**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

----

**FORM 10-Q**

----

**(Mark One)**

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

**Forthe quarterly period ended March 31, 2007**

**OR**

**o****   TRANSITIONREPORT 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   organization) |   | (I.R.S. Employer  Identification No.) |
|                                                              |   |                                  |
| **10445  Pacific Center Court, San Diego, CA**                    |   | **92121**                             |
| (Address of  principal executive offices)                         |   | (Zip Code)                            |

 

**(858)526-8000**

(Registrant’stelephone number, including area code)

**N/A**

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

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

Indicate by check markwhether the registrant is a large accelerated filer,  an acceleratedfiler, or a non-accelerated filer.  See definition of  “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act(Check one).
| Large Accelerated  Filer  o | Accelerated  Filer  o | Non-Accelerated  Filer  x |
|---------------------------------------|---------------------------------|-------------------------------------|

 

Indicate by check mark whether the registrant is shell company (asdefined in Rule 12b-2 of the Exchange Act).

YES  o    NO  x

The number of shares ofthe Registrant’s common stock outstanding as of May 2, 2007 was32,504,629.

 

----

**FAVRILLE,INC.**

**QUARTERLYREPORT ON FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 2007****TABLE OF CONTENTS**
| **PART I.**  | **FINANCIAL  INFORMATION**                                                                                                                                                               | ** ** | ** ** |
|-------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| Item 1.           | Financial  Statements                                                                                                                                                                    |       |       |
|              | Balance  Sheets as of March 31, 2007 (Unaudited) and December 31, 2006                                                                                                         |       |       |
|              | Statements of  Operations (Unaudited) for the three months ended March 31, 2007 and  2006 and the period from January 21, 2000 (inception) to March 31,  2007 (Unaudited) |       |       |
|              | Statements of Cash  Flows (Unaudited) for the three months ended March 31, 2007 and 2006 and  the period from January 21, 2000 (inception) to March 31, 2007  (Unaudited) |       |       |
|              | Notes to  Condensed Financial Statements (Unaudited)                                                                                                                                     |       |       |
| Item 2.           | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                                              |       |       |
| Item 3.           | Quantitative  and Qualitative Disclosures About Market Risk                                                                                                                              |       |       |
| Item 4T.          | Controls and  Procedures                                                                                                                                                                 |       |       |
|              |                                                                                                                                                                                     |       |       |
| **PART II.** | **OTHER INFORMATION**                                                                                                                                                                    | ** ** | ** ** |
| Item 1.           | Legal Proceedings                                                                                                                                                                        |       |       |
| Item  1A.         | Risk  Factors                                                                                                                                                                            |       |       |
| Item  6.          | Exhibits                                                                                                                                                                                 |       |       |
|              |                                                                                                                                                                                     |       |       |
| SIGNATURES        |                                                                                                                                                                                     |       |

 

2

----

**PART I — FINANCIAL INFORMATION**

**Item1. Financial Statements.**

**FAVRILLE, INC.**

**(adevelopment stage company)**

**BALANCE SHEETS**

**(inthousands, except share and per share data)**
| ** **                                                                                                                                                                                                        | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                        | ** ** | **(unaudited)**          | ** ** | ** **                  | ** ** |
| **Assets**                                                                                                                                                                                                        | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Current assets:                                                                                                                                                                                                   |       |                     |       |                        |       |
| Cash and cash  equivalents                                                                                                                                                                                        |       | $                        | 22,188     |                        | $          | 14,249 |   |
| Short-term  investments                                                                                                                                                                                           |       | 19,699                   |       | 28,160                      |       |
| Receivables                                                                                                                                                                                                       |       | 265                      |       | 242                         |       |
| Prepaid expenses  and other current assets                                                                                                                                                                        |       | 1,010                    |       | 608                         |       |
| Total current assets                                                                                                                                                                                              |       | 43,162                   |       | 43,259                      |       |
| Property and equipment,  net                                                                                                                                                                                      |       | 32,314                   |       | 25,071                      |       |
| Restricted cash                                                                                                                                                                                                   |       | 3,451                    |       | 3,451                       |       |
| Other assets                                                                                                                                                                                                      |       | 497                      |       | 508                         |       |
| Total assets                                                                                                                                                                                                      |       | $                        | 79,424     |                        | $          | 72,289 |   |
| **Liabilities and stockholders’  equity**                                                                                                                                                                    | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Current liabilities:                                                                                                                                                                                              |       |                     |       |                        |       |
| Accounts payable  and accrued liabilities                                                                                                                                                                         |       | $                        | 5,838      |                        | $          | 6,779 |   |
| Current portion  of debt                                                                                                                                                                                          |       | 5,848                    |       | 4,976                       |       |
| Total current  liabilities                                                                                                                                                                                        |       | 11,686                   |       | 11,755                      |       |
| Debt, less current  portion                                                                                                                                                                                       |       | 8,095                    |       | 5,754                       |       |
| Deferred rent                                                                                                                                                                                                     |       | 14,280                   |       | 10,145                      |       |
| Commitments and  contingencies                                                                                                                                                                                    |       |                     |       |                        |       |
| Stockholders’ equity:                                                                                                                                                                                        |       |                     |       |                        |       |
| Preferred stock,  $0.001 par value 5,000,000 shares authorized at March 31, 2007 and  December 31, 2006; no shares issued and outstanding at March 31,  2007 and December 31, 2006            |       | —                   |       | —                      |       |
| Common stock,  $0.001 par value:                                                                                                                                                                                  |       |                     |       |                        |       |
| Authorized  shares, 75,000,000 at March 31, 2007 and December 31, 2006; Issued  and outstanding shares— 32,503,721 and 29,060,081 at March 31, 2007 and  December 31, 2006, respectively |       | 33                       |       | 29                          |       |
| Additional  paid-in capital                                                                                                                                                                                       |       | 211,754                  |       | 200,497                     |       |
| Accumulated  other comprehensive loss                                                                                                                                                                             |       | 1                        |       | 3                           |       |
| Deficit  accumulated during the development stage                                                                                                                                                                 |       | (166,425                 | )          | (155,894                    | )          |
| Total stockholders’  equity                                                                                                                                                                                  |       | 45,363                   |       | 44,635                      |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                   |       | $                        | 79,424     |                        | $          | 72,289 |   |

 

See accompanyingnotes.

3

----

**FAVRILLE, INC.**

**(adevelopment stage company)**

**STATEMENTS OF OPERATIONS**

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

**Unaudited**
| ** **                                                                                               | ** ** | ** **                                           | ** ** | ** **                              | ** ** | **Period from  January 21, 2000** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                               | ** ** | **Three Months ended March 31,** | ** ** | **(inception) to  March 31,** | ** ** |
| ** **                                                                                               | ** ** | **2007**                                             | ** ** | **2006**                                | ** ** | **2007**                                         | ** ** |
| Operating  expenses:                                                                                     |       |                                                 |       |                                    |       |                                             |       |
| Research and development                                                                                 |       | $                                                    | 7,997      |                                    | $          | 8,421                                            |       | $ | 107,903 |   |
| Marketing, general and administrative                                                                    |       | 2,912                                                |       | 2,701                                   |       | 32,575                                           |       |
| Total operating  expenses                                                                                |       | 10,909                                               |       | 11,122                                  |       | 140,478                                          |       |
| Interest income                                                                                          |       | 565                                                  |       | 432                                     |       | 5,622                                            |       |
| Interest expense                                                                                         |       | (187                                                 | )          | (165                                    | )          | (3,028                                           | )          |
| Other income  (expense)                                                                                  |       | —                                               |       | —                                  |       | (381                                             | )          |
| Total other  income, net                                                                                 |       | 378                                                  |       | 267                                     |       | 2,213                                            |       |
| Net loss                                                                                                 |       | (10,531                                              | )          | (10,855                                 | )          | (138,265                                         | )          |
|                                                                                                     |       |                                                 |       |                                    |       |                                             |       |
| 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                                                              |       | $                                                    | (10,531    | )                                       | $          | (10,855                                          | )          | $ | (166,425 | ) |
| Historical net  loss per share:                                                                          |       |                                                 |       |                                    |       |                                             |       |
| Basic and  diluted                                                                                       |       | $                                                    | (0.34      | )                                       | $          | (0.49                                            | )          |   |   |
| Weighted-average  shares-basic and diluted                                                               |       | 30,690                                               |       | 22,355                                  |       |                                             |       |

 

See accompanyingnotes.

