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** **

 

** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-Q**

 

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| **(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, 2008** |
| ** **                                             | ** ** |
| **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 mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15 (d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.   YES   x   NO   o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See the definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act. (Check one):

 

| Large  accelerated filer  o         |   | Accelerated  filer  x         |
|-----------------------------------------------|--------|-----------------------------------------|
|                                          |   |                                    |
| Non-accelerated  filer  o           |   | Smaller  reporting company  o |
| (Do not check if a smaller reporting company) |   |                                    |

 

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 ofthe Registrant’s common stock outstanding as of July 30, 2008 was41,299,598.

 

 

 

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**FAVRILLE,INC.**

 

**QUARTERLYREPORT ON FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 2008**

 

**TABLE OF CONTENTS**

 
| ** **        | ** **                                                                                                                                                                         | **PAGE** |
|-------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------|
| **PART I.**  | **FINANCIAL INFORMATION**                                                                                                                                                          | 3        |
| Item 1.           | Financial Statements                                                                                                                                                               | 3        |
|              | Balance Sheets as of June 30,  2008 (Unaudited) and December 31, 2007                                                                                                    | 3        |
|              | Statements  of Operations (Unaudited) for the three and six months ended June 30,  2008 and 2007 and the period from January 21, 2000 (inception) to  June 30, 2008 | 4        |
|              | Statements of Cash Flows  (Unaudited) for the six months ended June 30, 2008 and 2007 and the  period from January 21, 2000 (inception) to June 30, 2008            | 5        |
|              | Notes to  Condensed Financial Statements (Unaudited)                                                                                                                               | 6        |
| Item 2.           | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                                        | 12       |
| Item 3.           | Quantitative  and Qualitative Disclosures About Market Risk                                                                                                                        | 16       |
| Item 4.           | Controls and  Procedures                                                                                                                                                           | 16       |
|              |                                                                                                                                                                               |     |
| **PART II.** | **OTHER INFORMATION**                                                                                                                                                              | 17       |
| Item 1.           | Legal Proceedings                                                                                                                                                                  | 17       |
| Item 1A.          | Risk Factors                                                                                                                                                                       | 17       |
| Item 2.           | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                                                       | 24       |
| Item 4            | Submission of  Matters to a Vote of Security Holders                                                                                                                               | 25       |
| Item 6.           | Exhibits                                                                                                                                                                           | 26       |
|              |                                                                                                                                                                               |     |
| SIGNATURES        | 28                                                                                                                                                                                 |

 

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**PART I – FINANCIAL INFORMATION**

 

**Item1. Financial Statements.**

 

**FAVRILLE, INC.**

 

**(adevelopment stage company)**

 

**BALANCE SHEETS**

 

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

 
| ** **                                                                                                                                                                       | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                       | ** ** | **(unaudited)**         | ** ** | ** **                  | ** ** |
| **Assets**                                                                                                                                                                       | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Current assets:                                                                                                                                                                  |       |                    |       |                        |       |
| Cash and cash  equivalents                                                                                                                                                       |       | $                       | 2,158      |                        | $          | 26,362 |   |
| Short-term  investments                                                                                                                                                          |       | —                  |       | 3,577                       |       |
| Assets held for  sale                                                                                                                                                            |       | 2,500                   |       | —                      |       |
| Other current assets                                                                                                                                                             |       | 359                     |       | 806                         |       |
| Total current  assets                                                                                                                                                            |       | 5,017                   |       | 30,745                      |       |
| Property and  equipment, net                                                                                                                                                     |       | —                  |       | 33,293                      |       |
| Restricted cash                                                                                                                                                                  |       | 3,571                   |       | 3,451                       |       |
| Other assets                                                                                                                                                                     |       | 356                     |       | 466                         |       |
| Total assets                                                                                                                                                                     |       | $                       | 8,944      |                        | $          | 67,955 |   |
| **Liabilities  and stockholders’ equity (deficit)**                                                                                                                         | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Current  liabilities:                                                                                                                                                            |       |                    |       |                        |       |
| Accounts payable  and accrued liabilities                                                                                                                                        |       | $                       | 5,645      |                        | $          | 3,551 |   |
| Current portion  of debt                                                                                                                                                         |       | 3                       |       | 5,275                       |       |
| Warrants  liability                                                                                                                                                              |       | —                  |       | 2,492                       |       |
| Total current  liabilities                                                                                                                                                       |       | 5,648                   |       | 11,318                      |       |
| Debt, less  current portion                                                                                                                                                      |       | —                  |       | 6,342                       |       |
| Deferred rent                                                                                                                                                                    |       | 15,693                  |       | 15,415                      |       |
| Commitments and  contingencies                                                                                                                                                   |       |                    |       |                        |       |
| Stockholders’  equity:                                                                                                                                                      |       |                    |       |                        |       |
|                                                                                                                                                                             |       |                    |       |                        |       |
| Preferred stock,  $0.001 par value; 5,000,000 shares authorized; no shares issued and  outstanding at June 30, 2008 and December 31, 2007, respectively                |       | —                  |       | —                      |       |
| Common stock,  $0.001 par value; 75,000,000 shares authorized; 41,299,598 and 41,168,432  issued and outstanding at June 30, 2008 and December 31, 2007,  respectively |       | 41                      |       | 41                          |       |
| Additional  paid-in capital                                                                                                                                                      |       | 236,391                 |       | 233,807                     |       |
| Accumulated  other comprehensive income                                                                                                                                          |       | —                  |       | 7                           |       |
| Deficit  accumulated during the development stage                                                                                                                                |       | (248,829                | )          | (198,975                    | )          |
| Total  stockholders’ (deficit) equity                                                                                                                                       |       | (12,397                 | )          | 34,880                      |       |
| Total  liabilities and stockholders’ equity                                                                                                                                 |       | $                       | 8,944      |                        | $          | 67,955 |   |

 

See accompanyingnotes.

 

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**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,** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|
| ** **                                                                                               | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008**                                                                                 | ** ** | **2007** | ** ** | **2008** | ** ** |
| Operating  expenses:                                                                                     |       |                                            |       |                                          |       |                                                                                     |       |   |   |   |   |
| Research and  development                                                                                |       | $                                               | 10,087     |                                          | $          | 9,623                                                                                    |       | $ | 18,151 |   | $ | 17,620 |   | $ | 152,921 |   |
| Marketing,  general and administrative                                                                   |       | 3,044                                           |       | 2,948                                         |       | 5,598                                                                                    |       | 5,860 |   | 46,459 |   |
| Total operating  expenses                                                                                |       | 13,131                                          |       | 12,571                                        |       | 23,749                                                                                   |       | 23,480 |   | 199,380 |   |
| Interest income                                                                                          |       | 96                                              |       | 497                                           |       | 377                                                                                      |       | 1,062 |   | 7,220 |   |
| Interest expense                                                                                         |       | (273                                            | )          | (314                                          | )          | (506                                                                                     | )          | (501 | ) | (4,400 | ) |
| Loss on  impairment of property and equipment                                                            |       | (28,478                                         | )          | —                                        |       | (28,478                                                                                  | )          | — |   | (28,478 | ) |
| Change in  valuation of warrants                                                                         |       | 2,403                                           |       | —                                        |       | 2492                                                                                     |       | — |   | 4,806 |   |
| Other income  (expense)                                                                                  |       | 10                                              |       | —                                        |       | 10                                                                                       |       | — |   | (437 | ) |
| Total other (expense)  income, net                                                                       |       | (26,242                                         | )          | 183                                           |       | (26,105                                                                                  | )          | 561 |   | (21,289 | ) |
| Net loss                                                                                                 |       | (39,373                                         | )          | (12,388                                       | )          | (49,854                                                                                  | )          | (22,919 | ) | (220,669 | ) |
|                                                                                                     |       |                                            |       |                                          |       |                                                                                     |       |   |   |   |   |
| 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                                                              |       | $                                               | (39,373    | )                                             | $          | (12,388                                                                                  | )          | $ | (49,854 | ) | $ | (22,919 | ) | $ | (248,829 | ) |
| Historical net  loss per share:                                                                          |       |                                            |       |                                          |       |                                                                                     |       |   |   |   |   |
| Basic and  diluted                                                                                       |       | $                                               | (0.95      | )                                             | $          | (0.38                                                                                    | )          | $ | (1.21 | ) | $ | (0.73 | ) |   |   |
| Weighted-average  shares-basic and diluted                                                               |       | 41,298                                          |       | 32,435                                        |       | 41,239                                                                                   |       | 31,598 |   |   |   |

 

See accompanyingnotes.

 

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**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,**       | ** ** |
| ** **                                                                   | ** ** | **2008**                       | ** ** | **2007**                | ** ** | **2008**             | ** ** |
| **Operating  activities:**                                                   | ** ** | ** **                     | ** ** | ** **              | ** ** | ** **           | ** ** |
| Net loss                                                                     |       | $                              | (49,854    | )                       | $          | (22,919              | )          | $ | (220,669 | ) |
|                                                                         |       |                           |       |                    |       |                 |       |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                           |       |                    |       |                 |       |
| Depreciation and  amortization                                               |       | 2,386                          |       | 1,484                   |       | 12,326               |       |
| Stock-based  compensation                                                    |       | 2,412                          |       | 2,259                   |       | 16,456               |       |
| Amortization of  premium/discount on short-term investments                  |       | (31                            | )          | (334                    | )          | (1,076               | )          |
| Change in  valuation of warrants                                             |       | (2,492                         | )          | —                  |       | (4,806               | )          |
| Loss on impairment  of property and equipment                                |       | 28,478                         |       | —                  |       | 28,478               |       |
| Other                                                                        |       | 60                             |       | 64                      |       | 371                  |       |
| Changes in  operating assets and liabilities:                                |       |                           |       |                    |       |                 |       |
| Other assets                                                                 |       | 485                            |       | (435                    | )          | (267                 | )          |
| Accounts payable  and accrued liabilities                                    |       | 2,224                          |       | (317                    | )          | 5,627                |       |
| Deferred rent                                                                |       | 278                            |       | 873                     |       | 4,493                |       |
| Net cash used in  operating activities                                       |       | (16,054                        | )          | (19,325                 | )          | (159,067             | )          |
| **Investing  activities:**                                                   | ** ** | ** **                     | ** ** | ** **              | ** ** | ** **           | ** ** |
| Purchases of  property and equipment                                         |       | (187                           | )          | (6,535                  | )          | (32,193              | )          |
| Purchases of  short-term investments                                         |       | (468                           | )          | (11,337                 | )          | (113,241             | )          |
| Maturities of  short-term investments                                        |       | 4,069                          |       | 26,400                  |       | 114,318              |       |
| Other assets                                                                 |       | —                         |       | —                  |       | (70                  | )          |
| Restricted cash                                                              |       | (120                           | )          | —                  |       | (3,571               | )          |
| Net cash  provided by (used in) investing activities                         |       | 3294                           |       | 8,528                   |       | (34,757              | )          |
| **Financing  activities:**                                                   | ** ** | ** **                     | ** ** | ** **              | ** ** | ** **           | ** ** |
| Proceeds from  debt                                                          |       | —                         |       | 5,623                   |       | 29,854               |       |
| Payments on debt                                                             |       | (11,616                        | )          | (2,659                  | )          | (29,904              | )          |
| Issuance of  preferred stock, net                                            |       | —                         |       | —                  |       | 76,144               |       |
| Proceeds from  issuance of convertible promissory note                       |       | —                         |       | —                  |       | 650                  |       |
| Issuance of  common stock and warrants                                       |       | 172                            |       | 10,161                  |       | 119,282              |       |
| Repurchase of  restricted common stock                                       |       | —                         |       | —                  |       | (44                  | )          |
| Net cash (used  in) provided by financing activities                         |       | (11,444                        | )          | 13,125                  |       | 195,982              |       |
| Net (decrease) increase  in cash and cash equivalents                        |       | (24,204                        | )          | 2,328                   |       | 2,158                |       |
| Cash and cash  equivalents at beginning of period                            |       | 26,362                         |       | 14,249                  |       | —               |       |
| Cash and cash  equivalents at end of period                                  |       | $                              | 2,158      |                    | $          | 16,577               |       | $ | 2,158 |   |
|                                                                         |       |                           |       |                    |       |                 |       |
| **Supplemental  non-cash activities:**                                       | ** ** | ** **                     | ** ** | ** **              | ** ** | ** **           | ** ** |
| Capitalized  interest recorded as plant and equipment                        |       | $                              | 0          |                    | $          | 231                  |       | $ | 559 |   |
| Accrued asset  acquisitions                                                  |       | $                              | (19        | )                       | $          | 232                  |       | $ | 0 |   |
| Leasehold  improvements acquired under tenant improvement allowance          |       | $                              | —     |                    | $          | 3,696                |       | $ | 11,200 |   |
| Conversion of  Series C to common stock                                 |       | $                              | —     |                    | $          | —               |       | $ | 43,678 |   |

 

See accompanyingnotes.

