10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended December 31, 2005
Or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from              to

Commission File Number 000-51134

Favrille, Inc.

(Exact name of registrant as specified in its charter)

Delaware	33-0892797
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

10421 Pacific Center Court, Suite 150
San Diego, CA 92121
(Address of principal executive offices, including zip code)

(858) 526-8000
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value per share
(Title of class)

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes o No ý

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes o No ý

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes ý   No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    o

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

Large accelerated filer     o     Accelerated filer     ¨Non-accelerated filer     ý

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

Yes o  No ý

The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the last sale price of the common stock reported on the Nasdaq National Market on June 30, 2005 was $34,458,779.   For purposes of determining this amount, Registrant has defined affiliates to include (a) the executive officers and directors of the Registrant on June 30, 2005 (b) stockholders affiliated with our directors and (c) each stockholder that had informed Registrant by June 30, 2005 that it was the beneficial owner of 10% or more of the outstanding common stock of the Registrant.  Exclusion of such shares should not be construed to indicate that any such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the registrant or that such person is controlled by or under common control with the registrant.

As of March 23, 2006, there were 28,920,426 shares of the registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Location in Form 10-K	Incorporated Document
Part III: Items 10, 11, 12 13 and 14	Proxy Statement for 2006 Annual Meeting of Stockholders

FAVRILLE, INC.

ANNUAL REPORT ON FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005

TABLE OF CONTENTS

Item 1B. Unresolved Staff Comments

Item 2. Properties

Item 3. Legal Proceedings

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

PART II

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Item 6. Selected Financial Data

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Item 8. Financial Statements and Supplementary Data

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Item 9A. Controls and Procedures

Item 9B. Other Information

PART III

Item 10. Directors and Executive Officers of the Registrant

Item 11. Executive Compensation

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item 13. Certain Relationships and Related Transactions

Item 14. Principal Accounting Fees and Services

PART IV

Item 15. Exhibits and Financial Statement Schedules

SIGNATURES

Cautionary Note Regarding Forward-Looking Statements

This annual report on Form 10-K contains forward-looking statements that involve many risks and uncertainties. These statements relate to future events and our future performance and are based on current expectations, estimates, forecasts and projections about the industry in which we operate and the beliefs and assumptions of our management. In some cases, you can identify forward-looking statements by terms such as “would,” “could,” “may,” “will,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “targets,” “seek,” or “continue,” the negative of these terms or other variations of such terms. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our business and other characterizations of future events or circumstances, are forward-looking statements. These statements are only predictions based upon assumptions that are believed to be reasonable at the time, and are subject to risk and uncertainties. Therefore, actual events or results may differ materially and adversely from those expressed in any forward-looking statement. In evaluating these statements, you should specifically consider the risks described in Item 1A of Part I and elsewhere in this Form 10-K. These factors may cause our actual results to differ materially from any forward-looking statements. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

PART I

Item 1.            Business

Overview

We are a biopharmaceutical company focused on the development and commercialization of targeted immunotherapies for the treatment of cancer and other diseases of the immune system. We have developed a proprietary technology that enables us to manufacture active immunotherapy products that are designed to stimulate a patient’s immune system to mount a specific and sustained response to disease. Our lead product candidate, FavId, is an active immunotherapy for the treatment of B-cell non-Hodgkin’s lymphoma, or NHL. We completed enrollment in a pivotal Phase 3 clinical trial of FavId in patients with follicular B-cell NHL in January 2006.

The American Cancer Society estimates that approximately 56,000 people were diagnosed with NHL in the United States in 2005, and the National Cancer Institute, or NCI, has estimated that approximately 332,000 patients suffer from this disease. Approximately 85% of NHL patients have B-cell NHL. We believe that approximately half of these patients have the slow-growing, or indolent, form of the disease. The majority of the remaining patients have a faster growing form of the disease, commonly referred to as aggressive NHL. Only half of these are cured with currently available standards of care. A number of therapies are used to treat indolent B-cell NHL, including the current standard of care, Rituxan^®, which had sales in the United States of approximately $1.8 billion in 2005 for indolent B-cell NHL and other indications. Despite the benefits of current therapies, patients with indolent B-cell NHL still relapse following treatment, and the disease is considered to be incurable.

FavId is being developed for use following treatment with existing standards of care to extend time to disease progression, or TTP, in patients with B-cell NHL. Our Phase 3 clinical trial is designed to evaluate FavId’s ability to extend TTP in patients with follicular B-cell NHL following treatment with Rituxan. Follicular B-cell NHL is the most common form of the indolent disease. We anticipate an analysis of the secondary endpoint, response improvement, during the fourth quarter of 2006. Analysis of the primary endpoint of the trial, TTP, is expected during the second half of 2007.In January 2006 we announced that we received Fast Track designation from the U.S. Food and Drug Administration, or FDA, for FavId.

In addition to our Phase 3 clinical trial, FavId has been evaluated in several multi-center, open-label Phase 2 clinical trials involving more than 130 patients. We presented long-term follow-up data from our Phase 2 clinical trial of FavId following Rituxan therapy in patients with follicular B-cell NHL at the American Society of Hematology, or ASH, Annual Meeting in Atlanta in December 2005. These data suggest that the administration of FavId following Rituxan may improve response over Rituxan alone and extend TTP compared to historical data of Rituxan alone.

Researchers have been conducting clinical trials of active immunotherapies in patients with B-cell NHL for more than a decade. The results of clinical trials at the Stanford University Medical Center and the NCI suggest that active immunotherapies similar to FavId, when used following chemotherapy, may induce long-term remission and improve survival time among indolent B-cell NHL patients. Despite the promising results of these trials, we believe manufacturing limitations have hindered commercialization of these immunotherapies. We believe that our proprietary technology will enable us to manufacture FavId in a timely and cost-effective manner and will therefore allow us to offer a treatment option not currently available to physicians and patients.

We believe FavId may be effective in treating other types of B-cell NHL as well. Five additional Phase 2 clinical trials of FavId are either ongoing or expected to begin during 2006. One of these clinical trials is being conducted under a separate physician-sponsored Investigational New Drug, or IND, application in the United States. A second of these is being conducted as a physician-sponsored

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clinical trial in Switzerland. Moreover, we believe our active immunotherapy expertise and proprietary manufacturing technology will enable us to develop additional product candidates for other oncology indications, such as T-cell lymphoma, and for autoimmune diseases, with an initial focus on multiple sclerosis. We are currently developing a second product candidate, FAV-201, for the treatment of T-cell lymphoma and intend to file an IND and initiate a Phase 1/2 clinical trial evaluating the safety and immune response of FAV-201 in the first half of 2006. We have retained exclusive worldwide commercialization rights to all of our product candidates.

We were incorporated in Delaware in January 2000.

The Immune System

The immune system is the body’s major defense against foreign pathogens, such as viruses and bacteria. The principal cells that make up the immune system are termed white blood cells. A subset of white blood cells known as lymphocytes is essential in generating an effective immune response to disease-causing agents. Lymphocytes consist primarily of B-cells and T-cells, which normally recognize and respond to antigens found within proteins derived from foreign pathogens. The B-cell receptor that recognizes an antigen is called an antibody. Once B-cells recognize antigens, they initiate a sequence of events that results in the immune system’s production of large amounts of antibodies specific to that antigen. These antibodies then circulate throughout the body and bind to their target antigen, thereby flagging pathogens for destruction. This type of immune response is known as the antibody-based, or humoral, immune response.

T-cells are responsible for carrying out what is known as the cell-mediated immune response. T-cell receptors recognize antigens presented on the surface of other cells. When a T-cell recognizes its target, it responds in one of two ways. Either it destroys the target directly, or it produces a variety of proteins that cause the growth and activation of itself and other T-cells and B-cells, which can then destroy the target.

Although any one B-cell or T-cell can recognize and respond to only a single antigen, the human immune system has evolved such that the collective B-cell and T-cell populations can respond to virtually every possible foreign pathogen that a person may encounter in his or her lifetime. Furthermore, the humoral and cell-mediated immune responses have an additional feature of “memory,” which enables B-cells and T-cells to recall an interaction with a foreign antigen and to respond to this antigen in a more rapid and aggressive fashion in the future.