4

----

**FAVRILLE, INC.**

**(adevelopment stage company)**

**STATEMENTS OF CASH FLOWS**

**(inthousands)**

**Unaudited**
| ** **                                                                              | ** ** | ** **                       | ** ** | ** **              | ** ** | **Period from** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------------------|------------|-------------------------|------------|----------------------|------------|
| ** **                                                                              | ** ** | ** **                       | ** ** | ** **              | ** ** | **January 21,** | ** ** |
| ** **                                                                              | ** ** | ** **                       | ** ** | ** **              | ** ** | **2000**             | ** ** |
| ** **                                                                              | ** ** | **Three Months ended** | ** ** | **(inception) to** | ** ** |
| ** **                                                                              | ** ** | **March 31,**               | ** ** | **March 31,**      | ** ** |
| ** **                                                                              | ** ** | **2007**                         | ** ** | **2006**                | ** ** | **2007**             | ** ** |
| **Operating  activities**                                                               | ** ** | ** **                       | ** ** | ** **              | ** ** | ** **           | ** ** |
| Net loss                                                                                |       | $                                | (10,531    | )                       | $          | (10,855              | )          | $ | (138,265 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities:            |       |                             |       |                    |       |                 |       |
| Depreciation and amortization                                                           |       | 659                              |       | 511                     |       | 7,150                |       |
| Stock-based compensation                                                                |       | 1,054                            |       | 879                     |       | 10,514               |       |
| Amortization of premium/discount on short-term  investments                             |       | (177                             | )          | 1                       |       | (810                 | )          |
| Other                                                                                   |       | 36                               |       | 131                     |       | 94                   |       |
| Changes in operating assets and liabilities:                                            |       |                             |       |                    |       |                 |       |
| Other assets                                                                            |       | (420                             | )          | (448                    | )          | (1,238               | )          |
| Accounts payable and accrued liabilities                                                |       | (1,178                           | )          | 1,462                   |       | 3,782                |       |
| Deferred rent                                                                           |       | 466                              |       | 418                     |       | 3,229                |       |
| Net cash used in  operating activities                                                  |       | (10,091                          | )          | (7,901                  | )          | (115,544             | )          |
| **Investing  activities**                                                               | ** ** | ** **                       | ** ** | ** **              | ** ** | ** **           | ** ** |
| Purchases of  property and equipment                                                    |       | (3,990                           | )          | (932                    | )          | (26,334              | )          |
| Purchases of  short-term investments                                                    |       | (6,263                           | )          | (5,909                  | )          | (104,137             | )          |
| Maturities of  short-term investments                                                   |       | 14,900                           |       | 8,650                   |       | 85,251               |       |
| Other assets                                                                            |       | —                           |       | —                  |       | (70                  | )          |
| Restricted cash                                                                         |       | —                           |       | —                  |       | (3,451               | )          |
| Net cash used in  investing activities                                                  |       | 4,647                            |       | 1,809                   |       | (48,741              | )          |
| **Financing  activities**                                                               | ** ** | ** **                       | ** ** | ** **              | ** ** | ** **           | ** ** |
| Proceeds from  debt                                                                     |       | 4,362                            |       | 315                     |       | 27,332               |       |
| Payments on debt                                                                        |       | (1,186                           | )          | (557                    | )          | (13,382              | )          |
| Issuance of  preferred stock, net                                                       |       | —                           |       | —                  |       | 76,144               |       |
| Proceeds from  issuance of convertible promissory note                                  |       | —                           |       | —                  |       | 650                  |       |
| Issuance of  common stock and warrants                                                  |       | 10,207                           |       | 45,168                  |       | 95,771               |       |
| Repurchase of  restricted common stock                                                  |       | —                           |       | (1                      | )          | (42                  | )          |
| Net cash  provided by financing activities                                              |       | 13,383                           |       | 44,925                  |       | 186,473              |       |
| Net increase in  cash and cash equivalents                                              |       | 7,939                            |       | 38,833                  |       | 22,188               |       |
| Cash and cash  equivalents at beginning of period                                       |       | 14,249                           |       | 12,065                  |       | —               |       |
| Cash and cash  equivalents at end of period                                             |       | $                                | 22,188     |                    | $          | 50,898               |       | $ | 22,188 |   |
|                                                                                    |       |                             |       |                    |       |                 |       |
| **Supplemental  schedule of non-cash investing and financing activities:**         |       |                             |       |                    |       |                 |       |
| Capitalized  interest recorded as property and equipment                                |       | $                                | 127        |                    | $          | —               |       | $  | 218 |   |
| Accrued property  and equipment acquisitions                                            |       | $                                | 238        |                    | $          | —               |       | $  | 2,057 |   |
| Leasehold improvements  acquired under tenant improvement allowance                     |       | $                           | 3,669      |                    | $          | —               |       | $ | 11,051 |   |
| Conversion of  convertible preferred stock to common stock upon initial public offering |       | $                                | —     |                    | $          | —               |       | $  | 43,678 |   |

 

See accompanyingnotes.

5

----

**FAVRILLE,INC.**

**NOTES TO CONDENSED FINANCIAL STATEMENTS**

**MARCH 31,2007**

**UNAUDITED**

**1. Basisof Presentation**

The accompanyingunaudited interim financial statements have been prepared in accordance withU.S. generally accepted accounting principles and with the rules andregulations of the Securities and Exchange Commission related to a quarterlyreport on Form 10-Q. Accordingly, they do not include all of theinformation and disclosures required by U.S. generally accepted accountingprinciples for complete financial statements. The balance sheet at December 31,2006 has been derived from the audited financial statements at that date butdoes not include all information and footnotes required by U.S. generallyaccepted accounting principles for complete financial statements. The interimfinancial statements reflect all adjustments which, in the opinion ofmanagement, are necessary for a fair presentation of the financial conditionand results of operations for the periods presented. Except as otherwisedisclosed, all such adjustments are of a normal recurring nature.

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

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

***Stock-Based Compensation***

Total stock-basedcompensation expense recognized for the three months ended March 31, 2007and 2006 were as follows (in thousands, except per share data):
| ** **                        | ** ** | **Three Months ended  March 31,** | ** ** | **Three Months ended  March 31,** | ** ** |
|-----------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                        | ** ** | **2007**                                         | ** ** | **2006**                                         | ** ** |
| Research and  development         |       | $                                                | 399        |                                             | $          | 433 |   |
| General and  administrative       |       | 655                                              |       | 446                                              |       |
| Share-based  compensation expense |       | $                                                | 1,054      |                                             | $          | 879 |   |

 

The Company recordedapproximately $1 million of stock-based compensation expense in our Statementof Operations for the three months ended March 31, 2007.  AtMarch 31, 2007, the total compensation cost related to unvestedstock-based awards granted to employees under the Company’s stock award plansbut not yet recognized was approximately $6.4 million, net of estimatedforfeitures of approximately $590,000. This cost will be amortized on astraight-line basis over a weighted-average period of approximately 2.7 yearsand will be adjusted for subsequent changes in estimated forfeitures.

***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

6

----

per share is calculatedusing the weighted average number of common shares outstanding during eachperiod, without consideration for common stock equivalents. Diluted loss pershare includes the dilutive effect of common equivalent shares outstanding forthe period determined using the treasury-stock method. For purposes of thiscalculation, common stock subject to repurchase by the Company, preferredstock, options and warrants are considered to be common stock equivalents andare only included in the calculation of diluted earnings per share when theireffect is dilutive.
| ** **                                                                                                    | ** ** | **As of March 31** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                    | ** ** | **(in thousands)**           | ** ** |
| ** **                                                                                                    | ** ** | **2007**                          | ** ** | **2006** | ** ** |
| **Historical  outstanding anti-dilutive securities not included in diluted net loss per  share calculation:** | ** ** | ** **                        | ** ** | ** ** | ** ** |
| Common stock  equivalents:                                                                                    |       |                              |       |   |   |
| Stock warrants                                                                                                |       | 3,372                             |       | 3,122 |   |
| Options to purchase common stock                                                                              |       | 3,183                             |       | 2,376 |   |
| Common stock  subject to repurchase                                                                           |       | 81                                |       | 233 |   |
|                                                                                                          |       | 6,636                             |       | 5,731 |   |

 

**Income Taxes**

On July 13, 2006, theFASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes –An Interpretation of FASB Statement No. 109” (“FIN 48”).  FIN 48 clarifies the accounting foruncertainty in income taxes recognized in an entity’s financial statements inaccordance with FASB Statement No. 109, “Accounting for Income Taxes” andprescribes a recognition threshold and measurement attributes for financialstatement disclosure of tax positions taken or expected to be taken on a taxreturn.  Under FIN 48, the impact of anuncertain income tax position on the income tax return must be recognized atthe largest amount that is more-likely-than-not to be sustained upon audit bythe relevant taxing authority.  Anuncertain income tax position will not be recognized if it has less than a 50%likelihood of being sustained. Additionally, FIN 48 provides guidance on derecognition, classification,interest and penalties, accounting in interim periods, disclosure andtransition.  FIN 48 is effective forfiscal years beginning after December 15, 2006.

The Company’s practice is to recognize interestand/or penalties related to income tax matters in income tax expense. Duringthe years ended December 31, 2006, 2005 and 2004, the Company has notrecognized any interest or penalties. Upon adoption of FIN 48 on January 1, 2007, the Company did not recordany interest or penalties.

The Company is subject totaxation in the US and various state jurisdictions.  The Company’s tax years for 2000 and forwardare subject to examination by the US and California tax authorities due to thecarryforward of unutilized net operating losses and research and developmentcredits.

The adoption of FIN 48did not impact our financial condition, results of operations or cashflows.  At January 1, 2007, we had netdeferred tax assets of $53.8 million. The deferred tax assets are primarily composed of federal and state taxnet operating loss (“NOL”) carryfowards and federal and state research anddevelopment (“R&D”) credit carryforwards. Due to uncertainties surrounding our ability to generate future taxableincome to realize these assets, a full valuation has been established to offsetour net deferred tax asset. Additionally, the future utilization of our NOL andR&D credit carryforwards to offset future taxable income may be subject toa substantial annual limitation as a result of ownership changes that may haveoccurred previously or that could occur in the future.  We have not yet determined whether such anownership change has occurred. However, the Company plans to complete a Section382 analysis regarding the limitation of the net operating losses and researchand development credits. When this project is completed, the Company plans toupdate the unrecognized tax benefits under FIN 48. Therefore, the Companyexpects that the unrecognized tax benefits may change within 12 months of thisreporting date.  At this time, theCompany cannot estimate how much the unrecognized tax benefits may change.  Any carryforwards that will expire prior toutilization as a result of such limitations will be removed from deferred taxassets with a corresponding reduction of the valuation allowance.  Due to the existence of thevaluation allowance, future changes in our unrecognized tax benefits willnot impact our effective tax rate.

7

----

**2.Comprehensive Loss**

Components ofcomprehensive loss were as follows (in thousands):
| ** **                                                  | ** ** | **Three Months ended March 31,** | ** ** |
|-------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                  | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
|                                                        |       |                                                 |       |   |   |
| Net loss                                                    |       | $                                                    | (10,531    | ) | $ | (10,855 | ) |
| Change in  unrealized gain (loss) on short-term investments |       | (2                                                   | )          | 47 |   |
| Comprehensive loss                                          |       | $                                                    | (10,533    | ) | $ | (10,808 | ) |

 

Accumulated othercomprehensive loss totaled $653 and $2,715 at March 31, 2007 andDecember 31, 2006, respectively, and was attributed to unrealized losseson short-term investments.

**3. Stockholders’ Equity**

*RegistrationStatement*

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

OnFebruary 12, 2007, the Company entered into common stock purchaseagreements with certain investors relating to a registered direct offering ofan aggregate 3,333,334 shares of our common stock at $3.00 per share tothe investors for gross proceeds of approximately $10 million.  The common stock was issued pursuant to aprospectus supplement filed with the SEC on February 13, 2007, inconnection with a shelf takedown from our shelf registration statement.

*PrivatePlacement of Common Stock and Warrants*

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

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

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

8

----

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

**CautionaryNote Regarding Forward-Looking Statements**

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

**Overview**

We are abiopharmaceutical company focused on the development and commercialization oftargeted immunotherapies for the treatment of cancer and other diseases of theimmune system. We have developed a proprietary technology that enables us tomanufacture active immunotherapy products that are designed to stimulate apatient’s immune system to mount a specific and sustained response to disease.Our lead product candidate, FavId, is an active immunotherapy for the treatmentof B-cell non-Hodgkin’s lymphoma, or NHL. We initiated a pivotal Phase 3clinical trial of FavId in patients with follicular B-cell NHL inJuly 2004 and completed patient enrollment in January 2006 with 349patients randomized into the trial.  In addition, FavId has been evaluatedin several multi-center, open-label Phase 2 clinical trials involving morethan 130 patients.

