**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-Q**

 

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**(Mark One)**

 

**ý********QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934**

 

**Forthe quarterly period ended March 31, 2006**

 

**OR**

 

**o********TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934**

 

**Forthe transition periodfrom              to              **

 

**Commission File Number 000-51134**

 

**Favrille, Inc.**

(Exact name of registrant as specified in itscharter)

 
| **Delaware**                                                    | ** ** | **33-0892797**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |       | (I.R.S. Employer  Identification No.) |
|                                                            |       |                                  |
| **10421  Pacific Center Court, San Diego, CA**                  | ** ** | **92121**                             |
| (Address of principal  executive offices)                       |       | (Zip Code)                            |

 

**(858) 526-8000**

(Registrant’s telephone number, including areacode)

 

**N/A**

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

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15 (d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.   YES  ý    NO o

 

Indicateby check mark whether the registrant is a large accelerated filer,  an accelerated filer, or a non-acceleratedfiler.  See definition of  “accelerated filer and large acceleratedfiler” in Rule 12b-2 of the Exchange Act (Check one).

 

LargeAccelerated Filer  o                              AcceleratedFiler  o                             Non-AcceleratedFiler ý

 

Indicateby check mark whether the registrant is shell company (as defined in Rule 12b-2of the Exchange Act).                     YES o    NO ý

 

Thenumber of shares of the Registrant’s common stock outstanding as of May 5,2006 was 28,918,185.

 

 

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**FAVRILLE,INC.**

 

**QUARTERLYREPORT ON FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 2006TABLE OF CONTENTS**

 
| **PART I.**  | **FINANCIAL INFORMATION**                                                                                                                                                               |   |
|-------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| Item 1.           | Financial Statements                                                                                                                                                                    |   |
|              | Balance Sheets as of March 31, 2006  (Unaudited) and December 31, 2005                                                                                                        |   |
|              | Statements of Operations (Unaudited) for  the three months ended March 31, 2006 and 2005 and the period from  January 21, 2000 (inception) to March 31, 2006 (Unaudited) |   |
|              | Statements of Cash Flows (Unaudited) for  the three months ended March 31, 2006 and 2005 and the period from  January 21, 2000 (inception) to March 31, 2006 (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 4.           | Controls and Procedures                                                                                                                                                                 |   |
|              |                                                                                                                                                                                    |   |
| **PART II.** | **OTHER  INFORMATION**                                                                                                                                                                  |   |
| Item  1.          | Legal  Proceedings                                                                                                                                                                      |   |
| Item  1A.         | Risk  Factors                                                                                                                                                                           |   |
| Item 2.           | Unregistered Sales of Equity Securities and  Use of Proceeds                                                                                                                            |   |
| Item 6.           | Exhibits                                                                                                                                                                                |   |
|              |                                                                                                                                                                                    |   |
| SIGNATURES        |                                                                                                                                                                                    |

 

2

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**PART I— FINANCIAL INFORMATION**

 

**Item 1. FinancialStatements.**

 

**FAVRILLE, INC.**

**(adevelopment stage company)**

**BALANCESHEETS**

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

 
| ** **                                                                                                                                                                                             | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                             | ** ** | **(unaudited)**          | ** ** | ** **                  | ** ** |
| **Assets**                                                                                                                                                                                             |       |                     |       |                        |       |
| Current assets:                                                                                                                                                                                        |       |                     |       |                        |       |
| Cash and cash equivalents                                                                                                                                                                              |       | $                        | 50,898     |                        | $          | 12,065 |   |
| Short-term investments                                                                                                                                                                                 |       | 19,732                   |       | 22,427                      |       |
| Receivables                                                                                                                                                                                            |       | 407                      |       | 372                         |       |
| Prepaid expenses and other current assets                                                                                                                                                              |       | 884                      |       | 563                         |       |
| Total current assets                                                                                                                                                                                   |       | 71,921                   |       | 35,427                      |       |
| Property and equipment, net                                                                                                                                                                            |       | 9,852                    |       | 9,430                       |       |
| Restricted cash                                                                                                                                                                                        |       | 1,550                    |       | 1,550                       |       |
| Other assets                                                                                                                                                                                           |       | 602                      |       | 600                         |       |
| Total assets                                                                                                                                                                                           |       | $                        | 83,925     |                        | $          | 47,007 |   |
| **Liabilities and stockholders’ equity**                                                                                                                                                          |       |                     |       |                        |       |
| Current liabilities:                                                                                                                                                                                   |       |                     |       |                        |       |
| Accounts payable and accrued liabilities                                                                                                                                                               |       | $                        | 5,350      |                        | $          | 3,888 |   |
| Current portion of debt                                                                                                                                                                                |       | 2,704                    |       | 2,553                       |       |
| Total current liabilities                                                                                                                                                                              |       | 8,054                    |       | 6,441                       |       |
| Debt, less current portion                                                                                                                                                                             |       | 3,181                    |       | 3,532                       |       |
| Deferred rent                                                                                                                                                                                          |       | 1,738                    |       | 1,320                       |       |
| Commitments and contingencies                                                                                                                                                                          |       |                     |       |                        |       |
| Stockholders’ equity:                                                                                                                                                                             |       |                     |       |                        |       |
| Preferred stock, $0.001 par value 5,000,000  shares authorized at March 31, 2006 and December 31, 2005; no  shares issued and outstanding at March 31, 2006 and December 31,  2005 |       | —                   |       | —                      |       |
| Common stock, $0.001 par value:                                                                                                                                                                        |       |                     |       |                        |       |
| Authorized shares, 75,000,000 at  March 31, 2006 and December 31, 2005;                                                                                                                      |       |                     |       |                        |       |
| Issued and outstanding shares— 28,920,426 and 20,329,046 at  March 31, 2006 and December 31, 2005, respectively                                                                         |       | 29                       |       | 20                          |       |
| Additional paid-in capital                                                                                                                                                                             |       | 197,264                  |       | 156,882                     |       |
| Deferred stock-based compensation                                                                                                                                                                      |       | —                   |       | (5,655                      | )          |
| Note receivable from stockholder                                                                                                                                                                       |       | (96                      | )          | (96                         | )          |
| Accumulated other comprehensive loss                                                                                                                                                                   |       | (7                       | )          | (54                         | )          |
| Deficit accumulated during the development  stage                                                                                                                                                      |       | (126,238                 | )          | (115,383                    | )          |
| Total stockholders’ equity                                                                                                                                                                        |       | 70,952                   |       | 35,714                      |       |
| Total liabilities and stockholders’ equity                                                                                                                                                        |       | $                        | 83,925     |                        | $          | 47,007 |   |

 

See accompanying notes.

 

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**FAVRILLE, INC.(a development stage company)**

 

**STATEMENTSOF OPERATIONS(in thousands, except per share data)**

**Unaudited**

 
| ** **                                                                                              | ** ** | ** **                            | ** ** | ** **                         | ** ** | **Period from  January 21, 2000** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                              | ** ** | **Three Months ended March 31,** | ** ** | **(inception) to  March 31,** | ** ** |
| ** **                                                                                              | ** ** | **2006**                              | ** ** | **2005**                           | ** ** | **2006**                               | ** ** |
| Operating expenses:                                                                                     |       |                                  |       |                               |       |                                   |       |
| Research and development                                                                                |       | $                                     | 8,421      |                               | $          | 6,828                                  |       | $ | 77,277 |   |
| Marketing, general and administrative                                                                   |       | 2,701                                 |       | 1,664                              |       | 21,194                                 |       |
| Total operating expenses                                                                                |       | 11,122                                |       | 8,492                              |       | 98,471                                 |       |
| Interest income                                                                                         |       | 432                                   |       | 296                                |       | 2,841                                  |       |
| Interest expense                                                                                        |       | (165                                  | )          | (208                               | )          | (2,172                                 | )          |
| Other income (expense)                                                                                  |       | —                                |       | (1                                 | )          | 14                                     |       |
| Loss on extinguishment of debt                                                                          |       | —                                |       | —                             |       | (290                                   | )          |
| Total other income, net                                                                                 |       | 267                                   |       | 87                                 |       | 393                                    |       |
| Net loss                                                                                                |       | (10,855                               | )          | (8,405                             | )          | (98,078                                | )          |
|                                                                                                    |       |                                  |       |                               |       |                                   |       |
| Deemed dividend-beneficial conversion  feature for Series C redeemable convertible preferred stock |       | —                                |       | —                             |       | (28,103                                | )          |
| Accretion of Series C redeemable  convertible preferred stock issuance costs                       |       | —                                |       | (6                                 | )          | (57                                    | )          |
| Net loss applicable to common stockholders                                                              |       | $                                     | (10,855    | )                                  | $          | (8,411                                 | )          | $ | (126,238 | ) |
| Historical net loss per share:                                                                          |       |                                  |       |                               |       |                                   |       |
| Basic and diluted                                                                                       |       | $                                     | (0.49      | )                                  | $          | (0.69                                  | )          |   |   |
| Weighted-average shares-basic and diluted                                                               |       | 22,355                                |       | 12,180                             |       |                                   |       |

 

See accompanying notes.

 

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**FAVRILLE, INC.(a development stage company)**

 

**STATEMENTSOF CASH FLOWS(in thousands)**

**Unaudited**

 
| ** **                                                                              | ** ** | ** **             | ** ** | ** **         | ** ** | **Period from**      | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------------------|------------|--------------------|------------|----------------------|------------|
| ** **                                                                              | ** ** | ** **             | ** ** | ** **         | ** ** | **January 21,** | ** ** |
| ** **                                                                              | ** ** | ** **             | ** ** | ** **         | ** ** | **2000**             | ** ** |
| ** **                                                                              | ** ** | **Three Months ended** | ** ** | **(inception) to** | ** ** |
| ** **                                                                              | ** ** | **March 31,**     | ** ** | **March 31,** | ** ** |
| ** **                                                                              | ** ** | **2006**               | ** ** | **2005**           | ** ** | **2006**             | ** ** |
| **Operating activities**                                                                |       |                   |       |               |       |                 |       |
| Net loss                                                                                |       | $                      | (10,855    | )                  | $          | (8,405               | )          | $ | (98,078 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities:            |       |                   |       |               |       |                 |       |
| Depreciation and amortization                                                           |       | 511                    |       | 438                |       | 4,869                |       |
| Issuance of options and warrant related to  consulting agreements                       |       | —                 |       | —             |       | 186                  |       |
| Stock-based compensation                                                                |       | 879                    |       | 747                |       | 6,329                |       |
| Non-cash interest expense                                                               |       | 42                     |       | 15                 |       | 214                  |       |
| Loss on extinguishment of debt                                                          |       | —                 |       | —             |       | (290                 | )          |
| Issuance of restricted common stock for  license                                        |       | —                 |       | —             |       | 24                   |       |
| Deferred rent                                                                           |       | 418                    |       | 136                |       | 1,738                |       |
| Amortization of premium/discount on  short-term investments                             |       | 1                      |       | 1                  |       | 6                    |       |
| Accrued interest on short-term investments                                              |       | 89                     |       | (37                | )          | (225                 | )          |
| Unrealized loss on cash and cash  equivalents                                           |       | —                 |       | 1                  |       | (1                   | )          |
| Changes in operating assets and  liabilities:                                           |       |                   |       |               |       |                 |       |
| Receivables                                                                             |       | (124                   | )          | (2                 | )          | (182                 | )          |
| Prepaid expenses and other assets                                                       |       | (324                   | )          | 5                  |       | (1,189               | )          |
| Accounts payable and accrued liabilities                                                |       | 1,462                  |       | 807                |       | 5,350                |       |
| Net cash used in operating activities                                                   |       | (7,901                 | )          | (6,294             | )          | (81,249              | )          |
| **Investing activities**                                                                |       |                   |       |               |       |                 |       |
| Purchases of property and equipment                                                     |       | (932                   | )          | (209               | )          | (14,690              | )          |
| Purchases of short-term investments                                                     |       | (5,909                 | )          | (3,561             | )          | (40,397              | )          |
| Maturities of short-term investments                                                    |       | 8,650                  |       | —             |       | 20,653               |       |
| Other assets                                                                            |       | —                 |       | —             |       | (70                  | )          |
| Restricted cash                                                                         |       | —                 |       | —             |       | (1,710               | )          |
| Sale of restricted cash                                                                 |       | —                 |       | —             |       | 160                  |       |
| Net cash from (used in) investing  activities                                           |       | 1,809                  |       | (3,770             | )          | (36,054              | )          |
| **Financing activities**                                                                |       |                   |       |               |       |                 |       |
| Proceeds from debt                                                                      |       | 315                    |       | —             |       | 15,722               |       |
| Payments on debt                                                                        |       | (557                   | )          | (603               | )          | (9,640               | )          |
| Issuance of preferred stock, net                                                        |       | —                 |       | —             |       | 76,144               |       |
| Proceeds from issuance of convertible  promissory note                                  |       | —                 |       | —             |       | 650                  |       |
| Issuance of common stock and warrants                                                   |       | 45,168                 |       | 39,457             |       | 85,363               |       |
| Repurchase of restricted common stock                                                   |       | (1                     | )          | (1                 | )          | (38                  | )          |
| Net cash provided by financing activities                                               |       | 44,925                 |       | 38,853             |       | 168,201              |       |
| Net decrease increase in cash and cash  equivalents                                     |       | 38,833                 |       | 28,789             |       | 50,898               |       |
| Cash and cash equivalents at beginning of  period                                       |       | 12,065                 |       | 25,065             |       | —               |       |
| Cash and cash equivalents at end of period                                              |       | $                      | 50,898     |               | $          | 53,854               |       | $ | 50,898 |   |
|                                                                                    |       |                   |       |               |       |                 |       |
| **Supplemental schedule of non-cash  investing and financing activities:**         | ** ** | ** **             | ** ** | ** **         | ** ** | ** **           | ** ** |
| Conversion of convertible preferred stock  to common stock upon initial public offering |       | $                      | —     |               | $          | 43,678               |       | $ | 43,678 |   |

 

See accompanying notes.