The immune system is generally very effective in destroying pathogens-viruses, bacteria, or other foreign microorganisms that it recognizes as foreign. For this reason, a properly functioning immune system is highly regulated to ensure that its destructive power is not directed against normal tissue. If this regulation breaks down, an immune response may be generated against normal tissue, which can lead to autoimmune diseases, such as multiple sclerosis, rheumatoid arthritis and lupus. In the case of cancer, this strict regulation of the immune system may prevent an effective immune response from being mounted because of the body’s inability to distinguish the cancer as foreign. Researchers believe that teaching the immune system to recognize the proteins associated with cancer cells as foreign will enable the immune system to identify and eliminate cancers, such as lymphoma.

Immunotherapy

Immunotherapy is designed to use a person’s immune system to fight diseases, including cancer. Immunotherapy enables the immune system to target and destroy diseased cells and has far fewer side effects than other therapies, such as surgery, chemotherapy and radiation therapy. There are two types of immunotherapy used to treat cancer: passive immunotherapy and active immunotherapy.

Passive immunotherapy utilizes large doses of infused antibodies that bind to antigens primarily expressed by a tumor cell and by few or no normal cells. These antibodies circulate throughout the bloodstream, binding to antigens on targeted cells, thereby flagging them for destruction. One of the most widely used passive immunotherapies for the treatment of B-cell NHL is Rituxan. Rituxan has demonstrated the ability to induce a clinical response – at least a 50% reduction in tumor burden – in approximately 50% of patients with indolent B-cell NHL with few side effects. In patients who respond to Rituxan, this response lasts on average approximately 12 months. Despite their widespread use in fighting cancer, passive immunotherapies such as Rituxan suffer from significant limitations, including a limited duration of efficacy and the development of resistance. Additional passive immunotherapies have attempted to overcome the shortcomings of Rituxan by linking antibodies to radioactive molecules that can directly destroy the cell to which the antibody is bound. However, improvements in time to disease progression, if any, have been modest.

Active immunotherapy teaches the patient’s own immune system to recognize and fight cancer. Active immunotherapy is designed to program the immune system to generate a sustained and robust humoral (B-cell) and cell-mediated (T-cell) immune response. Idiotype immunotherapy, including our product candidate, FavId, for the treatment of B-cell NHL, is an example of active immunotherapy. In the case of B-cell NHL, the antibody protein made by a person’s B-cell NHL is used as a target for immune attack. The unique antigens in this antibody protein are referred to as the idiotype. The immune system can differentiate between lymphoma cells and normal B-cells based on their idiotype. As a result, following successful idiotype immunotherapy, a patient’s immune response is

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specific to their B-cell lymphoma.

Development of Active Idiotype Immunotherapy

Active idiotype immunotherapy has been studied in patients with B-cell NHL since the late 1980’s and has shown substantial promise in clinical trials. Trials conducted at the Stanford University Medical Center and the NCI evaluated the use of active idiotype immunotherapy in treating patients with indolent B-cell NHL. The results suggest that active idiotype immunotherapy significantly increases the duration of response in patients previously placed into remission with chemotherapy. Remission is defined as at least a 50% reduction in tumor burden. The immunotherapy administered in both the Stanford and NCI trials was similar to FavId in that it involved the combination of an idiotype protein derived from a patient’s tumor with a foreign protein, keyhole limpet hemocyanin, or KLH. KLH is a protein derived from shellfish that elicits a strong immune response.

In the Stanford trial, 21 of 41 patients treated with idiotype immunotherapy mounted an immune response to their idiotype protein. The median TTP in these patients was calculated to be 7.9 years, compared to a median TTP of 1.3 years for the patients who failed to mount an immune response. For purposes of this trial, TTP was defined as the interval between the date of last dose of chemotherapy and the recurrence of disease. The median TTP for the responding patients was calculated based on available data using a statistical method known as Kaplan-Meier analysis, which allows for the estimation of a median time when not all of the patients have reached the event being measured at the time of analysis. The results from this trial were published in the medical journal Blood in May 1997.

In an attempt to increase the idiotype-specific immune response, the NCI trial supplemented the idiotype immunotherapy with granulocyte macrophage colony stimulating factor, or GM-CSF, a white blood cell growth factor designed to enhance the immune response. Lymphoma-specific immune responses were reported for 19 of the 20 patients in the trial, and the most recent update from this trial in December 2005 indicates that with a median follow-up time of 9.2 years, 45% of patients remain in continuous complete remission with an overall survival rate of 90%. The trial also showed that the immunotherapy converted eight of 11 patients tested to a molecular remission, which means no evidence of tumor could be seen even at the more sensitive level of DNA detection. The preliminary results from the NCI trial were published in the medical journal Nature Medicine in October 1999, and the most recent update from this trial was published in the medical journal Blood in November 2003.

Barriers to Commercialization

Although the Stanford and NCI clinical trials demonstrated favorable results, substantial manufacturing difficulties have limited further development of an active idiotype immunotherapeutic approach to the treatment of B-cell NHL. The manufacturing process used to produce the idiotype immunotherapies studied at Stanford and the NCI has lengthy and inconsistent production timelines and is labor-intensive, with a reported manufacturing failure rate as high as 15%. As a result, we believe this process would make active idiotype immunotherapies produced using this process difficult to commercialize.

Our Solution for the Commercial Production of Active Idiotype Immunotherapy

We have developed a proprietary technology that we believe enables us to overcome historical limitations to the manufacturing and commercialization of active idiotype immunotherapies. Our technology utilizes an insect-cell virus that carries genetic information that is identical to a patient’s lymphoma. By introducing this virus into an insect cell line, we can produce sufficient quantities of idiotype protein for our immunotherapy. We believe our manufacturing process has the following benefits:

• Rapid Production Cycle. We manufacture FavId and deliver it to the patient in eight weeks. We believe our production cycle time is a number of months shorter than previously reported cycle times for manufacturing idiotype immunotherapies for B-cell NHL. Our production timeline allows us to administer FavId at what we believe is the optimal time following treatment with Rituxan.

• Reliable Manufacturing. Our underlying production method for each patient will not change regardless of the number of units of FavId produced. This small-scale unit operation is easily replicated to produce multiple patient therapies simultaneously without the risks associated with traditional scale-up for commercial production.

• Automation. This small-scale unit operation is amenable to automation. The time required to identify the genetic information used to construct the insect-cell expression vector has been reduced by technological advances, including automation, some of which are the result of the human genome project. We believe that many other steps in the production of FavId can be automated.

Our production process requires standardized small volumes, is readily reproducible, and requires limited production time. As a result, we believe our cost of production can allow for a commercially viable product with gross margins similar to those seen for other biopharmaceuticals and enable physicians to use FavId in concert with all existing standards of care for indolent B-cell NHL,

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including Rituxan.

Our Development Programs

The chart below summarizes the status of ongoing, recently completed and currently planned clinical and preclinical development programs. We have retained exclusive worldwide commercialization rights to all of our product candidates.

Product	Indication	Patient Population	Status
FavId
Following Rituxan	Follicular B-cell NHL	Treatment-naïve or relapsed/refractory patients(1)	Phase 3 trial enrollment complete: analysis of secondary endpoint, response improvement, fourth quarter 2006; analysis of primary endpoint, TTP, second half of 2007
Following Rituxan	Follicular B-cell NHL	Treatment-naïve or relapsed/refractory patients	Phase 2 trial enrollment complete: patients in long-term follow-up
Single agent	Indolent B-cell NHL	Relapsed/refractory patients	Phase 2 trial enrollment complete: patients in long-term follow-up
Following autologous stem cell transplant	Indolent B-cell NHL	Patients eligible for autologous stem cell transplant	Phase 2 trial enrolling patients(2)
With maintenance Rituxan	Indolent B-cell NHL	Treatment-naïve patients	Phase 2 trial enrolling patients
Single agent	Non-follicular B-cell NHL	Treatment-naïve or relapsed/refractory patients	Phase 2 trial enrolling patients(2)
Following prior therapy	Follicular B-cell NHL	Patients who progressed in our Phase 3 trial without receiving FavId	Phase 2 trial enrolling patients
Following chemotherapy/Rituxan in patients with aggressive NHL	Aggressive B-cell NHL	Treatment-naïve patients	Randomized double-blind controlled Phase 2/3 trial open for enrollment
FAV-201	T-cell lymphoma	Previously treated patients	Phase 1/2 trial expected start: first half 2006
Autoimmune Disease Candidate	Multiple sclerosis	Not applicable	Preclinical development

(1) Patients are considered relapsed if their lymphoma has returned after a response to prior therapy. Patients are considered refractory if they have not responded to prior treatments.