 

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**FAVRILLE,INC.**

 

**NOTES TO CONDENSED FINANCIALSTATEMENTS**

 

**JUNE 30,2008**

 

**UNAUDITED**

 

**1. Basisof Presentation**

 

The accompanyingunaudited interim financial statements have been prepared in accordance withU.S. generally accepted accounting principles (GAAP) and in accordance with therules and regulations of the Securities and Exchange Commission related toa quarterly report on Form 10-Q. Accordingly, they do not include all ofthe information and disclosures required by GAAP for complete financialstatements. The balance sheet at December 31, 2007 has been derived fromthe audited financial statements at that date but does not include allinformation and footnotes required by U.S. generally accepted accountingprinciples for complete financial statements. The interim financial statementsreflect all adjustments which, in the opinion of management, are necessary fora fair presentation of the financial condition and results of operations forthe periods presented. Except as otherwise disclosed, all such adjustments areof a normal recurring nature.

 

Operating results for thethree and six months ended June 30, 2008 are not necessarily indicative ofthe results that may be expected for the year ending December 31, 2008.These financial 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, 2007 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 currently available,and changes in facts and circumstances may cause us to revise these estimates.

 

In May 2008, weannounced the discontinuation of development of SpecifidTM, our leadproduct candidate for patients with B-cell non-Hodgkin’s lymphoma (NHL), thediscontinuation of other programs requiring production of patient-specifictherapies including the T-cell and autoimmune disease programs and a workforcereduction which involved the termination of 132 of our 144 employees, includingsix of our executive officers. As a result of the foregoing events, weare considering our strategic alternatives, including possible businessarrangements such as a reorganization involving in-licensing of productscontingent upon additional financing or a merger with another entity. See ***Impairment of Long-lived Assets and Assets Held forSale***and **Note 6. RestructuringActivities**below for further discussion of these events.

 

***Going Concern***

 

The accompanyingcondensed financial statements have been prepared assuming the Company willcontinue as a going concern. The basis of accounting contemplates the recoveryof the Company’s assets and the satisfaction of liabilities in the normalcourse of business. From inception through June 30, 2008, the Company hasincurred net losses of approximately $220.7 million and has a deficitaccumulated during the development stage of approximately $248.8 million.

 

At June 30, 2008,current liabilities of $5.6 million exceeded cash and cash equivalents of $2.2million. The Company intends to sell all long-lived assets in August 2008and plans to use the current cash, cash equivalents and proceeds from the saleof the long-lived assets to fund current operations and to repay creditors.Although current liabilities exceed current assets, the accompanying condensedfinancial statements are prepared on a going-concern basis as the Company isconsidering, and believes it is reasonably possible, that it could complete anynumber of strategic alternatives, including business arrangements such as areorganization involving in-licensing of products contingent upon additionalfinancing or a merger with another entity. If the Company is unable to completesuch a strategic transaction, it will likely not be able to continue as a goingconcern.

 

***Impairmentof Long-lived Assets and Assets Held for Sale***

 

In May 2008, the Company obtained results ofthe data analysis of its Phase 3 registration trial for the lead productcandidate, Specifid, for patients with follicular NHL. Analysis of the primaryendpoint in the trial failed to show a statistically significant improvement inthe treatment arm, Specifid plus Leukine® following Rituxan®, compared to thecontrol arm, placebo plus LeukineTM following Rituxan. Based onthese results, the Company immediately discontinued development of Specifid andother programs 

 

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requiring production of patient-specific therapiesincluding the T-cell and autoimmune disease programs. The Company had previously devotedsubstantially all of its research, development and clinical efforts andfinancial resources toward the development of Specifid. The Company has ceasedthe manufacture of Specifid at the facility in San Diego, California. TheCompany plans to sell all of its equipment and other personal property in August 2008.

 

We performed arecoverability test of the long-lived assets included in our Specifid assetgroup in accordance with Statement of Financial Accounting Standards (SFAS) No. 144,*Accounting for the Impairment or Disposal ofLong-Lived Assets*. The recoverability test was based on theestimated undiscounted future cash flows expected to result from thedisposition of the Specifid asset group, including the estimated future cashinflows from anticipated sales and returns of assets and the estimated assetdisposition costs. Based on the recoverability analysis performed, managementdoes not believe that the estimated undiscounted future cash flows expected toresult from the disposition of the Specifid asset group are sufficient torecover the carrying value of these assets. Accordingly, we recorded a non-cashcharge for the impairment of long-lived assets of $28.5 million in the second quarterof 2008 to write-down the carrying value of the Specifid asset group to itsestimated fair value. The impairment loss has been recorded as a separate lineitem, “Loss on impairment of property and equipment”, in the statement ofoperations for the three and six months ended June 30, 2008. The fairvalue was estimated based upon sales prices of similar assets. The carryingvalue of the property and equipment that is held for sale is separatelypresented in the “Assets held for sale” caption in the balance sheet.

 

The carrying value ofproperty and equipment, net of accumulated depreciation and assets held forsale as December 31, 2007 and the carrying value of the assets held forsale as of June 30, 2008 were as follows (in thousands):

 
| ** **                             | ** ** | **As of**    | ** ** | ** **     | ** ** |
|----------------------------------------|------------|-------------------|------------|----------------|------------|
| ** **                             | ** ** | **June 30,** | ** ** | ** **     | ** ** |
| ** **                             | ** ** | **2008**          | ** ** | **As of** | ** ** |
| ** **                             | ** ** | **Carrying**      | ** ** | **Dec.31,**    | ** ** |
| ** **                             | ** ** | **Value**         | ** ** | **2007**       | ** ** |
| ** **                             | ** ** | **Adjusted for**  | ** ** | **Carrying**   | ** ** |
| ** **                             | ** ** | **Impairment**    | ** ** | **Value**      | ** ** |
| **Property  and Equipment, net**       |       |              |       |           |       |
| ** **                             |       |              |       |           |       |
| Leasehold  Improvements                |       | $                 | —     |           | $          | 19,159 |   |
| Equipment and  Construction-in-process |       | —            |       | 14,134         |       |
|                                   |       |              |       |           |       |
| Total Property  and Equipment          |       | $                 | —     |           | $          | 33,293 |   |

 
| ** **                             | ** ** | **As of**    | ** ** | ** **     | ** ** |
|----------------------------------------|------------|-------------------|------------|----------------|------------|
| ** **                             | ** ** | **June 30,** | ** ** | ** **     | ** ** |
| ** **                             | ** ** | **2008**          | ** ** | **As of** | ** ** |
| ** **                             | ** ** | **Carrying**      | ** ** | **Dec.31,**    | ** ** |
| ** **                             | ** ** | **Value**         | ** ** | **2007**       | ** ** |
| ** **                             | ** ** | **Adjusted for**  | ** ** | **Carrying**   | ** ** |
| ** **                             | ** ** | **Impairment**    | ** ** | **Value**      | ** ** |
| **Assets  held for sale**              |       |              |       |           |       |
| ** **                             |       |              |       |           |       |
| Leasehold  Improvements                |       | $                 | —     |           | $          | — |   |
| Equipment and  Construction-in-process |       | 2,500             |       | —         |       |
|                                   |       |              |       |           |       |
| Total Property  and Equipment          |       | $                 | 2,500      |           | $          | — |   |

 

***Stock-Based Compensation***

 

We account forstock-based compensation in accordance with SFAS No. 123 (revised 2004), *Share-Based Payment*, (SFAS 123(R)).  Under SFAS 123(R),stock-based compensation cost is measured at the grant date, based on theestimated fair value of the award, and is recognized as expense over theemployee’s requisite service period.

 

***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.

 

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| ** **                                                                                                    | ** ** | **As of June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                    | ** ** | **(in thousands)**           | ** ** |
| ** **                                                                                                    | ** ** | **2008**                          | ** ** | **2007** | ** ** |
| **Historical  outstanding anti-dilutive securities not included in diluted net loss per  share calculation:** | ** ** | ** **                        | ** ** | ** ** | ** ** |
| ** **                                                                                                    | ** ** | ** **                        | ** ** | ** ** | ** ** |
| Common stock equivalents:                                                                                     |       |                              |       |   |   |
| Stock warrants                                                                                                |       | 7,822                             |       | 3,372 |   |
| Options to  purchase common stock                                                                             |       | 6,535                             |       | 4,338 |   |
| Common stock  subject to repurchase                                                                           |       | 1                                 |       | 58 |   |
|                                                                                                          |       | 14,358                            |       | 7,768 |   |

 

***Adoption of Recent Accounting Pronouncements***

 

In September 2006,the FASB issued SFAS No. 157,*FairValue Measurements*. SFAS 157 defines fair value, establishes aframework for measuring fair value in GAAP and expands disclosures about fairvalue measurements. The standard applies whenever other standards require (orpermit) assets or liabilities to be measured at fair value. The standard doesnot expand the use of fair value in any new circumstances.  SFAS 157 iseffective for financial statements issued for fiscal years beginning after November 15,2007. The Company has adopted the provisions of SFAS 157 as of January 1,2008, for financial instruments. Although the adoption of SFAS 157 did notmaterially impact its financial condition, results of operations, or cash flow,the Company is now required to provide additional disclosures as part of itsfinancial statements. The Company has no financial instruments measured at fairvalue at June 30, 2008. In accordance with the guidance of FASB StaffPosition No. 157-2, the Company has postponed adoption of the standard fornon-financial assets and liabilities that are measured at fair value on anon-recurring basis, until the fiscal year beginning after November 15,2008. The Company does not anticipate adoption will have a material impact onits financial position, results of operations or liquidity.

 

In February 2007,the FASB issued SFAS No. 159,*The FairValue Option for Financial Assets and Financial Liabilities*(SFAS 159), including an amendment ofSFAS No. 115,*Accounting for CertainInvestments in Debt and Equity Securities*, which permits an entityto measure certain financial assets and financial liabilities at fair value.The objective of SFAS 159 is to improve financial reporting by allowingentities to mitigate volatility in reported earnings caused by the measurementof related assets and liabilities using different attributes, without having toapply complex hedge accounting provisions. Under SFAS 159, entities that electthe fair value option (by instrument) will report unrealized gains and lossesin earnings at each subsequent reporting date. The fair value option electionis irrevocable, unless a new election date occurs. SFAS 159 establishespresentation and disclosure requirements to help financial statement usersunderstand the effect of the entity’s election on its earnings, but does noteliminate disclosure requirements of other accounting standards. Assets andliabilities that are measured at fair value must be displayed on the face ofthe balance sheet. The Company chose not to elect the fair value option for itsfinancial assets and liabilities existing at January 1, 2008, and did notelect the fair value option on financial assets and liabilities transacted inthe three and six months ended June 30, 2008. Therefore, the adoption ofSFAS 159 had no impact on the Company’s financial statements.

 

**2.Comprehensive Loss**

 

Components ofcomprehensive loss were as follows (in thousands):

 
| ** **                                                  | ** ** | **Three Months ended June 30,** | ** ** | **Six Months ended June 30,** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                  | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                        |       |                                                |       |                                              |       |   |   |   |   |
| Net loss                                                    |       | $                                                   | (39,373    | )                                                 | $          | (12,388 | ) | $ | (49,854 | ) | $ | (22,919 | ) |
| Change in  unrealized gain (loss) on short-term investments |       | 2                                                   |       | 2                                                 |       | (7 | ) | — |   |
| Comprehensive  loss                                         |       | $                                                   | (39,371    | )                                                 | $          | (12,386 | ) | $ | (49,861 | ) | $ | (22,919 | ) |

 

Accumulated othercomprehensive income totaled approximately $0 and $7,000 at June 30, 2008and December 31, 2007, respectively, and was attributed to net unrealizedgains on short-term investments.