 

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**FAVRILLE,INC.NOTES TO CONDENSED FINANCIAL STATEMENTSMARCH 31, 2006UNAUDITED**

 

**1. Basis of Presentation**

 

The accompanying unaudited interim financial statements have beenprepared in accordance with U.S. generally accepted accounting principles andwith the rules and regulations of the Securities and Exchange Commissionrelated to a quarterly report on Form 10-Q. Accordingly, they do notinclude all of the information and disclosures required by U.S. generallyaccepted accounting principles for complete financial statements. The balancesheet at December 31, 2005 has been derived from the audited financialstatements at that date but does not include all information and footnotesrequired by U.S. generally accepted accounting principles for completefinancial statements. The interim financial statements reflect all adjustmentswhich, in the opinion of management, are necessary for a fair presentation ofthe financial condition and results of operations for the periods presented.Except as otherwise disclosed, all such adjustments are of a normal recurringnature.

 

Operating results for the three months ended March 31, 2006 arenot necessarily indicative of the results that may be expected for the yearending December 31, 2006. 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, 2005 and management’s discussion and analysis offinancial condition and results of operations included elsewhere herein.

 

The preparation of financial statements in conformity with U.S.generally accepted accounting principles requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities aswell as expenses during the reporting period. Actual results could differ fromthose estimates.  On an ongoing basis, wereview our estimates based on information currently available, and changes infacts and circumstances may cause us to revise these estimates.

 

Certain reclassifications have been made to prior periods’ financialstatements in order to conform to the current period’s presentation.  The March 31, 2005 Statement of Operationsincludes stock-based compensation expense in the applicable research anddevelopment and marketing, general and administrative amounts in a mannerconsistent with the March 31, 2006 Statement of Operations presentation.

 

***Stock-BasedCompensation***

 

***Adoption of SFAS123(R)***

 

Favrille has its Amended and Restated 2001Equity Incentive Plan (the Equity Incentive Plan), its 2005 Non-EmployeeDirectors’ Stock Option Plan (the Directors’ Plan) and its 2005 Employee StockPurchase Plan (the Stock Purchase Plan) that are described more fully in Note 5to the Financial Statements included in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2005. As of March 31, 2006, no grantshad been made from the Directors’ Plan.

 

Effective January 1, 2006, the Company adopted Statement ofFinancial Accounting Standards No. 123 (revised 2004), “Share-BasedPayment,” (SFAS 123(R)).  SFAS 123(R)requires the recognition of the fair value of stock-based compensation in netincome.  The Company recognizes thestock-based compensation expense over the requisite service period of theindividual grantees on a straight-line basis over the vesting period, which isgenerally four years.  Prior to January 1,2006, the Company recorded compensation expense for stock options based upontheir intrinsic value on the date of grant pursuant to Accounting PrinciplesBoard Opinion No. 25, *Accounting forStock Issued to Employees (APB 25)*. Prior to the Company’s initial public offering (IPO), the Companyestablished the exercise price based on the fair value of the Company’s stockat the date of grant as determined by the Board of Directors (the Board).Therefore, the options had no intrinsic value upon grant and no expense wasrecorded upon issuance. With respect to certain options granted during 2005 and2004, the Company had recorded deferred compensation of $350,000 and$9.4 million, respectively, for the incremental difference at the grantdate between the fair value per share determined by the Board and the deemedfair value per share determined solely for financial reporting purposes.

 

The Company has elected the modified prospective transition method foradopting SFAS 123(R).  Under this method,the provisions of SFAS 123(R) apply to all awards granted or modified after thedate of adoption.  The deferredstock-based compensation balance of $5.7 million as of December 31, 2005,which was accounted for under APB 25, was reclassified as a reduction ofadditional paid-in capital upon the adoption of SFAS 123(R).  In addition, the unrecognized expense ofawards not yet vested at the date of adoption will be recognized in net incomeor loss in the periods after the date of adoption using

 

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the same Black-Scholes valuation method and assumptions determinedunder the original provisions of SFAS 123, “Accounting for Stock-BasedCompensation,” as disclosed in our previous quarterly and annual reports.  The cumulative effect of the change inaccounting principle from APB 25 to SFAS 123(R) was not material, because theamortization of expense related to options granted prior to the adoption wasbased on the single-option approach.

 

***Determining FairValue***

 

The Companyestimates the fair value of each share-based award on the grant date using theBlack-Scholes valuation model.  Tofacilitate the adoption of SFAS 123(R), the Company applied provisions of StaffAccounting Bulletin (SAB) 107 in developing our methodologies to estimate ourBlack-Scholes valuation model inputs. Option valuation models, including Black-Scholes, require the input ofhighly subjective assumptions, and changes in the assumptions used canmaterially affect the grant date fair value of an award.  Below is a summary of the methodologies theCompany utilized to estimate the assumptions:

 

*Valuation andAmortization Method –*The Company estimates the fair value of stockoptions granted using the Black-Scholes option-pricing formula and asingle-option award approach.  This fairvalue is then amortized on a straight-line basis over the requisite serviceperiod, which is generally the vesting period.

 

*Expected Term-* The Company’sexpected term represents the period that the Company’s stock-based awards areexpected to be outstanding and is determined based on the SAB 107 simplifiedmethod, since the company does not have adequate history of exercises of itsstock-based awards since its IPO in February 2005.

 

*ExpectedVolatility-*The Company estimates its volatility factor byusing the historical average volatility, over a period equal to the expectedterm, of comparable companies since it does not have adequate stock pricehistory of its own stock to determine volatility.

 

*ExpectedDividend -*The Black-Scholes valuation model calls for asingle expected dividend yield as an input. The dividend yield of zero is based on the fact that the Company hasnever paid cash dividends and has no present intention to pay cash dividends inthe future.

 

*Risk-FreeInterest Rate –*The Company bases the risk-free interest rateused in the Black-Scholes valuation model on the implied yield currentlyavailable on the U.S. Treasury zero-coupon issues with an equivalent remainingterm.  Where the expected term of theCompany’s stock-based awards does not correspond with the terms for whichinterest rates are quoted, the Company performs a straight-line interpolationto determine the rate from the available maturities.

 

*EstimatedForfeitures –*When estimating forfeitures, the Company considersvoluntary termination behavior as well as an analysis of actual optionforfeitures.  As stock-based compensation expense recognized in theStatement of Operations for the first quarter of 2006 is based on awardsultimately expected to vest, it should be reduced for estimated forfeitures.SFAS 123(R) requires forfeitures to be estimated at the time of grant andrevised, if necessary, in subsequent periods if actual forfeitures differ fromthose estimates. Pre-vesting forfeitures were estimated based on historicalexperience. In the Company’s pro forma information required under SFAS 123 forthe periods prior to January 1, 2006, the Company accounted forforfeitures as they occurred.

 

*Fair Value –*The fair value ofthe Company’s stock options granted to employees and employee stock purchaseplan offerings for the three months ended March 31, 2006 and 2005 wasestimated using the following assumptions:

 
| ** **                               | ** ** | **Stock Option Plan  Three Months ended March 31,** | ** ** | **Employee Stock Purchase Plan  Three Months ended March 31** | ** ** |
|------------------------------------------|------------|----------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                               | ** ** | **2006**                                                 | ** ** | **2005**                                                           | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                               | ** ** | ** **                                               | ** ** | ** **                                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Expected term (in years)                 |       | 6.25                                                     |       | 4.0                                                                |       | 1.25 |   | 1.25 |   |
| Volatility                               |       | 61.8                                                     | %          | 70                                                                 | %          | 57.6 | % | 70 | % |
| Expected dividend                        |       | 0                                                        |       | 0                                                                  |       | 0 |   | 0 |   |
| Weighted average risk-free interest rate |       | 4.70                                                     | %          | 4.27                                                               | %          | 4.71 | % | 3.02 | % |
| Estimated forfeitures                    |       | 4.0                                                      | %          | —                                                             |       | 4.0 | % | — |   |
| Weighted-average fair value              |       | $                                                        | 4.38       |                                                               | $          | 3.26 |   | $ | 3.01 |   | $ | 3.18 |   |
|                                          |            |                                                          |            |                                                                    |            |  |  |  |  |  |  |  |  |

 

7

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***Stock-Based Compensation Expense***

 

Under provisions of SFAS 123(R), the Company recorded $879,000 ofstock-based compensation expense in our Statement of Operations for the threemonths ended March 31, 2006.  TheCompany utilized the Black-Scholes valuation model for estimating the fairvalue of the stock-based compensation granted both before and after theadoption of SFAS 123(R).  Prior to theadoption of SFAS 123(R), the Company recorded $747,000 of stock-basedcompensation in our Statement of Operations for the three months ended March 31,2005 under the provisions of APB 25 based upon their intrinsic value.  Total stock-based compensation expenserecognized for the three months ended March 31, 2006 and 2005 were asfollows (in thousands, except per share data):

 
| ** **                                              | ** ** | **Three Months ended  March 31,** | ** ** | **Three Months ended  March 31,** | ** ** |
|---------------------------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| ** **                                              | ** ** | **2006**                               | ** ** | **2005**                               | ** ** |
| Research and  development                               |       | $                                      | 433        |                                   | $          | 367 |   |
| General and  administrative                             |       | 446                                    |       | 380                                    |       |
| Share-based  compensation expense                       |       | $                                      | 879        |                                   | $          | 747 |   |
|                                                    |       |                                   |       |                                   |       |
| Net  share-based compensation expense, per common share |       |                                   |       |                                   |       |
| Basic and diluted                                       |       | $                                      | 0.04       |                                   | $          | 0.06 |   |

 

At March 31, 2006, the total compensation cost related to unvestedstock-based awards granted to employees under the Company’s stock award plansbut not yet recognized was approximately $8.7 million, net of estimatedforfeitures of approximately $540,000. This cost will be amortized on a straight-line basis over aweighted-average period of approximately 3.1 years and will be adjusted forsubsequent changes in estimated forfeitures.

 

***Pro-forma Disclosures***

 

SFAS 123(R) requires the Company to present pro forma information forthe comparative period prior to adoption as if it had accounted for all stockoptions under the fair value method of the original SFAS 123.  The following table illustrates the effect onnet income and earnings per share if we had applied the fair value recognitionprovisions of SFAS 123 to stock-based employee compensation to the same periodin the prior year:

 
| ** **                                                                                           | ** ** | **Three Months  ended March 31,**      | ** ** |
|------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                           | ** ** | **2005**                                    | ** ** |
| ** **                                                                                           | ** ** | **(in thousands,  except per share  data)** | ** ** |
| Pro forma net loss applicable to common  stockholders                                                |       | $                                           | (8,411     | ) |
| Add: Stock-based employee compensation  expense included in net loss                                 |       | 747                                         |       |
| Deduct: Stock-based employee compensation  expense determined under fair value method for all awards |       | (728                                        | )          |
| Pro forma net loss applicable to common  stockholders                                                |       | $                                           | (8,392     | ) |
| Net loss per share:                                                                                  |       |                                        |       |
| As reported-Basic and Diluted                                                                        |       | $                                           | (0.69      | ) |
| Pro forma-Basic and Diluted                                                                          |       | $                                           | (0.69      | ) |

 

As a resultof adopting SFAS 123(R), the Company’s net loss for the three months ended March 31,2006 is approximately $200,000 larger than if the Company had continued toaccount for stock-based compensation under APB 25.  Basic and diluted net loss per share for thethree months ended March 31, 2006, would have been $0.48 if the Companyhad not adopted SFAS 123(R) compared to reported basic and diluted net loss pershare of $0.49, respectively.

 

8

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***Stock Option Activity***

 

The Company issues new shares of common stock upon exercise of stockoptions.  The following is a summary ofoption activity for the Equity Incentive Plan:

 
| ** **                                          | ** ** | **Shares**         | ** ** | **Approximate  Weighted-  average  exercise price** | ** ** | **Weighted-  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|-----------------------------------------------------|------------|--------------------|------------|-----------------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                          | ** ** | **(in thousands)** | ** ** | ** **                                          | ** ** | ** **                                           | ** ** | **(in thousands)**             | ** ** |
| Outstanding at December 31, 2005               |       | 1,682              |       | $                                                   | 2.50       |                                                 |       |                           |       |   |
| Granted                                             |       | 697                |       | 7.04                                                |       |                                                 |       |                           |       |
| Exercised                                           |       | (2                 | )          | 0.63                                                |       |                                                 |       |                           |       |
| Forfeited                                           |       | (2                 | )          | 3.79                                                |       |                                                 |       |                           |       |
| Outstanding  at March 31, 2006                 |       | 2,375              |       | 3.84                                                |       | 8.93                                                 |       | $                              | 7,157      |   |
|                                                |       |               |       |                                                |       |                                                 |       |                           |       |
| Vested and  expected to vest at March 31, 2006 |       | 2,267              |       | 3.78                                                |       | 8.91                                                 |       | $                              | 6,956      |   |
|                                                |       |               |       |                                                |       |                                                 |       |                           |       |
| Exercisable  at March 31, 2006                 |       | 1,112              |       | 1.40                                                |       | 8.10                                                 |       | $                              | 5, 876     |   |
|                                                     |            |                    |            |                                                     |            |                                                      |            |                                |            |  |  |

 

Shares available for future stock option grants under the EquityIncentive Plan and the Directors’ Plan were 283,000 and 420,000, at March 31,2006, respectively.  Aggregate intrinsicvalue is calculated as the difference between the exercise price of the underlyingawards and the quoted price of the Company’s common stock for the 1.8 millionoptions that were in-the-money as of March 31, 2006.

 

***Stock Purchase Plan Information***

 

During the three months ended March 31, 2006, 36,070 shares wereissued at a purchase price of $3.93.  At March 31,2006, approximately 160,000 shares were reserved for future issuance and theaggregate intrinsic value of options outstanding under the Company’s StockPurchase Plan was $300,000.

 

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***Net Loss per CommonShare***

 

Net loss per share is calculated in accordance with SFAS No. 128, *Earnings Per Share,* and SAB No. 98.Basic loss per share is calculated using the weighted average number of commonshares outstanding during each period, without consideration for common stockequivalents. Diluted loss per share includes the dilutive effect of commonequivalent shares outstanding for the period determined using thetreasury-stock method. For purposes of this calculation, common stock subject torepurchase by the Company, preferred stock, options and warrants are consideredto be common stock equivalents and are only included in the calculation ofdiluted earnings per share when their effect is dilutive.

