development projects to pursue and howmuch funding to direct toward each project on an ongoing basis in response tothe scientific and clinical success of each product candidate.

At this time, due to therisks inherent in the clinical trial process, clinical trial completion datesand costs vary significantly for each product candidate and are difficult toestimate. The lengthy process of seeking regulatory approvals and thesubsequent compliance with applicable regulations require the expenditure ofsubstantial resources. Any failure by us to obtain, or any delay in obtaining,regulatory approvals for our product candidates could cause our research anddevelopment expenditures to increase and, in turn, have a material adverseeffect on our results of operations. We cannot be certain when, if ever, anycash flows from our current product candidates will commence.

**CriticalAccounting Policies and Estimates**

The discussion andanalysis of our financial condition and results of operations are based on ourfinancial statements, which have been prepared in accordance with U.S.generally accepted accounting principles. The preparation of financialstatements requires us to make estimates and assumptions that affect thereported amounts of assets, liabilities, expenses and related disclosures.Actual results could differ from those estimates. While our significantaccounting policies are described in more detail in Note 1 of the Notes toFinancial Statements included in our Annual Report on Form 10-K for the yearended December 31, 2006, we believe the following accounting policies to becritical to the judgments and estimates used in the preparation of ourfinancial statements:

***Stock-Based Compensation. ***Effective January 1, 2006, the Company adopted Statement of FinancialAccounting Standards No. 123 (revised 2004), “Share-Based Payments,” (SFAS 123(R)).  Under SFAS 123(R), stock-based compensation cost is measured at thegrant date, based on the estimated fair value of the award, and is recognizedas expense over the employee’s requisite service period.  The Company adoptedthe provisions of SFAS 123 (R) using a modified prospective application. Accordingly, prior periods have not been revised for comparativepurposes.  The valuation provisions of SFAS 123(R) apply to new awards andto awards that are outstanding on the effective date, which are subsequentlymodified or cancelled.  Estimated compensation for awards outstanding atthe effective date will be recognized over the remaining service period usingthe compensation cost calculated for pro forma disclosure purposes under SFAS123,*Accounting for Stock-Based Compensation*.

In the second quarter of2007 the Company granted 778,875 performance-based stock option awards underthe Favrille, Inc. Amended and Restated 2001 Equity Incentive Plan. Vesting istied to achievement of certain milestones. For purposes of measuringcompensation expense, the amount of awards ultimately expected to vest isestimated at each reporting date based on management’s expectations regardingthe relevant performance criteria. The recognition of compensation expenseassociated with performance-based grants requires judgment in assessing theprobability of meeting the performance milestones, as well as defined criteriafor assessing achievement of the performance related milestones. This may resultin significant expense recognition in the period in which the performance goalsare met or when achievement of the goals is deemed probable.

***Lease Obligation.***  We recognizerent expense on a straight-line basis over the reasonably assured leaseterm.  Our lease agreements provide for scheduled rent increases duringthe lease terms or for rental payments commencing at a date other than the dateof initial occupancy.  We include any rent escalations and rent holidaysin our straight-line rent expense.  In addition, tenant improvements paidby the landlord are capitalized as leasehold improvements and amortized overthe shorter of their estimated useful lives or the remaining lease term, whilethe tenant improvement allowance is recorded as deferred rent and recoveredratably over the remaining term of the lease.

***Capitalized Software. *** Softwaredeveloped for internal use, whether purchased or developed, is capitalized andamortized using the straight-line method over an estimated useful life of fiveyears.  Costs incurred until the point the project has reached developmentstage are expensed in accordance with Statement of Position (“SOP”) 98-1,*“Accounting for the Costs of Computer SoftwareDeveloped or Obtained for Internal Use.”*   Determining when aproject has reached the development stage requires the use of judgment. Subsequent additions, modifications or upgrades to internal-use software arecapitalized only to the extent that they allow the software to perform a taskit previously did not perform. Software maintenance and training costs areexpensed in the period in which they are incurred.

11

----

Management has discussedthe development and selection of these critical accounting policies with theAudit Committee of our Board of Directors, and the Audit Committee has reviewedthe disclosures presented above relating to them.

**Resultsof Operations**

***Comparison of the Three Months Ended June 30, 2007 and 2006***

*Researchand Development.*    Research anddevelopment expense increased from approximately $7.5 million during thethree months ended June 30, 2006 to $9.6 million during the three monthsended June 30, 2007. The increase of $2.1million, or 28%, was due primarily toan increase in personnel costs of approximately $635,000 which includesadditional employees, temporary staff and increased stock based compensationand an increase of approximately $1.1 million in facility operating costs, rentexpense and depreciation related to the facility expansion.

*Marketing,General and Administrative.*    Marketing,general and administrative expense was approximately $2.9 million duringthe three months ended June 30, 2006 and, 2007. Personnel costs increased byapproximately $356,000 primarily due to additional personnel in our commercialoperations organization and additional stock based compensation offsetprimarily by a decrease of approximately $300,000 due to consulting and outsideservices related to a software implementation project and strategic marketingprograms expenses during 2006.

*InterestIncome.* Interest income decreased from approximately $798,000during the three months ended June 30, 2006 to $497,000 during the three monthsended June 30, 2007. The decrease of $301,000, or 38%, was primarily the resultof the reduction in the average balance of cash, cash equivalents andshort-term investments from $64 million in 2006 compared to $34 million in2007 partially offset by increased interest rates.

*Interest Expense.*Interestexpense increased from approximately $213,000 during the three months endedJune 30, 2006 to $314,000 during the three months ended June 30, 2007. Theincrease of $101,000 or 47% is primarily due to the $5.4 million in additionaldebt outstanding under our credit facility partially offset by capitalizedinterest of $104,000 associated with our facility expansion and softwareimplementation projects.

***Comparison of the Six Months Ended June 30, 2007 and 2006***

*Researchand Development.*    Research anddevelopment expense increased from approximately $15.9 million during thesix months ended June 30, 2006 to $17.6 million during the six monthsended June 30, 2007. The increase of $1.7 million, or 11%, was primarily due toan increase in personnel costs of approximately $680,000 which includesadditional employees, temporary staff and increased stock based compensationand an increase of approximately $1.8 million in facility operating costs, rentexpense, supplies and depreciation related to the facility expansion; offset bya decrease of approximately $1 million in Phase 3 clinical trial expense relatedto the completion of patient enrollment into the trial in January 2006.

*Marketing,General and Administrative.*    Marketing,general and administrative expense increased from approximately$5.6 million during the six months ended June 30, 2006 to $5.9 millionduring the six months ended June 30, 2007. The increase of $240,000, or 4%,primarily reflects an increase of approximately $825,000 in compensation costsassociated with additional personnel in our commercial organization andadditional stock-based compensation; offset by a decrease of approximately$650,000 in consulting and outside services related to a softwareimplementation project and strategic marketing programs expensed in 2006.

*InterestIncome.* Interestincome decreased from approximately $1.2 million during the six months endedJune 30, 2006 to $1.1 million during the six months ended June 30, 2007. Thedecrease of $169,000, or 14%, was primarily the result of the reduction in theaverage balance of cash, cash equivalents and short-term investments from $54million in 2006 compared to $38 million in 2007 partially offset byincreased interest rates.

*Interest Expense. *Interest expense increasedfrom approximately $379,000 during the three months ended June 30, 2006 to$501,000 during the three months ended June 30, 2007. The increase of $122,000or 32% is primarily due to the $5.4 million in additional debt outstandingunder our credit facility partially offset by capitalized interest of $231,000associated with our facility expansion and software implementation projects.

12

----

**Liquidityand Capital Resources**

***Sources of Liquidity***

We have historicallyfunded our operations primarily through the sale of our equity securities andequipment and leasehold debt financing. As of June 30, 2007, we had receivedproceeds of approximately $76.1 million, net of stock issuance costs, fromthe sale of preferred stock which was converted to common stock; proceeds fromthe sale of common stock in our IPO of approximately $39.5 million, net ofunderwriters’ discounts and commissions and offering expenses; proceeds ofapproximately $45 million from the sale of common stock and warrants topurchase common stock to certain investors, in a private placement, net ofoffering expenses; and proceeds of approximately $9.9 million from aregistered direct offering of common stock to certain investors, net ofoffering expenses. In July 2007, we received proceeds of $1.4 million from thesale of common stock to Kingsbridge under our committed equity financingfacility.

As of June 30, 2007 wehad financed the purchase of equipment, software and leasehold improvementsthrough debt totaling approximately $28.6 million.  Total debt of$13.8 million was outstanding at that date.  These obligations are securedby our existing and future assets excluding intellectual property and are duein monthly installments through January 2011. They bear interest at statedrates ranging from approximately 9.34% to 12.17%.  The debt agreementssubject us to certain financial and non-financial covenants. As of June 30,2007, we were in compliance with the terms of the debt agreements.

***Cash Flows***

As of June 30, 2007,cash, cash equivalents and short-term investments were approximately $30million as compared to $42.4 million at December 31, 2006, a decreaseof approximately $12.4 million. The decrease resulted primarily from net cashused to fund ongoing operations partially offset by the $10 million in grossproceeds from the registered direct offering of our common stock in February2007.

Net cash used inoperating activities was approximately $19.3 million for the six months endedJune 30, 2007, compared to approximately $15.8 million for the same period in2006.  The increase of approximately $3.5 million is primarily due to anincrease in operating expenses related to additional personnel and otherexpenses related to the continuing clinical development and preparation forcommercialization of FavId.

Net cash provided byinvesting activities for the six months ended June 30, 2007 was approximately $8.5 millioncompared to net cash used in investing activities of $14.7 million for the sameperiod in 2006.  The increase in cash provided by investing activities ofapproximately $23.2 million is due to an increase of approximately $25.3 millionin short-term investment maturities net of short-term investment purchases,offset partially by an increase of approximately $3.9 million in property andequipment purchases.

Net cash provided byfinancing activities for the six months ended June 30, 2007 totaled $13.1 million,reflecting primarily the gross proceeds of approximately $10 million from ourregistered direct offering of common stock in February 2007.  Net cashprovided by financing for the same period in 2006 totaled approximately $47.2million, reflecting primarily the net proceeds of approximately $45 millionfrom our private placement of common stock and warrants in March 2006.

***Funding Requirements***

Our future capital usesand requirements depend on numerous forward-looking factors. These factors includebut are not limited to the following:

·     the results of our ongoing pivotal Phase 3clinical trial of FavId;

·              magnitude and costof our product development efforts and other research and developmentactivities;

·              rate of progresstoward obtaining regulatory approval for our product candidates;

·              costs of filing,prosecuting, defending and enforcing our patent claims and other intellectualproperty rights;

13

----

·     our ability to establish and maintaincollaborative, licensing or other arrangements for the development, sale,marketing or distribution of our product candidates and the terms of thosearrangements;

·              effects of competingtechnological and market developments; and

·              the success of thecommercialization of FavId.