(2) This trial is physician-sponsored, which means that a physician, rather than Favrille, is responsible for managing the conduct of the trial and the resulting data. The responsible physician has filed an IND with the FDA or similar regulatory authority in Switzerland for the study and is the owner of that IND. We will provide FavId at our own expense for use in physician-sponsored trials and, in some cases, funding.

FavId for B-Cell NHL

Overview

Our lead product candidate, FavId, is an active immunotherapy that is based upon unique genetic information extracted from a patient’s tumor. We completed enrollment in a pivotal Phase 3 clinical trial evaluating FavId in treatment-naïve or relapsed or refractory follicular B-cell NHL patients following treatment with Rituxan in January 2006. Follicular lymphoma accounts for the majority of all indolent B-cell NHL cases. To date, we have conducted several multi-center, open-label Phase 2 clinical trials of FavId involving more than 130 indolent B-cell NHL patients. Five additional Phase 2 clinical trials of FavId are either ongoing or expected to begin during 2006. One of these clinical trials is being conducted under a separate physician-sponsored IND in the United States. A second is being conducted as a physician-sponsored clinical trial in Switzerland. We currently retain exclusive worldwide commercialization rights to FavId.

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Market Opportunity

The American Cancer Society cites NHL as the sixth most common form of cancer and the sixth leading cause of death among cancers in the United States. The American Cancer Society estimated that approximately 56,000 people were diagnosed with NHL in the United States in 2005, and the NCI has estimated that approximately 332,000 patients suffer from this disease. B-cell NHL is a cancer of B-cell lymphocytes, the body’s white blood cells principally responsible for fighting disease. Approximately 85% of NHL patients in the United States have B-cell NHL. We believe that approximately half of these patients have the indolent form of the disease. Although indolent B-cell NHL is slow-growing, it is incurable with existing therapies and inevitably fatal. The median survival time for patients diagnosed with advanced stages of indolent B-cell NHL is estimated to be between seven and ten years.

Current Treatments

Overview.  B-cell NHL is composed of a diverse group of malignancies with varying patterns of behavior and responses to treatment. Both the prognosis for patients with this disease, and the treatment that they are likely to receive, depend on the histologic type and stage. B-cell NHL is commonly divided into two groups: indolent NHL and aggressive NHL. Indolent B-cell NHL has a relatively good prognosis, with a median survival as long as 10 years. Early-stage indolent B-cell NHL can be effectively treated and often cured with radiation therapy alone. Patients with advanced stage indolent B-cell NHL are not considered curable but generally respond to treatment with a remission. These remissions are generally temporary, however, and patients require additional treatments when they relapse. Aggressive B-cell NHL has a shorter natural history. Only 50% of these patients can be cured with chemotherapy alone or with combinations of chemotherapy and Rituxan. If patients relapse after treatment, the vast majority of relapses occur in the first two years following therapy.

Chemotherapy.  Prior to Rituxan’s availability, chemotherapy was traditionally used as the primary therapy for most patients with B-cell NHL. Chemotherapy is typically administered in repeated cycles over three to eight months and can substantially reduce the amount of lymphoma and often achieve remission. Patients receiving chemotherapy generally experience a number of side effects, including fatigue, nausea, hair loss and increased risk of infection. These side effects may result in the need for supportive care, including additional therapies and hospitalization. Patients also experience late side effects such as sterility, myelodysplastic syndromes, second cancers, and heart dysfunction. The toxicity and inconvenience of chemotherapy can impose a heavy strain on a patient’s overall quality of life.

Passive Immunotherapy.  Several passive immunotherapy products have been approved for the treatment of B-cell NHL, including Rituxan, Zevalin and Bexxar. Rituxan is the leading passive immunotherapy approved for the treatment of B-cell NHL and is being used for both indolent and aggressive B-cell NHL. Standard treatment with Rituxan alone involves four weekly intravenous infusions over a 22-day period. Rituxan is considered to be significantly less toxic to the bone marrow than chemotherapy. Rituxan is a monoclonal antibody that can induce a remission in approximately 50% of patients with indolent B-cell NHL. In these responding patients, the remission lasts approximately 12 months. Unfortunately, as with patients with indolent B-cell NHL who receive chemotherapy, patients treated with Rituxan eventually relapse. Several clinical trials have suggested that additional doses of Rituxan as a maintenance therapy can improve the time before patients with follicular B-cell NHL relapse. In addition, combinations of Rituxan and chemotherapeutic or immunostimulatory drugs at various doses and schedules may provide patients with an increase in TTP over that expected with Rituxan alone. When administered with chemotherapy to patients with aggressive B-cell NHL, Rituxan can increase the cure rate and the TTP.

Rituxan used either alone or in combination with another therapy is the current standard of care for the treatment of B-cell NHL patients. Sales of Rituxan in the United States have grown from $162 million in 1998 to approximately $1.8 billion in 2005. Our clinical registration strategy involves the administration of FavId to the group of patients who would receive Rituxan, that is combine active and passive immunotherapies. Since Rituxan is the current standard of  care, we believe this approach of FavId used in combination with Rituxan treatment will allow the largest number of patients with B-cell NHL to benefit.

Clinical Development

Pivotal Phase 3 Clinical Trial – FavId Following Rituxan.  We completed enrollment in a Phase 3 clinical trial of FavId in patients with follicular B-cell NHL in January 2006. This trial was initiated in July 2004 with an enrollment target of 342 eligible patients. The randomized, double-blind, placebo-controlled trial is being conducted at 67 oncology centers and more than 100 sites across the U.S. Approximately 80 percent of the patients enrolled are treatment-naïve, with the remainder either relapsed from or refractory to prior therapies.

We obtain tumor cells via biopsy from each patient to establish the genetic profile of the tumor for our use in manufacturing the patient’s FavId. In addition, a CT scan is conducted in order to measure tumor burden before Rituxan treatment. Each patient then receives the standard four doses of Rituxan alone at one-week intervals while the patient’s FavId is being manufactured. Five weeks after the last dose of Rituxan is administered, the patient is re-evaluated and a CT scan is conducted to assess the patient’s response to Rituxan. A patient whose disease remains stable or improves following treatment with Rituxan is randomized to receive either FavId

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with GM-CSF or placebo with GM-CSF. During the induction phase, randomized patients receive monthly injections of FavId or placebo for six months. If a patient’s lymphoma remains under control after the induction phase, the patient receives maintenance injections of FavId or placebo given every other month for a year and then every third month until the time of disease progression. Throughout the trial, patients receive CT scans every three months to determine whether their lymphoma is under control. During the trial, patients do not receive any cancer therapy other than that administered in the trial. However, once a patient’s disease progresses, the patient’s participation in the trial terminates.

The primary endpoint of the trial is TTP, which in this protocol is the time that elapses between randomization and disease progression. The trial is designed to demonstrate a statistically significant improvement in median TTP in those patients treated with FavId compared to those patients treated with placebo. We expect an analysis of the TTP data during the second half of 2007. The trial will also include an analysis based on a secondary endpoint, response improvement, which we anticipate will occur during the fourth quarter of 2006.

We have a Special Protocol Assessment, or SPA, from the FDA for our Phase 3 clinical trial. In the SPA process, the FDA reviewed the design, size and planned analysis of our Phase 3 clinical trial and provided comments regarding the trial’s adequacy to form a basis for approval of a Biologics Licensing Application, or BLA, if the trial is successful in meeting its predetermined objectives. The FDA’s written agreement is binding, except in limited circumstances, such as when a substantial scientific issue essential to determining the safety or effectiveness of a product candidate is identified after the Phase 3 clinical trial is commenced.