 

The pro forma shares used to compute basic and diluted net loss pershare below represent the weighted-average common shares outstanding, reducedby the weighted-average unvested common shares subject to repurchase, andinclude the assumed automatic conversion of all outstanding shares of preferredstock that automatically converted into shares of common stock upon the closingof our IPO, in February 2005, using the as-if converted method as of January 1,2005 or the date of issuance, if later.

 
| ** **                                                                                                   | ** ** | **Three Months ended  March 31,**     | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                   | ** ** | **2006**                                   | ** ** | **2005** | ** ** |
| ** **                                                                                                   | ** ** | **(in thousands, except per share  data)** | ** ** |
| **Historical:**                                                                                              | ** ** | ** **                                 | ** ** | ** ** | ** ** |
| Numerator:                                                                                                   |       |                                       |       |   |   |
| Net loss                                                                                                     |       | $                                          | (10,855    | ) | $ | (8,405 | ) |
| Deemed dividend-beneficial conversion  feature for Series C redeemable convertible preferred stock      |       | —                                     |       | — |   |
| Accretion of Series C redeemable convertible  stock issuance costs                                      |       | —                                     |       | (6 | ) |
| Net loss applicable to common stockholders                                                                   |       | $                                          | (10,855    | ) | $ | (8,411 | ) |
| Denominator:                                                                                                 |       |                                       |       |   |   |
| Weighted-average common shares                                                                               |       | 22,616                                     |       | 12,751 |   |
| Weighted-average unvested common shares  subject to repurchase                                               |       | (262                                       | )          | (571 | ) |
| Denominator for basic and diluted earnings  per share                                                        |       | 22,354                                     |       | 12,180 |   |
|                                                                                                         |       |                                       |       |   |   |
| Basic and diluted net loss per share                                                                         |       | $                                          | (0.49      | ) | $ | (0.69 | ) |
| **Pro forma:**                                                                                               | ** ** | ** **                                 | ** ** | ** ** | ** ** |
| Net loss applicable to common stockholders                                                                   |       | $                                          | (10,855    | ) | $ | (8,411 | ) |
|                                                                                                         |       |                                       |       |   |   |
| Pro forma basic and diluted net loss per  share                                                              |       | $                                          | (0.49      | ) | $ | (0.49 | ) |
|                                                                                                         |       |                                       |       |   |   |
| Shares used above                                                                                            |       | 22,355                                     |       | 12,180 |   |
| Pro forma adjustments to reflect  weighted-average affect of conversion of preferred stock                   |       | —                                     |       | 5,006 |   |
| Pro forma shares used to compute basic and  diluted net loss per share                                       |       | 22,355                                     |       | 17,186 |   |
|                                                                                                         |       |                                       |       |   |   |
|                                                                                                         |       | **As of March 31**                    |       |
|                                                                                                         |       | **(in thousands)**                         |       |
|                                                                                                         |       | **2006**                                   | ** ** | **2005** |   |
| **Historical outstanding anti-dilutive  securities not included in diluted net loss per share calculation:** | ** ** | ** **                                 | ** ** | ** ** |   |
| Common stock equivalents:                                                                                    |       |                                       |       |   |   |
| Stock warrants                                                                                               |       | 3,122                                      |       | 30 |   |
| Options to purchase common stock                                                                             |       | 2,376                                      |       | 1,460 |   |
| Common stock subject to repurchase                                                                           |       | 233                                        |       | 526 |   |
|                                                                                                         |       | 5,731                                      |       | 2,016 |   |

 

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**2. Comprehensive Loss**

 

Components of comprehensive loss were asfollows (in thousands):

 
| ** **                                                  | ** ** | **Three Months ended March 31,** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                  | ** ** | **2006**                              | ** ** | **2005** | ** ** |
|                                                        |       |                                  |       |   |   |
| Net loss                                                    |       | $                                     | (10,855    | ) | $ | (8,405 | ) |
| Change in unrealized gain (loss) on  short-term investments |       | 47                                    |       | (17 | ) |
| Comprehensive loss                                          |       | $                                     | (10,808    | ) | $ | (8,422 | ) |

 

Accumulated other comprehensive loss totaled$7,000 and $54,000 at March 31, 2006 and December 31, 2005,respectively, and was attributed to unrealized losses on short-terminvestments.

 

**3. Stockholders’ Equity**

 

*Private Placement of Common Stock andWarrants*

 

OnMarch 6, 2006, the Company entered into a securities purchase agreementrelating to a private placement in which the Company issued and sold to certaininvestors, for an aggregate 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 theprivate placement paid $5.26 per share of common stock and an additionalpurchase price equal to $0.125 per warrant.

 

Certain of the Company’s existing stockholders, including two membersof our board of directors, Ivor Royston, M.D. and Fred Middleton, and fundsaffiliated with Forward Ventures, Sanderling Ventures, Alloy Ventures andWilliam 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 directors,are associated with Forward Ventures, Sanderling Ventures, Alloy Ventures andWilliam Blair Capital Partners, respectively.

 

The Company filed a registration statement with the Securities andExchange Commission on March 31, 2006 covering the resale of the shares ofcommon stock issued in the private placement and the shares of common stockissuable upon exercise of the warrants issued in the private placement.   On April 12, 2006, the Securities andExchange Commission declared the registration statement effective.

 

*Initial Public Offering*

 

On February 7, 2005, the Company completed an initial closing ofits IPO in which it sold 6 million shares of common stock for proceeds of $37.7million, net of underwriting discounts and commissions and $1.4 million ofoffering expenses. In addition, on March 7, 2005, the Company completed anadditional closing of its IPO in which it sold an additional 285,000 shares ofcommon stock pursuant to the partial exercise by the underwriters of anover-allotment option which resulted in proceeds of $1.8 million, net ofunderwriting discounts and commissions.

 

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**Item 2. Management’sDiscussion and Analysis of Financial Condition and Results of Operations.**

 

**Cautionary Note Regarding Forward-LookingStatements**

 

*This Form 10-Q contains certain forward-looking statementsincluding expectations of market conditions, challenges and plans, within themeaning of Section 21E of the Securities Exchange Act of 1934, as amended,and is subject to the Safe Harbor provisions created by that statute. The words“anticipate”, “expect”, “believe”, “plan”, “intend”, and similar expressionsare intended to identify such statements. Although the forward-lookingstatements in this Form 10-Q reflect the good faith judgment of ourmanagement, such statements are subject to various risks and uncertainties,including but not limited to those discussed herein and, in particular, therisks described in Item 1A of Part II and throughout our Annual Report on Form 10-K for the year ended December 31,2005. Actual results and the timing of selected events may differ materiallyfrom those anticipated in these forward-looking statements. Except as requiredby applicable law, we disclaim any duty to update any forward-looking statementto reflect events or circumstances that occur after the date on which suchstatement is made.*

 

**Overview**

 

We are abiopharmaceutical company focused on the development and commercialization oftargeted immunotherapies for the treatment of cancer and other diseases of theimmune system. 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. FavId entered a pivotal Phase 3clinical trial in follicular B-cell NHL in July 2004 with a target of 342eligible patients and completed patient enrollment in January 2006.  In addition, FavId has been evaluated inseveral multi-center, open-label Phase 2 clinical trials involving morethan 130 patients.

 

We believeFavId may be effective in treating other types of B-cell NHL. Five additionalPhase 2 clinical trials of FavId are either ongoing or expected to begin during2006. One of these clinical trials is being conducted under a separatephysician-sponsored Investigational New Drug, or IND, application in the UnitedStates. A second of these is being conducted as a physician-sponsored clinicaltrial in Switzerland. Moreover, we believe our active immunotherapy expertiseand proprietary manufacturing technology will enable us to develop additionalproduct candidates for other oncology indications, such as T-cell lymphoma, andfor autoimmune diseases, with an initial focus on multiple sclerosis. We arecurrently developing a second product candidate, FAV-201, for the treatment ofT-cell lymphoma and intend to initiate a Phase 1/2 clinical trialevaluating the safety and preliminary efficacy of FAV-201 in the second quarterof 2006. We have retained exclusive worldwide commercialization rights to allof our product candidates.

 

We were incorporated in Delaware in January 2000. As of March 31,2006, we had not generated any revenues, and we had financed our operations andinternal growth through private placements of our common stock and warrants,equipment and leasehold debt financings and the sale of common stock in ourinitial public offering or IPO in February 2005. We are a developmentstage company and have incurred significant losses since our inception in 2000,as we have devoted substantially all of our efforts to research and developmentactivities, including clinical trials. As of March 31, 2006, our deficitaccumulated during the development stage was approximately $126.2 million. Weexpect to incur substantial and increasing losses for the next several years aswe:

 

•continue to develop and prepare for the commercialization of our lead productcandidate, FavId;

•expand our research and development programs;

•expand our current manufacturing capabilities to support commercialmanufacturing of FavId; and

•acquire or in-license oncology products that are complementary to our own.

 

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**Financial Operations Overview**

 

***Research andDevelopment Expense.***    Researchand development expense consists primarily of costs associated with clinicaltrials of our product candidates, including the costs of manufacturing ourproduct 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 in July 2004.We completed patient enrollment in the trial in January 2006.

 

Frominception through March 31, 2006, we incurred costs of approximately$77.3 million associated with the research and development of FavId, whichrepresents substantially all of our research and development costs to date. Weexpect our research and development costs to increase as we advance FavId andnew product candidates into later stages of clinical development. Whiledifficult to predict, we estimate that research and development costs requiredto complete the development of and file a Biologics Licensing Application, orBLA, for FavId will be an additional $60 million**. **We are unable to estimate with anycertainty the 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, primarilymultiple sclerosis.

 

Clinicaldevelopment timelines, likelihood of success and total costs vary widely.Although we are currently focused primarily on FavId, we anticipate that wewill make determinations as to which research and development projects topursue and how much funding to direct toward each project on an ongoing basisin response to the scientific and clinical success of each product candidate.

 

At this time,due to the risks inherent in the clinical trial process, clinical trialcompletion dates and costs vary significantly for each product candidate andare difficult to estimate. The lengthy process of seeking regulatory approvalsand the subsequent compliance with applicable regulations require theexpenditure of substantial resources. Any failure by us to obtain, or any delayin obtaining, regulatory approvals for our product candidates could cause ourresearch and development expenditures to increase and, in turn, have a materialadverse effect on our results of operations. We cannot be certain when any cashflows from our current product candidates will commence.

 

***Marketing, Generaland Administrative Expense.***    Marketing,general and administrative expenses consist primarily of compensation and otherexpenses related to our marketing and corporate general and administrativeemployees, legal fees and other professional services expenses. We anticipateincreases in marketing, general and administrative expenses as we add personneland continue to develop and prepare for commercialization of our productcandidates.

 

***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.

 

**Critical Accounting Policies and Estimates**

 

Thediscussion and analysis of our financial condition and results of operationsare based on our financial statements, which have been prepared in accordancewith U.S. generally accepted accounting principles. The preparation offinancial statements requires us to make estimates and assumptions that affectthe reported amounts of assets, liabilities, expenses and related disclosures.Actual results could differ materially from those estimates. While oursignificant accounting policies are described in more detail in Note 1 ofthe Notes to Financial Statements included in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2005, we believe the following accountingpolicies to be critical to the judgments and estimates used in the preparationof our financial statements:

 

***Deferred Tax Asset Valuation Allowance.***    Ourestimate for the valuation allowance for deferred tax assets requires us tomake significant estimates and judgments about our future operating results.Our ability to realize the deferred tax assets depends on our future taxableincome as well as limitations on utilization. A deferred tax asset must bereduced by a valuation allowance if it is more likely than not that someportion or all of the deferred tax asset will not be realized prior to itsexpiration. The projections of our operating results on which the establishmentof a valuation allowance is based involve significant estimates regardingfuture demand for our products, competitive conditions, product developmentefforts,

 

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approvals ofregulatory agencies and product cost. We have recorded a full valuationallowance on our net deferred tax assets as of March 31, 2006 and December 31,2005, due to uncertainties related to our ability to utilize our deferred taxassets in the foreseeable future. These deferred tax assets primarily consistof certain net operating loss carryforwards and research and development taxcredits.

 

***Stock-Based Compensation.***    We grant options to purchase our common stockto our employees and directors under our stock option plans. Eligible employeescan also purchase shares of our common stock at 85% of the lower of the fairmarket value on the first day of an offering period or the last day of eachsix-month purchase period during a twenty-four month offering under ouremployee stock purchase plan.  Thebenefits provided under these plans are stock-based payments subject to theprovisions of SFAS 123(R).  Effective January 1, 2006, we use thefair value method to apply the provisions of SFAS 123(R) with a modifiedprospective transition method**,**whichprovides for certain changes to the method for valuing share-basedcompensation. The valuation provisions of SFAS 123(R) apply to new awards andto awards that are outstanding on the effective date and subsequently modifiedor cancelled. Under the modified prospective transition method, prior periodsare not revised for comparative purposes. Prior to the adoption SFAS 123(R), we recorded compensationexpense for these plans based upon their intrinsic value on the date of grantpursuant to Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees (APB 25)*.  Prior to our IPO, we established the exerciseprice based on the fair value of the Company’s stock at the date of grant asdetermined by the Board of Directors (the Board). Therefore, the options had nointrinsic value upon grant and no expense was recorded upon issuance. Withrespect to certain options granted during 2005 and 2004, we had recordeddeferred compensation of $350,000 and $9.4 million, respectively, for theincremental difference at the grant date between the fair value per sharedetermined by the Board and the deemed fair value per share determined solelyfor financial reporting purposes.  Thedeferred stock-based compensation balance of $5.7 million as of December 31,2005, which was accounted for under APB 25, was reclassified as a reduction ofadditional paid-in capital upon the adoption of SFAS 123(R) and theunrecognized expense of awards not yet vested at the date of adoption will berecognized in net income or loss in the periods after the date of adoptionusing the same Black-Scholes valuation model and assumptions determined underthe original provisions of SFAS 123, “Accounting for Stock-Based Compensation,”as disclosed in our previous quarterly and annual reports.  The cumulative effect of the change inaccounting principle from APB 25 to SFAS 123(R) was not material, because theamortization of expense related to options granted prior to the adoption wasbased on the single-option approach.  Stock-based compensation expense recognizedunder SFAS 123(R) for the three months ended March 31, 2006 wasapproximately $879,000. At March 31, 2006, total unrecognized estimatedcompensation expense related to unvested stock options granted prior to thatdate was $8.7 million, net of estimated forfeitures of $540,000, which isexpected to be recognized over a weighted-average period of 3.1 years.