Until we can generatesignificant cash from our operations, we expect to continue to fund ouroperations with existing cash resources that were primarily generated from theproceeds of offerings of our equity securities and from equipment and leaseholdimprovement debt financing. In addition, we may finance future cash needsthrough additional sales of equity securities, strategic collaborationagreements and debt financing. However, we may not be successful in obtainingcollaboration agreements, or in receiving milestone or royalty payments underthose agreements. In addition, we cannot be sure that our existing cash, cashequivalents and short-term investments will be adequate or that additionalfinancing will be available when needed or that, if available, financing willbe obtained on terms favorable to us or our stockholders. Having insufficientfunds may require us to delay, scale back or eliminate some or all of ourresearch or development programs or to relinquish greater or all rights toproduct candidates at an earlier stage of development or on less favorableterms than we would otherwise choose. Failure to obtain adequate financing mayalso adversely affect our ability to operate as a going concern. If we raiseadditional funds by issuing equity securities, substantial dilution to existingstockholders would likely result. If we raise additional funds by incurringdebt financing, the terms of the debt may involve significant cash paymentobligations as well as covenants and specific financial ratios that mayrestrict our ability to operate our business.

As of June 30, 2007, wehave not invested in any variable interest entities. We do not have anyrelationships with unconsolidated entities or financial partnerships, such asentities often referred to as structured finance or special purpose entities,which would have been established for the purpose of facilitating off-balancesheet arrangements or other contractually narrow or limited purposes. Inaddition, we do not engage in trading activities involving non-exchange tradedcontracts. As such, we are not materially exposed to any financing, liquidity,market or credit risk that could arise if we had engaged in theserelationships. We do not have relationships or transactions with persons orentities that derive benefits from their non-independent relationship with usor our related parties other than what is disclosed in Note 8 of the Notesto Financial Statements included in our Annual Report on Form 10-K for the yearended December 31, 2006.

***Off-Balance Sheet Arrangements***

We do not have anyoff-balance sheet arrangements.

**Item3. Quantitative and Qualitative Disclosures about Market Risk.**

***Quantitative and Qualitative Disclosures About Market Risk***

The primary objective ofour investment activities is to preserve principal while maximizing incomewithout significantly increasing risk. Some of the securities in which weinvest may be subject to market risk. This means that a change in prevailinginterest rates may cause the market value of the investment to fluctuate. Tominimize this risk, we may maintain our portfolio of cash equivalents andshort-term investments in a variety of securities, including commercial paper,money market funds and direct or guaranteed obligations of the United Statesgovernment. The risk associated with fluctuating interest rates is limited toour investment portfolio, and we do not believe that a 1% change in interestrates would have a significant impact on our interest income. As of June 30,2007, all of our short-term investments were corporate notes and bonds,and our cash equivalents were held in checking accounts and money market funds.

**Item4T. Controls and Procedures.**

We maintain disclosurecontrols and procedures that are designed to ensure that information requiredto be disclosed in our reports under the Securities Exchange Act of 1934, asamended, is recorded, processed, summarized and reported within the timeperiods specified in the Securities and Exchange Commission’s rules and forms,and that such information is accumulated and communicated to our management,including our Chief Executive Officer and Chief Financial Officer, asappropriate, to allow timely decisions regarding required disclosure.

14

----

As of the end of theperiod covered by this report, we carried out an evaluation, under thesupervision and with the participation of our Chief Executive Officer and ChiefFinancial Officer, of the effectiveness of our disclosure controls andprocedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934,as amended, or Exchange Act. Based upon that evaluation, our Chief ExecutiveOfficer and Chief Financial Officer concluded that, as of the end of the periodcovered by this report, our disclosure controls and procedures were effectiveat the reasonable assurance level.

We believe that a controlsystem, no matter how well designed and operated, can only provide reasonable,not absolute, assurance that the objectives of the controls system are met. Inreaching a reasonable level of assurance, management necessarily was requiredto apply its judgment in evaluating the cost-benefit relationship of possiblecontrols and procedures.  In addition, the design of any system ofcontrols also is based in part upon certain assumptions about the likelihood offuture events, and there can be no assurance that any design will succeed inachieving its stated goals under all potential future conditions.  Overtime, a control may become inadequate because of changes in conditions, or thedegree of compliance with policies or procedures may deteriorate. No evaluationof controls can provide absolute assurance that all control issues andinstances of fraud, if any, within a company will be detected.

During the quarter endedJune 30, 2007, there were no changes in our internal control over financialreporting which materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

This quarterly reportdoes not include a report of management’s assessment regarding internal controlover financial reporting or an attestation report of the Company’s registeredpublic accounting firm, as permitted by temporary rules established by theSecurities and Exchange Commission that are applicable to registrants that areneither “large accelerated filers” nor “accelerated filers,” as those terms aredefined in Rule 12b-2 under the Securities Exchange Act of 1934, asamended.

**PART II- OTHER INFORMATION.**

**Item1.    Legal Proceedings.**

We are currently not aparty to any material legal proceeding. We may be subject to various claims andlegal actions arising in the ordinary course of business from time to time.

** ****Item 1A.****          *****Risk Factors***

*Youshould consider carefully the risk factors described below, together with theother information contained in this report. If any of the following risksactually occur, our business, financial condition, results of operations andfuture growth prospects would likely be materially and adversely affected. Inthese circumstances, the market price of our common stock could decline, andyou may lose all or part of your investment in our common stock.*

*We havemarked with an asterisk those risk factors that reflect substantive changesfrom the risk factors included in our Annual Report on Form 10-K for the yearended December 31, 2006.*

**Risks Related to the Development of Our Product Candidates**

**Failureto obtain product approvals by the FDA could harm our business.**

Weare subject to rigorous and extensive regulation by the FDA. In the UnitedStates, our biologic product candidates, currently in the preclinical andclinical stages of development, cannot be marketed until they are approved bythe FDA. Obtaining FDA approval involves the submission of the results ofpreclinical studies and clinical trials of the product candidates, among otherinformation. We may not be able to obtain FDA approval, and, even if we areable to do so, the approval process typically takes many years and requires thecommitment of substantial effort and financial resources. The FDA can delay,limit or deny approval of a biologic product candidate for many reasons,including:

·    theFDA may not find that the biologic product candidate is sufficiently safe oreffective;

15

----

·       FDA officials may interpret data frompreclinical testing and clinical trials differently than we do; and

·       the FDA may not find our manufacturingprocesses or facilities satisfactory.

Inaddition, the specific active immunotherapy technology on which FavId is basedis a relatively new form of cancer therapy that presents novel issues for theFDA to consider, which may make the regulatory process especially difficult.

Wecannot assure you that any of our product candidates in development will beapproved in the United States in a timely fashion, or at all. Failure to obtainregulatory approval of our product candidates in a timely fashion, or at all,would prevent or delay us from marketing or selling any products and,therefore, from generating revenues from their sale. If this occurs, we may beunable to generate sufficient revenues to attain or maintain profitability, ourability to raise additional capital will be impaired and our stock price may benegatively affected. In addition, both before and after approval, we aresubject to numerous FDA requirements covering, among other things, testing,manufacturing, quality control, labeling, advertising, promotion and export ofbiologics. Failure to comply with the law, including statutes and regulations,administered by the FDA, could result in, among others, any of the followingactions:

·       warning letters;

·       fines and other civil penalties;

·       unanticipated expenditures;

·       delays in approving or refusal to approve aproduct candidate;

·       product recall or seizure;

·       interruption of production;

·       operating restrictions;

·       injunctions; and

·       criminal prosecution.

***We aredependent on the success of our lead product candidate, FavId, and we cannot becertain that it will be commercialized.**

Wehave expended significant time, money and effort in the development of our leadproduct candidate, FavId, which is still in clinical development, has not yetreceived regulatory approval and may never be commercialized. In order tocommercialize FavId, we will need to demonstrate to the FDA and otherregulatory agencies that it satisfies rigorous standards of safety andeffectiveness. We completed patient enrollment in a pivotal Phase 3 clinicaltrial of FavId following Rituxan for the treatment of follicular B-cell NHL inJanuary 2006.

Weare also evaluating FavId for use in other B-cell NHL indications. However,even if we were to receive regulatory approval of FavId for the treatment offollicular B-cell NHL or the other indications we are exploring, our ability tosuccessfully commercialize FavId could be jeopardized by the emergence of acompetitive product that exhibits greater efficacy, longer duration of responseor other benefits. In addition, because our initial regulatory and marketingstrategy contemplates the administration of FavId to patients followingtreatment with Rituxan, the commercial opportunity for FavId may be limited bythe degree to which oncologists continue to use Rituxan to treat indolentB-cell NHL. Furthermore, to the extent FavId fails to gain market acceptancefor its initial indication, it may be more difficult for us to generatesufficient credibility with physicians and patients to commercialize FavId forother indications.

Otherthan FavId, we have only three other product development programs, which are atsignificantly earlier stages of development. In June 2006, we received an allowance from the FDA for an IND for aproduct candidate, FAV-201, for the treatment of cutaneous T-cell lymphoma. Wehave ongoing preclinical studies to assess the applicability 

16

----

ofour technology to autoimmune diseases, with an initial focus on multiplesclerosis. In June 2007, we acquired a series of optimized anti-CD20 antibodiesfrom Diversa Corporation (now Verenium Corporation). We are currentlyinitiating a plan to select a preferred candidate for preclinical studies. Wecannot be certain that we will be able to successfully develop any productcandidate from these development programs. We cannot be certain that theclinical development of FavId or any other product candidate in preclinicaltesting or clinical trials will be successful, that it will receive theregulatory approvals required to commercialize it, or that any of our otherresearch programs will yield a product candidate suitable for entry intoclinical trials. If we are unable to commercialize FavId or our other productcandidates, we may be unable to generate sufficient revenues to attain ormaintain profitability, our ability to raise additional capital will beimpaired and our stock price may be negatively affected.

*** Beforewe can seek regulatory approval of any of our product candidates, we mustsuccessfully complete clinical trials, which are uncertain.**

Conductingclinical trials is a lengthy, time-consuming and expensive process, and theresults of these trials are inherently uncertain. We have completed enrollmentof patients in several Phase 2 clinical trials of FavId involving over 130indolent B-cell NHL patients and are currently conducting follow-up evaluationof those patients. We completed enrollment of patients in a pivotaldouble-blind, placebo controlled Phase 3 clinical trial of FavId for thetreatment of follicular B-cell NHL in January 2006 with 349 randomizedpatients. During the week of November 6, 2006, our Data Monitoring Committeecompleted a planned interim analysis of data from the secondary endpoint,overall response improvement, in the first 226 patients enrolled in the trial.The independent Data Monitoring Committee concluded that the interim analysisdid not demonstrate a statistically significant difference between treatmentand control groups in the secondary endpoint. Analysis of time to progression,or TTP, the primary endpoint of our Phase 3 clinical trial, TTP, is currentlyprojected to occur during the first half of 2008. However, we cannot guaranteewhen the necessary data from the trial will be available, and accordingly, wemay not be able to complete final analysis of the TTP data within the projectedtime frame. According to our Special Protocol Assessment with the Food and DrugAdministration, the triggers for this analysis are either a specified number ofprogressions or a predetermined patient observation time. Our primary focus hasbeen on the pre-specified number of progressions. However, as previouslycommunicated, we have experienced a slowing in the rate of progressions overthe past several months. The consequence of this is that we are now evaluatinguse of the other option, patient observation time, for triggering the analysis.