In January 2006 we announced that we received Fast Track designation from the FDA for FavId. Fast Track designation is granted for a new drug that is intended to treat a serious or life-threatening condition and demonstrates the potential to address an unmet medical need and as a result is eligible for priority review by the FDA. This action by the FDA has the potential to save Favrille valuable time in the regulatory approval process and serves as an acknowledgement of the potential for FavId in the treatment of follicular B-cell NHL.

Phase 2 Clinical Trial – FavId Following Rituxan.  We initiated a Phase 2 clinical trial of FavId in patients with follicular B-cell NHL who were candidates for Rituxan therapy in June 2002. Initially, this trial was limited to relapsed or refractory patients who had previously undergone treatment with Rituxan, chemotherapy or both. In April 2003, we expanded the entry criteria for this trial to include patients with no prior treatment for their lymphoma. The open-label Phase 2 trial was conducted at 20 sites. Enrollment in this trial was completed in December 2003. A total of 103 patients were enrolled in the trial, of which 89 had stable disease or a better response to Rituxan and received FavId, including 55 who were relapsed from or refractory to prior treatments and 34 who were treatment-naïve.

We obtained tumor cells via biopsy from each patient to establish the genetic profile of the tumor for our use in manufacturing the patient’s FavId. In addition, a CT scan was conducted in order to measure tumor burden before Rituxan treatment. Each patient then received four doses of Rituxan alone at one-week intervals while the patient’s FavId was being manufactured. Approximately eight weeks after the last dose of Rituxan, the patient was re-evaluated and a CT scan was conducted to assess the patient’s response to Rituxan. Patients whose disease remained stable or improved following Rituxan treatment received monthly injections of FavId and GM-CSF for six months. If a patient remains progression free after this induction period, the patient continues to receive maintenance injections of FavId given every other month for a year and then every third month until the time of disease progression. Throughout the trial, patients receive CT scans every three months to determine whether their lymphoma is under control. During the trial, patients do not receive any cancer therapy other than that administered in the trial. However, once a patient’s disease progresses, the patient’s participation in the trial terminates.

Long-term follow-up data from this Phase 2 trial were reported at the ASH Annual Meeting in Atlanta in December 2005. In an oral presentation entitled “Extended Follow-Up and Analysis with Central Radiological Review of Patients Receiving FavId (Id/KLH) Vaccine Following Rituximab,” Omer Koc, M.D., a clinical trial principal investigator and Staff Physician, Hematology/Oncology, at the Cleveland Clinic Foundation, reported that the administration of FavId following Rituxan appears to improve response over Rituxan alone and extend TTP compared to historical data of Rituxan alone. The data also compare favorably with previous immunotherapy clinical trials in patients with B-cell NHL that have used chemotherapy to induce remissions.

Treatment-naïve patients who responded to an initial course of Rituxan with a partial or complete remission, or Rituxan responder population, demonstrated the longest TTP, with only 4 of 23 or 17% of patients in this subpopulation having progressed as of December 2005 at a median observation period of approximately 22 months. In addition, only 10 of 35, or 29% of the total treatment-naïve population and 10 of 44, or 23%, of the Rituxan-responder population (including those that were not treatment-naïve) had progressed as of December 2005.

As this Phase 2 clinical trial enrolled both patients that were relapsed or refractory from prior treatment and patients who had received no prior treatment for their lymphoma, we can only compare our preliminary results for these subsets of our patient population with available published data. One clinical trial published by Dr. Thomas E. Witzig in the Journal of Clinical Oncology in May 2002 reported results for 58 follicular B-cell NHL patients relapsed from or refractory to chemotherapy who were subsequently treated with

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Rituxan alone. In our Phase 2 clinical trial we treated 23 follicular B-cell NHL patients relapsed from chemotherapy whom we believe to be comparable with respect to the patient characteristics in the Witzig clinical trial. The median TTP for the subset of follicular patients in the Witzig trial was 10.2 months. The median TTP of the 23 patients relapsed from chemotherapy in our Phase 2 clinical trial is projected at 24.2 months. We believe these data show a positive trend to a longer TTP in patients treated with Rituxan followed by FavId compared to patients treated with Rituxan alone.

A secondary endpoint in our clinical trial was response improvement. Response improvement attempts to measure the additional responses that occur as a result of FavId. In this trial, response improvement was defined as the improvement in responses that occurred after three months from the start of Rituxan. Improvement in response can be seen in three different ways. Patients who have stable disease at month three can go on to have a response (either a complete or partial remission) sometime after month three. Partial remission is defined as reduction in tumor size of at least 50% and complete remission is defined as no detectable tumor by CT scan.  In addition, a patient with a partial remission at month three can go on to have a complete remission at some time following month three. Using this definition, we reported that 23 of 85, or 27%, of our patients experienced an improvement in their response category after month three, including 12 of 42, or 29%, from stable disease to partial response, 2 of 42, or 5%, from stable disease to complete response, and 9 of 43, or 21%, from partial remission to complete remission.

The overall clinical response rate in the Phase 2 trial increased from 49% at month 3 following Rituxan alone to 65% following the initiation of FavId.

The positive interim results found in this Phase 2 clinical trial do not guarantee final results, and our positive assessment of FavId in this clinical trial could differ from our assessment of FavId following completion of this trial or the pending Phase 3 clinical trial. We believe an analysis of the characteristics of those patients in our trial whose disease relapsed compared to those whose disease had not allowed us to optimize the design of our pivotal Phase 3 clinical trial.

Phase 2 Clinical Trial – FavId as a Single Therapeutic Agent in Relapsed or Refractory NHL Patients.In September 2002, we completed enrollment of a Phase 2 clinical trial evaluating FavId as a single therapeutic agent in indolent B-cell NHL patients who were either relapsed from, or refractory to, prior treatments. The trial was conducted at multiple sites and was designed to determine whether use of FavId alone could stimulate an immune response and whether this response would result in a clinical benefit. We obtained tumor cells via biopsy from each patient to establish the genetic profile of the tumor for our use in manufacturing the patient’s FavId. In addition, a CT scan was conducted in order to measure tumor burden before FavId treatment. Each patient received monthly injections of FavId and GM-CSF for six months. If a patient’s lymphoma remains under control after the induction period, the patient receives maintenance injections of FavId given every other month for a year and then every third month until TTP. Throughout the trial, patients receive CT scans every three months to determine whether their lymphoma is under control. During the trial, patients do not receive any cancer therapy other than that administered in the trial. However, once a patient’s disease progresses, the patient’s participation in the trial terminates.

Results from the 27 evaluable patients in the trial showed one patient with a complete remission and three patients with partial remissions, meaning at least a 50% reduction in tumor size, for an overall response rate of 15%. In addition, four patients demonstrated a 25% to 50% reduction in their total lymphoma burden, a minor response, and 15 patients demonstrated stable disease. The other four patients demonstrated disease progression. The median TTP for the 27 patients was 13.5 months using a Kaplan-Meier analysis. As of March 2006, one patient has remained progression free for 46 months and is continuing with FavId injections.

These results are encouraging compared to results from similar patients treated with other lymphoma biologic therapies. In a clinical trial conducted by Witzig and reported in the May 2002 issue of the Journal of Clinical Oncology, patients with follicular NHL treated with Rituxan alone had a median TTP of 10.2 months and a median duration of response of 12.1 months. In addition, patients with follicular NHL treated with Zevalin had a median TTP of 12.6 months with a median duration of response of 18.5 months. Similarly, in a trial conducted by McLaughlin and reported in the August 1998 issue of the Journal of Clinical Oncology, patients treated with Rituxan alone had a TTP of 9.0 months. Median duration of response in that trial was 11.2 months.

	Single Agent FavId	Witzig Rituxan	McLaughlin Rituxan	Witzig Zevalin
Patients	27	58	166	55
TTP (months)	13.5	10.2	9.0	12.6

This clinical trial demonstrated that FavId as a single agent is well tolerated and has activity in pretreated patients with relapsed indolent B-cell NHL. Patients with two or fewer prior therapies and with tumor burdens of less than 50 square centimeters at initiation of the trial appeared more likely to respond to administration of FavId than more heavily pretreated patients or patients with larger tumors.