 

Uponadoption of SFAS 123(R), we estimated the value of stock-based awards on thedate of grant using a Black-Scholes valuation model.  The determination of the fair value ofstock-based payment awards on the date of grant using an option-pricing modelis affected by our stock price as well as assumptions regarding a number ofcomplex and subjective variables. These variables include, but are not limitedto, our expected stock price volatility over the term of the awards, risk-freeinterest rate and expected dividends.

 

If factors change and weemploy different assumptions in the application of SFAS 123(R)  in future periods, the compensation expensethat we record under SFAS 123(R)  maydiffer significantly from what we have recorded in the current period.Therefore, we believe it is important for investors to be aware of the highdegree of subjectivity involved when using option pricing models to estimatestock-based compensation under SFAS 123(R). Option-pricing models weredeveloped for use in estimating the value of traded options that have novesting or hedging restrictions, are fully transferable and do not causedilution. Because our stock-based payments have characteristics significantlydifferent from those of freely traded options, and because changes in thesubjective input assumptions can materially affect our estimates of fairvalues, in our opinion, existing valuation models, including the Black-Scholesand lattice binomial models, may not provide reliable measures of the fair valuesof our share-based compensation. Consequently, there is a risk that ourestimates of the fair values of our share-based compensation awards on thegrant dates may bear little resemblance to the actual values realized upon theexercise, expiration, early termination or forfeiture of those share-basedpayments in the future. Certain share-based payments, such as employee stockoptions, may expire worthless or otherwise result in zero intrinsic value ascompared to the fair values originally estimated on the grant date and reportedin our financial statements. Alternatively, value may be realized from theseinstruments that is significantly in excess of the fair values originallyestimated on the grant date and reported in our financial statements. There iscurrently no market-based mechanism or other practical application to verifythe reliability and accuracy of the estimates stemming from these valuationmodels, nor is there a means to compare and adjust the estimates to actualvalues. Although the fair value of stock-based awards is determined inaccordance with SFAS 123(R) and the Securities and Exchange Commission’s StaffAccounting Bulletin No. 107 (SAB 107) using an option-pricing model, thatvalue may not be indicative of the fair value observed in a willingbuyer/willing seller market transaction.

 

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***Clinical Trial Accruals****.*    In the normal course ofbusiness, we contract with numerous third-party clinical trial centers toperform various clinical trial activities in the on-going development of FavId.The financial terms of these agreements are subject to negotiation andvariation from contract to contract may result in uneven payment flows. Paymentunder the contracts depends on factors such as the completion of individualpatients’ treatments and the related required documentation. * *Werecord expenses for contracted clinical trial costs based upon patientenrollment and the dates that they receive treatment.  Thesecosts are a significant component of research and development expenses.  The objective of our accrual policy isto match the recording of expenses in our financial statements to the actualservices received and efforts expended. However,our estimates may not match the timing of actual services performed by theclinical trial centers, which may result in adjustments to our research anddevelopment expenses in future periods.

 

***Short Term Investments.***    Weclassify all of our short-term investments as available-for-sale.  We carry these investments at fair value,based on quoted market prices, and unrealized gains and losses are included inaccumulated other comprehensive income which is reflected as a separatecomponent of stockholders’ equity.  Theamortized cost of securities in this category is adjusted for amortization ofpremiums and accretions of discounts to maturity.  Such amortization is included in interestincome.  Realized gains and losses arerecorded in our statement of operations. If we believe that an other-than-temporary decline exists, it is ourpolicy to record a write-down to reduce the investments to fair value andrecord the related charge as a realized loss.

 

Managementhas discussed the development and selection of these critical accountingpolicies with the Audit Committee of our Board of Directors and the AuditCommittee has reviewed the disclosures presented above relating to them.

 

**Results of Operations**

 

***Comparison of the Three Months Ended March 31,2006 and 2005***

 

***Research and Development****.    *Research and development expense increasedfrom approximately $6.8 million for the three months ended March 31, 2005to $8.4 million for the three months ended March 31, 2006. The increase of$1.6 million, or 24%, was due primarily to an increase of approximately$850,000 in expenses associated with an increase in personnel from 99 employees to 117 employees; an increase ofapproximately $790,000 in expenses for clinical trial sites and otherthird party vendors supporting the pivotal Phase 3 clinical trial; an increase of approximately $670,000 ofoperating expenses related to our manufacturing facility to support theproduction of FavId; offset by a decrease of approximately $780,000 of rawmaterials and supplies for the manufacture of FavId for our Phase 3 clinical trial due to thecompletion of patient enrollment during the first quarter of 2006.

 

***Marketing, Generaland Administrative****.   *Marketing, general and administrativeexpense increased from approximately $1.7 million for the three months ended March 31,2005 to $2.7 million for the three months ended March 31, 2006. Theincrease of $1 million, or 59%, primarily reflects an increase of approximately$490,000 associated with an increase in general and administrativepersonnel from 15 employees to 22employees; an increase of $260,000 for auditing, liability insurance premiumsand other public company expenses and an increase of approximately $190,000 inpersonnel and outside services related to strategic marketing programs.

 

***Interest Income****.  *Interest income increased from approximately $296,000 for the threemonths ended March 31, 2005 to approximately $432,000 for the three monthsended March 31, 2006. The increase of $136,000, or 45.9%, was a result ofrising interest rates during the past year and the additional laddered short-terminvestment programs initiated after the first quarter of 2005.

 

**Liquidity and Capital Resources**

 

***Sources of Liquidity***

 

We have historically funded our operations primarily through the saleof our equity securities and equipment and leasehold debt financing. As of March 31,2006, we had received proceeds from the sale of preferred stock ofapproximately $76.1 million, net of stock issuance costs of approximately$686,000; proceeds from the sale of common stock in our IPO of approximately$39.5 million, net of underwriters’ discounts and commissions of approximately$3.1 million and offering expenses of approximately $1.4 million; and proceedsof approximately $45.0 million from the sale of common stock and warrants topurchase common stock to certain investors, in a private placement, net ofoffering expenses of approximately $400,000.

 

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As of March 31, 2006, we had financed the purchase of equipmentand leasehold improvements through debt totaling approximately$12.7 million.  Total debt of $5.9million was outstanding at that date. These obligations are secured by our existing and future assetsexcluding intellectual property and are due in monthly installments through May 2009.They bear interest at stated rates ranging from approximately 9.34% to 11.19%.** **The debt agreementssubject us to certain financial and non-financial covenants. As of March 31,2006, we were in compliance with the terms of the debt agreements.

 

***Cash Flows***

 

As of March 31,2006, cash, cash equivalents and short-term investments were approximately$70.6 million as compared to $34.5 million at December 31, 2005,an increase of approximately $36.1million. The increase primarily is due to the$45.4 million in gross proceeds received from our private placement duringthe first quarter of 2006, partially offset by net cash used to fund ongoingoperations.

 

Net cash usedin operating activities was approximately $7.9 million for the threemonths ended March 31, 2006 compared to $6.3 million for the same periodin 2005. The increase of $1.6 million is primarily due to increased operatingexpenses related to additional personnel and other expenses related to thecontinuing clinical development and preparation for commercialization of FavId.

 

Net cash frominvesting activities was $1.8 million for the three months ended March 31,2006 compared to net cash used in investing activities of $3.8 million for thesame period in 2005. The increase of $5.6 million is due to $8.6 million inshort term investment maturities offset by increases of $2.3 million in shortterm investment purchases and $723,000 in property and equipment purchases.

 

Net cashprovided by financing activities for the three months ended March 31, 2006totaled $44.9 million, reflecting primarily the net proceeds from our private placement ofcommon stock and warrants in March 2006 of approximately$45.2 million.  Net cash provided by financingactivites for the same period in 2005 totaled $38.9 million, reflectingprimarily the net proceeds from our IPO of $39.5 million in February 2005.

 

***Funding Requirements***

 

Our futurecapital uses and requirements depend on numerous forward-looking factors. Thesefactors include but are not limited to the following:

 

•magnitude and cost of our product development efforts and other research anddevelopment activities;

 

•rate of progress toward obtaining regulatory approval for our productcandidates;

 

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

 

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

 

•effects of competing technological and market developments;

 

• the costof 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.

 

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 the sale of other equity securities, strategic collaboration agreementsand debt financing. However, we may not be successful in obtainingcollaboration agreements, or in receiving milestone or royalty payments underthose agreements. In addition, we cannot be sure that our existing cash, cashequivalents and short-term investments will be adequate or that additionalfinancing will be available when needed or that, if available, financing willbe obtained on terms favorable to us or our stockholders. Having insufficientfunds may require us to delay, scale back or eliminate some or all of ourresearch or development programs or to

 

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relinquishrights to product candidates at an earlier stage of development or on lessfavorable terms than we would otherwise choose. Failure to obtain adequatefinancing may also adversely affect our ability to operate as a going concern.If we raise additional funds by issuing equity securities, substantial dilutionto existing stockholders would likely result. If we raise additional funds byincurring debt financing, the terms of the debt may involve significant cashpayment obligations as well as covenants and specific financial ratios that mayrestrict our ability to operate our business.

 

As of March 31, 2006, we have not invested in any variableinterest entities. We do not have any relationships with unconsolidatedentities or financial partnerships, such as entities often referred to asstructured finance or special purpose entities, which would have beenestablished for the purpose of facilitating off-balance sheet arrangements orother contractually narrow or limited purposes. In addition, we do not engage intrading activities involving non-exchange traded contracts. As such, we are notmaterially exposed to any financing, liquidity, market or credit risk thatcould arise if we had engaged in these relationships.

 

**Item 3. Quantitativeand Qualitative Disclosures about Market Risk.**

 

The primary objective of our investment activities is to preserveprincipal while maximizing income without significantly increasing risk. Someof the securities in which we invest may be subject to market risk. This meansthat a change in prevailing interest rates may cause the market value of theinvestment to fluctuate. To minimize this risk, we may maintain our portfolioof cash equivalents and short-term investments in a variety of securities,including commercial paper, money market funds and direct or guaranteedobligations of the United States government. The risk associated withfluctuating interest rates is limited to our investment portfolio and we do notbelieve that a 1% change in interest rates would have a significant impact onour interest income. As of March 31, 2006, all of our short-terminvestments were government agency securities, corporate notes and bonds, andour cash equivalents were held in checking accounts and money market funds.

 

**Item 4. Controls andProcedures.**

 

As of the end of the period covered by this report, we carried out anevaluation, under the supervision and with the participation of our ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of ourdisclosure controls and procedures pursuant to Rule 13a-15 of theSecurities Exchange Act of 1934, as amended, or Exchange Act. Based upon thatevaluation, our Chief Executive Officer and Chief Financial Officer concludedthat, as of the end of the period covered by this report, our disclosurecontrols and procedures were effective to cause material information requiredto be disclosed by the Company in the reports that we file or submit under theExchange Act to be recorded, processed, summarized and reported within the timeperiods specified in the Securities and Exchange Commission’s rules andforms.  We believe that a control system,no matter how well designed and operated, is based in part upon certainassumptions about the likelihood of future events, and, therefore, can only providereasonable, not absolute, assurance that the objectives of the controls systemare met, and no evaluation of controls can provide absolute assurance that allcontrol issues and instances of fraud, if any, within a company will bedetected.

 

During the three months ended March 31, 2006, there were nochanges in our internal control over financial reporting which materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting.

 

**PART II - OTHERINFORMATION.**

 

**Item1.  Legal Proceedings.**

 

Weare currently not a party to any material legal proceeding. We may be subjectto various claims and legal actions arising in the ordinary course of businessfrom time to time.

 

**Item 1A.  Risk Factors**

 

*You should consider carefully the riskfactors described below, together with the other information contained in thisreport. If any of the following risks actually occur, our business, financialcondition, results of operations and future growth prospects would likely be materiallyand adversely affected. In these circumstances, the market price of our commonstock could decline, and you may lose all or part of your investment in ourcommon stock.*

 

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*We have marked with an asteriskthose risk factors that reflect substantive changes from the risk factorsincluded in our Annual Report on Form 10-K for the year ended December 31,2005.*

 

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

 

***We are dependent on the success of our leadproduct candidate, FavId, and we cannot be certain that it will becommercialized.**

 

We have expended significant time, money and effort in the developmentof our lead product candidate, FavId, which is still in clinical development,has not yet received regulatory approval and may never be commercialized. Inorder to commercialize FavId, we will need to demonstrate to the FDA and otherregulatory agencies that it satisfies rigorous standards of safety andeffectiveness. We completed patient enrollment in a pivotal Phase 3 clinicaltrial of FavId following Rituxan for the treatment of follicular B-cell NHL in January 2006.

 

We are also evaluating FavId for use in other B-cell NHL indications.However, even if we were to receive regulatory approval of FavId for thetreatment of indolent B-cell NHL or the other indications we are exploring, ourability to successfully commercialize FavId could be jeopardized by theemergence of a competitive product that exhibits greater efficacy, longerduration of response or other benefits. In addition, because our initialregulatory and marketing strategy contemplates the administration of FavId topatients following treatment with Rituxan, the commercial opportunity for FavIdmay be limited by the degree to which oncologists continue to use Rituxan totreat indolent B-cell NHL. Furthermore, to the extent FavId fails to gainmarket acceptance for its initial indication, it may be more difficult for usto generate sufficient credibility with physicians and patients tocommercialize FavId for other indications.