Threeadditional Phase 2 clinical trials of FavId are ongoing.  In June 2006, we received an allowance fromthe FDA for an IND for our second product candidate, FAV-201, for the treatmentof cutaneous T-cell lymphoma.

Wehave received a Special Protocol Assessment, or SPA, from the FDA for ourpivotal Phase 3 clinical trial of FavId. In the SPA process, the FDA reviewedthe design, size and planned analysis of our Phase 3 clinical trial andprovided comments regarding the trial’s adequacy to form a basis with respectto effectiveness for approval of a Biologics Licensing Application, or BLA, ifthe trial meets its predetermined objectives. We will not be able to file a BLAfor FavId until after we receive an analysis of the primary endpoint, TTP, ofour ongoing pivotal Phase 3 clinical trial (assuming the TTP data is positive),which analysis is anticipated during the first half of 2008, or at all. The FDA’swritten agreement is binding, except in limited circumstances, such as when asubstantial scientific issue essential to determining the safety oreffectiveness of a product candidate is identified after the Phase 3 clinicaltrial has commenced. Despite having received an SPA, we may be required toconduct an additional Phase 3 clinical trial of FavId for the treatment ofindolent B-cell NHL before we can apply for regulatory approval. Although theFDA typically requires successful results in two Phase 3 clinical trials tosupport marketing approval, the FDA has, on several occasions, approvedproducts based on a single Phase 3 clinical trial that demonstrates a highlevel of statistical significance where there is an unmet need for alife-threatening condition. We currently plan to seek FDA approval of FavIdbased on our ongoing pivotal Phase 3 clinical trial alone. In the event thatthe FDA requires the results of a second Phase 3 clinical trial beforeaccepting a BLA or before granting marketing approval of FavId, our launch ofFavId would be delayed, possibly by several years, and we would incursignificant costs in conducting the additional trial.

Thepreliminary, blinded clinical data reported from time to time prior to therelease of the final results of our pivotal Phase 3 clinical trial and thepreliminary clinical data from our Phase 2 clinical trials have not been fullyaudited and have been taken from databases that have not been fully reconciledagainst medical records kept at the clinical sites or that may not include themost current information on patient disease progressions.  The data released may not be indicative ofthe final results of our pivotal Phase 3 clinical trial or any other clinicaltrial of FavId.  Failure can occur at anystage of testing.  We do not know whetherour Phase 3 clinical trial or any future clinical trials will demonstratesafety and efficacy sufficient to result in marketable products.  Our failure to adequately demonstrate thesafety and efficacy of FavId will prevent us from obtaining regulatory approvalfor, or commercializing, FavId.

17

----

Completionof necessary clinical trials may take several years or more. Our commencementand rate of completion of clinical trials may be delayed by many factors,including:

·       ineffectiveness of the product candidate, orperceptions by physicians that the product candidate is not safe or effective fora particular indication;

·       inability to manufacture sufficient quantitiesof the product candidate for use in clinical trials;

·       delay or failure in obtaining approval of ourclinical trial protocols from the FDA;

·       slower than expected rate of patientrecruitment and enrollment;

·       inability to adequately follow and monitorpatients after treatment;

·       difficulty in managing multiple clinicalsites;

·       unforeseen safety issues; and

·       government or regulatory delays.

Evenif we achieve positive interim results in clinical trials, these results do notnecessarily predict final results, and positive results in early trials may notbe indicative of success in later trials. A number of companies in thepharmaceutical industry have suffered significant setbacks in advanced clinicaltrials, even after promising results in earlier trials. Negative orinconclusive results or adverse medical events during a clinical trial couldcause us to repeat or terminate a clinical trial or require us to conductadditional trials. Our clinical trials may be suspended at any time for avariety of reasons, including if the FDA or we believe the patientsparticipating in our trials are exposed to unacceptable health risks or if theFDA finds deficiencies in the conduct of these trials.

Failuresor perceived failures in our clinical trials will directly delay our productdevelopment and regulatory approval process, damage our business prospects,make it difficult for us to establish collaboration and partnershiprelationships, and negatively affect our reputation and competitive position inthe pharmaceutical community.

**Failureto enroll patients in our clinical trials may cause delays in developing FavIdor any other product candidate.**

Wemay encounter delays in development and commercialization, or fail to obtainmarketing approval, of FavId or any other product candidate that we may developif we are unable to enroll enough patients to complete clinical trials. Ourability to enroll sufficient numbers of patients in our clinical trials dependson many factors, including the size of the patient population, the nature ofthe protocol, the proximity of patients to clinical sites, the eligibilitycriteria for the trial and competing clinical trials. Although we completedpatient enrollment in our pivotal Phase 3 clinical trial of FavId in January2006, we have from time to time experienced slower-than-expected patientenrollment in our clinical trials and may do so in the future if additionalclinical trials of FavId are required or if we clinically develop any of ourother product candidates. Delays in planned patient enrollment may result inincreased costs and harm our ability to complete our clinical trials and obtainregulatory approval.

**Thedevelopment of FavId requires the continued availability of two FDA-approveddrugs: GM-CSF and Rituxan.**

Administrationof FavId requires an adjuvant, which is a substance that is used to enhance theimmune response. We use a white blood cell growth factor known as GM-CSF, whichis commercially available solely from Berlex Laboratories, Inc., as an adjuvantfor FavId. GM-CSF is an FDA-approved and commercially available drug that maybe purchased by physicians.  In February2007, we entered into a clinical supply and study agreement with Berlex for clinicaltrials of FavId performed in the United States, prior to which time we reliedon purchase orders to purchase GM-CSF from Berlex.  If we require GM-CSF for use in clinicaltrials outside the United States, or for use in other clinical trials not coveredby our agreement with Berlex, we will need to rely on purchase orders for suchpurchases.  Our current strategy for theinitial commercialization of FavId involves the administration of FavIdfollowing treatment with Rituxan. Rituxan is a passive immunotherapy forpatients with NHL, which is also FDA-approved and is commercially availablesolely from Genentech, Inc. and Biogen Idec Inc. We currently rely onphysicians to order and administer Rituxan to patients prior to theadministration of FavId in our registration trial. If GM-CSF or Rituxan were tobecome unavailable as a result of regulatory actions, supply constraints orother reasons, our ability to continue the clinical development of FavId wouldbe jeopardized.

18

----

**Risks Related to Our Financial Results and Need for Financing**

*** Wehave incurred significant operating losses since inception and anticipate thatwe will continue to incur substantial losses and negative cash flow fromoperations for the foreseeable future.**

Weare a development stage company with a limited operating history. We havefinanced our operations through private placements of common stock andwarrants, an initial public offering of our common stock and equipment andleasehold debt financing. We have incurred losses in each year since ourinception in 2000. Net losses applicable to common stockholders were $12.4million and $9.8 million for the three months ended June 30, 2007, and 2006,respectively, and $22.9 million and $20.7 million for the six months ended June30, 2007 and 2006, respectively.   As ofJune 30, 2007, we had an accumulated deficit of $178.8 million.  These losses, among other things, have hadand will continue to have an adverse effect on our stockholders’ equity andworking capital. We expect to incur substantial operating losses for at leastthe next several years. This is due primarily to the expansion of our clinicaltrials and research and development programs, preparations to manufacture FavIdon a commercial scale, and, selling, general and administrative expenses. Wealso have substantial lease and debt obligations related to our newmanufacturing and headquarters facilities impacting our operating expenses. Weexpect that our losses will fluctuate from quarter to quarter and that thesefluctuations may be substantial. We cannot guarantee that we will successfullydevelop, manufacture, commercialize or market any products. As a result, wecannot guarantee that we will ever achieve or sustain product revenues orprofitability.

***Wecurrently have no source of revenue and may never become profitable.**

Ourability to become profitable will depend upon our ability to generate revenue.To date, FavId has not generated any revenue, and we do not know when or ifFavId will generate revenue. Our ability to generate revenue depends on anumber of factors, including our ability to:

·       successfully complete clinical trials forFavId;

·       obtain regulatory approval for FavId,including regulatory approval for our commercial scale manufacturing facilityand process;

·       manufacture commercial quantities of FavId atacceptable cost levels; and

·       successfully market and sell FavId.

Wedo not anticipate that we will generate revenues until 2009, at the earliest.Further, we do not expect to achieve profitability for at least several yearsafter generating material revenues. If we are unable to generate revenue, wewill not become profitable, and we may be unable to continue our operations.

*** Wewill need substantial additional funds to continue operations, which we may notbe able to raise on favorable terms, or at all.**

Wewill need substantial additional funds for existing and planned preclinicalstudies and clinical trials, to continue research and development activities,for lease and debt obligations related to our manufacturing and headquarterfacilities, and to establish manufacturing and marketing capabilities for anyproducts we may develop. In addition, because we do not expect to generaterevenues from the sale of our product candidates for several years, if at all,we will also need to raise additional capital to fund our operations.

Webelieve that our cash, cash equivalents and short-term investments, which wasapproximately $30 million at June 30, 2007 and access to the Committed EquityFinancing Facility, or CEFF, through Kingsbridge Capital Limited, will besufficient to meet our projected operating requirements through the first halfof 2008**.**We will need to raise additionalfunds in order to commercialize FavId. Our forecast of the period of timethrough which our financial resources will be adequate to support ouroperations is a forward-looking statement and involves risks and uncertainties,and actual results could vary as a result of a number of factors, including thefactors discussed elsewhere in this prospectus. We have based this estimate onassumptions that may prove to be wrong, and we could utilize our availablecapital resources sooner than we currently expect.

19

----

Ourfuture capital requirements or the adequacy of our available funds will dependon many factors, including, but not limited to:

·       the results of our ongoing pivotal Phase 3clinical trial of FavId;

·       magnitude and cost of our product developmentefforts and other research and development activities;

·       rate of progress toward obtaining regulatoryapproval for our product candidates;

·       costs of filing, prosecuting, defending andenforcing our patent claims and other intellectual property rights;

·       our ability to establish and maintaincollaborative, licensing or other arrangements for the development, sale,marketing or distribution of our product candidates and the terms of thosearrangements;

·       effects of competing technological and marketdevelopments;

·       the cost of expansion of our current facilityfor commercial production or the construction of a large separatecommercial-scale production facility; and

·       the success of the commercialization of FavId.