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Phase 2 Clinical Trial – FavId Following Autologous Stem Cell Transplantation.Patient enrollment for a physician-sponsored Phase 2 clinical trial evaluating FavId in patients with indolent B-cell NHL following autologous stem cell transplantation began in November 2000. Autologous stem cell transplantation involves the removal of important blood cells from a patient before the patient receives large doses of chemotherapy. After chemotherapy, the blood cells are returned to the patient to speed recovery from the chemotherapy treatment. This trial is currently being conducted at two sites.

This trial is designed to evaluate the ability of FavId to induce humoral and cell-mediated immune responses, and to induce or maintain complete clinical or molecular remission, following autologous stem cell transplantation. In addition, the trial will evaluate the correlation of specific T-cell populations with immune responsiveness to FavId, as well as the safety of FavId following autologous stem cell transplantation. After we obtain tumor cells via biopsy from each patient to establish the genetic profile of the tumor for our use in manufacturing the patient’s FavId, patients undergo autologous stem cell transplantation using standard regimens. At three months following transplantation, patients receive the first of five monthly injections of FavId. Patients are assessed at fixed intervals for safety, development of immune responses to their tumor idiotype, and for evidence of molecular remissions.

Interim data from this trial were presented at the American Society of Clinical Oncology Annual Meeting in Orlando in May 2005. The data demonstrated that patients developed a rapid immune response to both KLH and their idiotype with T-cell responses to both KLH and idiotype, often measured following a single FavId injection. As of May 2005, 10 out of 13 patients remain in complete remission, ranging from 10 to 43 months since autologous stem cell transplantation.

Phase 2 Clinical Trial – FavId Combined with a Maintenance Rituxan Schedule.  Patient enrollment for a multi-center, physician-sponsored Phase 2 clinical trial evaluating FavId in combination with maintenance Rituxan for the treatment of indolent B-cell NHL began in May 2004. We assumed sponsorship of the IND in August 2004. The trial is open to treatment-naïve patients with indolent B-cell NHL and is designed to enroll a total of 56 patients over a two-year period.

This trial is intended to demonstrate an improvement over the results of prior trials using maintenance Rituxan for the treatment of indolent B-cell NHL. These prior trials demonstrated a median TTP of 34 months for patients with indolent B-cell NHL treated with maintenance Rituxan. Despite this long TTP, patients still experienced a high relapse rate and do not appear to be cured of their disease. We believe that by incorporating FavId into a schedule of maintenance Rituxan, patients may experience an increased TTP beyond what would be expected from maintenance Rituxan alone.

This trial is designed to evaluate the safety of this regimen, and to assess its efficacy, based on the endpoints of response rate and event-free survival. Event-free survival is defined as the time period from the start of Rituxan to the time of disease progression or death. We obtain tumor cells via biopsy from each patient to establish the genetic profile of the tumor for our use in manufacturing the patient’s FavId. In addition, a CT scan is conducted in order to measure tumor burden before the start of Rituxan treatment. Patients receive the same dose and schedule of maintenance Rituxan as was administered in the prior trials of maintenance Rituxan. FavId is incorporated into this treatment regimen starting on the third month and is administered monthly for the first 12 months, every other month for the second 12 months, and every three months thereafter. FavId is not administered during those months when patients receive Rituxan. With each FavId administration, GM-CSF is administered on four consecutive days beginning on the day of such FavId administration. Throughout the trial, patients receive CT scans every three months to determine whether their lymphoma is under control. During the trial, patients do not receive any cancer therapy other than that administered in the trial. However, once a patient’s disease progresses, the patient’s participation in the trial terminates.

Phase 2 Clinical Trial – FavId in Non-follicular B-cell NHL.  Patient enrollment for a physician-sponsored Phase 2 clinical trial evaluating FavId in patients with non-follicular B-cell NHL was initiated in Europe in June 2005. The trial is open to patients with various non-follicular lymphomas who are either treatment-naïve for their lymphoma, relapsed or refractory following prior chemotherapy for their lymphoma, or relapsed following a prior response to Rituxan. The trial is expected to enroll 15 patients, but enrollment may be expanded if activity is seen in any specific patient subset.

This trial is designed to evaluate the efficacy of FavId in patients with non-follicular indolent NHL, based on overall response rate, duration of response, time to progression and event-free survival. We will obtain tumor cells via biopsy from each patient to establish the genetic profile of the tumor for our use in manufacturing the patient’s FavId. In addition, a CT scan will be conducted in order to measure tumor burden before FavId treatment. FavId will be administered monthly for the first six months, every other month for the next 12 months, and every three months thereafter until disease progression. With each FavId administration, GM-CSF will be administered on four consecutive days beginning on the day of such FavId administration. Patients in the trial who need immediate therapy may receive Rituxan prior to administration of FavId and GM-CSF, while patients with more indolent disease that is not in need of immediate treatment may receive FavId and GM-CSF administered as a single agent. Throughout the trial, patients will receive CT scans every three months to determine whether their lymphoma is under control. During the trial, patients will not receive any cancer therapy other than that administered in the trial. However, once a patient’s disease progresses, the patient’s participation in the trial will terminate.

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Phase 2 Clinical Trial – FavId Following Prior Therapy.  We continue to enroll patients in our Phase 2 clinical trial of FavId in patients who have received prior therapy for their follicular B-cell NHL. This trial was designed primarily to provide FavId to those patients in our pivotal Phase 3 clinical trial who did not receive FavId. This would include patients who progressed after receiving Rituxan, and those patients who were randomized to placebo and later progressed. This trial is being conducted at sites participating in our Phase 3 clinical trial.

Prior to receiving FavId, these patients will be evaluated by their treating physician. If the physician feels that the patient is a candidate for receiving FavId alone, then we will provide the FavId previously manufactured for them in the registration trial for use as a single agent. In those patients who may require a more immediate reduction in the amount of their lymphoma, the treating physician will have the option of administering salvage treatment such as chemotherapy prior to the administration of FavId. We expect that many of these patients will be candidates for retreatment with Rituxan prior to starting FavId. In these patients we will be able to compare the TTP which occurs following their receipt of Rituxan on the registration trial with their TTP following the receipt of both Rituxan and FavId on this Phase 2 trial. We believe that this comparison will provide further insight into any contribution by FavId to extending TTP following treatment with Rituxan.

Phase 2/3 Clinical Trial – Following Chemotherapy/Rituxan in Patients with Aggressive B-cell NHL.  In the first half of 2006, we expect to begin enrolling patients in a randomized double-blind controlled Phase 2/3 clinical trial of FavId in patients with aggressive B-cell NHL who have received prior treatment with a chemotherapy/Rituxan combination. This trial will evaluate the ability of FavId to increase the cure rate of this disease. The trial will require the enrollment of approximately 480 patients over the course of three years.

Safety. In December 2005, our independent Data Monitoring Board met and reviewed safety data from our pivotal Phase 3 clinical trial of FavId and recommended that we continue the trial as planned.

FAV-201 for T-cell Lymphoma

Our product candidate FAV-201 is a patient-specific T-cell receptor-based immunotherapy. We intend to file an IND and initiate a Phase 1/2 clinical trial evaluating the safety and immune response of FAV-201 in patients with T-cell lymphoma during the first half of 2006. This trial builds upon preclinical data that suggest activity of an immunotherapy based on a T-cell receptor. Patients will be observed for evidence of specific cell-mediated and humoral immune responses to FAV-201, and any clinical responses will also be documented.

Autoimmune Disease Candidate

Autoimmune disease occurs when the body’s immune system mistakenly attacks and destroys body tissue that it believes to be foreign. In certain instances, autoimmune disease can result from an outgrowth of a limited number of disease-causing lymphocytes that recognize self antigens. Preclinical studies have shown that immunotherapies may prevent or treat autoimmune diseases. In the second half of 2005, we initiated preclinical studies to evaluate whether immunotherapies manufactured in a fashion similar to FAV-201 will be effective in preventing or treating autoimmune disease, with an initial focus on multiple sclerosis.

Strategy

Our goal is to become a leading biopharmaceutical company focused on the development and commercialization of targeted immunotherapies for the treatment of cancer and other diseases of the immune system. Key elements of our strategy for achieving this goal are to:

• Complete Clinical Development and Obtain Regulatory Approval for FavId. We have completed enrollment in a pivotal Phase 3 clinical trial evaluating FavId for the treatment of follicular B-cell NHL. The trial is under an SPA from the FDA. We also received Fast Track designation for FavId from the FDA, which may result in an expedited review by the FDA. We expect an analysis of the secondary endpoint, response improvement, in the fourth quarter of 2006 and an analysis of the primary endpoint, TTP, in the second half of 2007.