 

**3. Stockholders’ Equity**

 

*RegistrationStatement*

 

On June 20, 2006,the Company filed a shelf registration statement on Form S-3 with theSecurities Exchange Commission (the “SEC”). The shelf registration statement onForm S-3 permits the Company to sell, in one or more public offerings,shares of its common stock, debt securities or warrants, or any combination ofsuch securities, for proceeds in an aggregate amount of up to $60 million. Theshelf registration statement was declared effective by the SEC on July 11,2006. The registration statement expired on February 29, 2008.

 

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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 on February 13,2007, in connection with a shelf takedown from our shelf registrationstatement.

 

On November 2, 2007,the Company entered into definitive agreements with primarily institutionalinvestors relating to a registered direct offering of an aggregate 7.4 millionshares of common stock and warrants to purchase 4.4 million shares of ourcommon stock for gross proceeds of approximately $21.1 million, beforededucting placement agent fees and estimated offering expenses. The investorspurchased the shares of common stock and warrants to purchase common stock (together,a “unit”) at a price of $2.845 per unit, each unit consisting of one share anda warrant to purchase 0.6 shares of common stock. The warrants are exercisableat any time prior to November 7, 2012. The exercise price of the warrantsis $2.77 per share. The common stock was issued pursuant to a prospectussupplement filed with the SEC on November 2, 2007, in connection with thetakedown from our shelf registration statement.

 

Certain of the Company’sexisting stockholders, including three members of our board of directors, IvorRoyston, M.D., Fred Middleton and Antonio Grillo-Lopez, M.D., and fundsaffiliated with Forward Ventures and Sanderling Ventures, invested in theregistered direct offering.  Dr. Royston and Mr. Middleton,members of our board of directors on November 2, 2007, are associated withForward Ventures and Sanderling Ventures, respectively.

 

On March 11, 2008,the Company filed a shelf registration statement on Form S-3 with theSecurities Exchange Commission (the “SEC”). The shelf registration statement onForm S-3 permits the Company to sell, in one or more public offerings, upto 13 million shares of its common stock, inclusive of securities convertibleinto or exchangeable for shares of common stock, and/or debt securities andwarrants to purchase common stock up to a total dollar amount of $25 million.The shelf registration statement was declared effective by the SEC on March 17,2008.

 

*CommittedEquity Financing Facility*

 

On December 19,2006, the Company entered into a Committed Equity Financing Facility (CEFF)with Kingsbridge Capital Limited (Kingsbridge) pursuant to which Kingsbridgecommitted to purchase, subject to certain conditions, up to the lesser of 5.8million shares of the Company’s common stock or an aggregate of $40 millionduring the next three years.  In connection with the CEFF, the Companyissued a warrant to Kingsbridge to purchase 250,000 shares of the Company’scommon stock at an exercise price of $3.98 per share (the Warrant). The Warrantis exercisable through May 2012. On February 15, 2007, the Companyfiled a resale registration statement with the SEC with respect to resaleshares of common stock pursuant to the CEFF and underlying warrant. Theregistration statement was declared effective by the SEC on May 2, 2007.

 

In accordance with theCEFF, on July 17, 2007 and July 23, 2007, the Company issued anaggregate of approximately 462,000 shares of our common stock to Kingsbridge atan aggregate purchase price of $1.4 million. The common stock was issuedpursuant to a prospectus supplement filed with the SEC on July 24, 2007.On September 17, 2007 and September 21, 2007, the Company issued anaggregate of approximately 673,000 shares of our common stock to Kingsbridge atan aggregate purchase price of $1.9 million. The common stock was issuedpursuant to a prospectus supplement filed with the SEC on September 25,2007.

 

During July 2008, weterminated our CEFF with Kingsbridge. As a result, no additional financing isavailable to us under this arrangement.

 

*PrivatePlacement of Common Stock and Warrants*

 

On March 6, 2006,the Company 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,Doug Kelly, M.D. and Arda Minocherhomjee, Ph.D., members of our board ofdirectors on 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 SEC on March 31, 2006 covering the resaleof the shares of common stock issued in the private placement and the shares ofcommon stock issuable upon exercise of the warrants issued in the privateplacement.

 

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**4. StockBased Compensation**

 

On January 1, 2006,the Company adopted SFAS 123(R).  SFAS123(R) requires the recognition of the fair value of stock-basedcompensation in net income or loss.  TheCompany recognizes the stock-based compensation expense over the requisiteservice period of the individual grantees on a straight-line basis over thevesting period, which is generally four years for new awards.

 

The Company utilized theBlack-Scholes valuation model for estimating the fair value of the stock -basedawards granted both before and after the adoption of SFAS 123(R).  Total stock-based compensation expenserecognized for the three and six months ended June 30, 2008 and 2007 wasas follows (in thousands):

 
| ** **                        | ** ** | **Three Months  ended  June 30,** | ** ** | **Three Months  ended  June 30,** | ** ** | **Six Months  ended  June 30,** | ** ** | **Six Months  ended  June 30,** | ** ** |
|-----------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
| ** **                        | ** ** | **2008**                                    | ** ** | **2007**                                    | ** ** | **2008**                                  | ** ** | **2007**                                  | ** ** |
| Research and  development         |       | $                                           | 825        |                                        | $          | 610                                       |       | $                                         | 1,380      |   | $ | 1,027 |   |
| General and  administrative       |       | 470                                         |       | 594                                         |       | 1,032                                     |       | 1,232                                     |       |
| Stock-based  compensation expense |       | $                                           | 1,295      |                                        | $          | 1,204                                     |       | $                                         | 2,412      |   | $ | 2,259 |   |

 

 The Company hasemployment agreements with six members of its executive management team whowere included in the workforce reduction on June 6, 2008. The employmentagreements entitle the executives to accelerated vesting of the portion of anyoutstanding option to purchase common stock held by the executives on the dateof termination that would have otherwise vested during the nine monthsfollowing the date of termination. Approximately $600,000 of stock-basedcompensation expense for the three and six months ended June 30, 2008 isassociated with the accelerated vesting.

 

The following tablesummarizes the Company’s stock option activity, including performance-basedoptions, for employee and director stock options (shares in thousands):

 
| ** **                           | ** ** | ** **         | ** ** | ** **              | ** ** | **Weighted**              | ** ** | ** **              | ** ** |
|--------------------------------------|------------|--------------------|------------|-------------------------|------------|---------------------------|------------|-------------------------|------------|
| ** **                           | ** ** | ** **         | ** ** | **Weighted**            | ** ** | **Average**               | ** ** | **Aggregate**           | ** ** |
| ** **                           | ** ** | **Number of** | ** ** | **Average**             | ** ** | **Remaining**             | ** ** | **Intrinsic**           | ** ** |
| ** **                           | ** ** | **Options**        | ** ** | **Exercise Price** | ** ** | **Contractual Life** | ** ** | **Value**               | ** ** |
| ** **                           | ** ** | **Outstanding**    | ** ** | **Per Share**           | ** ** | **(years)**               | ** ** | **(in thousands)** | ** ** |
| Outstanding at  January 1, 2008 |       | 4,346              |       | $                       | 3.68       |                      | 8.27       |                    | $          | 734 |   |
| Granted                              |       | 2,227              |       | 1.75                    |       |                      |       |                    |       |
| Exercised                            |       |               |       |                    |       |                      |       |                    |       |
| Repurchased                          |       | (74                | )          | 0.73                    |       |                      |       |                    |       |
| Canceled                             |       | (2,733             | )          | 2.86                    |       |                      |       |                    |       |
| Expired                              |       |               |       |                    |       |                      |       |                    |       |
| Outstanding at  June 30, 2008   |       | 3,840              |       | 3.14                    |       | 5.87                      |       | $                       | —     |   |
| Exercisable at  June 30, 2008   |       | 2,230              |       | 3.48                    |       | 4.14                      |       | $                       | —     |   |
|                                      |            |                    |            |                         |            |                           |            |                         |            |  |  |  |

 

Of the exercisableoptions above, approximately 800,000 were granted to the 132 employees includedin the workforce reduction on June 6, 2008. The expiration date of theseoptions is September 6, 2008.

 

At June 30, 2008,the total compensation cost related to unvested stock-based awards granted toemployees under the Company’s stock award plans but not yet recognized,excluding performance-based options, was approximately $1.1 million, net ofestimated forfeitures.  This cost will be amortized using thestraight-line method and will be adjusted for subsequent changes in estimatedforfeitures.

 

Prior to the secondquarter of 2008, the Company granted an aggregate total of 2.7 millionperformance-based options with performance conditions dependent upon thesuccess of the trial. No stock-based compensation expense has been recorded forthese performance options as the Company did not assess the vesting asprobable. The compensation cost related to the options of approximately $3.7 millionwill not be recognized based on the results of the Phase 3 registration trial.

 

No amounts related tostock-based compensation expense have been capitalized. The tax benefit, andthe resulting effect on cash flows from operations and financial activities,related to stock-based compensation expense were not recognized as we currentlyprovide a full valuation allowance for all of our deferred tax assets.

 

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**5.Commitments and Contingencies**

 

In December 2005,the Company entered into a loan and security agreement with a lender and anamendment to a loan and security agreement with another lender (Agreements)under which the lenders agreed to extend the Company a line of credit equal to$20 million.  As a condition of theAgreements, on December 30, 2005, the Company borrowed $3 million againstthe line of credit to repay the outstanding balance of existing loan andsecurity agreements executed in March 2003.  The remaining proceeds were used solely forthe purchase of eligible equipment and certain leasehold improvements through December 2007.  Borrowings against the line of credit werestructured as promissory notes with the interest rate fixed at the time of eachdraw based on the three-year Treasury bill. Such borrowings were secured by all existing and future assets of theCompany, excluding intellectual property, and were to be repaid monthly over 36to 42 months, depending upon the nature of the equipment financed, through January 2011.  The Agreements contained a restrictivefinancial covenant requiring the Company to maintain a minimum of $15 millionin available cash, cash equivalents and short-term investments (available cashbalances). Under the Agreements, if the available cash balances dropped below$15 million, the lenders could require the Company to execute a letter ofcredit (LOC) for their benefit equal to the outstanding loan balances at thattime. In May 2008, the Agreements were amended to reduce the minimumavailable cash balances requirement to $14.5 million. In May 2008, theCompany’s available cash balances dropped below $14.5 million. Because theCompany did not execute an LOC equal to the outstanding loan balances, the lendersissued notices of default, acceleration and demand for payment of theoutstanding balances. In June 2008, the Company paid approximately $8.8million from the Company’s investment accounts as repayment of the outstandingprincipal balance, accrued interest and certain transaction costs. The lendersreleased the general lien on the Company’s assets. As of June 30, 2008,there were no outstanding balances under the Agreements.

 

**6. Restructuring Activities.**

 

On May 29, 2008, theCompany provided a notice under the federal Worker Adjustment and RetrainingNotification Act (WARN Act) to 132 employees, including six members of seniormanagement, that it planned to conduct a workforce reduction at its facility inSan Diego, and that their employment was expected to end on June 6, 2008.In accordance with employment agreements for senior management, the cost ofseverance totaling $1.4 million which included nine months of base salaries andhealth benefits was accrued as operating expense in the second quarter of 2008.The costs related to WARN Act notices of the remaining employees, ofapproximately $1.9 million, including two months of salaries, wages andbenefits, were accrued as operating expenses in the second quarter of 2008. Approximately$2.6 million was recorded as research and development expenses and approximately$700,000 was recorded as marketing, general and administrative expense for thethree and six months ended June 30, 2008. Accrued Flexible Time Off (FTO) forthe 132 employees given the WARN Act notice totaled approximately $700,000 asof June 6, 2008. Approximately $2.6 million in severance cost, WARN Actpayments and FTO for the 132 employees remained outstanding as of June 30,2008.