Futurecapital requirements will also depend on the extent to which we acquire orinvest in businesses, products and technologies, but we currently have nocommitments or agreements relating to any of these types of transactions.

Tothat end, on June 20, 2006, we filed a shelf registration statement with theSEC on Form S-3 pursuant to which we may periodically sell up to $60 million indebt securities, common stock or warrants to purchase debt securities or commonstock.  In February 2007, we sold $10million of common stock pursuant to the shelf registration statement.  Additionally, we have entered into the CEFFpursuant to which Kingsbridge committed to purchase, subject to certainconditions, up to $40.0 million of our common stock.  In July 2007, we sold 462,195 shares ofcommon stock to Kingsbridge pursuant to the CEFF for gross proceeds totaling$1.4 million. We may seek to access the public or private equity marketswhenever conditions are favorable, even if we do not have an immediate need foradditional capital at that time. Additional funding may not be available to us,and, if available, may not be on acceptable terms. If we raise additional fundsby issuing equity securities, stockholders will incur immediate dilution. Ifadequate funds are not available to us, we may be required to delay, reduce thescope of, or eliminate one or more of our research, development and clinicalactivities. Alternatively, we may need to seek funds through arrangements withcollaborative partners or others that require us to relinquish rights totechnologies or product candidates that we would otherwise seek to develop orcommercialize ourselves. Any of these events could have a material adverseeffect on our business, results of operations, financial condition or cashflow.

***Ourcommitted equity financing facility with Kingsbridge may not be available to usif we elect to make a draw down, may require us to make additional “blackout”or other payments to Kingsbridge and may result in dilution to ourstockholders.**

InDecember 2006, we entered into the CEFF with Kingsbridge. The CEFF entitles usto sell and obligates Kingsbridge to purchase, from time to time over a periodof 36 months, shares of our common stock for cash consideration up to anaggregate of $40.0 million, subject to specified conditions and restrictions.Kingsbridge will not be obligated to purchase shares under the CEFF unlessspecified conditions are met, which include a minimum price for our commonstock; the accuracy of representations and warranties made to Kingsbridge;compliance with laws; and the effectiveness of a registration statementregistering for resale the shares of common stock to be issued in connectionwith the CEFF. In addition, among other termination rights, Kingsbridge ispermitted to terminate the CEFF by providing written notice to us within 10business days after it obtains actual knowledge that an event has occurredresulting in a material and adverse effect on our business, operations,properties or financial condition (subject to specified exceptions, includingconditions or events that are reasonably expected to occur in the ordinarycourse of our business). If we are unable to access funds through the CEFF, orif Kingsbridge terminates the CEFF, we may be unable to access capital onfavorable terms, or at all. In July 2007, we issued an aggregate of 462,195shares of our common stock to Kingsbridge at an aggregate purchase price of$1.4 million.

20

----

Weare entitled, in certain circumstances, to deliver a “blackout” notice toKingsbridge to suspend the use of this prospectus and prohibit Kingsbridge fromselling shares under this prospectus for a certain period of time.  If we deliver a blackout notice in the 60trading days following the settlement of a draw down and the volume weightedaverage price on the trading day immediately preceding the related blackoutperiod is greater than the volume weighted average price on the first tradingday following such blackout period, or if the registration statement of whichthis prospectus is a part is not effective in circumstances not permitted byour registration rights agreement with Kingsbridge, then we must make a paymentto Kingsbridge, or issue Kingsbridge additional shares in lieu of this payment,calculated on the basis of a specified number of shares held by Kingsbridgeimmediately prior to the blackout period and the change in the market price ofour common stock during the period in which the use of the registrationstatement is suspended.  If the tradingprice of our common stock declines during a suspension of the resaleregistration statement, the blackout or other payment could be significant.

Shouldwe sell shares to Kingsbridge under the CEFF, or issue shares in lieu of ablackout payment, it will have a dilutive effect on the holdings of our currentstockholders and may result in downward pressure on the price of our commonstock. If we draw down amounts under the CEFF, we will issue shares toKingsbridge at a discount of up to 10% from the volume weighted average priceof our common stock. If we draw down amounts under the CEFF when our stockprice is decreasing, we will need to issue more shares to raise the same amountthan if our stock price was higher. Issuances in the face of a declining stockprice will have an even greater dilutive effect than if our stock price werestable or increasing and may further decrease our stock price.

***Futurechanges in financial accounting standards or practices or existing taxationrules or practices may cause adverse unexpected revenue or expense fluctuationsand affect our reported results of operations.**

Achange in accounting standards or practices or a change in existing taxationrules or practices can have a significant effect on our reported results andmay even affect our reporting of transactions completed before the change iseffective. New accounting pronouncements and taxation rules and varyinginterpretations of accounting pronouncements and taxation practice haveoccurred and may occur in the future. Changes to existing rules or thequestioning of current practices may adversely affect our reported financialresults or the way we conduct our business

**Other Risks Related to Our Business and Industry**

***Wecurrently depend on single source suppliers for critical raw materials formanufacturing. The loss of these suppliers could delay our clinical trials orprevent or delay commercialization of FavId.**

Wecurrently depend on single source suppliers for critical raw materials used inthe manufacture of FavId. In particular, our manufacturing process for FavIdrequires a foreign protein derived from shellfish that is known as keyholelimpet hemocyanin, or KLH. We purchase KLH from biosyn Arzneimittel GmbH, orbiosyn, which is currently the only supplier of KLH that has submitted therequired filing, known as a drug master file, to the FDA. In November 2004, weentered into an eight-year supply and license agreement with biosyn under whichbiosyn has agreed to supply us with KLH and we have agreed to make paymentsupon the achievement of certain milestones and committed to annual KLH purchaserequirements during the commercialization of FavId.  Either party may terminate the supplyagreement upon a breach by the other party that is not cured within 60 days orother events relating to insolvency or bankruptcy. If we identify anothersupplier of KLH of suitable quality for our purposes, we will not be able touse the supplier as a second source of KLH for the commercial manufacture ofFavId unless the KLH is tested to be comparable to the existing KLH.

Inaddition, we depend on a single source supplier for the cell growth media weuse to produce FavId. We purchase this material from Expression Systems LLC,which in turn obtains several of the components used in the cell growth mediafrom sole suppliers. In April 2007, we executed five-year supply andnon-exclusive license agreements with Expression Systems. Each agreement isrenewable for one three-year period at our option. Under the terms of theagreements, we have the right to purchase raw material components fromExpression Systems and manufacture the cell growth media in-house.

21

----

Establishingadditional or replacement suppliers for these materials may take a substantialamount of time. In addition, we may have difficulty obtaining similar materialsfrom other suppliers that are acceptable to the FDA. If we have to switch to areplacement supplier, we may face additional regulatory delays and the manufactureand delivery of FavId, or any other product candidates that we may develop,could be interrupted for an extended period of time, which may delay completionof our clinical trials or commercialization. If we are unable to obtainadequate amounts of these materials, our clinical trials will be delayed. Inaddition, we will be required to obtain regulatory clearance from the FDA touse different materials that may not be as safe or as effective. As a result,regulatory approval of FavId, or any other product candidates that we maydevelop, may not be received at all.

**We relyon third parties to conduct our clinical trials. If these third parties do notsuccessfully carry out their contractual duties or meet expected deadlines, wemay be delayed or may not be able to obtain regulatory approval for orcommercialize FavId or any other product candidates that we may develop.**

Ourpivotal Phase 3 clinical trial of FavId for the treatment of follicular B-cellNHL is being conducted at 67 centers in the United States and will requirelong-term follow up of at least 342 patients randomized into the trial. Oneclinical trial of FavId is being conducted under the direction of a physiciansponsor, rather than under our supervision. We do not have the ability to independentlyconduct clinical trials for FavId, or any other product candidate that we maydevelop, and we must rely on third parties, such as medical institutions andclinical investigators, including physician sponsors, to conduct our clinicaltrials. In particular, we will rely on these parties to recruit and enrollpatients in our clinical trials. We also rely on third-party couriers totransport patient tissue samples and FavId. If any of the third parties uponwhom we rely to conduct our clinical trials or transport patient tissue samplesand immunotherapies do not comply with applicable laws, successfully carry outtheir obligations or meet expected deadlines, and need to be replaced, ourclinical trials may be extended, delayed or terminated.

Ifthe quality or accuracy of the clinical data obtained by medical institutionsand clinical investigators, including physician sponsors and other third-partyvendors involved in data management, is compromised due to their failure toadhere to applicable laws or our clinical protocols or for other reasons, wemay not be able to obtain regulatory approval for or successfully commercializeFavId, or any other product candidates that we may develop. If any of ourrelationships with any of these organizations or individuals terminates, webelieve that we would be able to enter into arrangements with alternative thirdparties. However, replacing any of these third parties would delay our clinicaltrials and could jeopardize our ability to commercialize FavId and our otherproduct candidates on a timely basis, or at all.

**Even ifwe obtain regulatory approval, we will continue to be subject to extensivegovernment regulation that may cause us to delay the introduction of ourproducts or withdraw our products from the market.**

Evenif we obtain regulatory approval for FavId or our other product candidates, wewill still be subject to extensive regulation. These regulations will impactmany aspects of our operations, including production, record keeping, qualitycontrol, adverse event reporting, storage, labeling, advertising, promotion andpersonnel. In addition, the later discovery of previously unknown problems mayresult in restrictions of the product candidates, including their withdrawalfrom the market. Furthermore, regulatory approval may subject us to ongoingrequirements for post-marketing studies. If we or any third party that weinvolve in our operations fail to comply with any continuing regulations, wemay be subject to, among other things, product seizures, recalls, fines orother civil penalties, injunctions, suspensions or revocations of marketinglicenses, operating restrictions and criminal prosecution.

***Beforewe can obtain marketing approval for or commercially distribute FavId, we musthave a commercial-scale facility for the manufacture of FavId. In addition, theFDA and the California Department of Health Services must find ourmanufacturing facility and process satisfactory.**

Ourmanufacturing methods, equipment and processes must comply with the FDA’s currentGood Manufacturing Practices, or cGMP, requirements. We may also need toperform extensive audits of vendors, contract laboratories and suppliers. ThecGMP requirements govern, among other things, record keeping, productionprocesses and controls, personnel and quality control. We have only undertakeninitial steps towards achieving compliance with these regulatory requirements.Additional steps will require expenditure of significant time, money andeffort. We cannot predict the likelihood that the FDA will find our facilitysatisfactory, even if we believe that we have taken the necessary steps toachieve compliance. If we fail to comply with these requirements or fail topass a pre-approval inspection of our manufacturing facility in connection withan application to obtain marketing approval for FavId or another productcandidate, we would not receive regulatory approval, and we would be subject topossible regulatory action.