 

Other than FavId, we have only two other product development programs,which are at significantly earlier stages of development. We are currentlypreparing to file an IND for a product candidate, FAV-201, from one of theseprograms in patients with 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.

 

**Failure to obtain product approvals by theFDA could harm our business.**

 

We are subject to rigorous and extensive regulation by the FDA. In theUnited States, our biologic product candidates, currently in the preclinicaland clinical stages of development, cannot be marketed until they are approvedby the FDA. Obtaining FDA approval involves the submission of the results ofpreclinical studies and clinical trials, among other information, of theproduct candidates. We may not be able to obtain FDA approval, and, even if weare able to do so, the approval process typically takes many years and requiresthe commitment of substantial effort and financial resources. The FDA candelay, limit or deny approval of a biologic product candidate for many reasons,including:

 

• the FDAmay 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

 

• the FDAmay not find our manufacturing processes or facilities satisfactory.

 

In addition, the specific active immunotherapy technology on whichFavId is based is a relatively new form of cancer therapy that presents novelissues for the FDA to consider, which may make the regulatory processespecially difficult.

 

We cannot assure you that any of our product candidates in developmentwill be approved in the United States in a timely fashion, or at all. Failureto obtain regulatory approval of our product candidates in a timely fashionwould prevent or delay us from marketing or selling any products and,therefore, from generating revenues from their sale. If this occurs, we may beunable to generate sufficient revenues to attain or maintain profitability, ourability to raise additional capital will be impaired and our stock price may benegatively affected. In addition, both before and after approval, we aresubject to numerous FDA requirements covering, among other things, testing,manufacturing, quality control, labeling, advertising, promotion and export ofbiologics. Failure to comply with the law, including statutes and regulations,administered by the FDA, could result in, among others, any of the followingactions:

 

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• warningletters;

 

• fines andother civil penalties;

 

•unanticipated expenditures;

 

• delays inapproving or refusal to approve a product candidate;

 

• productrecall or seizure;

 

•interruption of production;

 

• operatingrestrictions;

 

•injunctions; and

 

• criminalprosecution.

 

**Before we can seek regulatory approval of anyof our product candidates, we must successfully complete clinical trials, whichare uncertain.**

 

Conducting clinical trials is a lengthy, time-consuming and expensiveprocess, and the results of these trials are inherently uncertain. We havecompleted enrollment of patients in several Phase 2 clinical trials of FavIdinvolving over 130 indolent B-cell NHL patients and are currently conductingfollow-up evaluation of those patients. We completed enrollment of patients ina pivotal Phase 3 clinical trial of FavId for the treatment of follicular B-cellNHL in January 2006 and anticipate an analysis of the secondary endpoint,response improvement, during the fourth quarter of 2006 and final analysis ofthe primary endpoint, TTP, during the second half of 2007. Four additionalPhase 2 clinical trials of FavId were ongoing during 2005, with oneadditional Phase 2 clinical trial planned for 2006. One of these clinicaltrials is being conducted under a separate physician-sponsored IND in theUnited States. A second of these is being conducted as a physician-sponsoredclinical trial in Switzerland. We are also developing our preclinical candidateFAV-201 for the treatment of T-cell lymphoma. We are currently preparing tofile an IND in the second quarter of 2006.

 

We have received a Special Protocol Assessment, or SPA, from the FDAfor our Phase 3 clinical trial. In the SPA process, the FDA reviewed thedesign, size and planned analysis of our Phase 3 clinical trial and providedcomments regarding 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 cannot assure you that we will beable to file a BLA for FavId until after we receive an analysis of the primaryendpoint, TTP, of our ongoing Phase 3 clinical trial (assuming the TTP data ispositive), which analysis is anticipated in the second half of 2007, or at all.The FDA’s written agreement is binding, except in limited circumstances, suchas when a substantial 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 Phase 3 clinical trial alone. In the event that theFDA requires the results of a second Phase 3 clinical trial before accepting aBLA or before granting marketing approval of FavId, our launch of FavId wouldbe delayed, possibly by several years, and we would incur significant costs inconducting the additional trial.

 

Completion of necessary clinical trials may take several years or more.Our commencement and rate of completion of clinical trials may be delayed bymany factors, including:

 

•ineffectiveness of the product candidate, or perceptions by physicians that theproduct candidate is not safe or effective for a particular indication;

 

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

 

• delay orfailure in obtaining approval of our clinical trial protocols from the FDA;

 

• slowerthan expected rate of patient recruitment and enrollment;

 

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• inabilityto adequately follow and monitor patients after treatment;

 

•difficulty in managing multiple clinical sites;

 

•unforeseen safety issues; and

 

•government or regulatory delays.

 

Even if we achieve positive interim results in clinical trials, theseresults do not necessarily predict final results, and positive results in earlytrials may not be indicative of success in later trials. A number of companiesin the pharmaceutical industry have suffered significant setbacks in advancedclinical trials, even after promising results in earlier trials. Negative orinconclusive results or adverse medical events during a clinical trial couldcause us to repeat or terminate a clinical trial or require us to conductadditional trials. Our clinical trials may be suspended at any time for avariety of reasons, including if the FDA or we believe the patientsparticipating in our trials are exposed to unacceptable health risks or if theFDA finds deficiencies in the conduct of these trials.

 

Failures or perceived failures in our clinical trials will directlydelay our product development and regulatory approval process, damage ourbusiness prospects, make it difficult for us to establish collaboration andpartnership relationships, and negatively affect our reputation and competitiveposition in the pharmaceutical community.

 

**Failure to enroll patients in our clinicaltrials may cause delays in developing FavId or any other product candidate.**

 

We may encounter delays in development and commercialization, or fail toobtain marketing approval, of FavId or any other product candidate that we maydevelop if we are unable to enroll enough patients to complete clinical trials.Our ability to enroll sufficient numbers of patients in our clinical trialsdepends on many factors, including the size of the patient population, thenature of the protocol, the proximity of patients to clinical sites, theeligibility criteria for the trial and competing clinical trials. Although wecompleted patient enrollment in our pivotal Phase 3 clinical trial of FavId in January 2006,we have from time to time experienced slower-than-expected patient enrollmentin our clinical trials and may do so in the future if additional clinicaltrials of FavId are required or if we clinically develop any of our otherproduct candidates. Delays in planned patient enrollment may result inincreased costs and harm our ability to complete our clinical trials and obtainregulatory approval.

 

**The development of FavId requires thecontinued availability of two FDA-approved drugs: GM-CSF and Rituxan.**

 

Administration of FavId requires an adjuvant to enhance the immuneresponse. An adjuvant is a substance that is used to enhance the immuneresponse. We use a white blood cell growth factor known as GM-CSF, which is commerciallyavailable solely from Berlex Laboratories, Inc., as an adjuvant for FavId.We currently rely on purchase orders to purchase GM-CSF for use in our clinicaltrials and do not have a supply agreement with Berlex. GM-CSF is anFDA-approved and commercially available drug that may be purchased byphysicians. Our current strategy for the initial commercialization of FavIdinvolves the administration of FavId following treatment with Rituxan. Rituxanis a passive immunotherapy for patients with NHL, which is also FDA-approvedand is commercially available solely from Genentech, Inc. and Biogen IdecInc. We currently rely on physicians to order and administer Rituxan topatients prior to the administration of FavId in our registration trial. IfGM-CSF or Rituxan were to become unavailable as a result of regulatory actions,supply constraints or other reasons, our ability to continue the clinicaldevelopment of FavId would be jeopardized.

 

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

 

***We have incurred significant operatinglosses since inception and anticipate that we will continue to incursubstantial losses and negative cash flow from operations for the foreseeablefuture.**

 

We are a development stage company with a limited operating history. Wehave financed our operations through private placements of stock and warrants,an initial public offering of our common stock and equipment and leasehold debtfinancing. We have incurred losses in each year since our inception in 2000.For the three months ended March 31, 2006 and 2005 net losses were $10.9million and $8.4 million, respectively. As of March 31, 2006, we had anaccumulated deficit of $126.2 million. These losses, among other things,have had and will continue to have an adverse effect on our stockholders’equity and working capital. We expect to incur substantial operating losses forat least the next several years. This is due primarily to the expansion of ourclinical trials and research and development programs, preparations to manufactureFavId on a commercial scale, and, to a lesser extent, general andadministrative expenses. We also have substantial lease and debt obligationsrelated to our new manufacturing and headquarters facilities impacting ouroperating expenses. We expect that our losses will fluctuate from quarter toquarter and that these fluctuations may be substantial. We cannot guaranteethat we

 

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will successfully develop, manufacture, commercialize or market anyproducts. As a result, we cannot guarantee that we will ever achieve or sustainproduct revenues or profitability.

 

**We currently have no source of revenue andmay never become profitable.**

 

Our ability to become profitable will depend upon our ability togenerate revenue. To date, FavId has not generated any revenue, and we do notknow when or if FavId will generate revenue. Our ability to generate revenuedepends on a number of factors, including our ability to:

 

•successfully complete clinical trials for FavId;

 

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

 

•manufacture commercial quantities of FavId at acceptable cost levels; and

 

•successfully market and sell FavId.

 

We do not anticipate that we will generate revenues until 2008, at theearliest. Further, we do not expect to achieve profitability for at leastseveral years after generating material revenues. If we are unable to generaterevenue, we will not become profitable, and we may be unable to continue ouroperations.

 

***We will need substantial additional funds tocontinue operations, which we may not be able to raise on favorable terms, orat all.**

 

We will need substantial additional funds for existing and plannedpreclinical studies and clinical trials, to continue research and developmentactivities, for lease and debt obligations related to our manufacturing andheadquarter facilities, and to establish manufacturing and marketingcapabilities for any products we may develop. In addition, because we do notexpect to generate revenues from the sale of our product candidates for severalyears, if at all, we will also need to raise additional capital to fund ouroperations.

 

We believe that our existing cash, cash equivalents and short-terminvestments, together with interest thereon, will be sufficient to meet ourprojected operating requirements through fiscal 2007. We will need to raiseadditional funds in order to commercialize FavId, including the completion ofthe expansion and qualification of our manufacturing facility forcommercial-scale production. Our forecast of the period of time through whichour financial resources will be adequate to support our operations is aforward-looking statement and involves risks and uncertainties, and actualresults could vary as a result of a number of factors, including the factorsdiscussed elsewhere in this report. We have based this estimate on assumptionsthat may prove to be wrong, and we could utilize our available capitalresources sooner than we currently expect.

 

Our future capital requirements or the adequacy of our available fundswill depend on many factors, including, but not limited to:

 

• 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;.

 

• the cost ofexpansion of our current facility for commercial production or the constructionof a large separate commercial-scale production facility; and

 

• thesuccess of the commercialization of FavId.

 

Future capital requirements will also depend on the extent to which weacquire or invest in businesses, products and technologies, but we currentlyhave no commitments or agreements relating to any of these types oftransactions.

 

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We may seek to access the public or private equity markets wheneverconditions are favorable, even if we do not have an immediate need foradditional capital at that time. Additional funding may not be available to us,and, if available, may not be on acceptable terms. If we raise additional fundsby issuing equity securities, stockholders will incur immediate dilution. Ifadequate funds are not available to us, we may be required to delay, reduce thescope of, or eliminate one or more of our research, development and clinicalactivities. Alternatively, we may need to seek funds through arrangements withcollaborative partners or others that require us to relinquish rights totechnologies or product candidates that we would otherwise seek to develop orcommercialize ourselves. Any of these events could have a material adverseeffect on our business, results of operations, financial condition or cashflow.

 

***Futurechanges in financial accounting standards or practices or existing taxation rules orpractices may cause adverse unexpected revenue or expense fluctuations andaffect our reported results of operations.**

 

Achange in accounting standards or practices or a change in existing taxation rules orpractices can have a significant effect on our reported results and may evenaffect our reporting of transactions completed before the change is effective.New accounting pronouncements and taxation rules and varyinginterpretations of accounting pronouncements and taxation practice haveoccurred and may occur in the future. Changes to existing rules or thequestioning of current practices may adversely affect our reported financialresults or the way we conduct our business. For example, in December 2004,the FASB issued SFAS No. 123(R), “Share-Based Payment,” which is arevision of SFAS No. 123, “Accounting for Stock-Based Compensation.”In April 2005, the SEC approved a vote that effectively required us toadopt this statement on January 1, 2006. This statement eliminates theability to account for stock-based compensation using the intrinsic valuemethod allowed under APB 25 and requires these transactions to berecognized as compensation expense in the statement of operations based on thefair values on the date of grant, with the compensation expense recognized overthe period in which an employee or director is required to provide service inexchange for the stock award. This new requirement will result in an increasein our stock-based compensation expense, which may increase our net losses. Forexample, as a result of adopting SFAS 123(R), the Company’s net loss for thethree months ended March 31, 2006 is approximately $200,000 larger than ifthe Company had continued to account for stock-based compensation under APB25.  Basic and diluted net loss per sharefor the three months ended March 31, 2006, would have been $0.48 if theCompany had not adopted SFAS 123(R), compared to reported basic and diluted netloss per share of $0.49.

 

**OtherRisks Related to Our Business and Industry**

 

**We currently depend on single sourcesuppliers for critical raw materials for manufacturing. The loss of thesesuppliers could delay our clinical trials or prevent or delay commercializationof FavId.**

 

We currently depend on single source suppliers for critical rawmaterials used in the manufacture of FavId. In particular, our manufacturingprocess for FavId requires a foreign protein derived from shellfish that isknown as keyhole limpet hemocyanin, or KLH. We purchase KLH from biosynArzneimittel GmbH, or biosyn, which is currently the only supplier of KLH thathas submitted the required filing, known as a drug master file, to the FDA. In November 2004,we entered into an eight-year supply and license agreement with biosyn underwhich biosyn has agreed to supply us with KLH and we have committed to annualKLH purchase requirements during the commercialization of FavId. An additionalaggregate of up to $300,000 will be due upon the achievement of certainmilestones, the timing of which is not known at this time. 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 on a single source supplier for the cell growthmedia we use to produce FavId. We purchase this material from ExpressionSystems LLC, which in turn obtains several of the components used in the cellgrowth media from sole suppliers. We currently rely on purchase orders toobtain this material and do not have a supply agreement with ExpressionSystems. We intend to qualify a second source for the cell growth media ormanufacture the cell growth media in house from commercially available rawmaterials but may not be able to do so.