• Utilize Our Proprietary Technology to Develop Additional Product Candidates. We believe that active immunotherapy may have applications in a number of additional diseases beyond B-cell NHL, such as T-cell lymphoma and autoimmune diseases, including multiple sclerosis. For example, we are currently studying a second product candidate, FAV-201, for the treatment of T-cell lymphoma and intend to initiate a Phase 1/2 clinical trial in the first half of 2006. In addition, we initiated a preclinical development program to identify active immunotherapies for the treatment of multiple sclerosis in the second half of 2005.

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• Retain Commercialization Rights to Our Oncology Products. We intend to focus our internal development efforts on FavId and other oncology product candidates. We hold exclusive worldwide commercialization rights to FavId without any obligation to pay royalties to any third party on sales. We plan to retain United States commercialization rights to these product candidates at least through completion of BLA filing. At that point, we will assess whether to market and sell FavId and future products in the United States directly through an internal sales force or together with a co-promotion partner. We intend to seek a commercialization and development partner outside of the United States. We intend to seek one or more collaborators to develop and commercialize our product candidates and programs for chronic autoimmune diseases, such as multiple sclerosis, in exchange for license fees, milestone payments and royalties.

• Expand our Product Portfolio Through In-Licensing and Acquisitions. We intend to capitalize upon our expertise in immunology, oncology, immunotherapy, clinical development and regulatory affairs to in-license or acquire complementary product candidates in various stages of development.

Manufacturing and Supply

Our Proprietary Manufacturing Process

Our process begins upon receipt of a patient’s lymphoma biopsy, which the treating physician sends to our manufacturing facility. The process can be divided into the three phases described below.

Gene Identification and Cloning

First, we perform a genetic profile of a sample of the patient’s tumor to identify and isolate the unique antibody genes that correspond to the patient’s tumor idiotype. We then insert these antibody genes into our proprietary insect cell-specific expression vectors. Our insect-cell expression vectors are DNA fragments that have all the genetic instructions needed for directing the production of full-length, recombinant, monoclonal antibodies.

Cell Culture

The next step in the process involves the use of an insect cell-specific expression vector to produce the recombinant idiotype that forms the basis for FavId. We insert the expression vector into a continually growing insect cell line, which converts this genetic information into an insect cell virus, referred to as a baculovirus. We then add the baculovirus culture to a second insect cell line that

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subsequently secretes high levels of idiotype protein. Within a few days, milligram quantities of this idiotype protein are harvested. The cell culture medium used to grow the insect cells is completely devoid of any animal products, which we believe enhances the safety of the final product.

Protein Purification and Formulation

Finally, we perform a multi-step process to purify the idiotype protein. Each step in this purification process results in idiotype protein that is progressively more purified. In order to enhance the immune response, purified idiotype protein is chemically linked to KLH. When the idiotype and KLH complex is injected subcutaneously, the patient’s immune system reacts to both the foreign KLH and the patient’s unique idiotype protein. We believe that, once activated, the patient’s immune system will be able to recognize the idiotype protein on the cancer cell and more effectively fight the tumor.

Manufacturing Facility

We currently manufacture FavId for our clinical trials in our state-of-the-art, multi-product cGMP manufacturing facility which consists of approximately 26,000 square feet of leased space in an 80,000 square-foot facility at our corporate headquarters. In September 2004, we received a manufacturing license from the California Department of Health Sciences. In November 2005, we signed an amended lease agreement to expand capacity within our existing manufacturing facility to support commercial-scale manufacturing of FavId^®. This 80,000-square foot facility will be devoted to manufacturing and research and development, and is intended to give us the capacity to produce FavId to meet commercial needs while continuing to support additional clinical trials. We anticipate that the expanded capacity of our manufacturing facility will be sufficient to supply FavId for up to 4,000 patients per year. In addition, we have committed to lease an adjacent 48,000-square foot facility to house our corporate headquarters and warehousing operations. We plan to begin construction for the expansion of capacity within our manufacturing facility in June 2006.

Key Suppliers

We currently depend on single source suppliers for critical raw materials used in the manufacture of FavId. We purchase KLH from biosyn Arzneimittel GmbH, or biosyn, which is currently the only supplier of KLH that has submitted the required filing, known as a drug master file, with the FDA. In November 2004, we entered into an eight-year supply agreement with biosyn under which biosyn has agreed to supply us with KLH. We have purchased the required initial minimum supply of KLH and we have committed to minimum annual KLH purchase requirements during commercialization of FavId. An additional aggregate of up to $300,000 will be due upon the achievement of certain milestones, the timing of which is not known at this time. Either party may terminate the supply agreement upon a breach by the other party that is not cured within 60 days or other events relating to insolvency or bankruptcy. There may be no other supplier of KLH of suitable quality for our purposes. In addition, we depend on a single source supplier for the cell growth media we use to produce FavId. We purchase this material from Expression Systems LLC. We currently rely on purchase orders to obtain this material and do not have a supply agreement with Expression Systems. We intend to qualify a second source for the cell growth media or manufacture the cell growth media in house from commercially available raw materials but may not be able to do so. The GM-CSF that we administer with FavId is commercially available only from Berlex Laboratories, Inc. We currently rely on purchase orders to purchase GM-CSF and do not have a supply agreement with Berlex. GM-CSF is an FDA-approved and commercially available drug that may be purchased by physicians. Our current strategy for initial commercialization of FavId involves the administration of FavId following treatment with Rituxan. Rituxan is a passive immunotherapy for patients with NHL, which is also FDA-approved and is commercially available solely from Genentech and Biogen Idec. We currently rely on physicians to order and administer Rituxan to patients prior to the administration of FavId in our registration trial.

Sales and Marketing

We intend to market and sell FavId and future products in the United States either directly through an internal sales force or together with a co-promotion partner. Because the community and institutional referral networks of cancer treatment physicians in the United States are relatively small and well-established, we believe that a small, focused sales and marketing organization will enable us to effectively penetrate our target markets. Outside of the United States, we plan to establish strategic collaborations for the development and marketing of FavId.

We may enter into collaboration agreements with third parties with respect to other product candidates we develop, which may include co-marketing or co-promotion arrangements. Alternatively, we may grant exclusive marketing rights to one or more strategic collaborators in exchange for upfront fees, future milestone payments and royalties on sales.

We are currently in the process of acquiring the resources and experience necessary to market FavId or our other product candidates ourselves. We currently have no arrangements for distribution of our product candidates. Our future commercial success will depend on our ability to establish our own sales and marketing infrastructure or to collaborate with third parties that have greater sales and marketing experience and resources than our own.

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Competition

The development and commercialization of new pharmaceutical products for the treatment of cancer and autoimmune diseases is quite competitive, and we expect to face competition from numerous sources, including major pharmaceutical biotechnology companies, as well as specialty pharmaceutical companies and biotechnology companies worldwide. Many of our competitors have substantially greater financial and technical resources and development, production and marketing capabilities than we do. In addition, many of these companies have more experience than we do in preclinical testing, human clinical trials and manufacturing of biologic therapeutics, as well as in obtaining FDA and foreign regulatory approvals. We will also compete with academic institutions, governmental agencies and private organizations that are conducting research in the fields of cancer and autoimmune disease. Competition among these entities to recruit and retain highly qualified scientific, technical and professional personnel and consultants is also intense.

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

Several companies are engaged in the development and commercialization of passive immunotherapy products for the treatment of B-cell NHL that may compete with FavId. Genentech and Biogen Idec are co-marketing Rituxan for the treatment of relapsed or refractory, indolent B-cell NHL. Biogen Idec is marketing Zevalin, its passive radioimmunotherapy product. GlaxoSmithKline plc is marketing Bexxar, its passive radioimmunotherapy product.