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

We were incorporated inDelaware in January 2000. As of March 31, 2007, we had not generated anyrevenues, and we had financed our operations and internal growth throughprivate placements of our stock and warrants, equipment and leasehold debtfinancings, the sale of common stock in our initial public offering, or IPO, inFebruary 2005, and a registered direct offering of common stock inFebruary 2007. We are a development stage company and have incurred significantlosses since our inception in 2000, as we have devoted substantially all of ourefforts to research and development activities, including clinical trials. Asof March 31, 2007, our deficit accumulated during the development stage wasapproximately $166.4 million. We expect to incur substantial and increasinglosses for the next several years as we:

· continue to develop and prepare for thecommercialization of our lead product candidate, FavId;

· expand our research and development programs;

· expand our current manufacturing capabilitiesto support commercial manufacturing of FavId; and

· acquire or in-license oncology products thatare complementary to our own.

**FinancialOperations Overview**

***Research and Development Expense. ***Research and development expense consists primarily of costs associated withclinical trials of our product candidates, including the costs of manufacturingour product candidates, compensation and other expenses related to research anddevelopment personnel, facilities costs and depreciation. We charge allresearch and development expenses to operations as they are incurred. Ourresearch and development activities are primarily focused on the development ofFavId. We have completed enrollment in two Phase 2 clinical trials and continueto evaluate the results. We initiated our pivotal Phase 3 clinical trial ofFavId following Rituxan in patients with follicular B-cell NHL inJuly 2004 and completed patient enrollment in the trial in January2006.  

9

----

In addition, fouradditional Phase 2 clinical trials of FavId are ongoing.

From inception throughMarch 31, 2007, we incurred costs of approximately $107.9 million associatedwith the research and development of FavId, which represents substantially allof our research and development costs to date. We expect our research anddevelopment costs to increase as we advance FavId and new product candidatesinto later stages of clinical development. While difficult to predict, weestimate that research and development costs required to complete thedevelopment of and file a Biologics Licensing Application, or BLA, for FavIdwill be an additional $48 million**. **  We are unable to estimate with any certaintythe costs we will incur in the continued development of other productcandidates for commercialization. On an ongoing basis, we expect to expand ourresearch and development activities to include clinical development of FAV-201and preclinical research of treatments for autoimmune diseases, initiallymultiple sclerosis.

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

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

***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. We anticipate increases inmarketing, general and administrative expenses as we add personnel and continueto develop and prepare for commercialization of our product candidates.

***Interest Income.***    Interestincome primarily consists of interest earned on our cash reserves, cashinvested in money market funds, government securities, corporate notes andbonds and certificates of deposit.

***Interest Expense.***    Interestexpense represents 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 the yearended December 31, 2006, we believe the following accounting policies to becritical to the judgments and estimates used in the preparation of ourfinancial statements:

***Stock-Based Compensation. ***Effective January 1, 2006, the Company adopted Statement of FinancialAccounting Standards No. 123 (revised 2004), “Share-Based Payments,” (SFAS 123(R)).  Under SFAS 123(R), stock-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.  The Company adopted theprovisions of SFAS 123 (R) using a modified prospective application.  Accordingly, prior periods have not beenrevised for comparative purposes.  Thevaluation provisions of SFAS 123(R) apply to new awards and to awards that areoutstanding on the effective date, which are subsequently modified orcancelled.  Estimated compensation forawards outstanding at the effective date will be recognized over the remainingservice period using the compensation cost calculated for pro forma disclosurepurposes under SFAS 123, *Accounting for Stock-BasedCompensation*.

10

----

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

***Capitalized Software. *** Softwaredeveloped for internal use, whether purchased or developed, is capitalized andamortized using the straight-line method over an estimated useful life of fiveyears.  Costs incurred until the point the project has reached developmentstage are expensed in accordance with Statement of Position (“SOP”) 98-1,*  “Accountingfor the Costs of Computer Software Developed or Obtained for Internal Use.”*  Determining when a project has reached thedevelopment stage requires the use of judgment.  Subsequent additions,modifications or upgrades to internal-use software are capitalized only to theextent that they allow the software to perform a task it previously did notperform. Software maintenance and training costs are expensed in the period inwhich they are incurred.

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

**Resultsof Operations**

***Comparison of the Three Months Ended March 31, 2007 and2006***

*Researchand Development.*    Research anddevelopment expense decreased from approximately $8.4 million during thethree months ended March 31, 2006 to $8 million during the three monthsended March 31, 2007. The decrease of $424,000, or 5%, was due primarily to anincrease of approximately $525,000 of utilities, maintenance and depreciationexpenses, deferred rent and lab supplies associated with the commercial-scalefacility expansion; offset by a decrease of approximately $1 million in Phase 3clinical trial expense related to the completion of patient enrollment into thetrial in January 2006.

*Marketing,General and Administrative.*    Marketing,general and administrative expense increased from approximately$2.7 million during the three months ended March 31, 2006 to$2.9 million during the three months ended March 31, 2007. The increase of$211,000, or 8%, primarily reflects an increase of approximately $200,000 incompensation costs associated with additional administrative personnel and$190,000 in stock-based compensation; offset by a decrease of approximately$75,000 in outside services related to strategic marketing programs and $75,000associated with consulting services related to a software implementationproject expensed in 2006.

*InterestIncome* Interest income increased from approximately $432,000during the three months ended March 31, 2006 to $565,000 during the threemonths ended March 31, 2007. The increase of $133,000, or 31%, was primarilythe result of higher average interest rates in 2007 compared to 2006.

**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 March 31, 2007, we had receivedproceeds of approximately $76.1 million, net of stock issuance costs, fromthe sale of preferred stock which was converted to common stock; proceeds fromthe sale of common stock in our IPO of approximately $39.5 million, net ofunderwriters’ discounts and commissions and offering expenses; proceeds ofapproximately $45.0 million from the sale of common stock and warrants topurchase common stock to certain investors, in a private placement, net ofoffering expenses; and proceeds of approximately $9.9 million from a registereddirect offering of common stock to certain investors, net of offering expenses.

As of March 31, 2007 wehad financed the purchase of equipment and leasehold improvements through debttotaling approximately $27.3 million.  Total debt of $13.9 millionwas outstanding at that date.  These obligations are

11

----

secured by our existingand future assets excluding intellectual property and are due in monthlyinstallments through October 2010. They bear interest at stated rates rangingfrom approximately 9.34% to 12.17%.  Thedebt agreements subject us to certain financial and non-financial covenants. Asof March 31, 2007, we were in compliance with the terms of the debt agreements.

***Cash Flows***

As of March 31,2007, cash, cash equivalents and short-term investments were approximately$41.9 million as compared to $42.4 million at December 31, 2006, adecrease of approximately $522,000. The decrease resulted primarily from netcash used to fund ongoing operations partially offset by the $10 million ingross proceeds from the registered direct offering of our common stock inFebruary 2007.

Net cash used inoperating activities was approximately $9.9 million for the three months endedMarch 31, 2007, compared to approximately $7.9 million for the same periodin 2006.  The increase of approximately $2 million is primarily due to anincrease in operating expenses related to additional personnel and otherexpenses related to the continuing clinical development and preparation forcommercialization of FavId.

Net cash provided byinvesting activities for the three months ended March 31, 2007 wasapproximately $4.4 million compared to net cash provided by investingactivities of $1.8 million for the same period in 2006.  The increase ofapproximately $2.6 million is due to an increase of approximately $5.9 millionin short-term investment maturities net of short-term investment purchases,offset by an increase of approximately $3.3 million in property and equipmentpurchases.

Net cash provided byfinancing activities for the three months ended March 31, 2007 totaled$13.4 million, reflecting primarily the gross proceeds of approximatley $10 million from our registered direct offering of common stock in February  2007.  Net cash provided by financingfor the same period in 2006 totaled approximately $44.9 million, reflectingprimarily the net proceeds of approximately $ 45 million from our privateplacement of common stock and warrants in March 2006.

***Funding Requirements***

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

·    theresults of our ongoing pivotal Phase 3 clinical trial of FavId;

·    magnitudeand cost of our product development efforts and other research and developmentactivities;

·    rate ofprogress toward obtaining regulatory approval for our product candidates;

·    costs offiling, prosecuting, defending and enforcing our patent claims and otherintellectual property rights;

·    ourability to establish and maintain collaborative, licensing or otherarrangements for the development, sale, marketing or distribution of ourproduct candidates and the terms of those arrangements;

·    effectsof competing technological and market developments; and

·    the success of the commercialization ofFavId.

Until we can generatesignificant cash from our operations, we expect to continue to fund ouroperations with existing cash resources that were primarily generated from theproceeds of offerings of our equity securities and from equipment and leaseholdimprovement debt financing. In addition, we may finance future cash needsthrough additional sales of equity securities, strategic collaborationagreements and debt financing. However, we may not be successful in obtainingcollaboration agreements, or in receiving milestone or royalty payments underthose agreements. In addition, we cannot be sure that our existing cash, cashequivalents and short-term investments will

12

----

be adequate or thatadditional financing will be available when needed or that, if available,financing will be obtained on terms favorable to us or our stockholders. Havinginsufficient funds may require us to delay, scale back or eliminate some or allof our research or development programs or to relinquish greater or all rightsto product candidates at an earlier stage of development or on less favorableterms than we would otherwise choose. Failure to obtain adequate financing mayalso adversely affect our ability to operate as a going concern. If we raiseadditional funds by issuing equity securities, substantial dilution to existingstockholders would likely result. If we raise additional funds by incurringdebt financing, the terms of the debt may involve significant cash paymentobligations as well as covenants and specific financial ratios that mayrestrict our ability to operate our business.

As of March 31,2007, we have not invested in any variable interest entities. We do not haveany relationships with unconsolidated entities or financial partnerships, suchas entities often referred to as structured finance or special purposeentities, which would have been established for the purpose of facilitatingoff-balance sheet arrangements or other contractually narrow or limitedpurposes. In addition, we do not engage in trading activities involvingnon-exchange traded contracts. As such, we are not materially exposed to anyfinancing, liquidity, market or credit risk that could arise if we had engagedin these relationships. We do not have relationships or transactions withpersons or entities that derive benefits from their non-independentrelationship with us or our related parties other than what is disclosed in Note 8of the Notes to Financial Statements included in our Annual Report on Form 10-Kfor the year ended December 31, 2006.

***Off-Balance Sheet Arrangements***

We do not have anyoff-balance sheet arrangements.

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

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

The primary objective ofour investment activities is to preserve principal while maximizing incomewithout significantly increasing risk. Some of the securities in which we investmay be subject to market risk. This means that a change in prevailing interestrates may cause the market value of the investment to fluctuate. To minimizethis risk, we may maintain our portfolio of cash equivalents and short-terminvestments in a variety of securities, including commercial paper, moneymarket funds and direct or guaranteed obligations of the United Statesgovernment. The risk associated with fluctuating interest rates is limited toour investment portfolio, and we do not believe that a 1% change in interestrates would have a significant impact on our interest income. As of March 31,2007, all of our short-term investments were corporate notes and bonds, and our cash equivalents were held in checkingaccounts and money market funds.