22

----

Wemanufacture FavId for our ongoing pivotal Phase 3 and for the planned andongoing Phase 2 clinical trials at our facility in San Diego. We currentlylease an 80,000 square foot facility in San Diego, California under a long-termlease agreement. Our pilot manufacturing facility consisted of approximately26,000 square feet of space in the facility. Our facility was inspected andlicensed by the California Department of Health Services. Our facility issubject to re-inspection at any time. Failure to maintain a license from theCalifornia Department of Health Services or to meet the inspection criteria ofthe California Department of Health Services would disrupt our manufacturingprocesses and prevent us from supplying FavId to patients. If an inspection bythe California Department of Health Services indicates that there are deficienciesin our manufacturing process, we could be required to take remedial actions atpotentially significant expense, and our facility may be temporarily orpermanently closed.

Weexpanded and qualified our current facility for commercial scale manufacturingin order to commercialize FavId or any other product candidates that we maydevelop. We completed construction to expand this facility during the secondquarter of 2007 and are currently validating the expanded  facility to comply with cGMP requirements.The entire 80,000 square foot facility will be dedicated to manufacturing. Wecannot assure you that we would be able to meet commercial demand for FavId inthis facility. Additionally, we may require a larger production facility tomeet the demand for FavId if it is approved. We would need to raise additionaldebt or equity capital to finance construction of the larger facility. Suchfinancing may not be available or, if available, may not be obtained on termsfavorable to us or our stockholders.

Preparinga facility for commercial manufacturing may involve unanticipated delays andthe costs of complying with FDA regulations may be significant. In addition,any material changes we make to the manufacturing process after approval mayrequire approval by the FDA and state regulatory authorities. Obtaining theseapprovals is a lengthy, involved process, and we may experience delays thatcould limit our ability to manufacture commercial quantities, increase ourcosts and adversely affect our business.

**We mayexperience difficulties in manufacturing FavId or any other product candidatesthat we may develop, which could prevent us from completing our ongoingclinical trials and commercializing these product candidates.**

ManufacturingFavId is a complex, multi-step process that requires us to expend significanttime, money and effort in production, record keeping and quality systems toassure that FavId will meet product specifications and other regulatoryrequirements. To date, we have manufactured FavId only for use in Phase 2 andPhase 3 clinical trials and have no experience in manufacturing FavId for thecommercial quantities that might be required if we receive regulatory approval.In particular, we cannot be sure that we will be able to manufacture FavId at acost that would enable commercial use. We may experience any of the followingproblems in our efforts to manufacture our product candidates for our expandingclinical trials or on a commercial scale:

·       failure to obtain a sufficient supply of keyraw materials;

·       difficulties in completing the development andvalidation of the specialized assays required to ensure the consistency of ourproduct candidates, including FavId;

·       difficulties in obtaining adequate tumorsamples from treating physicians and hospitals;

·       difficulties in manufacturing FavId formultiple patients simultaneously;

·       difficulties in the timely shipping of tumorsamples to us or in the shipping of FavId to the treating physicians due toerrors by third-party couriers, transportation restrictions or other reasons;

·       failure to ensure adequate quality control andassurance in the manufacturing process as we increase the production quantitiesof FavId;

·       difficulties in establishing and effectivelymanaging a commercial-scale manufacturing facility;

·       failure to comply with regulatoryrequirements, such as FDA regulations and environmental laws;

23

----

·       significant changes in regulatoryrequirements;

·       damage to or destruction of our manufacturingfacility or equipment;

·       difficulty in qualifying a second-source supplier forcertain critical equipment; and

·       shortages of qualified personnel.

Inaddition, because our manufacturing process only begins upon our receipt of apatient’s tumor biopsy, we cannot produce inventory reserves of our productcandidate to be stored in anticipation of any of these potential manufacturingproblems. The failure to produce an adequate supply of FavId could delay ourclinical trials and, in turn, delay submission of a BLA for FavId andcommercial launch. Similarly, any difficulties we experience in the manufactureand supply of other product candidates, such as FAV-201, would delay theclinical trials of those product candidates.

***If ourmanufacturing facility is damaged or destroyed, our ability to manufacture productswill be significantly affected, which could delay or prevent completion of ourclinical trials and commercialization of FavId or any other product candidatesthat we may develop.**

Wecurrently rely on the availability and condition of our manufacturing facilityin San Diego to manufacture FavId. We lease the property where this facility islocated under a lease agreement that expires June 30, 2025, but may be extendedat our option for two additional five-year periods. After that time, we may notbe able to negotiate a new lease for our facility. If our current facility orany additional facility we may construct or acquire, or our equipment in suchfacilities is damaged or destroyed, we will not be able to quickly orinexpensively replace our manufacturing capacity. This would significantlyaffect our ability to complete clinical trials of, and to manufacture andcommercialize, FavId, or any other product candidates that we may develop.

Inaddition, our facilities have been subject to electrical blackouts as a resultof a shortage of available electrical power. Although we have back-up emergencypower generators to cover energy needs for key support systems, a lengthyoutage could disrupt the operations of our facilities and clinical trials.While we carry business interruption insurance, this insurance may not beadequate. Any significant business interruption could cause delays in ourproduct development and harm our business.

*******If we do not develop a sufficientsales and marketing force or enter into agreements with third parties to selland market FavId, we may not be able to successfully commercialize ourproducts, which would limit our ability to earn product revenues.**

Wehave exclusive worldwide rights to FavId. If we are successful in obtaining BLAapproval or foreign marketing approval for FavId, we will need to establishsales and marketing capabilities. In the United States, we plan to do thiseither by establishing our own sales force or by entering into a co-promotionarrangement with a sales and distribution partner. Outside of the UnitedStates, we plan to establish strategic collaborations for the development andmarketing of FavId.

Wedo not presently possess the resources or experience necessary to market FavIdor our other product candidates ourselves, and we currently have noarrangements for the promotion or distribution of our product candidates. Ourfuture commercial success will depend on our ability to establish our own salesand marketing infrastructure or to collaborate with third parties that havegreater sales and marketing experience and resources. Developing effectiveinternal sales and marketing capabilities, which would include the hiring of asales force, would require a significant amount of our financial resources andtime.

Wemay be unable to establish and manage an effective sales force in a timely orcost-effective manner, or at all, and any sales force we do establish may notbe capable of generating demand for FavId or any other product candidate we maydevelop. In addition, if we cannot enter into co-promotion arrangements in theUnited States, or other strategic collaborations for the development andmarketing of FavId in other countries, in a timely manner and on acceptableterms, we may not be able to successfully commercialize FavId or any otherproduct candidate that we may develop.

24

----

Tothe extent that we enter into arrangements with third parties to perform sales,marketing and distribution services, our product revenues are likely to belower than if we directly marketed and sold FavId, or any other productcandidates that we may develop. If we are unable to establish adequate sales,marketing and distribution capabilities, independently or with others, we willnot be able to generate product revenue and will not become profitable.

**Ifphysicians and patients do not use any of our products that may be approved,our ability to generate revenue in the future will be limited.**

Ifapproved, FavId and other product candidates that we may develop may not gainmarket acceptance among physicians, healthcare payors, patients and the medicalcommunity. Demand for any approved product that we may develop will depend onmany factors, including:

·       our ability to provide acceptable evidence ofsafety and efficacy;

·       convenience and ease of administration;

·       availability of alternative treatments;

·       cost effectiveness;

·       continuing widespread use of Rituxan to treat ourinitial target disease market;

·       effectiveness of our regulatory and marketing strategies;

·       prevalence and severity of adverse side effects;

·       publicity concerning our products or competitiveproducts; and

·       our ability to obtain third-party coverage or reimbursement.

Furthermore,to the extent FavId fails to gain market acceptance for its initial indication,it may be more difficult for us to generate sufficient credibility withphysicians and patients to commercialize FavId for other indications.

**If weare unable to obtain acceptable prices or adequate coverage and reimbursementfrom third-party payors for FavId, or any other product candidates that we maydevelop, our revenues and prospects for profitability will suffer.**

Ourability to commercialize FavId, or any other product candidates that we maydevelop, depends on the extent to which coverage and reimbursement for FavId,or any other product candidates that we may develop, will be available from:

·       governmental payors, such as Medicare andMedicaid;

·       private health insurers, including managedcare organizations; and

·       other third-party payors.

Manypatients will not be capable of paying for FavId, or any other productcandidates that we may develop, themselves and will rely on third-party payorsto pay for their medical needs. The federal and state governments, insurancecompanies, managed care organizations and other third-party payors are activelyseeking to contain or reduce costs of health care in the United States andexert increasing influence on decisions regarding the use of, and reimbursementlevels for, particular treatments. Such third-party payors, including Medicare,are scrutinizing newly approved medical products and services and may not coveror may limit coverage and reimbursement for our product candidates. Inparticular, third-party payors may limit the indications for which they willreimburse patients who use FavId, or any other product candidates that we maydevelop. Cost-control initiatives could cause us to decrease the price we mightestablish for FavId, or any other product candidates that we may develop, whichwould result in lower product revenues. If the prices for FavId, or any otherproduct candidates that we may develop, decrease or if governmental and otherthird-party payors do not provide adequate coverage and reimbursement levelsfor FavId, or any other product candidates that we may develop, our revenue andprospects for profitability will suffer.

25

----

**If weare unable to establish or manage strategic collaborations in the future, ourrevenue and product development may be limited.**

Ourstrategy may include reliance on strategic collaborations for co-promotion ofFavId in the United States. In addition, we expect to rely on strategiccollaborators for commercialization of FavId outside of the United States and,to an even greater extent, for worldwide development and commercialization of productcandidates and programs for chronic autoimmune diseases, such as multiplesclerosis. To date, we have not entered into any agreements with third partiesfor any of these services.

Establishingstrategic collaborations is difficult and time-consuming. Our discussions withpotential collaborators may not lead to the establishment of new collaborationson favorable terms, or at all. For example, potential partners may rejectcollaborations based upon their assessment of our financial, regulatory or intellectualproperty position. If we successfully establish new collaborations, theserelationships may never result in the successful development orcommercialization of our product candidates or the generation of sales revenue.To the extent that we enter into co-promotion or other collaborativearrangements, our product revenues are likely to be lower than if we directlymarketed and sold any products that we may develop.

Managementof any collaborative relationship we may establish in the future will require:

·       significant time and effort from ourmanagement team;

·       coordination of our research and developmentprograms with the research and development priorities of our collaborators; and

·       effective allocation of our resources tomultiple projects.

Ifwe enter into development or commercialization collaborations, our success willin part depend on the performance of our corporate collaborators. We will notdirectly control the amount or timing of resources devoted by our corporatecollaborators to activities related to our product candidates. Our corporatecollaborators may not commit sufficient resources to our research anddevelopment programs or the commercialization, marketing or distribution of ourproduct candidates. If any corporate collaborator fails to commit sufficientresources, our preclinical or clinical development related to the collaborationcould be delayed or terminated. Also, our collaborators may pursue developmentor commercialization of other products, product candidates or alternative technologiesin preference to our product candidates. Finally, our collaborators mayterminate our relationships, and we may be unable to establish additionalcorporate collaborations in the future on acceptable terms, or at all.