 

Establishing additional or replacement suppliers for these materialsmay take a substantial amount of time. In addition, we may have difficultyobtaining similar materials from other suppliers that are acceptable to theFDA. If we have to switch to a replacement supplier, we may face additionalregulatory delays and the manufacture and delivery of FavId, or any otherproduct candidates that we may develop, could be interrupted for an extendedperiod of time, which may delay completion of our clinical trials orcommercialization. If we are unable to obtain adequate amounts of thesematerials, our clinical trials will be delayed. In addition, we will berequired to obtain regulatory clearance from the FDA to use different materialsthat may

 

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not be as safe or as effective. As a result, regulatory approval ofFavId, or any other product candidates that we may develop, may not be receivedat all.

 

***We rely on third parties to conduct ourclinical trials. If these third parties do not successfully carry out theircontractual duties or meet expected deadlines, we may be delayed or may not beable to obtain regulatory approval for or commercialize FavId or any otherproduct candidates that we may develop.**

 

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

 

If the quality or accuracy of the clinical data obtained by medicalinstitutions and clinical investigators, including physician sponsors and otherthird-party vendors involved in data management, is compromised due to theirfailure to adhere to applicable laws or our clinical protocols or for otherreasons, we may not be able to obtain regulatory approval for or successfullycommercialize FavId, or any other product candidates that we may develop. Ifany of our relationships with any of these organizations or individualsterminates, we believe that we would be able to enter into arrangements withalternative third parties. However, replacing any of these third parties woulddelay our clinical trials and could jeopardize our ability to commercializeFavId and our other product candidates on a timely basis, or at all.

 

**Even if we obtain regulatory approval, wewill continue to be subject to extensive government regulation that may causeus to delay the introduction of our products or withdraw our products from the market.**

 

Even if we obtain regulatory approval for FavId or our other productcandidates, we will still be subject to extensive regulation. These regulationswill impact many aspects of our operations, including production, recordkeeping, quality control, adverse event reporting, storage, labeling,advertising, promotion and personnel. In addition, the later discovery ofpreviously unknown problems may result in restrictions of the productcandidates, including their withdrawal from the market. Furthermore, regulatoryapproval may subject us to ongoing requirements for post-marketing studies. Ifwe or any third party that we involve in our operations fail to comply with anycontinuing regulations, we may be subject to, among other things, productseizures, recalls, fines or other civil penalties, injunctions, suspensions orrevocations of marketing licenses, operating restrictions and criminalprosecution.

 

**Before we can obtain marketing approval foror commercially distribute FavId, we must have a commercial-scale facility forthe manufacture of FavId. In addition, the FDA and the California Department ofHealth Services must find our manufacturing facility and process satisfactory.**

 

Our manufacturing methods, equipment and processes must comply with theFDA’s current Good Manufacturing Practices, or cGMP, requirements. We may alsoneed to perform extensive audits of vendors, contract laboratories andsuppliers. The cGMP requirements govern, among other things, record keeping,production processes and controls, personnel and quality control. We have onlyundertaken initial steps towards achieving compliance with these regulatoryrequirements. Additional steps will require expenditure of significant time,money and effort. We cannot predict the likelihood that the FDA will find ourfacility satisfactory, even if we believe that we have taken the necessarysteps to achieve compliance. If we fail to comply with these requirements orfail to pass a pre-approval inspection of our manufacturing facility inconnection with an application to obtain marketing approval for FavId oranother product candidate, we would not receive regulatory approval, and wewould be subject to possible regulatory action.

 

We manufacture FavId for our ongoing Phase 3 and for the plannedand ongoing Phase 1/2 clinical trials at our facility in San Diego. Wecurrently lease approximately 80,000 square feet of space in a facility in SanDiego, California under a long-term lease agreement. This space is used for ourcorporate headquarters and manufacturing and laboratory facilities. Ourmanufacturing facility consists of approximately 26,000 square feet of space inthe facility. Our manufacturing facility is subject to the licensingrequirements of the California Department of Health Services. Our facility wasinspected and licensed by the California Department of Health Services. Ourfacility is subject to re-inspection at any time. Failure to maintain a licensefrom the California Department of Health Services or to meet the inspectioncriteria of the California Department of Health Services would disrupt ourmanufacturing processes and prevent us from supplying FavId to patients. If aninspection by the California Department of Health Services indicates that thereare deficiencies in our manufacturing process, we could

 

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be required to take remedial actions at potentially significantexpense, and our facility may be temporarily or permanently closed.

 

We will need to either expand and qualify our current facility orconstruct and qualify a commercial scale manufacturing facility in order tocommercialize FavId or any other product candidates that we may develop. Webelieve our current facility could be used to manufacture FavId for initialcommercial launch and plan to begin construction of the expanded manufacturingfacility during the second quarter of 2006. We cannot assure you thatwe would be able to meet commercial demand for FavId in this facility.Additionally, we may require a larger production facility to meet the demandfor FavId if it is approved. We would need to raise additional debt or equitycapital to finance construction of the larger facility. Such financing may notbe available or, if available, may not be obtained on terms favorable to us orour stockholders.

 

Preparing a facility for commercial manufacturing may involveunanticipated delays and the costs of complying with FDA regulations may besignificant. In addition, any material changes we make to the manufacturingprocess after approval may require approval by the FDA and state regulatoryauthorities. Obtaining these approvals is a lengthy, involved process, and wemay experience delays that could limit our ability to manufacture commercialquantities, increase our costs and adversely affect our business.

 

**We may experience difficulties inmanufacturing FavId or any other product candidates that we may develop, whichcould prevent us from completing our ongoing clinical trials andcommercializing these product candidates.**

 

Manufacturing FavId is a complex, multi-step process that requires usto expend significant time, money and effort in production, record keeping andquality systems to assure that FavId will meet product specifications and otherregulatory requirements. To date, we have manufactured FavId only for use inPhase 2 and Phase 3 clinical trials and have no experience in manufacturingFavId for the commercial quantities that might be required if we receiveregulatory approval. In particular, we cannot be sure that we will be able tomanufacture FavId at a cost that would enable commercial use. We may experienceany of the following problems in our efforts to manufacture our productcandidates for our expanding clinical trials or on a commercial scale:

 

• failureto obtain a sufficient supply of key raw materials;

 

•difficulties in completing the development and validation of the specializedassays required to ensure the consistency of our product candidates, includingFavId;

 

•difficulties in obtaining adequate tumor samples from treating physicians andhospitals;

 

•difficulties in manufacturing FavId for multiple patients simultaneously;

 

•difficulties in the timely shipping of tumor samples to us or in the shippingof FavId to the treating physicians due to errors by third-party couriers,transportation restrictions or other reasons;

 

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

 

•difficulties in establishing and effectively managing a commercial-scalemanufacturing facility;

 

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

 

•significant changes in regulatory requirements;

 

• damage toor destruction of our manufacturing facility or equipment; and

 

• shortagesof qualified personnel.

 

In addition, because our manufacturing process only begins upon ourreceipt of a patient’s tumor biopsy, we cannot produce inventory reserves ofour product candidate to be stored in anticipation of any of these potentialmanufacturing problems. The failure to produce an adequate supply of FavIdcould delay our clinical trials and, in turn, delay submission of a BLA forFavId and commercial launch. Similarly, any difficulties we experience in themanufacture and supply of other product candidates, such as FAV-201, woulddelay the clinical trials of those product candidates.

 

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**If our manufacturing facility is damaged ordestroyed, our ability to manufacture products will be significantly affected,which could delay or prevent completion of our clinical trials andcommercialization of FavId or any other product candidates that we may develop.**

 

We currently rely on the availability and condition of ourmanufacturing facility in San Diego to manufacture FavId. We lease the propertywhere this facility is located under a lease agreement that expires June 30,2025, but may be extended at our option for two additional five-year periods.After that time, we may not be able to negotiate a new lease for our facility.If the facility or our equipment in the facility is damaged or destroyed, wewill not be able to quickly or inexpensively replace our manufacturingcapacity. This would significantly affect our ability to complete clinicaltrials of, and to manufacture and commercialize, FavId, or any other productcandidates that we may develop.

 

In addition, our facilities have been subject to electrical blackoutsas a result of a shortage of available electrical power. Although we haveback-up emergency power generators to cover energy needs for key supportsystems, a lengthy outage could disrupt the operations of our facilities andclinical trials. While we carry business interruption insurance, this insurancemay not be adequate. Any significant business interruption could cause delaysin our product development and harm our business.

 

**If we do not develop a sufficient sales andmarketing force or enter into agreements with third parties to sell and marketFavId, we may not be able to successfully commercialize our products, whichwould limit our ability to earn product revenues.**

 

We plan to retain exclusive worldwide rights to FavId for oncologyindications at least through the completion of our BLA filing with the FDA forapproval to market FavId in the United States. If we are successful inobtaining BLA approval or foreign marketing approval for FavId, we will need toestablish sales and marketing capabilities. In the United States, we plan to dothis either by establishing our own sales force or by entering into aco-promotion arrangement with a sales and distribution partner. Outside of theUnited States, we plan to establish strategic collaborations for thedevelopment and marketing of FavId.

 

We do not presently possess the resources or experience necessary tomarket FavId or our other product candidates ourselves, and we currently haveno arrangements for the promotion or distribution of our product candidates.Our future commercial success will depend on our ability to establish our ownsales and marketing infrastructure or to collaborate with third parties thathave greater sales and marketing experience and resources. Developing effectiveinternal sales and marketing capabilities, which would include the hiring of asales force, would require a significant amount of our financial resources andtime.

 

We may be unable to establish and manage an effective sales force in atimely or cost-effective manner, or at all, and any sales force we do establishmay not be capable of generating demand for FavId or any other productcandidate we may develop. In addition, if we cannot enter into co-promotionarrangements in the United States, or other strategic collaborations for thedevelopment and marketing of FavId in other countries, in a timely manner andon acceptable terms, we may not be able to successfully commercialize FavId orany other product candidate that we may develop.

 

To the extent that we enter into arrangements with third parties toperform sales, marketing and distribution services, our product revenues arelikely to be lower than if we directly marketed and sold FavId, or any otherproduct candidates that we may develop. If we are unable to establish adequatesales, marketing and distribution capabilities, independently or with others,we will not be able to generate product revenue and will not become profitable.

 

**If physicians and patients do not use any ofour products that may be approved, our ability to generate revenue in thefuture will be limited.**

 

If approved, FavId and other product candidates that we may develop maynot gain market acceptance among physicians, healthcare payors, patients andthe medical community. Demand for any approved product that we may develop willdepend on many factors, including:

 

• ourability to provide acceptable evidence of safety and efficacy;

 

•convenience and ease of administration;

 

•availability of alternative treatments;

 

• costeffectiveness;

 

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

 

•effectiveness of our regulatory and marketing strategies;

 

•prevalence and severity of adverse side effects;

 

• publicityconcerning our products or competitive products; and

 

• ourability to obtain third-party coverage or reimbursement.

 

Furthermore, to the extent FavId fails to gain market acceptance forits initial indication, it may be more difficult for us to generate sufficientcredibility with physicians and patients to commercialize FavId for otherindications.

 

**If we are unable to obtain acceptable pricesor adequate coverage and reimbursement from third-party payors for FavId, orany other product candidates that we may develop, our revenues and prospectsfor profitability will suffer.**

 

Our ability to commercialize FavId, or any other product candidatesthat we may develop, depends on the extent to which coverage and reimbursementfor FavId, or any other product candidates that we may develop, will beavailable from:

 

• governmentalpayors, such as Medicare and Medicaid;

 

• privatehealth insurers, including managed care organizations; and

 

• otherthird-party payors.

 

Many patients will not be capable of paying for FavId, or any otherproduct candidates that we may develop, themselves and will rely on third-partypayors to pay for their medical needs. The federal and state governments,insurance companies, managed care organizations and other third-party payorsare actively seeking to contain or reduce costs of health care in the UnitedStates and exert increasing influence on decisions regarding the use of, andreimbursement levels for, particular treatments. Such third-party payors,including Medicare, are scrutinizing newly approved medical products andservices and may not cover or may limit coverage and reimbursement for ourproduct candidates. In particular, third-party payors may limit the indicationsfor which they will reimburse patients who use FavId, or any other productcandidates that we may develop. Cost-control initiatives could cause us todecrease the price we might establish for FavId, or any other productcandidates that we may develop, which would result in lower product revenues.If the prices for FavId, or any other product candidates that we may develop,decrease or if governmental and other third-party payors do not provideadequate coverage and reimbursement levels for FavId, or any other productcandidates that we may develop, our revenue and prospects for profitabilitywill suffer.

 

**If we are unable to establish or managestrategic collaborations in the future, our revenue and product development maybe limited.**

 

Our strategy may include reliance on strategic collaborations forco-promotion of FavId in the United States. In addition, we expect to rely onstrategic collaborators for commercialization of FavId outside of the UnitedStates and, to an even greater extent, for worldwide development andcommercialization of product candidates and programs for chronic autoimmunediseases, such as multiple sclerosis. To date, we have not entered into anyagreements with third parties for any of these services and do not plan toestablish a collaboration for FavId in the United States until at leastcompletion of a BLA filing.

 

Establishing strategic collaborations is difficult and time-consuming.Our discussions with potential collaborators may not lead to the establishmentof new collaborations on favorable terms, or at all. For example, potentialpartners may reject collaborations based upon their assessment of ourfinancial, regulatory or intellectual property position. If we successfullyestablish new collaborations, these relationships may never result in thesuccessful development or commercialization of our product candidates or thegeneration of sales revenue. To the extent that we enter into co-promotion orother collaborative arrangements, our product revenues are likely to be lowerthan if we directly marketed and sold any products that we may develop.

 

Management of any collaborative relationship we may establish in thefuture will require:

 

•significant time and effort from our management team;

 

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•coordination of our research and development programs with the research anddevelopment priorities of our collaborators; and

 

• effectiveallocation of our resources to multiple projects.