**Item4T. Controls and Procedures.**

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

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

We believe that a controlsystem, no matter how well designed and operated, can only provide reasonable, notabsolute, assurance that the objectives of the controls system are met. Inreaching a reasonable level of assurance, management necessarily was requiredto apply its judgment in evaluating the cost-benefit relationship of possiblecontrols and procedures.  In addition,the design of any system of controls also is based in part upon certainassumptions about the likelihood of future events, and there can be noassurance that any design will succeed in achieving its stated goals under allpotential future conditions.  Over time,a control may become inadequate because of changes in conditions, or the degreeof compliance with policies or procedures may deteriorate. No evaluation ofcontrols can provide absolute assurance that all control issues and instancesof fraud, if any, within a company will be detected.

During the quarter endedMarch 31, 2007, there were no changes in our internal control over financialreporting which materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

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

13

----

**PART II- OTHER INFORMATION.**

**Item1.  Legal Proceedings.**

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

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

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

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

**RisksRelated to the Development of Our Product Candidates**

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

We are subject torigorous and extensive regulation by the FDA. In the United States, ourbiologic product candidates, currently in the preclinical and clinical stagesof development, cannot be marketed until they are approved by the FDA. ObtainingFDA approval involves the submission of the results of preclinical studies andclinical trials of the product candidates, among other information. We may notbe able to obtain FDA approval, and, even if we are able to do so, the approvalprocess typically takes many years and requires the commitment of substantialeffort and financial resources. The FDA can delay, limit or deny approval of abiologic product candidate for many reasons, including:

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

·        FDAofficials may interpret data from preclinical testing and clinical trialsdifferently than we do; and

·        theFDA may not find our manufacturing processes or facilities satisfactory.

In addition, thespecific active immunotherapy technology on which FavId is based is arelatively new form of cancer therapy that presents novel issues for the FDA toconsider, which may make the regulatory process especially difficult.

We cannot assure you thatany of our product candidates in development will be approved in the UnitedStates in a timely fashion, or at all. Failure to obtain regulatory approval ofour product candidates in a timely fashion, or at all, would prevent or delayus from marketing or selling any products and, therefore, from generatingrevenues from their sale. If this occurs, we may be unable to generatesufficient revenues to attain or maintain profitability, our ability to raiseadditional capital will be impaired and our stock price may be negatively affected.In addition, both before and after approval, we are subject to numerous FDArequirements covering, among other things, testing, manufacturing, qualitycontrol, labeling, advertising, promotion and export of biologics. Failure tocomply with the law, including statutes and regulations, administered by theFDA, could result in, among others, any of the following actions:

·        warningletters;

·        finesand other civil penalties;

·        unanticipatedexpenditures;

·      delaysin approving or refusal to approve a product candidate;

·        productrecall or seizure;

14

----

·        interruptionof production;

·        operatingrestrictions;

·        injunctions;and

·        criminalprosecution.

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

We have expendedsignificant time, money and effort in the development of our lead productcandidate, FavId, which is still in clinical development, has not yet receivedregulatory approval and may never be commercialized. In order to commercializeFavId, we will need to demonstrate to the FDA and other regulatory agenciesthat it satisfies rigorous standards of safety and effectiveness. We completedpatient enrollment in a pivotal Phase 3 clinical trial of FavId followingRituxan for the treatment of follicular B-cell NHL in January 2006.

We are also evaluatingFavId for use in other B-cell NHL indications. However, even if we were toreceive regulatory approval of FavId for the treatment of follicular B-cell NHLor the other indications we are exploring, our ability to successfullycommercialize FavId could be jeopardized by the emergence of a competitiveproduct that exhibits greater efficacy, longer duration of response or otherbenefits. In addition, because our initial regulatory and marketing strategycontemplates the administration of FavId to patients following treatment withRituxan, the commercial opportunity for FavId may be limited by the degree towhich oncologists continue to use Rituxan to treat indolent B-cell NHL.Furthermore, to the extent FavId fails to gain market acceptance for itsinitial indication, it may be more difficult for us to generate sufficientcredibility with physicians and patients to commercialize FavId for otherindications.

Other than FavId, we haveonly two other product development programs, which are at significantly earlierstages of development.  In June 2006, we received an allowance from theFDA for an IND for a product candidate, FAV-201, from one of these programs forthe treatment of cutaneous T-cell lymphoma. We have ongoing preclinical studiesto assess the applicability of our technology to autoimmune diseases, with aninitial focus on multiple sclerosis. We cannot be certain that we will be ableto successfully develop any product candidate from these development programs.We cannot be certain that the clinical development of FavId or any otherproduct candidate in preclinical testing or clinical trials will be successful,that it will receive the regulatory approvals required to commercialize it, orthat any of our other research programs will yield a product candidate suitablefor entry into clinical trials. If we are unable to commercialize FavId or ourother product candidates, we may be unable to generate sufficient revenues toattain or maintain profitability, our ability to raise additional capital willbe impaired and our stock price may be negatively affected.

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

Conducting clinicaltrials is a lengthy, time-consuming and expensive process, and the results ofthese trials are inherently uncertain. We have completed enrollment of patientsin several Phase 2 clinical trials of FavId involving over 130 indolent B-cellNHL patients and are currently conducting follow-up evaluation of thosepatients. We completed enrollment of patients in a pivotal double-blind,placebo controlled Phase 3 clinical trial of FavId for the treatment offollicular B-cell NHL in January 2006 with 349 randomized patients. During theweek of November 6, 2006, our Data Monitoring Committee completed a plannedinterim analysis of data from the secondary endpoint, overall responseimprovement, in the first 226 patients enrolled in the trial. The independentData Monitoring Committee concluded that the interim analysis did notdemonstrate a statistically significant difference between treatment andcontrol groups in the secondary endpoint. We anticipate the final analysis ofthe primary endpoint of our Phase 3 clinical trial, TTP, around the end of2007. However, we cannot guarantee when the necessary data from the trial willbe available, and accordingly, we may not be able to complete final analysis ofthe TTP data within the projected time frame.

Four additionalPhase 2 clinical trials of FavId are ongoing.  One of these clinicaltrials is being conducted under a separate physician-sponsored IND in theUnited States.  In June 2006, we received an allowance from the FDA for anIND for our second product candidate, FAV-201, for the treatment of cutaneousT-cell lymphoma.

15

----

We have received aSpecial Protocol Assessment, or SPA, from the FDA for our pivotal Phase 3clinical trial of FavId. In the SPA process, the FDA reviewed the design, sizeand planned analysis of our Phase 3 clinical trial and provided commentsregarding the trial’s adequacy to form a basis with respect toeffectiveness for approval of a Biologics Licensing Application, or BLA, if thetrial meets its predetermined objectives. We will not be able to file a BLA forFavId until after we receive an analysis of the primary endpoint, TTP, of ourongoing pivotal Phase 3 clinical trial (assuming the TTP data is positive),which analysis is anticipated around the end of 2007, or at all. The FDA’swritten agreement is binding, except in limited circumstances, such as when asubstantial scientific issue essential to determining the safety oreffectiveness of a product candidate is identified after the Phase 3 clinicaltrial is commenced. Despite having received an SPA, we may be required toconduct an additional Phase 3 clinical trial of FavId for the treatment ofindolent B-cell NHL before we can apply for regulatory approval. Although theFDA typically requires successful results in two Phase 3 clinical trials tosupport marketing approval, the FDA has, on several occasions, approvedproducts based on a single Phase 3 clinical trial that demonstrates a highlevel of statistical significance where there is an unmet need for alife-threatening condition. We currently plan to seek FDA approval of FavIdbased on our ongoing pivotal Phase 3 clinical trial alone. In the eventthat the FDA requires the results of a second Phase 3 clinical trial beforeaccepting a BLA or before granting marketing approval of FavId, our launch ofFavId would be delayed, possibly by several years, and we would incursignificant costs in conducting the additional trial.

The preliminary, blindedclinical data reported from time to time prior to the release of the final resultsof our pivotal Phase 3 clinical trial and the preliminary clinical data fromour Phase 2 clinical trials have not been fully audited and have been takenfrom databases that have not been fully reconciled against medical records keptat the clinical sites or that may not include the most current information onpatient disease progressions.  The data released may not be indicative ofthe final results of our pivotal Phase 3 clinical trial or any other clinicaltrial of FavId.  Failure can occur at any stage of testing.  We donot know whether our Phase 3 clinical trial or any future clinical trials willdemonstrate safety and efficacy sufficient to result in marketableproducts.  Our failure to adequately demonstrate the safety and efficacy ofFavId will prevent us from obtaining regulatory approval for, orcommercializing, FavId.

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:

·        ineffectivenessof the product candidate, or perceptions by physicians that the productcandidate is not safe or effective for a particular indication;

·        inabilityto manufacture sufficient quantities of the product candidate for use inclinical trials;

·        delayor failure in obtaining approval of our clinical trial protocols from the FDA;

·        slowerthan expected rate of patient recruitment and enrollment;

·        inabilityto adequately follow and monitor patients after treatment;

·        difficultyin managing multiple clinical sites;

·        unforeseensafety issues; and

·        governmentor regulatory delays.

Even if we achievepositive interim results in clinical trials, these results do not necessarilypredict final results, and positive results in early trials may not be indicativeof success in later trials. A number of companies in the pharmaceuticalindustry have suffered significant setbacks in advanced clinical trials, evenafter promising results in earlier trials. Negative or inconclusive results oradverse medical events during a clinical trial could cause us to repeat orterminate a clinical trial or require us to conduct additional trials. Ourclinical trials may be suspended at any time for a variety of reasons,including if the FDA or we believe the patients participating in our trials areexposed to unacceptable health risks or if the FDA finds deficiencies in theconduct of these trials.

16

----

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.

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

We may encounter delaysin development and commercialization, or fail to obtain marketing approval, ofFavId or any other product candidate that we may develop if we are unable to enrollenough patients to complete clinical trials. Our ability to enroll sufficientnumbers of patients in our clinical trials depends on many factors, includingthe size of the patient population, the nature of the protocol, the proximityof patients to clinical sites, the eligibility criteria for the trial andcompeting clinical trials. Although we completed patient enrollment in ourpivotal Phase 3 clinical trial of FavId in January 2006, we have from time totime experienced slower-than-expected patient enrollment in our clinical trialsand may do so in the future if additional clinical trials of FavId are requiredor if we clinically develop any of our other product candidates. Delays inplanned patient enrollment may result in increased costs and harm our abilityto complete our clinical trials and obtain regulatory approval.