 

**7. Subsequent Event.**

 

On July 18, 2008, inconnection with the discontinuation of the development of SpecifidTM, theCompany entered into a Lease Termination Agreement (Termination Agreement) withits landlord.  The Termination Agreementterminates the Amended and Restated Office Lease dated October 31, 2005,as amended by the First Amendment dated as of September 22, 2006(collectively, the Lease),pursuant to which the landlord leased to the Company its principal headquartersand manufacturing facilities, consisting of 128,580 rentable square feet ofspace (the Premises). Under the terms of the Termination Agreement, the Leasewill terminate on August 31, 2008 (Termination Date).  Through the Termination Date, the Companywill pay for all electrical, gas and water usage and for all clean roomjanitorial services, and will shut down all installations and equipment locatedin the GMP lab portion of the Premises in accordance with mutually agreed uponprocedures.

 

In consideration of theearly termination of the Lease term, which was originally scheduled to expireon June 30, 2025, and the releases set forth in the Termination Agreement,the Company has transferred and relinquished to the landlord all rights, claimsand/or interest it may have had in and to the security deposit of approximately$360,000 which is included in Other Assets in the June 30, 2008 balancesheet. Further, the Company acknowledged that the landlord has the right todraw upon the approximately $3.6 million letter of credit (L-C) for the entireL-C amount at any time.  Cashcollateralizing the L-C is included in Restricted Cash in the June 30,2008 balance sheet. The Company has agreed that the landlord may retain allamounts drawn on the L-C and has transferred and relinquished to landlord allrights, claims and interest it may have had in and to the L-C. The base rentand direct expenses which would have otherwise been payable by the Company forthe months of July and August 2008 shall be applied from the securitydeposit and amounts drawn on the L-C. Upon the effective date of termination ofthe Lease, August 31, 2008, the Company will record a gain on termination andthe deferred rent currently recorded on the balance sheet will be eliminated.

 

The Company has no othersignificant remaining commitments under leases.

 

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**Item2. Management’s Discussion and Analysis of Financial Condition and Results ofOperations.**

 

**CautionaryNote Regarding Forward-Looking Statements**

 

*This Form 10-Qcontains certain forward-looking statements including expectations of marketconditions, challenges and plans, within the meaning of Section 21E of theSecurities Exchange Act of 1934, as amended, and is subject to the Safe Harborprovisions created by that statute. The words “anticipate”, “expect”,“believe”, “plan”, “intend”, and similar expressions are intended to identifysuch statements. Although the forward-looking statements in this Form 10-Qreflect the good faith judgment of our management, such statements are subjectto various risks and uncertainties, including but not limited to thosediscussed herein and, in particular, the risks described in Item 1A of Part II and throughout our Annual Report on Form 10-K for the year ended December 31,2007. Actual results and the timing of selected events may differ materiallyfrom those anticipated in these forward-looking statements. Except as requiredby applicable law, we disclaim any duty to update any forward-looking statementto reflect events or circumstances that occur after the date on which suchstatement is made.*

 

**Overview**

 

We are abiopharmaceutical company focused on the development and commercialization oftargeted immunotherapies for the treatment of cancer and other diseases of theimmune system.

 

In May 2008, we obtained results of the dataanalysis of our Phase 3 registration trial for our lead product candidate,Specifid, for patients with follicular B-cell non-Hodgkin’s lymphoma, or fNHL.Analysis of the primary endpoint in the trial failed to show a statisticallysignificant improvement in the treatment arm, Specifid plus Leukine®(sargramostim, GM-CSF) following Rituxan, compared to the control arm, placeboplus Leukine following Rituxan. Based on these results, we immediatelydiscontinued development of Specifid and other programs requiring production ofpatient-specific therapies including the T-cell and autoimmune diseaseprograms. We had previously devoted substantially all of our research,development and clinical efforts and financial resources toward the developmentSpecifid. In connection with the termination of our clinical trials forSpecifid, effective June 6, 2008, we had a major workforce reduction inwhich 132 of our 144 employees were terminated. We have also ceased themanufacture of Specifid at our facility in San Diego, California. In July 2008,we executed an Agreement with our landlord to terminate our facility lease on August 31,2008. We plan to sell our equipment and other personal property in August 2008.****Accordingly, we recorded a non-cash charge for theimpairment of long-lived assets of $28.5 million in the second quarter of 2008to write-down the carrying value of the Specifid asset group to its estimatedfair value.

 

We are considering ourstrategic alternatives, including business arrangements, such as areorganization involving in-licensing of products contingent upon additionalfinancing or a merger with another entity. There is a substantial risk that wemay not successfully implement any of these restructuring alternatives, andeven if we determine to pursue one or more of these alternatives, we may beunable to do so on acceptable financial terms. Any such transactions mayrequire us to incur non-recurring or other charges and may pose significantintegration challenges and/or management and business disruptions, any of whichcould materially and adversely affect our business and financial results.

 

We were incorporated inDelaware in January 2000. As of June 30, 2008, we had not generatedany revenues, and we had financed our operations and internal growth throughprivate placements and public offerings of our stock and warrants, andequipment and leasehold debt financings. We are a development stage company andhave incurred significant losses since our inception in 2000, as we havedevoted substantially all of our efforts to research and developmentactivities, including clinical trials. As of June 30, 2008, our deficitaccumulated during the development stage was approximately $248.8 million. Weexpect to incur substantial and increasing losses for the next several years aswe attempt to complete any strategic transactions such as a reorganizationinvolving in-licensing of products or a merger with another company.

 

**GoingConcern**

 

As more fully describedin the Risk Factors and Note 1 of the Notes to Condensed Financial Statements,our independent registered public accounting firm has included an explanatoryparagraph in their report on our 2007 financial statements included with ourAnnual Report on Form 10-K for the year ended December 31, 2007 filedwith the SEC on February 29, 2008, related to the uncertainty of ourability to continue as a going concern. At June 30, 2008, our currentliabilities of $5.6 million exceeded our cash and cash equivalents of $2.2million. We intend to sell all of our equipment and other personal property in August 2008and plan to use our current cash, cash equivalents and proceeds from the saleof assets to fund current operations and to repay our creditors. Although ourcurrent liabilities exceed our currents assets, we have prepared the CondensedFinancial Statements on a going-concern basis as we are considering our strategicalternatives, including business arrangements, such as a reorganizationinvolving in-licensing of products contingent upon additional financing or amerger with another entity. If we are unable to complete a strategictransaction, we will likely not be able to continue as a going concern entity.

 

**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 have been primarily focused on thedevelopment of Specifid. Because we have discontinued the development ofSpecifid and substantially reduced our workforce, we expect our research anddevelopment expenditures to decrease significantly during the remainder of2008.

 

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From inception through June 30,2008, we incurred costs of approximately $152.9 million associated with theresearch and development of Specifid and, since May 2008, the discontinuationof the Specifid development program, which represents substantially all of ourresearch and development costs to date. If we are successful in completing astrategic transaction which may involve in-licensing of product candidates,preclinical development of our anti-CD20 antibody panel or merger with anothercompany, we are unable to estimate with any certainty the costs we will incurin the development of product candidates. Clinical development timelines,likelihood of success and total costs vary widely among different productcandidates and the development of clincial products is subject to extensivegovernmental regulation. These factors make it difficult for us to predict thetiming and costs of further development, if any, of any future productcandidates.

 

***Marketing, General and Administrative Expense.***  Marketing,general and administrative expenses consist primarily of compensation and otherexpenses related to our marketing and corporate administrative employees, legalfees and other professional services expenses. Because we have discontinued thedevelopment of Specifid and substantially reduced our workforce, we expect ourmarketing, general and administrative expenditures to decrease significantlyduring the remainder of 2008.

 

***Interest Income.***  Interest incomeprimarily consists of interest earned on our cash reserves, cash invested inmoney market funds, government securities, corporate notes and bonds andcertificates of deposit.

 

***Interest Expense.***  Interest expenserepresents interest on our debt, including capital leases.

 

**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 theyear ended December 31, 2007, we believe the following accounting policiesto be critical to the judgments and estimates used in the preparation of ourfinancial statements:

 

***Stock-Based Compensation.***  Weaccount for stock-based compensation in accordance with Statement of FinancialAccounting Standards (SFAS) No. 123 (revised 2004), *Share-BasedPayment*, (SFAS 123(R)).  Under SFAS 123(R), stock-basedcompensation cost is measured at the grant date, based on the estimated fairvalue of the award, and is recognized as expense over the employee’s requisiteservice period.

 

***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 other rentholidays in our straight-line rent expense.  In addition, tenantimprovements paid by the landlord are capitalized as leasehold improvements andamortized over the shorter of their estimated useful lives or the remaininglease term, while the tenant improvement allowance is recorded as deferred rentand recovered ratably over the remaining term of the lease.

 

***Impairmentof Long-lived Assets.******  ***Long-livedassets to be held and used are reviewed for impairment when events or changesin circumstances indicate the carrying amount of an asset may not berecoverable or its estimated useful life has changed significantly. Impairmentis the condition that exists when the carrying amount of a long-lived asset (orgroup of assets herein referred to as an asset group) exceeds its fair value.An impairment loss must be recognized when the carrying amount of thelong-lived asset (asset group) is not recoverable and exceeds its fair value. Thecarrying amount of a long-lived asset (asset group) is not recoverable if itexceeds the sum of the undiscounted cash flows expected to result from the useand eventual disposition of the asset.

 

***CostsAssociated with Exit or Disposal Activities.* **A liability for costs associated with exitor disposal activities should be measured and recognized, initially at its fairvalue, in the period in which the liability is incurred. In the second quarterof 2008, we recorded a liability associated with severance and related costs ofa workforce reduction in which 132 employees were terminated on June 6,2008.

 

***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 Software Developed or Obtained forInternal Use.” Determining when a project has reached the development stagerequires the use of judgment.  Subsequent additions, modifications orupgrades to internal-use software are capitalized only to the extent that theyallow the software to perform a task it previously did not perform. Softwaremaintenance and training costs are expensed in the period in which they areincurred.

 

***Fair Value Measurement.***  Asdiscussed in Notes 1 and 4 to the condensed financial statements, the Companyadopted the provisions of SFAS No. 157 and SFAS No. 159 effective January 1,2008.

 

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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.

 

 **Results of Operations**

 

***Comparison of the Three Months Ended June 30, 2008 and2007***

 

*Researchand Development.*  Research and development expenseincreased from approximately $9.6 million during the three months ended June 30,2007 to $10.1 million during the three months ended June 30, 2008. Theincrease of $500,000, or 5%, was primarily due to approximately $2.6 millionassociated with severance and other costs related to the workforce reduction onJune 6, 2008, $400,000 in depreciation expense associated with ourcommercial manufacturing facility and an increase of approximately $200,000 instock-based compensation; which was partially offset by a decrease ofapproximately $800,000 in compensation expense due to the workforce reduction, a$700,000 reduction in the purchase of manufacturing supplies and a $500,000 reductionin clinical site costs associated with the discontinuation of the developmentof Specifid and a decrease in cash bonus expense of approximately $200,000 pursuantto the Company’s cash bonus plan which was contingent upon meeting certainmilestones associated with the Phase 3 registration trial. The likelihood ofpayment of the $200,000 under the cash bonus plan is now considered remote.

 

*Marketing,General and Administrative.*  Marketing, general andadministrative expense increased from approximately $2.9 million duringthe three months ended June 30, 2007 to $3.0 million during the threemonths ended June 30, 2008. The increase of $100,000, or 3%, primarilyreflects an increase of approximately $700,000 associated with severanceexpense and other costs related to the workforce reduction on June 6, 2008and $200,000 in legal fees which were partially offset by a decrease ofapproximately $400,000 of compensation expense associated with the workforcereduction, a $200,000 decrease in consulting services associated with marketingand compliance projects conducted in 2007 which did not recur in 2008, a $100,000decrease in stock-based compensation, and a $100,000 reduction in travelexpenses.

 

*InterestIncome.*  Interest income decreased from approximately$500,000 during the three months ended June 30, 2007 to $100,000 duringthe three months ended June 30, 2008. The decrease of $400,000, or 80%,was primarily the result of the reduction in the average balance of cash, cashequivalents and short-term investments and a lower average interest rate.