***Ourefforts to discover, develop and commercialize new product candidates beyondFavId are at an early stage and are subject to a high risk of failure.**

Ourstrategy is focused on the research, development and commercialization oftargeted immunotherapies for the treatment of cancer and other diseases of theimmune system. The process of successfully developing product candidates isvery time-consuming, expensive and unpredictable. We have only recently begunto direct significant effort toward the development of product candidates inaddition to FavId, such as FAV-201 for T-cell lymphoma and a preclinicalproduct candidate for the treatment of multiple sclerosis. In addition, weacquired a series of optimized anti-CD20 antibodies in June 2007. We arecurrently initiating a plan to select a preferred candidate for initiatingpreclinical studies.

Wedo not know whether our planned preclinical studies or clinical trials forthese other product candidates will begin on time or be completed on schedule,or at all. In addition, we do not know whether these clinical trials willresult in marketable products. Typically, there is a high rate of attrition forproduct candidates in preclinical and clinical trials. We do not anticipatethat any of our product candidates will reach the market for at least severalyears.

Wemay not identify, develop or commercialize any additional new productcandidates from our proprietary active immunotherapy technology. Our ability todevelop successfully any of these product candidates depends on our ability to demonstratesafety and efficacy in humans through extensive preclinical testing andclinical trials and to obtain regulatory approval from the FDA and otherregulatory authorities. Development of our product candidates will also dependsubstantially upon the availability of funding for our research and developmentprograms.

26

----

**If ourcompetitors develop and market products that are more effective than ourexisting product candidates or others we may develop, or obtain marketingapproval before we do, our commercial opportunity may be reduced or eliminated.**

Thedevelopment and commercialization of new pharmaceutical products for thetreatment of cancer and autoimmune diseases is competitive, and we will facecompetition from numerous sources, including major pharmaceutical companies,specialty pharmaceutical companies and biotechnology companies worldwide. Manyof our competitors have substantially greater financial and technical resourcesand development, production and marketing capabilities than we do. In addition,many of these companies have more experience than we do in preclinical testing,clinical trials and manufacturing of biologic therapeutics, as well as inobtaining FDA and foreign regulatory approvals. We will also compete withacademic institutions, governmental agencies and private organizations that areconducting research in the fields of cancer and autoimmune disease. Competitionamong these entities to recruit and retain highly qualified scientific,technical and professional personnel and consultants is also intense.

Weare aware of a number of companies that are developing active immunotherapiesto treat B-cell NHL. Genitope Corporation is evaluating its idiotypeimmunotherapy product candidate in a Phase 3 clinical trial in patients withfollicular B-cell NHL who are in remission following prior treatment withchemotherapy. Antigenics, Inc. completed a Phase 2 clinical trial evaluatingits active immunotherapy candidate in indolent NHL patients. The NCI is alsoconducting a Phase 3 clinical trial of an active idiotype immunotherapy incollaboration with Accentia Biopharmaceuticals.

Severalcompanies are engaged in the development and commercialization of passiveimmunotherapy products for the treatment of B-cell NHL that may compete withFavId. Genentech and Biogen Idec are co-marketing Rituxan for the treatment ofrelapsed or refractory, indolent B-cell NHL. Biogen Idec is also marketingZevalin, its passive radioimmunotherapy product. GlaxoSmithKline plc currentlymarkets Bexxar, a passive radioimmunotherapy product.

Themost recent advances in the treatment of B-cell NHL have involved thecombination of existing products and changes to approved schedules and doses,particularly for Rituxan. Numerous clinical trials reported in recent years haveindicated that additional doses of Rituxan and maintenance dosing of Rituxancan improve TTP in patients who respond to therapy. Combination therapiesinvolving chemotherapeutic or immunostimulatory drugs in combination withRituxan at various doses and schedules may provide patients with an increase inTTP over that expected with Rituxan alone. Accordingly, we may face competitionas a result of developments in this area.

Weexpect that our ability to compete effectively will depend upon our ability to:

·       successfully and rapidly complete clinicaltrials and obtain all requisite regulatory approvals in a cost-effectivemanner;

·       reliably and cost-effectively manufacturesufficient quantities of our products;

·       maintain a proprietary position for our manufacturingprocess and other technology;

·       price our products competitively;

·       obtain appropriate reimbursement approvals forour products;

·       establish an adequate sales and marketingforce for our products; and

·       attract and retain key personnel.

Inaddition, our ability to compete effectively will depend on the relativeefficacy and safety of other active immunotherapy products approved for sale ascompared to our own products.

27

----

**We aresubject to new legislation, regulatory proposals and managed care initiativesthat may increase our costs of compliance and adversely affect our ability tomarket our products, obtain collaborators and raise capital.**

Therehave been a number of legislative and regulatory proposals aimed at changingthe healthcare system and pharmaceutical industry, including reductions in thecost of prescription products and changes in the levels at which consumers andhealthcare providers are reimbursed for purchases of pharmaceutical products.For example, the Prescription Drug and Medicare Improvement Act of 2003 wasrecently enacted. This legislation provides for a Medicare prescription drugbenefit which began in 2006 and mandates other reforms. Although we cannotpredict the full effects on our business of the implementation of this new legislation,it is possible that the new benefit, which will be managed by private healthinsurers, pharmacy benefit managers and other managed care organizations, willresult in decreased reimbursement for prescription drugs, which may furtherexacerbate industry-wide pressure to reduce the prices charged for prescriptiondrugs. This could harm our ability to market our products and generaterevenues. However, we expect that FavId will be administered under thesupervision of a physician and, therefore, fall outside of the prescriptiondrug legislation.

**Wedepend on attracting and retaining key scientific and management personnel toadvance our technology, and the loss of these personnel could impair thedevelopment of our products.**

Oursuccess depends on our continued ability to attract, retain and motivate highlyqualified management, clinical and scientific personnel and on our ability todevelop and maintain important relationships with leading academicinstitutions, clinicians and scientists. We are highly dependent upon oursenior management and scientific staff, particularly John P. Longenecker,Ph.D., our President and Chief Executive Officer, and Daniel P. Gold, Ph.D.,one of our co-founders and our Chief Scientific Officer. The loss of servicesof Dr. Longenecker or Dr. Gold, or one or more of our other members of seniormanagement, could delay or prevent the successful completion of our pivotalPhase 3 clinical trial or the commercialization of FavId. Although we haveemployment agreements with each of our executives, their employment with us is “atwill,” and each executive can terminate his or her agreement with us at anytime. We do not carry “key person” insurance covering members of seniormanagement, other than Drs. Longenecker and Gold. This insurance may notcontinue to be available on commercially reasonable terms and may proveinadequate to compensate us for the loss of their services.

Thecompetition for qualified personnel in the biotechnology field is intense. Inparticular, our manufacturing process depends on our ability to attract andretain qualified manufacturing and quality control personnel. We will need tohire additional personnel as we continue to expand our manufacturing, researchand development activities. We may not be able to attract and retain qualitypersonnel on acceptable terms given the competition for such personnel amongbiotechnology, pharmaceutical and other companies. We are not aware of any keypersonnel planning to retire or terminate their employment in the near future.

*** Wewill need to increase the size of our organization, and we may experiencedifficulties in managing growth.**

Asof June 30, 2007, we had 156 employees. Of these, 127 employees were inresearch and development comprised of 91 in manufacturing, quality control andquality assurance, 31 in research and process development, and five members ofsenior management.  Of the remainingemployees, three were members of senior management and 26 were in marketing,general and administration. We will need to expand our financial, managerial,operational and other resources in order to continue our clinical trials andcommercialize FavId, FAV-201, or any other product candidates that we maydevelop. Future growth would impose significant added responsibilities on ourmanagement team, including the need to identify, recruit, maintain andintegrate additional employees. Our ability to commercialize FavId, FAV-201, orany other product candidates that we may develop, and our future financialperformance in general, will depend in part on our ability to manage any futuregrowth effectively. In order to meet these challenges, we would need to:

·       manage our clinical trials effectively;

·       manage our research and development effortseffectively;

·       develop our administrative, accounting andmanagement information systems and controls; and

·       hire, train and integrate additionalmanagement, administrative, manufacturing and sales and marketing personnel.

Wemay not be able to accomplish these tasks, and our failure to accomplish any ofthem could harm our business or future prospects.

28

----

**If weuse biological and hazardous materials in a manner that causes injury orviolates laws, we may be liable for damages.**

Ourresearch and development and manufacturing activities involve the use ofbiological and hazardous materials that could be dangerous to human health,safety or the environment. Although we believe our safety procedures forhandling and disposing of these materials comply with federal, state and locallaws and regulations, we cannot entirely eliminate the risk of accidentalinjury or contamination from the use, storage, handling or disposal of thesematerials. In the event of contamination or injury, we could be held liable forany resulting damages, and any liability could exceed our resources. Wecurrently maintain property and casualty insurance coverage which coversliability for hazardous and controlled materials. However, this insurancecoverage may not be sufficient to cover our liability and we may not be able toobtain sufficient coverage in the future at a reasonable cost. In addition, wemay incur significant costs complying with both existing and futureenvironmental laws and regulations. In particular, we are subject to regulationby the Occupational Safety and Health Administration, or OSHA, and theEnvironmental Protection Agency, or EPA, and to regulation under the ToxicSubstances Control Act and the Resource Conservation and Recovery Act. OSHA,the EPA or other agencies may adopt regulations that adversely affect ourresearch and development programs.

**We facea risk of product liability claims and may not be able to obtain adequateinsurance.**

Ourbusiness exposes us to potential liability risks that may arise from theclinical testing of our product candidates and the manufacture and sale of anyapproved products. These risks will exist even with respect to those productcandidates that are approved for commercial sale by the FDA and manufactured infacilities regulated by the FDA. Any product liability claim or series ofclaims brought against us could significantly harm our business by, among otherthings, reducing demand for our products, injuring our reputation and creatingsignificant adverse media attention and costly litigation. Plaintiffs havereceived substantial damage awards in some jurisdictions against pharmaceuticalcompanies based upon claims for injuries allegedly caused by the use of theirproducts. Any judgment against us that is in excess of our insurance policylimits would have to be paid from our cash reserves, which would reduce ourcapital resources. We currently maintain clinical trial insurance. Although webelieve our current insurance coverage is adequate, we cannot be certain thatit will be sufficient. Furthermore, we cannot be certain that our currentinsurance coverage will continue to be available, or that increased coverage,which will be necessary if we are able to commercialize our products, will beavailable in the future on reasonable terms, or at all. Further, we may nothave sufficient capital resources to pay a judgment, in which case ourcreditors could levy claims against our assets, including our intellectualproperty.