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

Administration of FavIdrequires an adjuvant, which is a substance that is used to enhance the immuneresponse. We use a white blood cell growth factor known as GM-CSF, which iscommercially available solely from Berlex Laboratories, Inc., as anadjuvant for FavId. GM-CSF is an FDA-approved and commercially available drugthat may be purchased by physicians.  In February 2007, we entered into aclinical supply and study agreement with Berlex for clinical trials of FavIdperformed in the United States, prior to which time we relied on purchaseorders to purchase GM-CSF from Berlex.  If we require GM-CSF for use inclinical trials outside the United States, or for use in other clinical trialsnot covered by our agreement with Berlex, we will need to rely on purchaseorders for such purchases.  Our current strategy for the initial commercializationof FavId involves the administration of FavId following treatment with Rituxan.Rituxan is a passive immunotherapy for patients with NHL, which is alsoFDA-approved and is commercially available solely from Genentech, Inc. andBiogen Idec Inc. We currently rely on physicians to order and administerRituxan to patients prior to the administration of FavId in our registrationtrial. If GM-CSF or Rituxan were to become unavailable as a result ofregulatory actions, supply constraints or other reasons, our ability tocontinue the clinical development of FavId would be jeopardized.

**RisksRelated to Our Financial Results and Need for Financing**

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

We are a developmentstage company with a limited operating history. We have financed our operationsthrough private placements of common stock and warrants, an initial publicoffering of our common stock and equipment and leasehold debt financing. Wehave incurred losses in each year since our inception in 2000. Net lossesapplicable to common stockholders were $10.5 million and $10.9 million for thethree months ended March 31, 2007, and 2006, respectively.  As of March31, 2007, we had an accumulated deficit of $166.4 million.  These losses,among other things, have had and will continue to have an adverse effect on ourstockholders’ equity and working capital. We expect to incur substantialoperating losses for at least the next several years. This is due primarily tothe expansion of our clinical trials and research and development programs,preparations to manufacture FavId on a commercial scale, and, selling, generaland administrative expenses. We also have substantial lease and debtobligations related to our new manufacturing and headquarters facilitiesimpacting our operating expenses. We expect that our losses will fluctuate fromquarter to quarter and that these fluctuations may be substantial. We cannotguarantee that we will successfully develop, manufacture, commercialize ormarket any products. As a result, we cannot guarantee that we will ever achieveor sustain product revenues or profitability.

**We currentlyhave no source of revenue and may never become profitable.**

Our ability to becomeprofitable will depend upon our ability to generate revenue. To date, FavId hasnot generated

17

----

any revenue, and we donot know when or if FavId will generate revenue. Our ability to generaterevenue depends on a number of factors, including our ability to:

·        successfullycomplete clinical trials for FavId;

·        obtainregulatory approval for FavId, including regulatory approval for our commercialscale manufacturing facility and process;

·        manufacturecommercial quantities of FavId at acceptable cost levels; and

·        successfullymarket and sell FavId.

We do not anticipate thatwe will generate revenues until 2008, at the earliest. Further, we do notexpect to achieve profitability for at least several years after generatingmaterial revenues. If we are unable to generate revenue, we will not becomeprofitable, and we may be unable to continue our operations.

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

We will need substantialadditional funds for existing and planned preclinical studies and clinicaltrials, to continue research and development activities, for lease and debtobligations related to our manufacturing and headquarter facilities, and toestablish manufacturing and marketing capabilities for any products we maydevelop. In addition, because we do not expect to generate revenues from thesale of our product candidates for several years, if at all, we will also needto raise additional capital to fund our operations.

We believe that our cash,cash equivalents and short-term investments, which was approximately $41.9million at March 31, 2007 and access to the Committed Equity FinancingFacility, or CEFF, through Kingsbridge Capital Limited, will be sufficient tomeet our projected operating requirements at least for the next 12months.  We will need to raise additional funds in order to commercializeFavId, including the completion of the expansion and qualification of ourmanufacturing facility for commercial-scale production. Our forecast of theperiod of time through which our financial resources will be adequate tosupport our operations is a forward-looking statement and involves risks anduncertainties, and actual results could vary as a result of a number offactors, including the factors discussed elsewhere in this prospectus. We havebased this estimate on assumptions that may prove to be wrong, and we couldutilize our available capital resources sooner than we currently expect.

Our future capitalrequirements or the adequacy of our available funds will depend on manyfactors, including, but not limited to:

·        theresults of our ongoing pivotal Phase 3 clinical trial of FavId;

·        magnitudeand cost of our product development efforts and other research and developmentactivities;

·        rateof progress toward obtaining regulatory approval for our product candidates;

·        costsof filing, prosecuting, defending and enforcing our patent claims and otherintellectual property rights;

·        ourability to establish and maintain collaborative, licensing or otherarrangements for the development, sale, marketing or distribution of ourproduct candidates and the terms of those arrangements;

·        effectsof competing technological and market developments;

·        thecost of expansion of our current facility for commercial production or theconstruction of a large separate commercial-scale production facility; and

·        thesuccess of the commercialization of FavId.

18

----

Future capitalrequirements will also depend on the extent to which we acquire or invest inbusinesses, products and technologies, but we currently have no commitments oragreements relating to any of these types of transactions.

To that end, on June 20,2006, we filed a shelf registration statement with the SEC on Form S-3 pursuantto which we may periodically sell up to $60 million in debt securities, commonstock or warrants to purchase debt securities or common stock.  InFebruary 2007, we sold $10 million of common stock pursuant to the shelfregistration statement.  Additionally, we have entered into the CEFFpursuant to which Kingsbridge committed to purchase, subject to certainconditions, up to $40.0 million of our common stock.  We may seek to accessthe public or private equity markets whenever conditions are favorable, even ifwe do not have an immediate need for additional capital at that time.Additional funding may not be available to us, and, if available, may not be onacceptable terms. If we raise additional funds by issuing equity securities,stockholders will incur immediate dilution. If adequate funds are not availableto us, we may be required to delay, reduce the scope of, or eliminate one ormore of our research, development and clinical activities. Alternatively, wemay need to seek funds through arrangements with collaborative partners orothers that require us to relinquish rights to technologies or productcandidates that we would otherwise seek to develop or commercialize ourselves.Any of these events could have a material adverse effect on our business,results of operations, financial condition or cash flow.

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

In December 2006, weentered into the CEFF with Kingsbridge. The CEFF entitles us to sell andobligates Kingsbridge to purchase, from time to time over a period of 36months, shares of our common stock for cash consideration up to an aggregate of$40.0 million, subject to specified conditions and restrictions.Kingsbridge will not be obligated to purchase shares under the CEFF unless specifiedconditions are met, which include a minimum price for our common stock; theaccuracy of representations and warranties made to Kingsbridge; compliance withlaws; and the effectiveness of a registration statement registering for resalethe shares of common stock to be issued in connection with the CEFF. Inaddition, among other termination rights, Kingsbridge is permitted to terminatethe CEFF by providing written notice to us within 10 business days after itobtains actual knowledge that an event has occurred resulting in a material andadverse effect on our business, operations, properties or financial condition(subject to specified exceptions, including conditions or events that arereasonably expected to occur in the ordinary course of our business). If we areunable to access funds through the CEFF, or if Kingsbridge terminates the CEFF,we may be unable to access capital on favorable terms, or at all.

We are entitled, incertain circumstances, to deliver a “blackout” notice to Kingsbridge to suspendthe use of this prospectus and prohibit Kingsbridge from selling shares underthis prospectus for a certain period of time.  If we deliver a blackoutnotice in the 75 trading days following the settlement of a draw down and thevolume weighted average price on the trading day immediately preceding therelated blackout period is greater than the volume weighted average price onthe first trading day following such blackout period, or if the registrationstatement of which this prospectus is a part is not effective in circumstancesnot permitted by our registration rights agreement with Kingsbridge, then wemust make a payment to Kingsbridge, or issue Kingsbridge additional shares inlieu of this payment, calculated on the basis of a specified number of sharesheld by Kingsbridge immediately prior to the blackout period and the change inthe market price of our common stock during the period in which the use of theregistration statement is suspended.  If the trading price of our commonstock declines during a suspension of the resale registration statement, theblackout or other payment could be significant.

Should we sell shares toKingsbridge under the CEFF, or issue shares in lieu of a blackout payment, itwill have a dilutive effect on the holdings of our current stockholders and mayresult in downward pressure on the price of our common stock. If we draw downamounts under the CEFF, we will issue shares to Kingsbridge at a discount of upto 10% from the volume weighted average price of our common stock. If we drawdown amounts under the CEFF when our stock price is decreasing, we will need toissue more shares to raise the same amount than if our stock price was higher.Issuances in the face of a declining stock price will have an even greaterdilutive effect than if our stock price were stable or increasing and mayfurther decrease our stock price.

19

----

***Future changes in financial accounting standards orpractices or existing taxation rules or practices may cause adverse unexpectedrevenue or expense fluctuations and affect our reported results of operations.**

A change in accountingstandards or practices or a change in existing taxation rules or practices canhave a significant effect on our reported results and may even affect ourreporting of transactions completed before the change is effective. Newaccounting pronouncements and taxation rules and varying interpretations ofaccounting pronouncements and taxation practice have occurred and may occur inthe future. Changes to existing rules or the questioning of current practicesmay adversely affect our reported financial results or the way we conduct ourbusiness

**OtherRisks Related to Our Business and Industry**

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

We currently depend onsingle source suppliers for critical raw materials used in the manufacture ofFavId. In particular, our manufacturing process for FavId requires a foreignprotein derived from shellfish that is known as keyhole limpet hemocyanin, orKLH. We purchase KLH from biosyn Arzneimittel GmbH, or biosyn, which iscurrently the only supplier of KLH that has submitted the required filing, knownas a drug master file, to the FDA. In November 2004, we entered into aneight-year supply and license agreement with biosyn under which biosyn hasagreed to supply us with KLH and we have agreed to make payments upon theachievement of certain milestones and committed to annual KLH purchaserequirements during the commercialization of FavId.  Either party mayterminate the supply agreement upon a breach by the other party that is notcured within 60 days or other events relating to insolvency or bankruptcy.If we identify another supplier of KLH of suitable quality for our purposes, wewill not be able to use the supplier as a second source of KLH for thecommercial manufacture of FavId unless the KLH is tested to be comparable tothe existing KLH.

In addition, we depend ona single source supplier for the cell growth media we use to produce FavId. Wepurchase this material from Expression Systems LLC, which in turn obtainsseveral of the components used in the cell growth media from sole suppliers. InApril 2007, we executed five-year supply and non-exclusive license agreementswith Expression Systems. Each agreement is renewable for one three-year periodat our option. Under the terms of the agreements, we have the right to purchaseraw material components from Expression Systems and manufacture the cell growthmedia in-house.