 

If we enter into development or commercialization collaborations, oursuccess will in part depend on the performance of our corporate collaborators.We will not directly control the amount or timing of resources devoted by ourcorporate collaborators to activities related to our product candidates. Ourcorporate collaborators may not commit sufficient resources to our research anddevelopment programs or the commercialization, marketing or distribution of ourproduct candidates. If any corporate collaborator fails to commit sufficientresources, our preclinical or clinical development related to the collaborationcould be delayed or terminated. Also, our collaborators may pursue developmentor commercialization of other products, product candidates or alternativetechnologies in preference to our product candidates. Finally, ourcollaborators may terminate our relationships, and we may be unable toestablish additional corporate collaborations in the future on acceptableterms, or at all.

 

**Our efforts to discover, develop andcommercialize new product candidates beyond FavId are at an early stage and aresubject to a high risk of failure.**

 

Our strategy is focused on the research, development andcommercialization of targeted immunotherapies for the treatment of cancer andother diseases of the immune system. The process of successfully developingproduct candidates is very time-consuming, expensive and unpredictable. We haveonly recently begun to direct significant effort toward the development ofproduct candidates in addition to FavId, such as FAV-201 for T-cell lymphomaand a preclinical product candidate for the treatment of multiple sclerosis. Wedo not know whether our planned preclinical studies or clinical trials forthese other product candidates will begin on time or be completed on schedule,or at all. In addition, we do not know whether these clinical trials willresult in marketable products. Typically, there is a high rate of attrition forproduct candidates in preclinical and clinical trials. We do not anticipatethat any of our product candidates will reach the market for at least severalyears.

 

We may not identify, develop or commercialize any additional new productcandidates from our proprietary active immunotherapy technology. Our ability todevelop successfully any of these product candidates depends on our ability 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 our competitors develop and marketproducts that are more effective than our existing product candidates or otherswe may develop, or obtain marketing approval before we do, our commercialopportunity may be reduced or eliminated.**

 

The development and commercialization of new pharmaceutical productsfor the treatment of cancer and autoimmune diseases is competitive, and we willface competition from numerous sources, including major pharmaceuticalcompanies, specialty pharmaceutical companies and biotechnology companies worldwide.Many of our competitors have substantially greater financial and technicalresources and development, production and marketing capabilities than we do. Inaddition, many of these companies have more experience than we do inpreclinical testing, clinical trials and manufacturing of biologictherapeutics, as well as in obtaining FDA and foreign regulatory approvals. Wewill also compete with academic institutions, governmental agencies and privateorganizations that are conducting research in the fields of cancer andautoimmune disease. Competition among these entities to recruit and retainhighly qualified scientific, technical and professional personnel andconsultants is also intense.

 

We are aware of a number of companies that are developing activeimmunotherapies to treat B-cell NHL. Genitope Corporation is evaluating itsidiotype immunotherapy product candidate in a Phase 3 clinical trial inpatients with follicular B-cell NHL who are in remission following priortreatment with chemotherapy. Antigenics, Inc. completed a Phase 2 clinicaltrial evaluating its active immunotherapy candidate in indolent NHL patients.The NCI is also conducting a Phase 3 clinical trial of an active idiotypeimmunotherapy in collaboration with Accentia Biopharmaceuticals.

 

Several companies are engaged in the development and commercializationof passive immunotherapy products for the treatment of B-cell NHL that maycompete with FavId. Genentech and Biogen Idec are co-marketing Rituxan for thetreatment of relapsed or refractory, indolent B-cell NHL. Biogen Idec has alsoreceived FDA approval to market Zevalin, its passive radioimmunotherapyproduct. GlaxoSmithKline plc has received FDA approval to market Bexxar, apassive radioimmunotherapy product.

 

The most recent advances in the treatment of B-cell NHL have involvedthe combination of existing products and changes to approved schedules anddoses, particularly for Rituxan. Numerous clinical trials reported in recentyears have indicated that

 

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additional doses of Rituxan and maintenance dosing of Rituxan canimprove TTP in 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 our ability to compete effectively will depend upon ourability to:

 

•successfully and rapidly complete clinical trials and obtain all requisiteregulatory approvals in a cost-effective manner;

 

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

 

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

 

• price ourproducts competitively;

 

• obtainappropriate reimbursement approvals for our products;

 

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

 

• attractand retain key personnel.

 

In addition, our ability to compete effectively will depend on therelative efficacy and safety of other active immunotherapy products approvedfor sale as compared to our own products.

 

**We are subject to new legislation, regulatoryproposals and managed care initiatives that may increase our costs ofcompliance and adversely affect our ability to market our products, obtaincollaborators and raise capital.**

 

There have been a number of legislative and regulatory proposals aimedat changing the healthcare system and pharmaceutical industry, includingreductions in the cost of prescription products and changes in the levels atwhich consumers and healthcare providers are reimbursed for purchases ofpharmaceutical products. For example, the Prescription Drug and MedicareImprovement Act of 2003 was recently enacted. This legislation provides a newMedicare prescription drug benefit beginning in 2006 and mandates otherreforms. Although we cannot predict the full effects on our business of theimplementation of this new legislation, it is possible that the new benefit,which will be managed by private health insurers, pharmacy benefit managers andother managed care organizations, will result in decreased reimbursement forprescription drugs, which may further exacerbate industry-wide pressure toreduce the prices charged for prescription drugs. This could harm our abilityto market our products and generate revenues.

 

**We depend on attracting and retaining keyscientific and management personnel to advance our technology, and the loss ofthese personnel could impair the development of our products.**

 

Our success depends on our continued ability to attract, retain andmotivate highly qualified management, clinical and scientific personnel and onour ability to develop and maintain important relationships with leadingacademic institutions, clinicians and scientists. We are highly dependent uponour senior management and scientific staff, particularly John P. Longenecker,Ph.D., our President and Chief Executive Officer, and Daniel P. Gold, Ph.D.,one of our co-founders and our Chief Scientific Officer. The loss of servicesof Dr. Longenecker or Dr. Gold, or one or more of our other membersof senior management, could delay or prevent the successful completion of ourpivotal Phase 3 clinical trial or the commercialization of FavId. Although wehave employment agreements with each of our executives, their employment withus is “at will,” and each executive can terminate his or her agreement with usat any time. We do not carry “key person” insurance covering members of seniormanagement, other than Drs. Longenecker and Gold. This insurance may notcontinue to be available on commercially reasonable terms and may proveinadequate to compensate us for the loss of their services.

 

The competition for qualified personnel in the biotechnology field isintense. In particular, our manufacturing process depends on our ability toattract and retain qualified manufacturing and quality control personnel. Wewill need to hire additional personnel as we continue to expand ourmanufacturing, research and development activities. We may not be able toattract and retain quality personnel on acceptable terms given the competitionfor such personnel among biotechnology, pharmaceutical and other companies. Weare not aware of any key personnel planning to retire or terminate theiremployment in the near future.

 

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**We will need to increase the size of ourorganization, and we may experience difficulties in managing growth.**

 

As of March 31, 2006, we had 141 employees. Of these, 112employees were in research and development comprised of 76 in manufacturing,quality control and quality assurance, 31 in research and process development,and five members of senior management.  Of the remaining employees, threewere members of senior management and 26 were in administration. We will needto expand our financial, managerial, operational and other resources in orderto continue our clinical trials and commercialize FavId, FAV-201, or any otherproduct candidates that we may develop. Future growth would impose significantadded responsibilities on our management team, including the need to identify,recruit, maintain and integrate additional employees. Our ability tocommercialize FavId, FAV-201, or any other product candidates that we maydevelop, and our future financial performance in general, will depend in parton our ability to manage any future growth effectively. In order to meet thesechallenges, 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 to accomplish these tasks, and our failure toaccomplish any of them could harm our business or future prospects.

 

**If we use biological and hazardous materialsin a manner that causes injury or violates laws, we may be liable for damages.**

 

Our research and development and manufacturing activities involve theuse of biological and hazardous materials that could be dangerous to humanhealth, safety or the environment. Although we believe our safety proceduresfor handling and disposing of these materials comply with federal, state andlocal laws and regulations, we cannot entirely eliminate the risk of accidentalinjury or contamination from the use, storage, handling or disposal of thesematerials. In the event of contamination or injury, we could be held liable forany resulting damages, and any liability could exceed our resources. Wecurrently maintain property and casualty insurance coverage which covers liabilityfor hazardous and controlled materials. However, this insurance coverage maynot be sufficient to cover our liability and we may not be able to obtainsufficient coverage in the future at a reasonable cost. In addition, we mayincur significant costs complying with both existing and future environmentallaws and regulations. In particular, we are subject to regulation by theOccupational Safety and Health Administration, or OSHA, and the EnvironmentalProtection Agency, or EPA, and to regulation under the Toxic Substances ControlAct and the Resource Conservation and Recovery Act. OSHA, the EPA or otheragencies may adopt regulations that adversely affect our research anddevelopment programs.

 

**We face a risk of product liability claimsand may not be able to obtain adequate insurance.**

 

Our business exposes us to potential liability risks that may arisefrom the clinical testing of our product candidates and the manufacture andsale of any approved products. These risks will exist even with respect to thoseproduct candidates that are approved for commercial sale by the FDA andmanufactured in facilities regulated by the FDA. Any product liability claim orseries of claims brought against us could significantly harm our business by,among other things, reducing demand for our products, injuring our reputationand creating significant adverse media attention and costly litigation.Plaintiffs have received substantial damage awards in some jurisdictionsagainst pharmaceutical companies based upon claims for injuries allegedlycaused by the use of their products. Any judgment against us that is in excessof our insurance policy limits would have to be paid from our cash reserves,which would reduce our capital resources. We currently maintain clinical trial insurance.Although we believe our current insurance coverage is adequate, we cannot becertain that it will be sufficient. Furthermore, we cannot be certain that ourcurrent insurance coverage will continue to be available, or that increasedcoverage, which will be necessary if we are able to commercialize our products,will be available in the future on reasonable terms, or at all. Further, we maynot have sufficient capital resources to pay a judgment, in which case ourcreditors could levy claims against our assets, including our intellectualproperty.

 

**We could be negatively impacted by futureinterpretation or implementation of federal and state fraud and abuse laws,including anti-kickback laws and other federal and state anti-referral laws.**

 

If we are able to commercialize FavId or any other product candidatesthat we may develop, we will be subject to various federal and state lawspertaining to healthcare fraud and abuse, including anti-kickback laws andphysician self-referral laws. Violations of these laws are punishable bycriminal and civil sanctions, including, in some instances, imprisonment and

 

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exclusion from participation in federal and state healthcare programs,including Medicare, Medicaid and Veterans Administration health programs.Because of the far-reaching nature of these laws, we may be required to alterone or more of our practices to be in compliance with these laws. Healthcarefraud and abuse regulations are complex, and even minor, inadvertentirregularities can potentially give rise to claims that a statute orprohibition 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 are able to commercialize FavId or any other productcandidates that we may develop, we could become subject to false claimslitigation under federal statutes, which can lead to civil money penalties,criminal fines and imprisonment, and exclusion from participation in Medicare,Medicaid and other federal and state healthcare programs. These false claimsstatutes include the False Claims Act, which allows any person to bring suit onbehalf of the federal government alleging the submission of false or fraudulentclaims, or causing to present such false or fraudulent claims, under federalprograms or contracts claims or other violations of the statute and to share inany amounts paid by the entity to the government in fines or settlement. Thesesuits against biotechnology companies have increased significantly in recentyears and have increased the risk that a healthcare company will have to defenda false claim action, pay fines or be excluded from the Medicare, Medicaid orother federal and state healthcare programs as a result of an investigationarising out of such action. We cannot assure you that we will not becomesubject to such litigation or, if we are not successful in defending againstsuch actions, that such actions will not have a material adverse effect on ourbusiness, financial condition and results of operations. In addition, we cannotassure you that the costs of defending claims or allegations under the FalseClaims Act will not have a material adverse effect on our business, financialcondition and results of operations.

 

**RisksRelated to Our Intellectual Property and Potential Litigation**

 

***If we are unable to obtain and maintainprotection for our intellectual property, the value of our technology and productsmay be adversely affected.**

 

Our business and competitive positions are dependent upon our abilityto protect our proprietary technology. Our success will depend in large part onour ability to obtain and maintain patent protection for our product and technologies,preserve trade secrets and operate without infringing the intellectual propertyright of others. Because of the substantial length of time and expenseassociated with development of new products, we, along with the rest of thebiopharmaceutical industry, place considerable importance on obtaining andmaintaining patent protection for new technologies, products and processes. Thepatent positions of pharmaceutical, biopharmaceutical and biotechnologycompanies, including us, are generally uncertain and involve complex legal andfactual questions. Our patent applications may not protect our technologies andproducts because, among other things:

 

• there isno guarantee that any of our pending patent applications will result in issuedpatents;

 

• we maydevelop additional proprietary technologies that are not patentable;

 

• there isno guarantee that any patents issued to us, our collaborators or our licensorswill provide a basis for a commercially viable product;

 

• there isno guarantee that any patents issued to us or our collaborators or ourlicensors will provide us with any competitive advantage;

 

• there isno guarantee that any patents issued to us or our collaborators or ourlicensors will not be challenged, circumvented or invalidated by third parties;and

 

• there isno 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 our intellectual property position by filingUnited States patent applications related to our proprietary technology,inventions and improvements that are important to the development of ourbusiness. Currently we own U.S. Patent No. 6,911,204 concerning thetreatment of NHL with our technology together with four pending United Statespatent applications covering methods of treating immune system diseases,including B-cell and T-cell lymphomas, using our

 

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proprietary immunotherapy production methods, as well as methods forcombining the idiotype immunotherapies with other therapies that are used totreat diseases of the immune system.