 

*Loss onImpairment of Assets.*  Following the discontinuation ofdevelopment of Specifid, we performed a recoverability test of the long-livedassets included in our Specifid asset group in accordance with SFAS No. 144,*Accounting for the Impairment or Disposal ofLong-Lived Assets*. The test was based on the estimated undiscountedfuture cash flows expected to result from the disposition of the Specifid assetgroup, including the estimated future cash inflows from anticipated sales andreturns of assets and the estimated asset disposition costs. Accordingly, werecorded a non-cash charge for the impairment of long-lived assets of $28.5million in the second quarter of 2008 to write-down the carrying value of theSpecifid asset group to its estimated fair value.

 

*Changein Valuation of Warrants.*  In November 2007, theCompany issued warrants to purchase 4.4 million shares of Common Stock inconjunction with the registered direct offering of Common Stock and warrants.These warrants were recorded as a liability utilizing the Black-Scholesvaluation model for estimating the fair value in November 2007. Utilizingthe Black-Scholes valuation model, on June 30, 2008, these warrants werevalued at $0. The change in valuation was recorded as other income during thethree months ended June 30, 2008.

 

***Comparison of the Six Months Ended June 30, 2008 and2007***

 

*Researchand Development.*    Research anddevelopment expense increased from approximately $17.6 million during thesix months ended June 30, 2007 to $18.2 million during the six monthsended June 30, 2008. The increase of $600,000, or 3%, is primarily due toapproximately $2.6 million associated with severance and other costs related tothe workforce reduction on June 6, 2008, increases of approximately$800,000 in depreciation expense associated with the commercial manufacturingfacility and $400,000 in stock-based compensation; which was partially offsetby decreases of approximately $1.0 million in the purchase of manufacturingsupplies and $500,000 in clinical site costs associated with discontinuation ofthe development of Specifid; $800,000 in compensastion expense due to theworkforce reduction; decreases in cash bonus expense of approximately $200,000as payment under the Company’s cash bonus plan which was contingent uponmeeting certain milestones associated with the Phase 3 registration trial and isnow considered remote;  and an approximately$100,000 reduction in travel costs.

 

*Marketing,General and Administrative.*    Marketing,general and administrative expense decreased from approximately$5.9 million during the six months ended June 30, 2007 to$5.6 million during the six months ended June 30, 2008. The decreaseof $300,000, or 4%, primarily reflects approximately $700,000 associated withseverance expense and other costs related to the workforce reduction on June 6,2008 and an increase of $300,000 in legal fees, which were offset by decreasesof approximately $600,000 in compensation expense associated with the workforcereduction; a $300,000 reduction in travel expenses; a $200,000 reduction inconsulting services associated with marketing and compliance projects conductedin 2007 which did not recur in 2008, and a $200,000 decrease in stock-based compensation.

 

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*InterestIncome.*  Interest income decreased from approximately$1.1 million during the six months ended June 30, 2007 to $380,000 duringthe six months ended June 30, 2008. The decrease of $680,000, or 64%, wasprimarily the result of the reduction in the average balance of cash, cashequivalents and short-term investments and a lower average interest rate.

 

*Loss onImpairment of Assets.*  Following the discontinuation ofdevelopment of Specifid, we performed a recoverability test of the long-livedassets included in our Specifid asset group in accordance with SFAS No. 144,*Accounting for the Impairment or Disposal ofLong-Lived Assets*. The test was based on the estimated undiscountedfuture cash flows expected to result from the disposition of the Specifid assetgroup, including the estimated future cash inflows from anticipated sales and returnsof assets and the estimated asset disposition costs. Accordingly, we recorded anon-cash charge for the impairment of long-lived assets of $28.5 million in thesecond quarter of 2008 to write-down the carrying value of the Specifid assetgroup to its estimated fair value.

 

*Changein Valuation of Warrants.*  In November 2007, theCompany issued warrants to purchase 4.4 million shares of Common Stock inconjunction with the registered direct offering of Common Stock and warrants.These warrants were recorded as a liability utilizing the Black-Scholesvaluation model for estimating the fair value in November 2007. UtilizingBlack-Scholes, on December 31, 2007, the warrants were valued atapproximately $2.5 million and on June 30, 2008, the warrants were valuedat $0. The change in valuation was recorded as other income during the sixmonths ended June 30, 2008.

 

**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, 2008, we hadreceived proceeds of approximately $76.1 million, net of stock issuancecosts from the sale of preferred stock which was converted to common stock;proceeds from the sale of common stock in our IPO of approximately $39.5million, net of underwriters’ discounts and commissions and offering expenses;proceeds of approximately $74.9 million from the sale of common stock andwarrants to purchase common stock to certain investors, in a private placementand in registered direct offerings, net of offering expenses; and proceeds of$3.3 million from the sale of common stock to certain investors, in a committedequity financing facility.

 

As more fully describedin the Risk Factors and Note 1 of the Notes to Condensed Financial Statements,our independent registered public accounting firm has included an explanatoryparagraph in their report on our 2007 financial statements included with ourAnnual Report on Form 10-K for the year ended December 31, 2007 filedwith the SEC on February 29, 2008, related to the uncertainty of ourability to continue as a going concern. At June 30, 2008, our currentliabilities of $5.6 million exceeded our cash and cash equivalents of $2.2million. We intend to sell equipment and personal property in August 2008and plan to use our current cash, cash equivalents and proceeds from the saleof assets to fund current operations and to repay our creditors. In addition,we are considering our strategic alternatives, including business arrangementssuch as a reorganization involving in-licensing of products contingent uponadditional financing or a merger with another entity. If we are unable tocomplete a strategic transaction, we will likely not be able to continue as agoing concern entity.

 

***Cash Flows***

 

As of June, 2008, cash,cash equivalents and short-term investments were approximately $2.2 million ascompared to $29.9 million at December 31, 2007, a decrease ofapproximately $27.7 million. The decrease resulted primarily from the netcash used to fund ongoing operations and the repayment of debt.

 

Net cash used inoperating activities was approximately $16.1 million for the six months ended June 30,2008, compared to approximately $19.3 million for the same period in2007.  The decrease of approximately $3.2 million is primarily due toslightly lower spending and an increase in accounts payable and accruedliabilities as the company approached the June 2008 data release.

 

Net cash used ininvesting activities for the six months ended June 30, 2008 wasapproximately $3.3 million compared to net cash provided by investingactivities of $8.5 million for the same period in 2007.  The decreased useof cash of approximately $5.2 million is due to a decrease of $22.3 million inmaturities of short-term investments offset by a decrease of approximately$10.8 million in purchases of short-term investments and approximately $6.3million in property and equipment purchases.

 

Net cash used infinancing activities for the six months ended June 30, 2008 wasapproximately $11.4 million, reflecting primarily debt repayments ofapproximately $11.6 million.  Net cash provided by financing for the sameperiod in 2007 totaled approximately $13.1 million, reflecting primarily thegross proceeds of approximately $10 million from our registered direct offeringof common stock in February 2007 and approximately $5.6 million of grossproceeds from our credit facility, offset by approximately $2.6 million of debtrepayments.

 

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***Funding Requirements***

 

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

 

·the proceeds from the sale of our equipment and other personal property; and 

 

·our ability to complete any strategic transactions such as a reorganizationinvolving in-licensing of products or a merger with another company.

 

If we are able tocomplete a strategic transaction, our future capital uses and requirements willdepend on numerous forward-looking factors, which include but are not limitedto;

 

·rate of progress toward obtaining regulatory approval of any future productcandidates;

 

·costs of filing, prosecuting, defending and enforcing our patent claims andother intellectual property rights;

 

·our ability to establish and maintain collaborative, licensing or otherarrangements for the development, sale, marketing or distribution of any futureproduct candidates and the terms of those arrangements;

 

·effects of competing technological and market developments; and

 

·the success of the commercialization of any future product candidates.

 

As of June 30, 2008,we have 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 theyear ended December 31, 2007.

 

***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 10% change in interestrates over a twelve month period beginning on June 30, 2008 would have asignificant impact on our interest income. As of June 30, 2008, we had noshort-term investments and our cash equivalents were held in checking accountsand money market funds.

 

**Item4. Controls and Procedures.**

 

***Disclosure Controls and Procedures***

 

Under the supervision andwith the participation of our Chief Executive Officer and Chief FinancialOfficer, we evaluated the effectiveness of the design and operation of ourdisclosure controls and procedures, as defined under Rule 13a-15(e) promulgatedunder the Securities Exchange Act of 1934, as amended (the Exchange Act). Basedon that evaluation, our Chief Executive Officer and Chief Financial Officerhave concluded that, as of the end of the period covered by this report, ourdisclosure controls and procedures were effective.

 

***Changes in Internal Control over Financial Reporting***

 

Our management, includingour Chief Executive Officer and Chief Financial Officer, has concluded thatthere were changes in our internal control over financial reporting thatoccurred during our quarter ended March 31, 2008 that have materiallyaffected, and are reasonably likely to materially affect, our internal controlover financial reporting.

 

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All but three members ofour finance staff were included in the workforce reduction on June 6,2008. Therefore, certain segregation of duties did not exist and other controlswere not performed in the preparation of this report as had been the case inpast closing and reporting cycles. We did not adequately divide, or compensatefor, incompatible functions among personnel to reduce the risk that a potentialmaterial misstatement of the financial statements could occur without beingprevented or detected.

 

**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.

 

**Item1A.          *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 theyear ended December 31, 2007.*

 

Going Concern—See “GoingConcern” in Note 1 of Notes to Condensed Financial Statements and page     of this Risk Factors section, in which we discuss the need to obtain additionalfinancing in 2008.

 

**RisksRelated to Our Business**

 

***In light of our decision to discontinuedevelopment of our Specifid clinical program, we are seeking to maximize thevalue of our assets, and address our liabilities and raise additional capitalfor our existing business.  We areattempting to pursue mergers or similar strategic transactions.  We may be unable to satisfy our liabilitiesand can provide no assurances that we can be successful in strategic pursuing astrategic transaction.**

 

**In May 2008, we obtained results of the dataanalysis of our Phase 3 registration trial for our lead product candidate,Specifid, for patients with follicular B-cell non-Hodgkin’s lymphoma, or fNHL.Analysis of time to progression, or TTP, the primary endpoint in the trial,failed to show a statistically significant improvement in the treatment arm,Specifid plus Leukine® (sargramostim, GM-CSF) following Rituxan, compared tothe control arm, placebo plus Leukine following Rituxan. Analysis of allsubgroups also did not show any significant differences in primary or secondaryendpoints when adjusted for prognostic factors. Based on these results, we immediately discontinued development ofSpecifid and other programs requiring production of patient-specific therapiesincluding the T-cell and autoimmune disease programs.**We had previously devotedsubstantially all of our research, development and clinical efforts andfinancial resources toward the development Specifid. Subsequent to ourtermination of   the development of  Specifid, We have had or expect to have thefollowing developments:

** **

**·**      We had a major workforcereduction in which 132 of our 144 employees were terminated.

**·**      We have incurred approximately$3.3 million of severance costs, the substantial majority of which will be cashexpenditures; approximately $2.6 million of severance and accrued Flexible TimeOff (“FTO”) remained outstanding at June 30, 2008.

**·**      We have also ceased themanufacture of Specifid at our facility in San Diego, California. On July 18,2008, we executed the Termination Agreement with our landlord to terminate ourfacility lease on August 31, 2008.

**·**      We plan to sell our equipment andother personal property assets in an auction to be held in August 2008.

** **

As a result of thediscontinuation of our clinical trials of Specifid, we are actively consideringstrategic alternatives with the goal of maximizing the value of our assets. Inaddition to our workforce reduction and the termination of our Specifiddevelopment activities, we are considering our restructuring alternatives,including business arrangements such as a reorganization involving in-licensingof products contingent upon additional financing or a merger with anotherentity. There are substantial challenges and risks which will make it difficultto successfully implement any of these restructuring alternatives.  Even if we determine to pursue one or more ofthese alternatives, we may be unable to do so on acceptable terms.