Establishing additionalor replacement suppliers for these materials may take a substantial amount oftime. In addition, we may have difficulty obtaining similar materials fromother suppliers that are acceptable to the FDA. If we have to switch to areplacement supplier, we may face additional regulatory delays and themanufacture and delivery of FavId, or any other product candidates that we maydevelop, could be interrupted for an extended period of time, which may delaycompletion of our clinical trials or commercialization. If we are unable toobtain adequate amounts of these materials, our clinical trials will bedelayed. In addition, we will be required to obtain regulatory clearance fromthe FDA to use different materials that may not be as safe or as effective. Asa result, regulatory approval of FavId, or any other product candidates that wemay develop, may not be received at all.

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

Our pivotal Phase 3clinical trial of FavId for the treatment of follicular B-cell NHL is beingconducted at 67 centers in the United States and will require long-termfollow up of at least 342 patients randomized into the trial. One clinical trialof FavId is being conducted under the direction of a physician sponsor, ratherthan under our supervision. We do not have the ability to independently conductclinical trials for FavId, or any other product candidate that we may develop,and we must rely on third parties, such as medical institutions and clinicalinvestigators, including physician sponsors, to conduct our clinical trials. Inparticular, we will rely on these parties to recruit and enroll patients in ourclinical trials. We also rely on third-party couriers to transport patienttissue samples and FavId. If any of the third parties upon whom we rely toconduct our clinical trials or transport patient tissue samples andimmunotherapies do not comply with applicable laws, successfully carry outtheir obligations or meet expected deadlines, and need to be replaced, ourclinical trials may be extended, delayed or terminated.

20

----

If the quality oraccuracy of 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 FavId, orany other product candidates that we may develop. If any of our relationshipswith any of these organizations or individuals terminates, we believe that wewould be able to enter into arrangements with alternative third parties. However,replacing any of these third parties would delay our clinical trials and couldjeopardize our ability to commercialize FavId and our other product candidateson a timely basis, or at all.

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

Even if we obtainregulatory approval for FavId or our other product candidates, we will still besubject to extensive regulation. These regulations will impact many aspects ofour operations, 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.

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

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

We manufacture FavId forour ongoing pivotal Phase 3 and for the planned and ongoing Phase 2clinical trials at our facility in San Diego. We currently lease an 80,000square foot facility in San Diego, California under a long-term leaseagreement. Our manufacturing facility consists of approximately 26,000 squarefeet of space in the facility. Our manufacturing facility is subject to thelicensing requirements of the California Department of Health Services. Ourfacility was inspected and licensed by the California Department of HealthServices. Our facility is subject to re-inspection at any time. Failure tomaintain a license from the California Department of Health Services or to meetthe inspection criteria of the California Department of Health Services woulddisrupt our manufacturing processes and prevent us from supplying FavId topatients. If an inspection by the California Department of Health Servicesindicates that there are deficiencies in our manufacturing process, we could berequired to take remedial actions at potentially significant expense, and ourfacility may be temporarily or permanently closed.

We will need to eitherexpand and qualify our current facility or construct and qualify a commercialscale manufacturing facility in order to commercialize FavId or any otherproduct candidates that we may develop. We believe our current facility couldbe used to manufacture FavId for initial commercial launch, and we beganconstruction to expand this facility during the second quarter of 2006. Wecannot assure you that we would be able to meet commercial demand forFavId in this facility. Additionally, we may require a larger productionfacility to meet the demand for FavId if it is approved. We would need to raiseadditional debt or equity capital to finance

21

----

construction of thelarger facility. Such financing may not be available or, if available, may notbe obtained on terms favorable to us or our stockholders.

Preparing a facility forcommercial manufacturing may involve unanticipated delays and the costs ofcomplying with FDA regulations may be significant. In addition, any materialchanges we make to the manufacturing process after approval may requireapproval by the FDA and state regulatory authorities. Obtaining these approvalsis a lengthy, involved process, and we may experience delays that could limitour ability to manufacture commercial quantities, increase our costs andadversely affect our business.

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

Manufacturing FavId is acomplex, multi-step process that requires us to expend significant time, moneyand effort in production, record keeping and quality systems to assure thatFavId will meet product specifications and other regulatory requirements. Todate, we have manufactured FavId only for use in Phase 2 and Phase 3 clinicaltrials and have no experience in manufacturing FavId for the commercialquantities that might be required if we receive regulatory approval. Inparticular, we cannot be sure that we will be able to manufacture FavId at acost that would enable commercial use. We may experience any of the followingproblems in our efforts to manufacture our product candidates for our expandingclinical trials or on a commercial scale:

·        failureto obtain a sufficient supply of key raw materials;

·      difficultiesin completing the development and validation of the specialized assays requiredto ensure the consistency of our product candidates, including FavId;

·        difficultiesin obtaining adequate tumor samples from treating physicians and hospitals;

·        difficultiesin manufacturing FavId for multiple patients simultaneously;

·        difficultiesin the timely shipping of tumor samples to us or in the shipping of FavId tothe treating physicians due to errors by third-party couriers, transportationrestrictions or other reasons;

·        failureto ensure adequate quality control and assurance in the manufacturing processas we increase the production quantities of FavId;

·        difficultiesin establishing and effectively managing a commercial-scale manufacturingfacility;

·        failureto comply with regulatory requirements, such as FDA regulations andenvironmental laws;

·        significantchanges in regulatory requirements;

·        damageto or destruction of our manufacturing facility or equipment;

·        difficultyin qualifying a second-source supplier for certain critical equipment; and

·        shortagesof qualified personnel.

In addition, because ourmanufacturing process only begins upon our receipt of a patient’s tumor biopsy,we cannot produce inventory reserves of our product candidate to be stored inanticipation of any of these potential manufacturing problems. The failure toproduce an adequate supply of FavId could delay our clinical trials and, inturn, delay submission of a BLA for FavId and commercial launch. Similarly, anydifficulties we experience in the manufacture and supply of other productcandidates, such as FAV-201, would delay the clinical trials of those productcandidates.

22

----

*** If ourmanufacturing facility is damaged or destroyed, our ability to manufactureproducts will be significantly affected, which could delay or preventcompletion of our clinical trials and commercialization of FavId or any otherproduct candidates that we may develop.**

We currently rely on theavailability and condition of our manufacturing facility in San Diego tomanufacture FavId. We lease the property where this facility is located under alease agreement that expires June 30, 2025, but may be extended at our optionfor two additional five-year periods. After that time, we may not be able tonegotiate a new lease for our facility. If our current facility or anyadditional facility we may construct or acquire, or our equipment in suchfacilities is damaged or destroyed, we will not be able to quickly orinexpensively replace our manufacturing capacity. This would significantlyaffect our ability to complete clinical trials of, and to manufacture andcommercialize, FavId, or any other product candidates that we may develop.

In addition, ourfacilities have been subject to electrical blackouts as a result of a shortageof available electrical power. Although we have back-up emergency powergenerators to cover energy needs for key support systems, a lengthy outagecould disrupt the operations of our facilities and clinical trials. While wecarry business interruption insurance, this insurance may not be adequate. Anysignificant business interruption could cause delays in our product developmentand harm our business.

*** If wedo not develop a sufficient sales and marketing force or enter into agreementswith third parties to sell and market FavId, we may not be able to successfullycommercialize our products, which would limit our ability to earn productrevenues.**

We have exclusiveworldwide rights to FavId. If we are successful in obtaining BLA approval orforeign marketing approval for FavId, we will need to establish sales andmarketing capabilities. In the United States, we plan to do this either byestablishing our own sales force or by entering into a co-promotion arrangementwith a sales and distribution partner. Outside of the United States, we plan toestablish strategic collaborations for the development and marketing of FavId.

We do not presentlypossess the resources or experience necessary to market FavId or our otherproduct candidates ourselves, and we currently have no arrangements for thepromotion or distribution of our product candidates. Our future commercialsuccess will depend on our ability to establish our own sales and marketinginfrastructure or to collaborate with third parties that have greater sales andmarketing experience and resources. Developing effective internal sales andmarketing capabilities, which would include the hiring of a sales force, wouldrequire a significant amount of our financial resources and time.

We may be unable toestablish and manage an effective sales force in a timely or cost-effectivemanner, or at all, and any sales force we do establish may not be capable ofgenerating demand for FavId or any other product candidate we may develop. Inaddition, if we cannot enter into co-promotion arrangements in the UnitedStates, or other strategic collaborations for the development and marketing ofFavId in other countries, in a timely manner and on acceptable terms, we maynot be able to successfully commercialize FavId or any other product candidatethat we may develop.

To the extent that weenter into arrangements with third parties to perform sales, marketing anddistribution services, our product revenues are likely to be lower than if wedirectly marketed and sold FavId, or any other product candidates that we maydevelop. If we are unable to establish adequate sales, marketing anddistribution capabilities, independently or with others, we will not be able togenerate product revenue and will not become profitable.

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

If approved, FavId andother product candidates that we may develop may not gain market acceptanceamong physicians, healthcare payors, patients and the medical community. Demandfor any approved product that we may develop will depend on many factors,including:

·        ourability to provide acceptable evidence of safety and efficacy;

·        convenienceand ease of administration;

23

----

·        availabilityof alternative treatments;

·        costeffectiveness;

·        continuingwidespread use of Rituxan to treat our initial target disease market;

·        effectivenessof our regulatory and marketing strategies;

·        prevalenceand severity of adverse side effects;

·        publicityconcerning our products or competitive products; and

·        ourability to obtain third-party coverage or reimbursement.

Furthermore, to theextent FavId fails to gain market acceptance for its initial indication, it maybe more difficult for us to generate sufficient credibility with physicians andpatients to commercialize FavId for other indications.

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

Our ability tocommercialize FavId, or any other product candidates that we may develop,depends on the extent to which coverage and reimbursement for FavId, or anyother product candidates that we may develop, will be available from:

·        governmentalpayors, such as Medicare and Medicaid;

·        privatehealth insurers, including managed care organizations; and

·        otherthird-party payors.

Many patients will not becapable of paying for FavId, or any other product candidates that we maydevelop, themselves and will rely on third-party payors to pay for theirmedical needs. The federal and state governments, insurance companies, managedcare organizations and other third-party payors are actively seeking to containor reduce costs of health care in the United States and exert increasinginfluence on decisions regarding the use of, and reimbursement levels for,particular treatments. Such third-party payors, including Medicare, are scrutinizingnewly approved medical products and services and may not cover or may limitcoverage and reimbursement for our product candidates. In particular,third-party payors may limit the indications for which they will reimbursepatients who use FavId, or any other product candidates that we may develop.Cost-control initiatives could cause us to decrease the price we mightestablish for FavId, or any other product candidates that we may develop, whichwould result in lower product revenues. If the prices for FavId, or any otherproduct candidates that we may develop, decrease or if governmental and otherthird-party payors do not provide adequate coverage and reimbursement levelsfor FavId, or any other product candidates that we may develop, our revenue andprospects for profitability will suffer.