The most recent advances in the treatment of B-cell NHL have involved the combination of existing products and changes to approved schedules and doses, particularly for Rituxan. Numerous clinical trials reported in recent years have indicated that additional doses of Rituxan and maintenance dosing of Rituxan can improve the time to progression in patients who respond to therapy. Combination therapies involving chemotherapeutic or immuno-stimulatory drugs in combination with Rituxan at various doses and schedules may provide patients with an increase in time to progression over that expected with Rituxan alone. Accordingly, we may face competition as a result of developments in this area.

Patents and Proprietary Rights

Our success will depend in large part on our ability to obtain and maintain patent protection for our products and technologies, preserve trade secrets and operate without infringing the intellectual property rights of others. We intend to prosecute and defend our intellectual property rights aggressively. Our policy is to seek patent protection for the inventions that we consider important to the development of our business. Currently we own U.S. Patent No. 6,911,204 together with four pending United States patent applications covering methods of treating immune system diseases, including B-cell and T-cell lymphomas, using our proprietary immunotherapy production methods, as well as methods for combining the idiotype immunotherapies with other therapies that are used to treat diseases of the immune system. We also have three issued patents and 19 patent applications pending outside of the United States, and have received notice that one of these applications will issue as a patent. Our intellectual property related to T-cell receptor-based immunotherapies includes an exclusive royalty-free license from the Sidney Kimmel Cancer Center to intellectual property developed by Dr. Daniel Gold while he was employed there prior to joining us. We have responsibility for the filing, prosecution and maintenance of patent rights associated with this license, but the intellectual property is jointly owned with the Sidney Kimmel Cancer Center which holds a license to use the technology for non-commercial research and educational purposes.

Although we believe these patent applications, if they issue as patents, will provide a competitive advantage, the patent positions of pharmaceutical and biotechnology companies are highly uncertain and involve complex legal and factual questions. We may not be able to develop patentable products or processes, and may not be able to obtain patents from pending applications. Even if patent claims are allowed, the claims may not issue, or in the event of issuance, may not be sufficient to protect our technology. In addition, any patents or patent rights we obtain may be circumvented, challenged or invalidated by our competitors.

While our product candidates are in clinical trials, and prior to commercialization, we believe our current activities in the United States fall within the scope of the exemptions against patent infringement provided by 35 U.S.C. Section 271(e) which covers activities related to developing information for submission to the FDA. As our product candidates progress toward commercialization, the possibility of an infringement claim against us increases. While we attempt to ensure that our product candidates and the methods we employ to manufacture them do not infringe other parties’ patents and proprietary rights, competitors or other parties may assert that we infringe on their patents or proprietary rights. Competitors or third parties may be issued patents that may cover subject matter that we use in developing, producing, or administering our products. In particular, we are aware of the following third party patents:

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• Genentech and City of Hope National Medical Center hold patent rights relating to the expression of recombinant antibodies;

• Genitope holds patent rights relating to immunotherapy using idiotype proteins produced using T lymphoid cells for the treatment of B-cell lymphoma; and

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

Additionally, because patent prosecution can proceed in secret prior to issuance of a patent, third parties may obtain other patents with claims of unknown scope prior to the issuance of patents relating to our product candidates which they could attempt to assert against us. Further, as we develop our products, we may infringe the current patents of third parties or patents that may issue in the future.

We believe that we have valid defenses to any assertion that our product candidates, or the methods that we employ to manufacture them, infringe the claims of the patent held jointly by Genentech and City of Hope National Medical Center relating to the expression of recombinant antibodies. We also believe that the patent may be invalid and/or unenforceable. The relevant patent was issued to Genentech in 2001 in connection with the settlement of a district court action and an interference proceeding in the United States Patent and Trademark Office between Genentech and Celltech R&D Ltd. We believe other biotechnology companies are aware of and are considering the possible impact of this patent and that other companies have negotiated license agreements for this patent. 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 be reexamined as to their patentability. We have not attempted to obtain a license to this patent because we believe that properly construed claims do not cover activities related to the manufacture of FavId and FAV-201. If we decide to attempt to obtain a license for this patent, we cannot guarantee that we would be able to obtain such a license on commercially reasonable terms, or at all.

We also believe that we have valid defenses to any assertion that our product candidates infringe the claims of the patent held by Genitope relating to immunotherapy using idiotype proteins produced using T-lymphoid cells for treatment of B-cell lymphoma, and the claims of the patent held by Schering Corp. relating to use of GM-CSF as a vaccine adjuvant for use against infectious diseases. The relevant Genitope patent issued in 1999. We believe that FavId and FAV-201 and the methods we use to manufacture them do not infringe the claims of the patent. The relevant Schering patent issued in 1997. We believe that FavId and FAV-201 and the methods we use to manufacture them do not infringe the claims of the patent and that the claims of the patent are invalid.

Although we believe that our product candidates, production methods and other activities do not currently infringe the intellectual property rights of these and other third parties, we cannot be certain that a third party will not challenge our position in the future. If a third party alleges that we are infringing its intellectual property rights, we may need to obtain a license from that third party, but there can be no assurance that any such license will be available on acceptable terms or at all. Any infringement claim that results in litigation could result in substantial cost to us and the diversion of management’s attention away from our core business and could also prevent us from marketing our products. To enforce patents issued to us or to determine the scope and validity of other parties’ proprietary rights, we may also become involved in litigation or in interference proceedings declared by the United States Patent and Trademark Office, which could result in substantial costs to us or an adverse decision as to the priority of our inventions. We may be involved in interference and/or opposition proceedings in the future. We believe there will continue to be significant litigation in the industry regarding patent and other intellectual property rights.

We are party to license agreements which provide us rights to use technologies in our research, development and commercialization of our product candidates. We obtained a non-exclusive license from Boyce Thompson Institute for Plant Research to use certain information and materials in the field of prevention and treatment of immune system diseases and disorders related to NHL. This party has sole responsibility for the prosecution, maintenance and enforcement of the licensed intellectual property.

We also rely on trade secrets to protect our technology, particularly when we do not believe that patent protection is appropriate or available. However, trade secrets are difficult to protect. We attempt to protect our trade secrets by requiring each of our employees, consultants and advisors to execute a non-disclosure and assignment of invention agreement before beginning his or her employment, consulting or advisory relationship with us. We cannot guarantee that these agreements will provide meaningful protection, that these agreements will not be breached, that we will have an adequate remedy for any such breach, or that our trade secrets will not otherwise become known or independently developed by a third party.

Government Regulation

The testing, development, manufacturing, labeling, storage, record keeping, advertising, promotion, export and marketing, among other things, of our product candidates are subject to extensive regulation by governmental authorities in the United States and other countries. In the United States, pharmaceutical and biologic products are regulated by the FDA under the Federal Food, Drug, and Cosmetic Act, its implementing regulations and other laws, including, in the case of biologics, the Public Health Service Act. Our

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product candidates are regulated by the FDA as biologics. Biologics require the submission of a Biologics License Application, or BLA, and approval by the FDA prior to being marketed in the United States. None of our product candidates have been approved by the FDA for marketing in the United States, and we currently have no BLAs pending. Manufacturers of biologics may also be subject to state regulation. Failure to comply with FDA requirements, both before and after product approval, may subject us to administrative or judicial sanctions, including, but not limited to, FDA refusal to approve pending applications, warning letters, product recalls, product seizures, total or partial suspension of production or distribution, fines, injunction and criminal prosecution.

The steps required before a biologic may be approved for marketing in the United States generally include:

• completion of preclinical laboratory tests and animal tests;

• the submission to the FDA of an investigational new drug, or IND, application for human clinical testing, which must become effective before human clinical trials may commence;

• performance of adequate and well-controlled human clinical trials to establish the safety and efficacy of the product candidate for each proposed indication;

• the submission to the FDA of a BLA;

• FDA review of the BLA; and

• satisfactory completion of an FDA pre-approval inspection of the manufacturing facility or facilities at which the product candidate is made to assess compliance with the FDA’s current Good Manufacturing Practices, or cGMP, regulations.

The testing and approval process typically takes several years and requires the commitment of substantial effort and financial resources. Despite the time and expense committed, there can be no assurance that any approval will be granted on a timely basis, or at all.