 

Stockholders shouldrecognize that in our efforts to address our liabilities and fund the futuredevelopment of our anti-CD20 antibody program, we may pursue strategicalternatives that result in the stockholders of the Company having little or nocontinuing interest in the assets of the Company as stockholders or otherwise.We will continue to evaluate our alternatives in light of our cash position,including the possibility that we may need to seek protection under theprovisions of the U.S. Bankruptcy Code.

 

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***We maynot be able to continue as a going concern and may be unable to satisfy ourliabilities.**

 

As more fully describedin Note 1 of the Notes to Condensed Financial Statements, our independentregistered public accounting firm has included an explanatory paragraph intheir report on our 2007 financial statements related to the uncertainty of ourability to continue as a going concern. Our cash and cash equivalents, whichwere approximately $2.2 million at June 30, 2008 are insufficient todischarge our existing and anticipated liabilities and obligations. We areunlikely to be able to raise sufficient additional capital to continue ourexisting operations beyond that time. If we are unable to complete a strategictransaction, we do not expect to be able to continue as a going concern.

 

***We may need to liquidate the Company in avoluntary dissolution under Delaware law or to seek protection under theprovisions of the U.S. Bankruptcy Code, and in that event, it is unlikely thatstockholders would receive any value for their shares.**

 

We have not generated anyrevenues to date, and we have incurred losses in each year since our inceptionin 2000. We do not expect to be able to raise capital to continue our existingoperations, particularly in light of our obligations to our former employeesand unsecured creditors. We are currently evaluating our strategic alternativeswith respect to all aspects of our business. We cannot assure you that anyactions that we take would raise or generate sufficient capital to fullyaddress the uncertainties of our financial position. As a result, we may beunable to realize value from our assets and discharge our liabilities in thenormal course of business. If we are unable to settle our obligations to ourcreditors or if we are unable to consummate a strategic transaction we wouldlikely need to liquidate the Company in a voluntary dissolution under Delawarelaw or to seek protection under the provisions of the U.S. Bankruptcy Code. Inthat event, we or a trustee appointed by the court may be required to liquidateour assets. In either of these events, we might realize significantly less fromour assets than the values at which they are carried on our financialstatements. The funds resulting from the liquidation of our assets would beused first to satisfy obligations to creditors before any funds would beavailable to pay our stockholders, and any shortfall in the proceeds woulddirectly reduce the amounts available for distribution, if any, to our creditorsand to our stockholders. In the event we were required to liquidate underDelaware law or the federal bankruptcy laws, it is highly unlikely thatstockholders would receive any value for their shares.

 

***We recorded an impairment loss for the secondquarter of 2008 and may need to record additional charges in the future.**

 

In light of our decisionto discontinue the development of Specifid, to evaluate the possible sale ofour equipment and other personal property assets, to reduce our workforce andissue WARN notices to more than 90% of our employees, and to consider ourstrategic alternatives with respect to all aspects of our business, managementconsidered whether, under SFAS 144, any events or circumstances hadoccurred since December 31, 2007 and prior to June 30, 2008 thatwould indicate an impairment of our long-lived assets. After completing itsevaluation and considering all external and internal information available asof the impairment analysis, management concluded that, as of June 30, 2008,the carrying amount of the asset group was not fully recoverable and that amaterial impairment did exist. Accordingly, our financial statements reflect acharge of $28.5 million for impairment of assets during the second quarterof 2008. As we continue to evaluate our business and our assets under SFAS 144,we may need to reflect additional impairment charges in the future, which wouldnegatively impact our financial results.

 

***We haveincurred significant operating losses since inception and anticipate that wewill continue to incur losses and negative cash flow from operations for theforeseeable future.**

 

We are a developmentstage company with a limited operating history. We have financed our operationsthrough private placements of common stock and warrants, public offerings ofour common stock and warrants to purchase our common stock, equipment andleasehold debt financing, and our CEFF through Kingsbridge Capital Limited. Wehave incurred losses in each year since our inception in 2000. For the threeand six months ended June 30, 2008, the Company reported a net loss of$39.4 million and $49.9 million, or $0.95 and $1.21 per share, respectively,compared to a net loss of $12.4 million and $ 22.9 million, or $0.38 per shareand $0.73 per share, respectively, for the same period in 2007.  Theselosses, among other things, have had and will continue to have an adverseeffect on our stockholders’ equity and working capital. We have discontinuedthe development of Specifid and we are evaluating strategic alternatives topreserve the value of our other assets. As a result, if our operationscontinue, we expect that we would continue to incur operating losses for theforeseeable future.

 

***Wereceived notices of default, acceleration and demand for payment from GeneralElectric Capital Corporation and Oxford Finance Corporation (the “Lenders”) andmay be subject to demands from our other creditors.**

 

Subsequent to thereceipt of those notices, the Lenders received approximately $8.8 million asrepayment of the outstanding principal, accrued interest and certaincosts.  Acceleration of the loan wastriggered when the Company’s cash fell below the $14.5 million minimum cashcovenant on May 30, 2008.  TheCompany and the Lenders subsequently reached an agreement, under terms of whichthe Company reimbursed the Lenders an additional $47,000 of transactioncosts.  The Lenders have been paid infull and, therefore, agreed to release the general lien on the Company’sassets. If we are unable to timely pay our obligations to other creditors, wemay be subject to additional demands from our creditors.

 

***During July 2008,we terminated our committed equity financing facility with Kingsbridge.**

 

In December 2006, weentered into the CEFF with Kingsbridge, which we terminated on July 2008  As a result of the termination of the CEFF,no additional financing is available to us.

 

*** We may have difficulty raisingadditional capital to fund future operations.**

 

The results of our Phase3 registration trial of Specifid and the subsequent discontinuation of ourdevelopment of Specifid and other programs have significantly depressed ourstock price and severely impaired our ability to raise additional funds. We arecurrently evaluating our strategic alternatives with respect to all aspects ofour business, including in-licensing of products contingent upon additionalfinancing. Even if we are able to identify new product candidates toin-license, we may not be able to obtain sufficient equity or other financingto develop in-licensed product candidates or to take advantage of our otherstrategic alternatives.

 

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**OtherRisks Related to Our Business and Industry**

 

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

 

If we are able tocomplete a reorganization of the Company involving pursuing our anti-CD20program, and/or in-licensing other preclinical or clinical product candidatesfor future development, we will likely be subject to rigorous and extensiveregulation by the FDA. In the United States, our biologic product candidates,currently at the preclinical stage of development, or any future preclinical orclinical product candidates that we may develop cannot be marketed until theyare approved by the FDA. Obtaining FDA approval of a product candidate involvesthe submission of the results of preclinical studies and clinical trials, amongother information. We may not be able to obtain FDA approval for any futureproduct candidates, and, even if we are able to do so, the approval processtypically takes many years and requires the commitment of substantial effortand financial resources. The FDA can delay, limit or deny approval of abiologic product candidate for many reasons, including:

 

·     the FDA may not find that ourproduct candidates are sufficiently safe or effective;

·     FDA officials may interpretdata from preclinical testing and clinical trials differently than we do; and

·     the FDA may not find ourrequired manufacturing processes or facilities satisfactory.

 

In addition, both beforeand after approval, we are subject to numerous FDA requirements covering, amongother things, testing, manufacturing, quality control, labeling, advertising,promotion and export of biologics. Failure to comply with the law, includingstatutes and regulations administered by the FDA, could result in, amongothers, any of the following actions:

 

·     warning letters;

·     fines and other civilpenalties;

·     unanticipated expenditures;

·     delays in approving orrefusal to approve a product candidate;

·     product recall or seizure;

·     interruption of production;

·     operating restrictions;

·     injunctions; and

·     criminal prosecution.

 

***Beforewe can seek regulatory approval of any of our future product candidates, wemust successfully complete clinical trials, which are uncertain.**

 

Completion of necessaryclinical trials may take several years or more. Our commencement and rate ofcompletion of clinical trials may be delayed by many factors, including:

 

·     ineffectiveness of theproduct candidate, or perceptions by physicians that the product candidate isnot safe or effective for a particular indication;

·     inability to manufacture orhave manufactured sufficient quantities of the product candidate for use inclinical trials;

·     delay or failure in obtainingapproval of our clinical trial protocols from the FDA;

·     slower than expected rate ofpatient recruitment and enrollment;

·     inability to adequatelyfollow and monitor patients after treatment;

·     difficulty in managingmultiple clinical sites;

·     unforeseen safety issues; and

·     government or regulatorydelays.

 

As our experience withSpecifid demonstrates, even if we achieve positive interim results in clinicaltrials, these results do not necessarily predict final results, and positiveresults in early trials may not be indicative of success in later trials. Manyother companies in the pharmaceutical industry have suffered significantsetbacks in advanced clinical trials, even after promising results in earliertrials. Negative or inconclusive results or adverse medical events during aclinical trial could cause us to repeat or terminate a clinical trial orrequire us to conduct additional trials. Any future clinical trials we conductmay be suspended at any time for a variety of reasons, including if the FDA orwe believe the patients participating in our trials are exposed to unacceptablehealth risks or if the FDA finds deficiencies in the conduct of these trials.

 

Failures or perceivedfailures in our clinical trials will directly delay our product development andregulatory approval process, damage our business prospects, make it difficultfor us to establish collaboration and partnership relationships, and negativelyaffect our reputation and competitive position in the pharmaceutical community.

 

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***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 any future product candidates that we may develop.**

 

In May 2008, wediscontinued development of Specifid. If we complete a reorganization of theCompany involving pursuing our anti-CD20 program, and/or in-licensing ofpreclinical or clinical product candidates, we do not have the ability toindependently conduct clinical trials for any other future product candidatethat we may develop, and we must rely on third parties, such as medicalinstitutions and clinical investigators, including physician sponsors, toconduct our clinical trials. In particular, we will rely on these parties torecruit and enroll patients in our clinical trials. If the quality or accuracyof the clinical data obtained by medical institutions and clinicalinvestigators, including physician sponsors and other third-party vendorsinvolved in data management, is compromised due to their failure to adhere toapplicable laws or our clinical protocols or for other reasons, we may not beable to obtain regulatory approval for or successfully commercialize any futureproduct candidates that we may develop.

 

***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.**

 

Even if we obtainregulatory approval of any future product candidates, we will still be subjectto extensive regulation. These regulations will impact many aspects of ouroperations, including production, record keeping, quality control, adverseevent reporting, storage, labeling, advertising, promotion and personnel. Inaddition, the later discovery of previously unknown problems may result inrestrictions of the product candidates, including their withdrawal from themarket. Furthermore, regulatory approval may subject us to ongoing requirementsfor post-marketing studies. If we or any third party that we involve in ouroperations fail to comply with any continuing regulations, we may be subjectto, among other things, product seizures, recalls, fines or other civilpenalties, injunctions, suspensions or revocations of marketing licenses,operating restrictions and criminal prosecution.

 

***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.**

 

If approved, any productcandidates that we may develop may not gain market acceptance among physicians,healthcare payors, patients and the medical community. Demand for any approvedproduct that we may develop will depend on many factors, including:

 

·     our ability to provideacceptable evidence of safety and efficacy;

·     convenience and ease ofadministration;

·     availability of alternativetreatments;

·     cost effectiveness;

·     effectiveness of ourregulatory and marketing strategies;

·     prevalence and severity ofadverse side effects;

·     publicity concerning ourproducts or competitive products; and

·     our ability to obtainthird-party coverage or reimbursement.

 

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

 

Our ability tocommercialize any future product candidates that we may develop depends on theextent to which coverage and reimbursement for any future product candidatesthat we may develop, will be available from:

 

·     governmental payors, such asMedicare and Medicaid;

·     private health insurers,including managed care organizations; and

·     other third-party payors.

 

Many patients may beincapable of paying for any future product candidates that we may develop,themselves and will rely on third-party payors to pay for their medical needs.The federal and state governments, insurance companies, managed careorganizations and other third-party payors are actively seeking to contain orreduce costs of health care in the United States and exert increasing influenceon decisions regarding the use of, and reimbursement levels for, particulartreatments. Such third-party payors, including Medicare, are scrutinizing newlyapproved medical products and services and may not cover or may limit coverageand reimbursement for our product candidates. In particular, third-party payorsmay limit the indications for which they will reimburse patients who use anyproduct candidates that we may develop. Cost-control initiatives could cause usto decrease the price we might establish for any product candidates that we maydevelop, which would result in lower product revenues. If the prices for anyproduct candidates that we may develop, decrease or if governmental and otherthird-party payors do not provide adequate coverage and reimbursement levelsfor any product candidates that we may develop, our revenue and prospects forprofitability will suffer.