 

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

 

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

 

**We are not able to prevent others, includingpotential competitors, from using certain types of patient-specific idiotypeprotein-KLH conjugates, like those we use in our lead product candidate, FavId,for the treatment of indolent B-cell NHL.**

 

Certain types of patient-specific idiotype-KLH conjugates, comprisingsingle idiotype proteins, and their use for the treatment of indolent B-cellNHL are in the public domain and therefore cannot be patented. Consequently, wemay only be able to seek patent protection for methods of treating immunesystem diseases, including B-cell and T-cell lymphomas, using our proprietaryimmunotherapy production methods for making idiotype protein conjugates andcompositions comprising such conjugates, as well as methods for combining theidiotype or T-cell receptor-based immunotherapies with other therapies that areused to treat diseases of the immune system. As a result, we may not be able toprevent other companies using different manufacturing processes from developingactive immunotherapies that directly compete with FavId.

 

**We may have to engage in costly litigation toenforce our proprietary rights or to defend challenges to our intellectualproperty by our competitors, which may harm our business, results ofoperations, financial condition and cash flow.**

 

The pharmaceutical field is characterized by a large number of patentfilings involving complex legal and factual questions, and, therefore, wecannot predict with certainty whether our patents will be enforceable.Competitors may have filed applications for or have been issued patents and mayobtain additional patents and proprietary rights related to products orprocesses that compete with or are similar to ours. We may not be aware of allof the patents potentially adverse to our interests that may have been issuedto others. Litigation may be necessary to protect our patent position, and wecannot be certain that we will have the required resources to pursue litigationor otherwise to protect our patent rights. In addition, our efforts to protectour patents may not be successful.

 

**Our ability to market our products may beimpaired by the intellectual property rights of third parties.**

 

Our commercial success will depend in part on not infringing thepatents or proprietary rights of third parties. We are aware of competingintellectual property relating to active idiotype immunotherapies for cancer.Competitors or third parties may be issued, or may currently hold, patents thatmay cover subject matter that we use in developing the technology required tobring our product candidates to market, that we use in producing our productcandidates, or that we use in treating patients with our product candidates. Inaddition, from time to time we receive correspondence inviting us to license patentsfrom third parties. While we currently believe we have freedom to operate inour area, others may challenge our position in the future. There has been, andwe believe that there will continue to be, significant litigation in thepharmaceutical industry regarding patent and other intellectual propertyrights.

 

While we believe that our pre-commercialization activities fall withinthe scope of an available exemption against patent infringement provided by35 U.S.C. §271(e), and that our subsequent manufacture of our commercialproducts will also not require the license of any patents, claims may bebrought against us in the future based on these or other patents held byothers. As our product candidates progress toward commercialization,competitors or other parties may assert that we infringe on their patents orproprietary rights.

 

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In particular, we are aware of the following third party patents:

 

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

 

•              Genitope holds patent rightsrelating to immunotherapy using idiotype proteins produced using T-lymphoidcells for the treatment of B-Cell lymphoma;

 

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

 

The first patent listed above was issued to Genentech in 2001. We donot believe that this patent covers our technology, and we note that in May 2005,a third party filed a request for reexamination of this patent with the U.S.Patent and Trademark Office, requesting that the claims of this patent bereexamined as to their patentability. If this patent reissues and we decide toattempt to obtain a license for this patent, we cannot guarantee that we wouldbe able to obtain such a license on commercially reasonable terms, or at all.

 

Additionally, because patent prosecution can proceed in secret prior toissuance of a patent, third parties may obtain other patents with claims ofunknown scope relating to our product candidates, which they could attempt toassert against us. Further, as we develop our products, we may infringe thecurrent patents of third parties or patents that may issue in the future. Third parties could bring legal actions against us claiming damages and seekingto enjoin clinical testing, manufacturing and marketing of the affected productor products. If we become involved in any litigation, it could consume asubstantial portion of our resources, regardless of the outcome of thelitigation. If any of these actions are successful, in addition to anypotential liability for damages, we could be required to obtain a license tocontinue to manufacture or market the affected product, in which case we may berequired to pay substantial royalties or grant cross-licenses to our patents.However, there can be no assurance that any such license will be available onacceptable terms or at all. To enforce patents issued to us or to determine thescope and validity of other parties’ proprietary rights, we may also becomeinvolved in litigation or in interference proceedings declared by the UnitedStates Patent and Trademark Office, which could result in substantial costs tous, regardless of the outcome of the litigation, or an adverse decision as tothe priority of our inventions. Ultimately, as a result of patent infringementclaims, our business could be harmed and we could be prevented fromcommercializing a product, or forced to cease some aspect of our businessoperations.

 

**If we are not able to protect and controlunpatented trade secrets, know-how and other technological innovation, we maysuffer competitive harm.**

 

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

 

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

 

***Until our initial public offering in February 2005,there was no public market for our common stock, and the price of our commonstock may be volatile and could decline significantly.**

 

Until our initial public offering, or IPO, in February 2005, therewas no public market for our common stock, and despite our IPO, an activepublic market for these shares may not develop or be sustained. Our stock pricehas traded in the range of $7.77 - $3.20 from the commencement of our IPO on February 2,2005 to May 5, 2006.

 

The stock market in general has been experiencing dramatic fluctuationsthat have often been unrelated to the operating performance of companies. Themarket prices for securities of biotechnology companies in general have beenhighly volatile and may continue to be highly volatile in the future. Ifmarket-based or industry-based volatility continues, the trading price of ourcommon stock could decline significantly, independent of our actual operatingperformance, and you could lose all or part of your investment. The marketprice of our common stock could fluctuate significantly as a result of severalfactors, including:

 

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

 

•announcement of FDA approval or non-approval of FavId or any other productcandidates that we 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;

 

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

 

• actual oranticipated fluctuations in our operating results;

 

• changesin financial estimates or recommendations by securities analysts;

 

• sales oflarge blocks of our common stock;

 

• sales ofour common stock by our executive officers, directors and significantstockholders;

 

• changesin accounting principles; and

 

• loss ofany of our key scientific or management personnel.

 

Specifically, you may not be able to resell your shares at or above theprice you paid for such shares. In addition, class action litigation has oftenbeen instituted against companies whose securities have experienced periods ofvolatility in market price. Any such litigation brought against us could resultin substantial costs and a diversion of management’s attention and resources,which could hurt our business, operating results and financial condition.

 

***Concentration of ownership among ourexisting officers, directors and principal stockholders may prevent other stockholdersfrom influencing significant corporate decisions and depress our stock price.**

 

As of March 31, 2006, our officers and directors, stockholdersaffiliated with our directors and those stockholders owning at least tenpercent of our outstanding capital stock together beneficially heldapproximately 61.1% of our outstanding common stock on an as-converted basis.If some or all of these officers, directors and principal stockholders acttogether, they will be able to exert a significant degree of influence over ourmanagement and affairs and over matters requiring stockholder approval,including the election of directors, the merger, consolidation or sale of allor substantially all of our assets, and any other significant corporatetransaction. The interests of this concentration of ownership may not alwayscoincide with our interests or the interests of our other stockholders. Forinstance, officers, directors and principal stockholders, acting together,

 

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could cause us to enter into transactions or agreements that we wouldnot otherwise consider. Similarly, this concentration of ownership may have theeffect of delaying or preventing a change in control of us otherwise favored byour other stockholders. This concentration of ownership also could depress ourstock price.

 

**Provisions in our amended and restatedcertificate of incorporation and amended and restated bylaws and applicableDelaware law may prevent or discourage third parties or our stockholders fromattempting to replace our management or influencing significant decisions.**

 

Provisions in our amended and restated certificate of incorporation andamended and restated bylaws may have the effect of delaying or preventing achange in control of us or our management, even if doing so would be beneficialto our stockholders. These provisions include:

 

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

 

•authorizing our board of directors to issue preferred stock without stockholderapproval;

 

•prohibiting cumulative voting in the election of directors;

 

•prohibiting stockholder actions by written consent;

 

• limitingthe persons who may call special meetings of stockholders;

 

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

 

**Because we do not intend to pay any cashdividends on our shares of common stock, our stockholders will not be able toreceive a return on their shares unless they sell them.**

 

We have never paid or declared any cash dividends on our capital stockand intend to retain any future earnings to finance the development andexpansion of our business. The payment of dividends by us on our common stockis limited by our debt agreements. We do not anticipate paying any cashdividends on our common stock in the foreseeable future. Unless we paydividends, our stockholders will not be able to receive a return on theirshares unless they sell them.

 

**We may incur increased costs as a result ofrecently enacted and proposed changes in laws and regulations.**

 

Recently enacted and proposed changes in the laws and regulationsaffecting public companies, including the provisions of the Sarbanes-Oxley Actof 2002 and rules related to corporate governance and other matterssubsequently adopted by the SEC and the Nasdaq Stock Market, could result in increasedcosts to us. The new rules and any related regulations that may beproposed in the future could make it more difficult or more costly for us toobtain certain types of insurance, including directors’ and officers’ liabilityinsurance, and we may be forced to accept reduced policy limits and coverage orincur substantially higher costs to obtain the same or similar coverage. Theimpact of these events could also make it more difficult for us to attract andretain qualified persons to serve on our board of directors, our boardcommittees or as executive officers. We are presently evaluating and monitoringdevelopments with respect to new and proposed rules and cannot predict orestimate the amount of the additional costs we may incur or the timing of suchcosts.

 

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**Item 2.Unregistered Sales of Equity Securities and Use of Proceeds**

 

OnMarch 6, 2006, we entered into a securities purchase agreement relating toa private placement in which we issued and sold to certain investors, for anaggregate purchase price of approximately $45.4 million, 8,555,133 sharesof our common stock and warrants to purchase up to 2,994,288 shares of ourcommon stock at an exercise price of $5.26 per share.  At the closing, investors paid $5.26 pershare of common stock purchased and an additional purchase price equal to$0.125 per warrant.

 

The Company relied on the exemption from the registration requirementsof the Securities Act of 1933, as amended (the ***“Act”***),by virtue of Section 4(2) thereof and Rule 506 ofRegulation D promulgated thereunder. The Company filed a registration statement with the Securities andExchange Commission on March 31, 2006 covering the resale of the shares ofcommon stock issued in the private placement and the shares of common stockissuable upon exercise of the warrants issued in the private placement.   On April 12, 2006, the Securities andExchange Commission declared the registration statement effective.

 

Eachinvestor in the private placement represented that it was an accreditedinvestor, as such term is defined in Regulation D under the Act, and thatit was acquiring the common stock and warrants for investment only and not witha view to or for sale in connection with any distribution thereof, andappropriate legends were affixed to the common stock and warrants issued in theprivate placement.

 

Ourinitial public offering of our common stock, par value $0.001, was effectedthrough a Registration Statement on Form S-1 (File No. 333-114299) thatwas declared effective by the Securities and Exchange Commission on February 2,2005.  Our initial public offeringcommenced on February 2, 2005.  On February 7, 2005, 6 millionshares of our common stock were sold for an aggregate offering price of $42.0million.  On March 7, 2005, 285,000 shares of our common stock weresold for an aggregate offering price of $2.0 million upon the partial exerciseof the underwriters’ over-allotment option.  Our initial public offeringresulted in aggregate proceeds to us of approximately $39.4 million, netof underwriting discounts and commissions of approximately $3.1 million andoffering expenses of approximately $1.4 million, through a syndicate ofunderwriters managed by Bear, Stearns & Co. Inc., CIBC World MarketsCorp., Needham & Company, Inc. and A.G. Edwards & Sons, Inc.

 

Nooffering expenses were paid directly or indirectly to any of our directors orofficers (or their associates) or person owning ten percent or more of anyclass of our equity securities or to any other affiliates.  All offeringexpenses were paid directly to others.

 

Wehad invested $40.9 million in proceeds from the offering, net of underwritingdiscounts and commissions but before expenses, in government agency securities,corporate bonds and notes and money market funds.  Through March 31,2006, we used approximately $19.3 million of the proceeds from our initialpublic offering to develop and prepare for filing a biologic licenseapplication, or BLA, for regulatory approval of FavId, for development of ourother product candidates, for general and administrative expenses, and forworking capital, including debt repayments.

 

The foregoing payments were direct payments made to third parties whowere not our directors or officers (or their associates), persons owning tenpercent or more of any class of our equity securities or any other affiliate,except that the proceeds used for salaries expense included regularcompensation for our officers and directors. The use of proceeds does not represent a material change from the use ofproceeds described in the prospectus we filed pursuant to Rule 424(b)(4) ofthe Securities Act of 1933, as amended, with the Securities and ExchangeCommission on February 3, 2005.

 

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**Item 6. Exhibits.**

 

Theexhibits listed on the accompanying index to exhibits are filed or incorporatedby reference (as stated 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)                                                                                                                             |
|                |       |                                                                                                                                                                                                        |
| 10.1                |       | Amendment dated March 16, 2006 to the  Employment Agreement dated January 5, 2005 between the Registrant and  Alice Wei (3)                                                                       |
|                |       |                                                                                                                                                                                                        |
| 31.1                |       | Certification of Chief Executive Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                   |
|                |       |                                                                                                                                                                                                        |
| 31.2                |       | Certification of Chief Financial Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                   |
|                |       |                                                                                                                                                                                                        |
| 32.1                |       | Certification of Chief Executive Officer,  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                  |
|                |       |                                                                                                                                                                                                        |
| 32.2                |       | Certification of Chief Financial Officer,  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                  |

 

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(1)          Previously filed as an Exhibit toFavrille, Inc.’s Registration Statement on Form S-1 (File No. 333-114299),as amended, and incorporated by reference herein.

(2)          Previously filed as anexhibit to Favrille’s Current Report on Form 8-K dated March 6, 2006and incorporated herein by reference.

(3)   Indicates management contract or compensatoryplan.

 

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**Favrille, Inc.**

 

**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
| Dated: May 15, 2006 |                                                                                                    |
|--------------------------|---------------------------------------------------------------------------------------------------------|
|                     |                                                                                                    |
|                     | Favrille, Inc.                                                                                     |
|                     |                                                                                                    |
|                     | /s/ Tamara A. Seymour                                                                                   |
|                     |                                                                                                    |
|                     | Tamara A. Seymour                                                                                       |
|                     |                                                                                                    |
|                     | Chief Financial Officer                                                                                 |
|                     |                                                                                                    |
|                     | (On behalf of the registrant and as the  registrant’s  Principal Financial and Accounting Officer) |

 

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