**We couldbe negatively impacted by future interpretation or implementation of federaland state fraud and abuse laws, including anti-kickback laws and other federaland state anti-referral laws.**

Ifwe are able to commercialize FavId or any other product candidates that we maydevelop, we will be subject to various federal and state laws pertaining tohealthcare fraud and abuse, including anti-kickback laws and physicianself-referral laws. Violations of these laws are punishable by criminal andcivil sanctions, including, in some instances, imprisonment and exclusion fromparticipation in federal and state healthcare programs, including Medicare,Medicaid and Veterans Administration health programs. Because of thefar-reaching nature of these laws, we may be required to alter one or more ofour practices to be in compliance with these laws. Healthcare fraud and abuseregulations are complex, and even minor, inadvertent irregularities canpotentially give rise to claims that a statute or prohibition has beenviolated. Any violations of these laws, or any action against us for violationof these laws, even if we successfully defend against it, could result in amaterial adverse effect on our business, financial condition and results ofoperations. If there is a change in law, regulation or administrative orjudicial interpretations, we may have to change our business practices or ourexisting business practices could be challenged as unlawful, which could have amaterial adverse effect on our business, financial condition and results ofoperations. In addition, some allegations under these laws have been claimed toviolate the False Claims Act, discussed in more detail below.

29

----

Inaddition, if we are able to commercialize FavId or any other product candidatesthat we may develop, we could become subject to false claims litigation underfederal statutes, which can lead to civil money penalties, criminal fines andimprisonment, and exclusion from participation in Medicare, Medicaid and otherfederal and state healthcare programs. These false claims statutes include theFalse Claims Act, which allows any person to bring suit on behalf of thefederal government alleging the submission of false or fraudulent claims, orcausing to present such false or fraudulent claims, under federal programs orcontracts claims or other violations of the statute and to share in any amountspaid by the entity to the government in fines or settlement. These suitsagainst biotechnology companies have increased significantly in recent yearsand have increased the risk that a healthcare company will have to defend afalse claim action, pay fines or be excluded from the Medicare, Medicaid orother federal and state healthcare programs as a result of an investigationarising out of such action. We cannot assure you that we will not becomesubject to such litigation or, if we are not successful in defending againstsuch actions, that such actions will not have a material adverse effect on ourbusiness, financial condition and results of operations. In addition, we cannotassure you that the costs of defending claims or allegations under the FalseClaims Act will not have a material adverse effect on our business, financialcondition and results of operations.

**Risks Related to Our Intellectual Property and Potential Litigation**

**If weare unable to obtain and maintain protection for our intellectual property, thevalue of our technology and products may be adversely affected.**

Ourbusiness and competitive positions are dependent upon our ability to protectour proprietary technology. Our success will depend in large part on ourability to obtain and maintain patent protection for our product andtechnologies, preserve trade secrets and operate without infringing theintellectual property right of others. Because of the substantial length oftime and expense associated with development of new products, we, along withthe rest of the biopharmaceutical industry, place considerable importance onobtaining and maintaining patent protection for new technologies, products andprocesses. The patent positions of pharmaceutical, biopharmaceutical andbiotechnology companies, including us, are generally uncertain and involvecomplex legal and factual questions. Our patent applications may not protectour technologies and products because, among other things:

·       there is no guarantee that any of our pendingpatent applications will result in issued patents;

·       we may develop additional proprietarytechnologies that are not patentable;

·       there is no guarantee that any patents issuedto us, our collaborators or our licensors will provide a basis for acommercially viable product;

·       there is no guarantee that any patents issuedto us or our collaborators or our licensors will provide us with anycompetitive advantage;

·       there is no guarantee that any patents issuedto us or our collaborators or our licensors will not be challenged,circumvented or invalidated by third parties; and

·       there is no guarantee that any patentspreviously issued to others or issued in the future will not have an adverseeffect on our ability to do business.

Weattempt to protect our intellectual property position by filing United Statespatent applications related to our proprietary technology, inventions andimprovements that are important to the development of our business. Currentlywe own U.S. Patent No. 6,911,204 concerning the treatment of NHL with ourtechnology together with four pending United States patent applicationscovering methods of treating immune system diseases, including B-cell andT-cell lymphomas, using our proprietary immunotherapy production methods, aswell as methods for combining the idiotype immunotherapies with other therapiesthat are used to treat diseases of the immune system.

Outsideof the United States, we have six issued patents and over twenty pending patentapplications.  Limitations on patentprotection in some countries outside the United States, and the differences inwhat constitutes patentable subject matter in these countries, may limit theprotection we have under patents issued to us outside of the United States. Inaddition, laws of foreign countries may not protect our intellectual propertyto the same extent as would laws of the United States. In determining whetheror not to seek a patent or to license any patent in a particular foreigncountry, we weigh the relevant costs and benefits, and consider, among otherthings, the market potential of our product candidates in the jurisdiction, andthe scope and enforceability of patent protection afforded by the law of thejurisdiction. Failure to obtain adequate patent protection for our proprietaryproduct candidates and technology would impair our ability to be commerciallycompetitive in these markets.

30

----

Althoughwe believe our issued patents, as well as our patent applications if they issueas patents, will provide a competitive advantage, we may not be able to developadditional patentable products or processes. Further, we may not be able to obtain patents from any of the pendingapplications. Even if patent claims are allowed, the claims may not issue, orin the event of issuance, may not be sufficient to protect our technology. Inaddition, any patents or patent rights we obtain may be circumvented, challengedor invalidated by our competitors.

**We arenot able to prevent others, including potential competitors, from using certaintypes of patient-specific idiotype protein-KLH conjugates, like those we use inour lead product candidate, FavId, for the treatment of indolent B-cell NHL.**

Certaintypes of patient-specific idiotype-KLH conjugates, comprising single idiotypeproteins, and their use for the treatment of indolent B-cell NHL are in thepublic domain and therefore cannot be patented. Consequently, we may only beable to seek patent protection for methods of treating immune system diseases,including B-cell and T-cell lymphomas, using our proprietary immunotherapyproduction methods for making idiotype protein conjugates and compositionscomprising such conjugates, as well as methods for combining the idiotype orT-cell receptor-based immunotherapies with other therapies that are used totreat diseases of the immune system. As a result, we may not be able to preventother companies using different manufacturing processes from developing activeimmunotherapies that directly compete with FavId.

**We mayhave to engage in costly litigation to enforce our proprietary rights or todefend challenges to our intellectual property by our competitors, which may harmour business, results of operations, financial condition and cash flow.**

Thepharmaceutical field is characterized by a large number of patent filingsinvolving complex legal and factual questions, and, therefore, we cannotpredict with certainty whether our patents will be enforceable. Competitors mayhave filed applications for or have been issued patents and may obtainadditional patents and proprietary rights related to products or processes thatcompete with or are similar to ours. We may not be aware of all of the patentspotentially adverse to our interests that may have been issued to others.

Litigationmay be necessary to protect our patent position, and we cannot be certain thatwe will have the required resources to pursue litigation or otherwise toprotect our patent rights. In addition, our efforts to protect our patents maynot be successful.

**Ourability to market our products may be impaired by the intellectual propertyrights of third parties.**

Ourcommercial success will depend in part on not infringing the patents orproprietary rights of third parties. We are aware of competing intellectualproperty relating to active idiotype immunotherapies for cancer. Competitors orthird parties may be issued, or may currently hold, patents that may coversubject matter that we use in developing the technology required to bring ourproduct candidates to market, that we use in producing our product candidates,or that we use in treating patients with our product candidates. In addition,from time to time we receive correspondence inviting us to license patents fromthird parties. While we currently believe we have freedom to operate in ourarea, others may challenge our position in the future. There has been, and webelieve that there will continue to be, significant litigation in thepharmaceutical industry regarding patent and other intellectual propertyrights.

Whilewe believe that our pre-commercialization activities fall within the scope ofan available exemption against patent infringement provided by 35 U.S.C.§271(e), and that our subsequent manufacture of our commercial products willalso not require the license of any patents, claims may be brought against usin the future based on these or other patents held by others. As our productcandidates progress toward commercialization, competitors or other parties mayassert that we infringe on their patents or proprietary rights.

Inparticular, we are aware of the following third party patents:

·     Genentech and City of Hope National Medical Center hold patent rightsrelated to the expression of recombinant antibodies;

31

----

·     Genitope holds patent rights relating to immunotherapy using idiotypeproteins produced using T-lymphoid cells for the treatment of B-Cell lymphoma;and

·     Schering Corp. holds patent rights relating to the use of GM-CSF as avaccine adjuvant for use against infectious diseases.

Thefirst patent listed above was issued to Genentech in 2001. We do not believethat this patent covers our technology, and we note that in May 2005, a thirdparty filed a request for reexamination of this patent with the U.S. Patent andTrademark Office, requesting that the claims of this patent be reexamined as totheir patentability; the reexamination is currently pending.  During reexamination the issued claims wererejected; proceedings before the U.S. Patent and Trademark Officecontinue.  If this patent reissues and wedecide to attempt to obtain a license for this patent, we cannot guarantee thatwe would be able to obtain such a license on commercially reasonable terms, orat all.

Additionally,because patent prosecution can proceed in secret prior to issuance of a patent,third parties may obtain other patents with claims of unknown scope relating toour product candidates, which they could attempt to assert against us. Further,as we develop our products, we may infringe the current patents of thirdparties or patents that may issue in the future.  Third parties could bring legal actionsagainst us claiming damages and seeking to enjoin clinical testing, manufacturingand marketing of the affected product or products. If we become involved in anylitigation, it could consume a substantial portion of our resources, regardlessof the outcome of the litigation. If any of these actions are successful, inaddition to any potential liability for damages, we could be required to obtaina license to continue to manufacture or market the affected product, in whichcase we may be required to pay substantial royalties or grant cross-licenses toour patents. However, there can be no assurance that any such license will beavailable on acceptable terms or at all. To enforce patents issued to us or todetermine the scope and validity of other parties’ proprietary rights, we mayalso become involved in litigation or in interference proceedings declared bythe United States Patent and Trademark Office, which could result insubstantial costs to us, regardless of the outcome of the litigation, or anadverse decision as to the priority of our inventions. Ultimately, as a result ofpatent infringement claims, our business could be harmed and we could beprevented from commercializing a product, or forced to cease some aspect of ourbusiness operations.

**If weare not able to protect and control unpatented trade secrets, know-how andother technological innovation, we may suffer competitive harm.**

Wealso rely on trade secrets to protect our technology, particularly when we donot believe that patent protection is appropriate or available. However, tradesecrets are difficult to protect. We attempt to protect our trade secrets byrequiring each of our employees, consultants and advisors to execute anon-disclosure and assignment of invention agreement before beginning his orher employment, consulting or advisory relationship with us. We cannotguarantee that these agreements will provide meaningful protection, that theseagreements will not be breached, that we will have an adequate remedy for anysuch breach, or that our trade secrets will not otherwise become known orindependently developed by a third party. Our trade secrets, or those of ourfuture collaborators, may become known or may be independently discovered byothers, which could adversely affect the competitive position of our productcandidates.