 

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

 

Our strategy may includereliance on strategic collaborations for co-promotion or commercialization ofany future product candidates both in and outside of the United States. Todate, we have not entered into any agreements with third parties for any ofthese services.

 

Establishing strategiccollaborations is difficult and time-consuming. Our discussions with potentialcollaborators may not lead to the establishment of new collaborations onfavorable terms, or at all. For example, potential partners may rejectcollaborations based upon their assessment of our financial, regulatory orintellectual property position. If we successfully establish newcollaborations, these 

 

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relationships may neverresult in the successful development or commercialization of our productcandidates or the generation of sales revenue. To the extent that we enter intoco-promotion or other collaborative arrangements, our product revenues arelikely to be lower than if we directly marketed and sold any products that wemay develop.

 

Management of anycollaborative relationship we may establish in the future will require:

 

·     significant time and effortfrom our management team;

·     coordination of our researchand development programs with the research and development priorities of ourcollaborators; and

·     effective allocation of ourresources to multiple projects.

 

If we enter intodevelopment or commercialization collaborations, our success will in partdepend on the performance of our corporate collaborators. We likely 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 alternativetechnologies in preference to our product candidates. Finally, ourcollaborators may terminate our relationships, and we may be unable toestablish additional corporate collaborations in the future on acceptable terms,or at all.

 

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

 

Our strategy has beenfocused on the research, development and commercialization of targeted immunotherapiesfor the treatment of cancer and other diseases of the immune system. Theprocess of successfully developing product candidates is very time-consuming,expensive and unpredictable. We have only recently begun to direct significanteffort toward completing strategic transactions for the development of otherproduct candidates since we discontinued development of Specifid, FAV-201 forT-cell lymphoma and a preclinical product candidate for the treatment ofmultiple sclerosis. We acquired a series of optimized anti-CD20 antibodies in June 2007which could be included in our future development plans.

 

We do not know whetherany preclinical studies or clinical trials for this or any other productcandidates will be commenced or completed on schedule, or at all. In addition,we do not know whether these clinical trials will result in marketableproducts. Typically, there is a high rate of attrition for product candidatesin preclinical and clinical trials.

 

***If ourcompetitors develop and market products that are more effective than productcandidates that we may develop, or obtain marketing approval before we do, ourcommercial opportunity may be reduced or eliminated.**

 

The development andcommercialization of new pharmaceutical products is competitive, and we willface competition from numerous sources, including major pharmaceuticalcompanies, specialty pharmaceutical companies and biotechnology companiesworldwide. Many of our competitors have substantially greater financial andtechnical resources and development, production and marketing capabilities thanwe do. In addition, many of these companies have more experience than we do inpreclinical testing, clinical trials and manufacturing of biologictherapeutics, as well as in obtaining FDA and foreign regulatory approvals. Wewill also compete with academic institutions, governmental agencies and privateorganizations that are conducting research in the fields of cancer andautoimmune disease. Competition among these entities to recruit and retain highlyqualified scientific, technical and professional personnel and consultants isalso intense.

 

***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.**

 

There have been a numberof legislative and regulatory proposals aimed at changing the healthcare systemand pharmaceutical industry, including reductions in the cost of prescriptionproducts and changes in the levels at which consumers and healthcare providersare reimbursed for purchases of pharmaceutical products. For example, thePrescription Drug and Medicare Improvement Act of 2003 was recently enacted.This legislation provides for a Medicare prescription drug benefit which beganin 2006 and mandates other reforms. Although we cannot predict the full effectson our business of the implementation of this new legislation, it is possiblethat the new benefit, which will be managed by private health insurers,pharmacy benefit managers and other managed care organizations, will result indecreased reimbursement for prescription drugs, which may further exacerbateindustry-wide pressure to reduce the prices charged for prescription drugs. Thiscould harm our ability to market future products and generate revenues.

 

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

 

Our historical researchand development and manufacturing activities involve the use of biological andhazardous materials that could be dangerous to human health, safety or theenvironment. Although we believe our safety procedures for handling anddisposing of these materials comply with federal, state and local laws andregulations, we cannot entirely eliminate the risk of accidental injury or contaminationfrom the use, storage, handling or disposal of these materials. In the event ofcontamination or injury, we could be held liable for any resulting damages, andany liability could exceed our resources. We currently maintain property andcasualty insurance coverage which covers liability for hazardous and controlledmaterials. However, this insurance coverage may not be sufficient to 

 

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cover our liability andwe may not be able to obtain sufficient coverage in the future at a reasonablecost. In addition, we may incur significant costs complying with both existingand future environmental laws and regulations. In particular, we are subject toregulation by the Occupational Safety and Health Administration, or OSHA, andthe Environmental 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.**

 

Our business exposes usto potential liability risks that may arise from the clinical testing of ourproduct candidates and the manufacture and sale of any approved products. Theserisks will exist even with respect to those product candidates that areapproved for commercial sale by the FDA and manufactured in facilitiesregulated by the FDA. Any product liability claim or series of claims broughtagainst us could significantly harm our business by, among other things,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 our creditorscould levy claims against our assets, including our intellectual property.

 

***Wecould be negatively impacted by future interpretation or implementation offederal and state fraud and abuse laws, including anti-kickback laws and otherfederal and state anti-referral laws.**

 

If we are able tocommercialize any product candidates that we may develop, we will be subject tovarious federal and state laws pertaining to healthcare fraud and abuse,including anti-kickback laws and physician self-referral laws. Violations ofthese laws are punishable by criminal and civil sanctions, including, in someinstances, imprisonment and exclusion from participation in federal and statehealthcare programs, including Medicare, Medicaid and Veterans Administrationhealth programs. Because of the far-reaching nature of these laws, we may berequired to alter one or more of our practices to be in compliance with theselaws. Healthcare fraud and abuse regulations are complex, and even minor,inadvertent irregularities can potentially give rise to claims that a statuteor prohibition has been violated. Any violations of these laws, or any actionagainst us for violation of these laws, even if we successfully defend againstit, could result in a material adverse effect on our business, financialcondition and results of operations. If there is a change in law, regulation oradministrative or judicial interpretations, we may have to change our businesspractices or our existing business practices could be challenged as unlawful,which could have a material adverse effect on our business, financial conditionand results of operations. In addition, some allegations under these laws havebeen claimed to violate the False Claims Act, discussed in more detail below.

 

In addition, if we areable to commercialize any product candidates that we may develop, we couldbecome subject to false claims litigation under federal statutes, which canlead to civil money penalties, criminal fines and imprisonment, and exclusionfrom participation in Medicare, Medicaid and other federal and state healthcareprograms. These false claims statutes include the False Claims Act, whichallows any person to bring suit on behalf of the United States federalgovernment alleging the submission of false or fraudulent claims, or causing topresent such false or fraudulent claims, under federal programs or contractsclaims or other violations of the statute and to share in any amounts paid bythe entity to the government in fines or settlement. These suits againstbiotechnology companies have increased significantly in recent years and haveincreased the risk that a healthcare company will have to defend a false claimaction, pay fines or be excluded from the Medicare, Medicaid or other federaland state healthcare programs as a result of an investigation arising out ofsuch action. We cannot assure you that we will not become subject to suchlitigation or, if we are not successful in defending against such actions, thatsuch actions will not have a material adverse effect on our business, financialcondition and results of operations. In addition, we cannot assure you that thecosts of defending claims or allegations under the False Claims Act will nothave a material adverse effect on our business, financial condition and resultsof operations.

 

**RisksRelated 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.**

 

Our business andcompetitive positions are dependent upon our ability to protect our proprietarytechnology. Our success will depend in large part on our ability to obtain andmaintain patent protection for our product and technologies, preserve tradesecrets and operate without infringing the intellectual property right ofothers. Because of the substantial length of time and expense associated withdevelopment of new products, we, along with the rest of the biopharmaceuticalindustry, place considerable importance on obtaining and maintaining patentprotection for new technologies, products and processes. The patent positionsof pharmaceutical, biopharmaceutical and biotechnology companies, including us,are generally uncertain and involve complex legal and factual questions. Ourpatent applications may not protect our technologies and products because,among other things:

 
| · |   | there is no guarantee  that any of our pending patent applications will result in issued patents; |
|--------|--------|---------------------------------------------------------------------------------------------------|

 

 

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| · |   | we may develop  additional proprietary technologies that are not patentable;                                                                                          |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · |   | there is no guarantee  that any patents issued to us, our collaborators or our licensors will  provide a basis for a commercially viable product;                     |
| · |   | there is no guarantee  that any patents issued to us or our collaborators or our licensors will  provide us with any competitive advantage;                           |
| · |   | there is no guarantee  that any patents issued to us or our collaborators or our licensors will not  be challenged, circumvented or invalidated by third parties; and |
| · |   | there is no guarantee  that any patents previously issued to others or issued in the future will not  have an adverse effect on our ability to do business.           |

 

We attempt to protect ourintellectual property position by filing United States patent applicationsrelated to our proprietary technology, inventions and improvements that areimportant to the development of our business. Currently we own U.S. Patent No. 6,911,204concerning the treatment of NHL with our technology together with five pendingUnited States patent applications covering methods of treating immune systemdiseases, including B-cell and T-cell lymphomas, using our proprietaryimmunotherapy production methods, as well as methods for combining the idiotypeimmunotherapies with other therapies that are used to treat diseases of theimmune system, as well as a panel of optimized anti-CD20 antibodies and theiruse in treating immune system diseases.

 

Outside of the UnitedStates, we have six issued patents and over twenty pending patentapplications. Limitations on patent protection in some countries outsidethe United States, and the differences in what constitutes patentable subjectmatter in these countries, may limit the protection we have under patentsissued to us outside of the United States. In addition, laws of foreigncountries may not protect our intellectual property to the same extent as wouldlaws of the United States. In determining whether or not to seek a patent or tolicense any patent in a particular foreign country, we weigh the relevant costsand benefits, and consider, among other things, the market potential of ourproduct candidates in the jurisdiction, and the scope and enforceability ofpatent protection afforded by the law of the jurisdiction. Failure to obtainadequate patent protection for our proprietary product candidates andtechnology would impair our ability to be commercially competitive in thesemarkets.

 

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

 

The pharmaceutical fieldis characterized by a large number of patent filings involving complex legaland factual questions, and, therefore, we cannot predict with certainty whetherour patents will be enforceable. Competitors may have filed applications for orhave been issued patents and may obtain additional patents and proprietaryrights related to products or processes that compete with or are similar toours. We may not be aware of all of the patents potentially adverse to our intereststhat may have been issued to others.

 

Litigation may benecessary to protect our patent position, and we cannot be certain that we willhave the required resources to pursue litigation or otherwise to protect ourpatent rights. In addition, our efforts to protect our patents may not besuccessful.

 

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

 

We also rely on tradesecrets to protect our technology, particularly when we do not believe thatpatent protection is appropriate or available. However, trade secrets aredifficult to protect. We attempt to protect our trade secrets by requiring eachof our employees, consultants and advisors to execute a non-disclosure andassignment of invention agreement before beginning his or her employment,consulting or advisory relationship with us. We cannot guarantee that theseagreements will provide meaningful protection, that these agreements will notbe breached, that we will have an adequate remedy for any such breach, or thatour trade secrets will not otherwise become known or independently developed bya third party. Our trade secrets, or those of our future collaborators, maybecome known or may be independently discovered by others, which couldadversely affect the competitive position of our product candidates.

 

**RisksRelated to the Securities Markets and Ownership of Our Common Stock**

 

***Untilour initial public offering in February 2005, there was no public marketfor our common stock.  The price of ourcommon stock has been volatile and has declined significantly; we will likelybe delisted from Nasdaq.**

 

Until our initial publicoffering, or IPO, in February 2005, there was no public market for ourcommon stock, and despite our IPO, an active public market for these shares maynot be sustained. Our stock price has traded in the range of $7.77- $0.04 fromthe commencement of our IPO on February 2, 2005 to July 30, 2008.