**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 of FavId in the UnitedStates. In addition, we expect to rely on strategic collaborators forcommercialization of FavId outside of the United States and, to an even greaterextent, for worldwide development and commercialization of product candidatesand programs for chronic autoimmune diseases, such as multiple sclerosis. Todate, we have not entered into any agreements with third parties for any ofthese services.

24

----

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 relationships may never result in the successfuldevelopment or commercialization of our product candidates or the generation ofsales revenue. To the extent that we enter into co-promotion or othercollaborative arrangements, our product revenues are likely to be lower than ifwe directly marketed and sold any products that we may develop.

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

·        significanttime and effort from our management team;

·        coordinationof our research and development programs with the research and developmentpriorities of our collaborators; and

·        effectiveallocation of our resources to multiple projects.

If we enter intodevelopment or commercialization collaborations, our success will in partdepend on the performance of our corporate collaborators. We will not directlycontrol 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 sufficient resources,our preclinical or clinical development related to the collaboration could bedelayed or terminated. Also, our collaborators may pursue development orcommercialization 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 acceptableterms, or at all.

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

Our strategy is focusedon 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 the development of product candidates in addition to FavId, suchas FAV-201 for T-cell lymphoma and a preclinical product candidate for thetreatment of multiple sclerosis. We do not know whether our planned preclinicalstudies or clinical trials for these other product candidates will begin ontime or be completed on schedule, or at all. In addition, we do not knowwhether these clinical trials will result in marketable products. Typically,there is a high rate of attrition for product candidates in preclinical andclinical trials. We do not anticipate that any of our product candidates willreach the market for at least several years.

We may not identify,develop or commercialize any additional new product candidates from ourproprietary active immunotherapy technology. Our ability to developsuccessfully any of these product candidates depends on our ability todemonstrate safety and efficacy in humans through extensive preclinical testingand clinical trials and to obtain regulatory approval from the FDA and otherregulatory authorities. Development of our product candidates will also dependsubstantially upon the availability of funding for our research and developmentprograms.

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

The development andcommercialization of new pharmaceutical products for the treatment of cancerand autoimmune diseases is competitive, and we will face competition fromnumerous sources, including major pharmaceutical companies, specialtypharmaceutical companies and biotechnology companies worldwide. Many of ourcompetitors have substantially greater financial and technical resources anddevelopment, production and marketing capabilities than we do. In addition,many of these companies have more experience than we do in

25

----

preclinical testing,clinical trials and manufacturing of biologic therapeutics, as well as inobtaining FDA and foreign regulatory approvals. We will also compete withacademic institutions, governmental agencies and private organizations that areconducting research in the fields of cancer and autoimmune disease. Competitionamong these entities to recruit and retain highly qualified scientific,technical and professional personnel and consultants is also intense.

We are aware of a numberof companies that are developing active immunotherapies to treat B-cell NHL.Genitope Corporation is evaluating its idiotype immunotherapy product candidatein a Phase 3 clinical trial in patients with follicular B-cell NHL who are inremission following prior treatment with chemotherapy. Antigenics, Inc.completed a Phase 2 clinical trial evaluating its active immunotherapycandidate in indolent NHL patients. The NCI is also conducting a Phase 3clinical trial of an active idiotype immunotherapy in collaboration withAccentia Biopharmaceuticals.

Several companies areengaged in the development and commercialization of passive immunotherapyproducts for the treatment of B-cell NHL that may compete with FavId.Genentech and Biogen Idec are co-marketing Rituxan for the treatment ofrelapsed or refractory, indolent B-cell NHL. Biogen Idec is also marketingZevalin, its passive radioimmunotherapy product. GlaxoSmithKline plc currentlymarkets Bexxar, a passive radioimmunotherapy product.

The most recent advancesin the treatment of B-cell NHL have involved the combination of existingproducts and changes to approved schedules and doses, particularly for Rituxan.Numerous clinical trials reported in recent years have indicated thatadditional doses of Rituxan and maintenance dosing of Rituxan can improve TTPin patients who respond to therapy. Combination therapies involvingchemotherapeutic or immunostimulatory drugs in combination with Rituxan atvarious doses and schedules may provide patients with an increase in TTP overthat expected with Rituxan alone. Accordingly, we may face competition as aresult of developments in this area.

We expect that ourability to compete effectively will depend upon our ability to:

·        successfullyand rapidly complete clinical trials and obtain all requisite regulatoryapprovals in a cost-effective manner;

·        reliablyand cost-effectively manufacture sufficient quantities of our products;

·        maintaina proprietary position for our manufacturing process and other technology;

·        priceour products competitively;

·        obtainappropriate reimbursement approvals for our products;

·        establishan adequate sales and marketing force for our products; and

·        attractand retain key personnel.

In addition, our abilityto compete effectively will depend on the relative efficacy and safety of otheractive immunotherapy products approved for sale as compared to our ownproducts.

**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 a new Medicare prescription drug benefit beginning in2006 and mandates other reforms. Although we cannot predict the

26

----

full effects on our businessof the implementation of this new legislation, it is possible that the newbenefit, which will be managed by private health insurers, pharmacy benefitmanagers and other managed care organizations, will result in decreasedreimbursement for prescription drugs, which may further exacerbateindustry-wide pressure to reduce the prices charged for prescription drugs.This could harm our ability to market our products and generate revenues.

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

Our success depends onour continued ability to attract, retain and motivate highly qualifiedmanagement, clinical and scientific personnel and on our ability to develop andmaintain important relationships with leading academic institutions, cliniciansand scientists. We are highly dependent upon our senior management andscientific staff, particularly John P. Longenecker, Ph.D., our President andChief Executive Officer, and Daniel P. Gold, Ph.D., one of our co-founders andour Chief Scientific Officer. The loss of services of Dr. Longenecker orDr. Gold, or one or more of our other members of senior management, coulddelay or prevent the successful completion of our pivotal Phase 3 clinicaltrial or the commercialization of FavId. Although we have employment agreementswith each of our executives, their employment with us is “at will,” and eachexecutive can terminate his or her agreement with us at any time. We do notcarry “key person” insurance covering members of senior management, other thanDrs. Longenecker and Gold. This insurance may not continue to be availableon commercially reasonable terms and may prove inadequate to compensate us forthe loss of their services.

The competition forqualified personnel in the biotechnology field is intense. In particular, ourmanufacturing process depends on our ability to attract and retain qualifiedmanufacturing and quality control personnel. We will need to hire additionalpersonnel as we continue to expand our manufacturing, research and developmentactivities. We may not be able to attract and retain quality personnel onacceptable terms given the competition for such personnel among biotechnology,pharmaceutical and other companies. We are not aware of any key personnelplanning to retire or terminate their employment in the near future.

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

As of March 31, 2007, wehad 152 employees. Of these, 123 employees were in research and developmentcomprised of 86 in manufacturing, quality control and quality assurance, 34 inresearch and process development, and three members of senior management. Of the remaining employees, three were members of senior management and 26 werein marketing, general and administration. We will need to expand our financial,managerial, operational and other resources in order to continue our clinicaltrials and commercialize FavId, FAV-201, or any other product candidates thatwe may develop. Future growth would impose significant added responsibilitieson our management team, including the need to identify, recruit, maintain andintegrate additional employees. Our ability to commercialize FavId, FAV-201, orany other product candidates that we may develop, and our future financialperformance in general, will depend in part on our ability to manage any futuregrowth effectively. In order to meet these challenges, we would need to:

·        manageour clinical trials effectively;

·        manageour research and development efforts effectively;

·        developour administrative, accounting and management information systems and controls;and

·        hire,train and integrate additional management, administrative, manufacturing andsales and marketing personnel.

We may not be able toaccomplish these tasks, and our failure to accomplish any of them could harmour business or future prospects.

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

Our research anddevelopment and manufacturing activities involve the use of biological andhazardous materials

27

----

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

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

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 ourcreditors could levy claims against our assets, including our intellectualproperty.

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

If we are able to commercializeFavId or any other product candidates that we may develop, we will be subjectto various 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 FavId or any other product candidates that we maydevelop, we could become subject to false claims litigation under federalstatutes, which can lead to civil money penalties, criminal fines andimprisonment, and exclusion from participation in Medicare, Medicaid and otherfederal and state healthcare programs. These false claims statutes include theFalse Claims Act, which allows any person to bring suit on behalf of thefederal government alleging the submission of false or fraudulent claims, orcausing to present such false or fraudulent claims, under federal programs orcontracts claims or other violations of the statute and to share in any amountspaid by the entity to the government in fines or settlement. These suitsagainst biotechnology companies have increased significantly in recent yearsand have increased the risk that a healthcare company will

28

----

have to defend a falseclaim action, pay fines or be excluded from the Medicare, Medicaid or otherfederal and state healthcare programs as a result of an investigation arisingout of such action. We cannot assure you that we will not become subject tosuch litigation or, if we are not successful in defending against such actions,that such 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:

·        thereis no guarantee that any of our pending patent applications will result inissued patents;

·        wemay develop additional proprietary technologies that are not patentable;

·        thereis no guarantee that any patents issued to us, our collaborators or ourlicensors will provide a basis for a commercially viable product;

·        thereis no guarantee that any patents issued to us or our collaborators or ourlicensors will provide us with any competitive advantage;

·        thereis no guarantee that any patents issued to us or our collaborators or ourlicensors will not be challenged, circumvented or invalidated by third parties;and

·        thereis no guarantee that any patents previously issued to others or issued in thefuture 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 four 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.

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.

Although we believe ourissued patents, as well as our patent applications if they issue as patents,will provide a competitive advantage, we may

29

----

not be able to developadditional patentable products or processes.  Further, we may not be ableto obtain patents from any of the pending applications. Even if patent claimsare allowed, the claims may not issue, or in the event of issuance, may not besufficient to protect our technology. In addition, any patents or patent rightswe obtain may be circumvented, challenged or invalidated by our competitors.

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

Certain types ofpatient-specific idiotype-KLH conjugates, comprising single idiotype proteins,and their use for the treatment of indolent B-cell NHL are in the public domainand therefore cannot be patented. Consequently, we may only be able to seekpatent protection for methods of treating immune system diseases, includingB-cell and T-cell lymphomas, using our proprietary immunotherapy productionmethods for making idiotype protein conjugates and compositions comprising suchconjugates, as well as methods for combining the idiotype or T-cellreceptor-based immunotherapies with other therapies that are used to treatdiseases of the immune system. As a result, we may not be able to prevent othercompanies using different manufacturing processes from developing activeimmunotherapies that directly compete with FavId.

**We mayhave to engage in costly litigation to enforce our proprietary rights or todefend challenges to our intellectual property by our competitors, which 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 ourinterests that 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.