**Risks Related to the Securities Markets and Ownership of Our CommonStock**

*** Untilour initial public offering in February 2005, there was no public market forour common stock, and the price of our common stock may be volatile and coulddecline significantly.**

Untilour initial public offering, or IPO, in February 2005, there was no publicmarket for our common stock, and despite our IPO, an active public market forthese shares may not be sustained. Our stock price has traded in the range of$7.77- $2.39 from the commencement of our IPO on February 2, 2005 to August 9,2007.

Thestock market in general has been experiencing dramatic fluctuations that haveoften been unrelated to the operating performance of companies. The marketprices for securities of biotechnology companies in general have been highlyvolatile and may continue to be highly volatile in the future. If market-basedor industry-based volatility continues, the trading price of our common stockcould decline significantly, independent of our actual operating performance, andyou could lose all or part of your investment. The market price of our commonstock could fluctuate significantly as a result of several factors, including:

32

----

·     announcements of technological innovations or new products by us or ourcompetitors;

·     announcement of FDA approval or non-approval of FavId or any otherproduct candidates that we may develop, or delays in the FDA review process;

·     actions taken by regulatory agencies with respect to FavId and FAV-201,or any other product candidates that we may develop, or our clinical trials,manufacturing process or sales and marketing activities;

·     regulatory developments in the United States and foreign countries;

·     success of our research efforts and clinical trials;

·     any intellectual property infringement lawsuit in which we may becomeinvolved;

·     announcements concerning our competitors, or the biotechnology orbiopharmaceutical industries in general;

·     actual or anticipated fluctuations in our operating results;

·     changes in financial estimates or recommendations by securitiesanalysts;

·     sales of large blocks of our common stock;

·     sales of our common stock by our executive officers, directors andsignificant stockholders;

·     changes in accounting principles; and

·     loss of any of our key scientific or management personnel.

Specifically,you may not be able to resell your shares at or above the price you paid forsuch shares. In addition, class action litigation has often been institutedagainst companies whose securities have experienced periods of volatility inmarket price. Any such litigation brought against us could result insubstantial costs and a diversion of management’s attention and resources,which could hurt our business, operating results and financial condition.

***Concentration of ownership among our existing officers, directors and principalstockholders may prevent other stockholders from influencing significantcorporate decisions and depress our stock price.**

Asof June 30, 2007, our officers and directors and stockholders affiliated withour directors together beneficially held approximately 34.4% of our outstandingcommon stock on an as-converted basis. If some or all of these officers,directors and principal stockholders act together, they will be able to exert asignificant degree of influence over our management and affairs and overmatters requiring stockholder approval, including the election of directors,the merger, consolidation or sale of all or substantially all of our assets,and any other significant corporate transaction. The interests of thisconcentration of ownership may not always coincide with our interests or theinterests of our other stockholders. For instance, officers, directors andprincipal stockholders, acting together, could cause us to enter intotransactions or agreements that we would not otherwise consider. Similarly,this concentration of ownership may have the effect of delaying or preventing achange in control of us otherwise favored by our other stockholders. Thisconcentration of ownership also could depress our stock price.

**Provisionsin our amended and restated certificate of incorporation and amended andrestated bylaws and applicable Delaware law may prevent or discourage thirdparties or our stockholders from attempting to replace our management or influencingsignificant decisions.**

Provisionsin our amended and restated certificate of incorporation and amended andrestated bylaws may have the effect of delaying or preventing a change incontrol of us or our management, even if doing so would be beneficial to ourstockholders. These provisions include:

·     dividing our board of directors into three classes serving staggeredthree-year terms;

33

----

·     authorizing our board of directors to issue preferred stock withoutstockholder approval;

·     prohibiting cumulative voting in the election of directors;

·     prohibiting stockholder actions by written consent;

·     limiting the persons who may call special meetings of stockholders;

·     prohibiting our stockholders from making certain changes to ourcertificate of incorporation or bylaws except with 66.7% stockholder approval;and

·     requiring advance notice for raising business matters or nominatingdirectors at stockholders’ meetings.

Weare also subject to provisions of the Delaware corporation law that, ingeneral, prohibit any business combination with a beneficial owner of 15% ormore of our common stock for five years unless the holder’s acquisition of ourstock was approved in advance by our board of directors. Together, thesecharter and statutory provisions could make the removal of management moredifficult and may discourage transactions that otherwise could involve paymentof a premium over prevailing market prices for our common stock.

**Becausewe do not intend to pay any cash dividends on our shares of common stock, ourstockholders will not be able to receive a return on their shares unless theysell them.**

Wehave never paid or declared any cash dividends on our capital stock and intendto retain any future earnings to finance the development and expansion of ourbusiness. The payment of dividends by us on our common stock is limited by ourdebt agreements. We do not anticipate paying any cash dividends on our commonstock in the foreseeable future. Unless we pay dividends, our stockholders willnot be able to receive a return on their shares unless they sell them.

**We mayincur increased costs as a result of recently enacted and proposed changes inlaws and regulations.**

Recentlyenacted and proposed changes in the laws and regulations affecting publiccompanies, including the provisions of the Sarbanes-Oxley Act of 2002 and rulesrelated to corporate governance and other matters subsequently adopted by theSEC and the Nasdaq Stock Market, could result in increased costs to us. The newrules and any related regulations that may be proposed in the future could makeit more difficult or more costly for us to obtain certain types of insurance,including directors’ and officers’ liability insurance, and we may be forced toaccept reduced policy limits and coverage or incur substantially higher coststo obtain the same or similar coverage. The impact of these events could alsomake it more difficult for us to attract and retain qualified persons to serveon our board of directors, our board committees or as executive officers. Weare presently evaluating and monitoring developments with respect to new andproposed rules and cannot predict or estimate the amount of the additionalcosts we may incur or the timing of such costs.

34

----

**Item6.  Exhibits.**

The exhibits listed onthe accompanying index to exhibits are filed or incorporated by reference (asstated therein) as part of this Quarterly Report on Form 10-Q.
| Exhibit  Number | ** ** | **Description of Document**                                                                                                                                                                                            |
|-----------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **      | ** ** | ** **                                                                                                                                                                                                                       |
| 3.1             |       | Registrant’s Amended and Restated Certificate of Incorporation.(1)                                                                                                                                                          |
|            |       |                                                                                                                                                                                                                             |
| 3.2             |       | Registrant’s Amended and Restated Bylaws.(1)                                                                                                                                                                                |
|            |       |                                                                                                                                                                                                                             |
| 4.1             |       | Form of Common Stock Certificate of  Registrant.(1)                                                                                                                                                                         |
|            |       |                                                                                                                                                                                                                             |
| 4.2             |       | Amended and Restated Investor Rights Agreement dated  March 26, 2004 between the Registrant and certain of its stockholders.(1)                                                                                             |
|            |       |                                                                                                                                                                                                                             |
| 4.3             |       | Amendment No. 1 to Amended and Restated  Investor Rights Agreement dated April 6, 2004 between the Registrant and  certain of its stockholders.(1)                                                                     |
|            |       |                                                                                                                                                                                                                             |
| 4.4             |       | Securities Purchase Agreement dated March 6,  2006, by and among Favrille and the individuals and entities identified on  Exhibit A thereto (the “Securities Purchase Agreement”). (2)                       |
|            |       |                                                                                                                                                                                                                             |
| 4.5             |       | Form of Warrant issued pursuant to the  Securities Purchase Agreement. (2)                                                                                                                                                  |
|            |       |                                                                                                                                                                                                                             |
| 4.6             |       | Securities Purchase Agreement dated February 12,  2007, by and among Favrille and certain investors.(3)                                                                                                                          |
|            |       |                                                                                                                                                                                                                             |
| 4.7             |       | Warrant to purchase 250,000 shares of Common Stock  dated December 19, 2006 issued to Kingsbridge  Capital Limited.(4)                                                                                                           |
|            |       |                                                                                                                                                                                                                             |
| 4.8             |       | Registration Rights Agreement, dated December 19,  2006, by and between Favrille and Kingsbridge Capital Limited.(4)                                                                                                             |
|            |       |                                                                                                                                                                                                                             |
| 4.9             |       | Warrant to purchase 48,834 shares of Common Stock  dated December 30, 2005 issued to General Electric Capital Corporation.(5)                                                                                                    |
|            |       |                                                                                                                                                                                                                             |
| 4.10            |       | Warrant to purchase 48,834 shares of Common Stock  dated December 30, 2005 issued to Oxford Finance  Corporation.(5)                                                                                                             |
|            |       |                                                                                                                                                                                                                             |
| 4.11            |       | Amendment No. 1 to Registration Rights  Agreement, dated December 19, 2006, by and between Favrille and Kingsbridge  Capital Limited.                                                                                       |
|            |       |                                                                                                                                                                                                                             |
| 31.1            |       | Certification of principal executive officer  required by Rule 13a-14(a) or Rule 15d-14(a).                                                                                                                                      |
|            |       |                                                                                                                                                                                                                             |
| 31.2            |       | Certification of principal accounting officer  required by Rule 13a-14(a) or Rule 15d-14(a).                                                                                                                                     |
|            |       |                                                                                                                                                                                                                             |
| 32              |       | Certification by the Chief Executive Officer and  Chief Financial Officer of Favrille, Inc., as required by Rule 13a-14(b) or  15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States  Code (18 U.S.C. 1350). |

 

----

| (1) |   | Filed as an Exhibit to Favrille, Inc.’s  Registration Statement on Form S-1 (File No. 333-114299), as  amended, and incorporated by reference herein. |
|-----|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

35

----

 
| (2)    |   | Filed as an exhibit to Favrille’s Current Report on  Form 8-K dated March 6, 2006 and incorporated herein by reference.              |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                |
| (3)    |   | Filed as an exhibit to Favrille’s Current Report on  Form 8-K dated February 13, 2007 and incorporated herein by reference.                    |
|   |   |                                                                                                                                                |
| (4)    |   | Filed as an exhibit to Favrille’s Current Report on  Form 8-K dated December 20, 2006 and incorporated herein by reference.                    |
|   |   |                                                                                                                                                |
| (5)    |   | Filed as an exhibit to Favrille’s Annual Report on  Form 10-K for the year ended December 31, 2005 and incorporated herein  by reference. |

 

36

----

**Favrille, Inc.**

**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
| Dated: August 14, 2007 |   |                                                                                                     |
|------------------------|--------|----------------------------------------------------------------------------------------------------------|
|                   |   |                                                                                                     |
|                   |   | Favrille, Inc.                                                                                      |
|                   |   |                                                                                                     |
|                   |   | /s/ Tamara A. Seymour                                                                                    |
|                   |   |                                                                                                     |
|                   |   | Tamara A. Seymour                                                                                        |
|                   |   |                                                                                                     |
|                   |   | Chief Financial Officer                                                                                  |
|                   |   |                                                                                                     |
|                   |   | (On behalf of the registrant and as the registrant’s    Principal Financial and Accounting Officer) |

 

37

----