 

We received Nasdaqstaff deficiency letters dated July 9, 2008 indicating that, for the prior30 consecutive days, the bid price for the Company’s common stock had closedbelow the minimum $1.00 per share requirement and had not maintained a minimummarket value of publicly held  shares of$5,000,000 as required for continued inclusion of the Nasdaq Global Marketunder Marketplace Rules 4450(A)(5) and (2).  In accordance with Marketplace Rule 4450(e)(1),the Company has 90 calendar days, or until October 7, 2008, to regaincompliance with the $5,000,000 minimum market value requirement.  In accordance with Marketplace Rule 4450(e)(2),the 

 

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Company has 180calendar days, or until February 9, 2009, to regain compliance with theminimum $1.00 price per share requirement. If the Company does not regain compliance, Nasdaq will provide writtennotification that the Company’s common stock will be delisted, after which theCompany may appeal the staff determination to the Nasdaq Listing QualificationsPanel if it so chooses.

 

Specifically, you may notbe able to resell your shares at or above the price you paid for such shares orat all. In addition, class action litigation has often been instituted againstcompanies whose securities have experienced periods of volatility in marketprice. Any such litigation brought against us could result in substantial costsand a diversion of management’s attention and resources, which could hurt ourbusiness, operating results and financial condition.

 

***Concentrationof ownership among our existing officers, directors and principal stockholdersmay prevent other stockholders from influencing significant corporate decisionsand depress our stock price.**

 

As of June 30, 2008,our officers and directors and stockholders affiliated with our directorstogether beneficially held approximately 34% of our outstanding common stock onan as-converted basis. If some or all of these officers, directors andprincipal stockholders act together, they will be able to exert a significantdegree of influence over our management and affairs and over matters requiringstockholder approval, including the election of directors, the merger,consolidation or sale of all or substantially all of our assets, and any othersignificant corporate transaction. The interests of this concentration ofownership may not always coincide with our interests or the interests of ourother stockholders. For instance, officers, directors and principalstockholders, acting together, could cause us to enter into transactions oragreements that we would not otherwise consider. Similarly, this concentrationof ownership may have the effect of delaying or preventing a change in controlof us otherwise favored by our other stockholders. This concentration ofownership 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 orinfluencing significant decisions.**

 

Provisions in our amendedand restated certificate of incorporation and amended and restated bylaws mayhave the effect of delaying or preventing a change in control of us or ourmanagement, even if doing so would be beneficial to our stockholders. Theseprovisions include:

 

·                                                  dividingour board of directors into three classes serving staggered three-year terms;

·                                                  authorizingour board of directors to issue preferred stock without stockholder approval;

·                                                  prohibitingcumulative voting in the election of directors;

·                                                  prohibitingstockholder actions by written consent;

·                                                  limitingthe persons who may call special meetings of stockholders;

·                                                 prohibitingour stockholders from making certain changes to our certificate ofincorporation or bylaws except with 66.7% stockholder approval; and

·                                                  requiringadvance notice for raising business matters or nominating directors atstockholders’ meetings.

 

We are also subject toprovisions of the Delaware corporation law that, in general, prohibit anybusiness combination with a beneficial owner of 15% or more of our common stockfor five years unless the holder’s acquisition of our stock was approved inadvance by our board of directors. Together, these charter and statutoryprovisions could make the removal of management more difficult and may discouragetransactions that otherwise could involve payment of a premium over prevailingmarket prices for our common stock.

 

**Item2.    Unregistered Sales of Equity Securities and Use ofProceeds.**

 

On April 8, 2008, inconjunction with a consulting agreement with Porter Novelli Life Sciences, LLC,we issued warrants to purchase up to 10,000 shares of our common stock at anexercise price of $1.80 per share. The warrants are exercisable through April 8,2013. These warrants were issued in reliance upon the exemption fromregistration provided in section 4(2) of the Securities Act of 1933, asamended, and/or Regulation D promulgated thereunder pursuant to theconsultant’s status as an accredited investor.

 

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**Item 4.Submission of Matters to a Vote of Security Holders.**

 

At our 2008 annualmeeting of stockholders held on June 25, 2008, the stockholders were asked tovote on three items as follows:

 

| 1.     |   | The election of four  Class III directors to hold office for a three-year term, through the 2011  annual meeting of stockholders. The nominees for election were Antonio  Grillo-Lopez, M.D., John P. Longenecker, Ph.D., Fred Middleton and Wayne I  Roe. No other nominations were received in accordance with the Company’s  Bylaws. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                         |
| 2.     |   | The amendment of our  Amended and Restated Certificate of Incorporation to increase the number of  authorized shares of our common stock by 75,000,000 from 75,000,000 to  150,000,000 shares.                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                         |
| 3.     |   | The amendment of our  2005 Employee Stock Purchase Plan (the “Purchase Plan”) to increase the  number of shares of our common stock authorized for issuance by 1,000,000  shares, from 450,000 shares to 1,450,000 shares, subject to adjustment as  provided in the Purchase Plan.                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                         |
| 3.     |   | The ratification of the  selection of Ernst & Young LLP to serve as the independent registered  public accounting firm of the Company for the fiscal year ending December 31,  2008.                                                                                                                                                     |

 

The results of thematters presented at the annual meeting, based on the presence in person or byproxy of holders of 35,268,557 shares of the 41,299,598 shares of our commonstock of record entitled to vote, were as follows:

 

1. The election ofAntonio Grillo-Lopez, M.D., John P. Longenecker, Ph.D., Fred Middleton andWayne I. Roe as directors of the Company until the 2011 annual meeting ofstockholders and until their successors are elected was approved as follows:

 
| ** **                 | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|----------------------------|------------|------------|------------|--------------|------------|
| Antonio Grillo-Lopez, M.D. |       | 32,777,183 |       | 2,491,374    |       |
|                       |       |       |       |         |       |
| John P. Longenecker, Ph.D. |       | 34,647,549 |       | 621,008      |       |
|                       |       |       |       |         |       |
| Fred Middleton             |       | 34,655,069 |       | 613,488      |       |
|                       |       |       |       |         |       |
| Wayne I. Roe               |       | 34,622,674 |       | 645,883      |       |

 

2.  The amendment of our Amended and RestatedCertificate of Incorporation to increase the number of authorized shares of ourcommon stock by 75,000,000 from 75,000,000 to 150,000,000 shares was approvedas follows:

 
| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker Withheld** | ** ** |
|------------|------------|-------------|------------|-------------|------------|--------------------------|------------|
| 30,324,589 |       | 4,801,068   |       | 142,900     |       | 6,005,750                |       |

 

3.  The amendment of the Purchase Plan toincrease the number of shares of our common stock authorized for issuance by1,000,000 shares, from 450,000 shares to 1,450,000 shares, subject toadjustment as provided in the Purchase Plan was approved as follows:

 
| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker Withheld** | ** ** |
|------------|------------|-------------|------------|-------------|------------|--------------------------|------------|
| 24,429,360 |       | 1,665,420   |       | 2,520,467   |       | 12,659,058               |       |

 

4. The ratification ofErnst & Young LLP as serve as the independent registered public accountingfirm of the Company for its fiscal year ending December 31, 2008 was approvedas follows:

 
| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker Withheld** | ** ** |
|------------|------------|-------------|------------|-------------|------------|--------------------------|------------|
| 35,077,995 |       | 135,483     |       | 55,080      |       | 12,659,058               |       |

 

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**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.(7)                                                                                                                                                            |
|                      |       |                                                                                                                                                                                                          |
| 4.1                       |       | Form of Common  Stock Certificate of Registrant.(1)                                                                                                                                                      |
|                      |       |                                                                                                                                                                                                          |
| 4.2                       |       | Amended and Restated  Investor Rights Agreement dated March 26, 2004 among the Registrant and  certain of its stockholders.(1)                                                                           |
|                      |       |                                                                                                                                                                                                          |
| 4.3                       |       | Amendment No. 1 to  Amended and Restated Investor Rights Agreement dated April 6, 2004 among  the Registrant and certain of its stockholders.(1)                                                    |
|                      |       |                                                                                                                                                                                                          |
| 4.4                       |       | Securities Purchase Agreement  dated March 6, 2006, by and among Registrant 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 Registrant 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 Registrant 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  Registrant and Kingsbridge Capital Limited dated August 10, 2007.(6)                                |
|                      |       |                                                                                                                                                                                                          |
| 4.12                      |       | Form of Warrant  issued to investors in November 2007 registered direct offering. (8)                                                                                                               |
|                      |       |                                                                                                                                                                                                          |
| 4.13                      |       | Placement Agent  Agreement dated November 2, 2007, by and between Registrant and Lazard  Capital Markets, LLC. (8)                                                                                       |
|                      |       |                                                                                                                                                                                                          |
| 4.14                      |       | Warrant to purchase  10,000 shares of Common Stock dated April 8, 2008 issued to Porter  Novelli Life Sciences, LLC. (9)                                                                                 |
|                      |       |                                                                                                                                                                                                          |
| 10.1                      |       | Loan Amendment  Agreement dated May 16, 2008, by and between Registrant and General  Electric Capital Corporation and Oxford Finance Corporation                                                         |
|                      |       |                                                                                                                                                                                                          |
| 10.2                      |       | Retention Plan  Agreement dated June 26, 2008, by and between Registrant and Tamara A.  Seymour (10)                                                                                                     |
|                      |       |                                                                                                                                                                                                          |
| 10.3                      |       | Salary Deferral Payment  Agreement dated June 27, 2008, by and between Registrant and John P.  Longenecker (10)                                                                                          |

 

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| 10.4   |   | Agreement dated  June 30, 2008, by and between Registrant and General Electric Capital  Corporation                                                                                                                                            |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                |
| 10.5   |   | Agreement dated  June 30, 2008, by and between Registrant and Oxford Finance Corporation                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                |
| 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 Rule13a-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). |

 

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| (1)    |   | Filed as an  Exhibit to Registrant’s Registration Statement on Form S-1 (File  No. 333-114299), as amended, and incorporated by reference herein. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                  |
| (2)    |   | Filed as an exhibit to  Registrant’s Current Report on Form 8-K dated March 6, 2006 and  incorporated herein by reference.                             |
|   |   |                                                                                                                                                                  |
| (3)    |   | Filed as an exhibit to  Registrant’s Current Report on Form 8-K dated February 13, 2007 and  incorporated herein by reference.                         |
|   |   |                                                                                                                                                                  |
| (4)    |   | Filed as an exhibit to  Registrant’s Current Report on Form 8-K dated December 20, 2006 and  incorporated herein by reference.                         |
|   |   |                                                                                                                                                                  |
| (5)    |   | Filed as an exhibit to  Registrant’s Annual Report on Form 10-K for the year ended  December 31, 2005 and incorporated herein by reference.            |
|   |   |                                                                                                                                                                  |
| (6)    |   | Filed as an exhibit to  Registrant’s Quarterly Report on Form 10-Q for the quarter ended  June 30, 2006 and incorporated herein by reference.          |
|   |   |                                                                                                                                                                  |
| (7)    |   | Filed as an exhibit to  Registrant’s Current Report on Form 8-K dated October 4, 2007 and  incorporated herein by reference.                           |
|   |   |                                                                                                                                                                  |
| (8)    |   | Filed as an exhibit to  Registrant’s Current Report on Form 8-K dated November 2, 2007 and  incorporated herein by reference.                          |
|   |   |                                                                                                                                                                  |
| (9)    |   | Filed as an exhibit to  Registrant’s Quarterly Report on Form 10-Q for the quarter ended March  31, 2008 and incorporated herein by reference.              |
|   |   |                                                                                                                                                                  |
| (10)   |   | Indicates management  contract or compensatory plan.                                                                                                                  |

 

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**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 11,  2008 |                                                                                                     |
|------------------------------|----------------------------------------------------------------------------------------------------------|
|                         |                                                                                                     |
|                         |                                                                                                     |
|                         | 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) |

 

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