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

Our commercial successwill depend in part on not infringing the patents or proprietary rights ofthird parties. We are aware of competing intellectual property relating toactive idiotype immunotherapies for cancer. Competitors or third parties may beissued, or may currently hold, patents that may cover subject matter that weuse in developing the technology required to bring our product candidates tomarket, that we use in producing our product candidates, or that we use intreating patients with our product candidates. In addition, from time to timewe receive correspondence inviting us to license patents from third parties.While we currently believe we have freedom to operate in our area, others maychallenge our position in the future. There has been, and we believe that therewill continue to be, significant litigation in the pharmaceutical industryregarding patent and other intellectual property rights.

While we believe that ourpre-commercialization activities fall within the scope of an availableexemption against patent infringement provided by 35 U.S.C. §271(e), andthat our subsequent manufacture of our commercial products will also notrequire the license of any patents, claims may be brought against us in thefuture based on these or other patents held by others. As our productcandidates progress toward commercialization, competitors or other parties mayassert that we infringe on their patents or proprietary rights.

In particular, we areaware of the following third party patents:

·        Genentechand City of Hope National Medical Center hold patent rights related to theexpression of recombinant antibodies;

·        Genitopeholds patent rights relating to immunotherapy using idiotype proteins producedusing T-lymphoid cells for the treatment of B-Cell lymphoma; and

30

----

·        ScheringCorp. holds patent rights relating to the use of GM-CSF as a vaccine adjuvantfor use against infectious diseases.

The first patent listedabove was issued to Genentech in 2001. We do not believe that this patentcovers our technology, and we note that in May 2005, a third party filed arequest for reexamination of this patent with the U.S. Patent and TrademarkOffice, requesting that the claims of this patent be reexamined as to theirpatentability; the reexamination is currently pending.  Duringreexamination the issued claims were rejected; proceedings before the U.S.Patent and Trademark Office continue.  If this patent reissues and wedecide to attempt to obtain a license for this patent, we cannot guarantee thatwe would be able to obtain such a license on commercially reasonable terms, or atall.

Additionally, becausepatent prosecution can proceed in secret prior to issuance of a patent, thirdparties may obtain other patents with claims of unknown scope relating to ourproduct candidates, which they could attempt to assert against us. Further, aswe develop our products, we may infringe the current patents of third partiesor patents that may issue in the future.  Third parties could bring legalactions against us claiming damages and seeking to enjoin clinical testing,manufacturing and marketing of the affected product or products. If we becomeinvolved in any litigation, it could consume a substantial portion of ourresources, regardless of the outcome of the litigation. If any of these actionsare successful, in addition to any potential liability for damages, we could berequired to obtain a license to continue to manufacture or market the affectedproduct, in which case we may be required to pay substantial royalties or grantcross-licenses to our patents. However, there can be no assurance that any suchlicense will be available on acceptable terms or at all. To enforce patentsissued to us or to determine the scope and validity of other parties’proprietary rights, we may also become involved in litigation or ininterference proceedings declared by the United States Patent and TrademarkOffice, which could result in substantial costs to us, regardless of theoutcome of the litigation, or an adverse decision as to the priority of ourinventions. Ultimately, as a result of patent infringement claims, our businesscould be harmed and we could be prevented from commercializing a product, orforced to cease some aspect of our business operations.

**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 market forour common stock, and the price of our common stock may be volatile and coulddecline significantly.**

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- $2.39 fromthe commencement of our IPO on February 2, 2005 to May 2, 2007.

The stock market ingeneral has been experiencing dramatic fluctuations that have often beenunrelated to the operating performance of companies. The market prices forsecurities of biotechnology companies in general have been highly volatile andmay continue to be highly volatile in the future. If market-based orindustry-based volatility continues, the trading price of our common stockcould decline significantly, independent of our actual operating performance,and you could lose all or part of your investment. The market price of ourcommon stock could fluctuate significantly as a result of several factors,including:

31

----

·        announcementsof technological innovations or new products by us or our competitors;

·        announcementof FDA approval or non-approval of FavId or any other product candidates thatwe may develop, or delays in the FDA review process;

·        actionstaken by regulatory agencies with respect to FavId and FAV-201, or any otherproduct candidates that we may develop, or our clinical trials, manufacturingprocess or sales and marketing activities;

·        regulatorydevelopments in the United States and foreign countries;

·        successof our research efforts and clinical trials;

·        anyintellectual property infringement lawsuit in which we may become involved;

·        announcementsconcerning our competitors, or the biotechnology or biopharmaceuticalindustries in general;

·        actualor anticipated fluctuations in our operating results;

·        changesin financial estimates or recommendations by securities analysts;

·        salesof large blocks of our common stock;

·        salesof our common stock by our executive officers, directors and significantstockholders;

·        changesin accounting principles; and

·        lossof any of our key scientific or management personnel.

Specifically, you may notbe able to resell your shares at or above the price you paid for such shares.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 March 31, 2007, ourofficers and directors and stockholders affiliated with our directors togetherbeneficially held approximately 34.3% of our outstanding common stock on anas-converted basis. If some or all of these officers, directors and principalstockholders act together, they will be able to exert a significant degree ofinfluence 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

32

----

to our stockholders.These provisions 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 maydiscourage transactions that otherwise could involve payment of a premium overprevailing market prices for our common stock.

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

We have never paid ordeclared any cash dividends on our capital stock and intend to retain anyfuture earnings to finance the development and expansion of our business. Thepayment of dividends by us on our common stock is limited by our debtagreements. We do not anticipate paying any cash dividends on our common stockin the foreseeable future. Unless we pay dividends, our stockholders will notbe able to receive a return on their shares unless they sell them.

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

Recently enacted andproposed changes in the laws and regulations affecting public companies,including the provisions of the Sarbanes-Oxley Act of 2002 andrules related to corporate governance and other matters subsequentlyadopted by the SEC and the Nasdaq Stock Market, could result in increased coststo us. The new rules and any related regulations that may be proposed inthe future could make it more difficult or more costly for us to obtain certaintypes of insurance, including directors’ and officers’ liability insurance, andwe may be forced to accept reduced policy limits and coverage or incursubstantially higher costs to obtain the same or similar coverage. The impactof these events could also make it more difficult for us to attract and retainqualified persons to serve on our board of directors, our board committees oras executive officers. We are presently evaluating and monitoring developmentswith respect to new and proposed rules and cannot predict or estimate theamount of the additional costs we may incur or the timing of such costs.

33

----

**Item6.  Exhibits.**

The exhibits listed onthe accompanying index to exhibits are filed or incorporated by reference (asstated therein) as part of this Quarterly Report on Form 10-Q.
| Exhibit  Number | ** ** | **Description of Document**                                                                                                                                                                                            | ** ** |
|-----------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **      | ** ** | ** **                                                                                                                                                                                                                       | ** ** |
| 3.1             |       | Registrant’s  Amended and Restated Certificate of Incorporation.(1)                                                                                                                                                         |       |
|            |       |                                                                                                                                                                                                                             |       |
| 3.2             |       | Registrant’s  Amended and Restated Bylaws.(1)                                                                                                                                                                               |       |
|            |       |                                                                                                                                                                                                                             |       |
| 4.1             |       | Form of  Common Stock Certificate of Registrant.(1)                                                                                                                                                                         |       |
|            |       |                                                                                                                                                                                                                             |       |
| 4.2             |       | Amended and Restated Investor Rights Agreement dated  March 26, 2004 between the Registrant and certain of its stockholders.(1)                                                                                             |       |
|            |       |                                                                                                                                                                                                                             |       |
| 4.3             |       | Amendment No. 1 to Amended and Restated  Investor Rights Agreement dated April 6, 2004 between the Registrant and  certain of its stockholders.(1)                                                                     |       |
|            |       |                                                                                                                                                                                                                             |       |
| 4.4             |       | Securities Purchase Agreement dated March 6,  2006, by and among Favrille and the individuals and entities identified on  Exhibit A thereto (the “Securities Purchase Agreement”). (2)                       |       |
|            |       |                                                                                                                                                                                                                             |       |
| 4.5             |       | Form of  Warrant issued pursuant to the Securities Purchase Agreement. (2)                                                                                                                                                  |       |
|            |       |                                                                                                                                                                                                                             |       |
| 4.6             |       | Securities  Purchase Agreement dated February 12, 2007, by and among Favrille and certain  investors.(3)                                                                                                                         |       |
|            |       |                                                                                                                                                                                                                             |       |
| 4.7             |       | Warrant to purchase 250,000 shares of Common Stock  dated December 19, 2006 issued to Kingsbridge Capital Limited.(4)                                                                                                            |       |
|            |       |                                                                                                                                                                                                                             |       |
| 4.8             |       | Registration Rights Agreement, dated December 19,  2006, by and between Favrille and Kingsbridge Capital Limited.(4)                                                                                                             |       |
|            |       |                                                                                                                                                                                                                             |       |
| 4.9             |       | Warrant to purchase 48,834 shares of Common Stock  dated December 30, 2005 issued to General Electric Capital Corporation.(5)                                                                                                    |       |
|            |       |                                                                                                                                                                                                                             |       |
| 4.10            |       | Warrant to purchase 48,834 shares of Common Stock  dated December 30, 2005 issued to Oxford Finance Corporation.(5)                                                                                                              |       |
|            |       |                                                                                                                                                                                                                             |       |
| 10.1            |       | Employment  Agreement dated May 2, 2007 between Registrant and Richard G. Ghalie, M.D.  (6)                                                                                                                                      |       |
|            |       |                                                                                                                                                                                                                             |       |
| 31.1            |       | Certification of  principal executive officer required by Rule 13a-14(a) or Rule 15d-14(a).                                                                                                                                      |       |
|            |       |                                                                                                                                                                                                                             |       |
| 31.2            |       | Certification of  principal accounting officer required by Rule 13a-14(a) or Rule 15d-14(a).                                                                                                                                     |       |
|            |       |                                                                                                                                                                                                                             |       |
| 32              |       | Certification by the Chief Executive Officer and  Chief Financial Officer of Favrille, Inc., as required by Rule 13a-14(b) or  15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States  Code (18 U.S.C. 1350). |       |
|            |       |                                                                                                                                                                                                                             |       |

 

----

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

 

34

----

**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: May 11, 2007 |                                                                                                   |
|--------------------------|--------------------------------------------------------------------------------------------------------|
|                     |                                                                                                   |
|                     | Favrille, Inc.                                                                                    |
|                     |                                                                                                   |
|                     | /s/ Tamara A. Seymour                                                                                  |   |
|                     |                                                                                                   |
|                     | Tamara A. Seymour                                                                                      |
|                     |                                                                                                   |
|                     | Chief Financial Officer                                                                                |
|                     |                                                                                                   |
|                     | (On behalf of the registrant and as the registrant’s  Principal Financial and Accounting Officer) |

 

35

----