Preclinical tests include laboratory evaluation and animal studies to assess the pharmacology and toxicology of the product candidate. The results of the preclinical tests, together with manufacturing information and analytical data, are submitted to the FDA as part of an IND, which must become effective before human clinical trials may be commenced. The IND will automatically become effective 30 days after receipt by the FDA, unless the FDA before that time raises concerns or questions about the conduct of the trials as outlined in the IND, including concerns that human research subjects will be exposed to unreasonable risks. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before clinical trials can proceed. There can be no assurance that submission of an IND will result in FDA authorization to commence clinical trials. A separate submission to an existing IND must also be made for each successive clinical trial conducted during product development. Further, each clinical trial must be reviewed and approved by an independent Institutional Review Board, or IRB.

Clinical trials typically are conducted in three sequential phases, but the phases may overlap. In Phase 1, the initial introduction of the drug into human subjects, the drug is usually tested for safety (adverse effects), dosage tolerance, absorption, metabolism, distribution, excretion and pharmaocodynamics. Phase 2 usually involves studies in a limited patient population to (i) evaluate preliminarily the efficacy of the drug for specific, targeted indications, (ii) determine dosage tolerance and optimal dosage and (iii) identify possible adverse effects and safety risks. Phase 3 clinical trials generally further evaluate clinical efficacy and test further for safety within an expanded patient population. There can be no assurance that Phase 1, Phase 2 or Phase 3 testing will be completed successfully within any specific time period, if at all, with respect to any of our product candidates. Furthermore, we, the FDA or the relevant IRB may suspend clinical trials at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk.

The results of the preclinical studies and clinical trials, together with other detailed information, including information on the manufacture and composition of the product, are submitted to the FDA in the form of a BLA requesting approval to market the product. Before approving a BLA, the FDA will inspect the facilities at which the product is manufactured and will not approve the product unless the facility cGMP compliance is satisfactory. The FDA may deny a BLA if applicable regulatory criteria are not satisfied, require additional testing or information or require postmarketing testing and surveillance to monitor the safety or efficacy of a product. Approval entails limitations on the indicated uses for which a product may be marketed. Also, if we seek to make certain changes to an approved product, such as promoting or labeling a product for a new indication, making certain manufacturing changes, or changing manufacturers or suppliers of certain ingredients or components, we will need FDA review and approval before the change can be implemented.

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We are utilizing the procedure called “Special Protocol Assessment” for FavId. Under this procedure, a sponsor may seek the FDA’s agreement on the design and size of a clinical trial intended to form the primary basis of an effectiveness claim. If the FDA agrees in writing, its agreement may not be changed after the trial begins, except in limited circumstances. If the outcome of the trial is successful, the sponsor will ordinarily be able to rely on it as the primary basis for approval with respect to effectiveness. Although we received our SPA, there can be no assurance that any of our trials will have a successful outcome.

In December 2005, we received the FDA designation of FavId as a “fast track product” for treatment of patients with follicular B-cell NHL. We also intend to apply for “fast track” designation for FAV-201 for T-cell lymphoma. Fast track products are those which are intended for the treatment of a serious or life-threatening condition and which demonstrate the potential to address unmet medical needs for such conditions. Fast track products are eligible for two means of potentially expediting product development and FDA review of BLAs. First, a fast track product may be approved on the basis of either a clinical endpoint or a surrogate endpoint that is reasonably likely to predict clinical benefit. It is sometimes possible to demonstrate efficacy with respect to such endpoints in a shorter period of time than would be the case for other endpoints. Approvals of this kind may be subject to requirements for appropriate post-approval studies to validate the surrogate endpoint or otherwise confirm the effect of the clinical endpoint, and to certain other conditions. Second, if the FDA determines after review of preliminary clinical data submitted by the sponsor that a fast track product may be effective, it may begin review of portions of a BLA before the sponsor submits the complete BLA, thereby accelerating the date on which review of a portion of the BLA can begin. There can be no assurance that any of our product candidates in development will receive designation as fast track products, and even if they are designated as fast track products, there can be no assurance that our product candidates will be reviewed or approved more expeditiously than would otherwise have been the case.

We intend to request priority review of our BLA for FavId. A priority designation sets the target date for the FDA to complete review of a BLA within six months of the date of submission. Priority review of biologics is available for product candidates which, if approved, would be a significant improvement in the safety or effectiveness of the treatment of a serious or life-threatening disease. Even if priority review is granted, there can be no assurance that FDA review will be completed within six months or any other specific period of time, nor that the product candidate will be approved.

BLA holders must continue to comply with a number of FDA requirements both before and after approval. For example, BLA holders are required to report certain adverse reactions to the FDA and to comply with certain requirements concerning advertising and promotional labeling for their products. Also, quality control and manufacturing procedures must continue to conform to cGMP regulations after approval, and the FDA periodically conducts inspections of manufacturing facilities to assess compliance with cGMP. Accordingly, manufacturers must continue to expend time, monies and effort in the area of production and quality control to maintain cGMP compliance. In addition, discovery of problems, such as safety problems, may result in changes in labeling or restrictions on a product, manufacturer or BLA holder, including removal of the product from the market.

We have applied for orphan drug designation for the use of FavId for the treatment of certain forms of follicular B-cell NHL and plan to seek orphan drug designation for the use of FAV-201 for T-cell lymphoma. Under the Orphan Drug Act, the FDA may grant orphan drug designation to drugs intended to treat a “rare disease or condition,” which generally is a disease or condition that affects fewer than 200,000 individuals in the United States. Orphan drug designation must be requested before submitting a BLA. After the FDA grants orphan drug designation, the generic identity of the therapeutic agent and its potential orphan use are publicly disclosed by the FDA. Orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory review and approval process. If a product which has an orphan drug designation subsequently receives the first FDA approval for the indication for which it has such designation, the product is entitled to orphan exclusivity, i.e., the FDA may not approve any other applications to market the same drug for the same indication for a period of seven years, except in limited circumstances. Our products may not be eligible for orphan drug status or be designated as orphan drugs. Even if designated as orphan drugs, our products may not be approved before other applications or granted orphan drug exclusivity if approved.

Third-Party Reimbursement

We expect that sales volumes and prices of our products will be dependent in part on the availability of coverage and reimbursement from third-party payors. In the United States, such payors include governmental programs, including Medicare and Medicaid, private insurance plans and managed care programs. The Medicare program, a federally-funded and administered health insurance program, is the nation’s single largest payor, and provides for coverage for certain medical products and services for certain aged and disabled individuals and individuals with end-stage renal disease. Significantly, other third-party payors often model their coverage and reimbursement policies after Medicare. Medicare and other third-party payors may deny coverage and reimbursement if they determine that a medical product or procedure is not medically necessary or used for an unapproved indication, among other things. There can be no assurance that a new product will be considered medically necessary or otherwise eligible for coverage and reimbursement. Our ability to earn sufficient returns on our products may depend in part on the extent to which adequate third-party reimbursement is available for the costs of such products and related treatments. Significant uncertainty exists as to the coverage and reimbursement status of newly approved health care products, and there can be no assurance that adequate third-party coverage and reimbursement will be available.

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Fraud and Abuse Laws

If we are able to commercialize FavId or any other product candidates that we may develop, we will be subject to various federal and state laws pertaining to healthcare fraud and abuse, including anti-kickback laws and physician self-referral laws. Violations of these laws are punishable by criminal and civil sanctions, including, in some instances, imprisonment and exclusion from participation in federal and state healthcare programs, including Medicare, Medicaid and Veterans Administration health programs. Healthcare fraud and abuse regulations are complex, and even minor, inadvertent irregularities can potentially give rise to claims that a statute or prohibition has been violated. If there is a change in law, regulation or administrative or judicial interpretations, we may have to change our business practices or our existing business practices could be challenged as unlawful, which could have a material adverse effect on our business, financial condition and results of operations. In addition, some allegations under these laws have been claimed to violate the False Claims Act, discussed in more detail below.

In addition, if we are able to commercialize FavId or any other product candidates that we may develop, we could become subject to false claims litigation 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 claims statutes include the False Claims Act, which any person to bring suit on behalf of the federal government alleging the submission of false or fraudulent claims, or causing to present such false or fraudulent claims, under federal programs or contracts claims or other violations of the statute and to share in any amounts paid by the entity to the government in fines or settlement. These suits against biotechnology companies have increased significantly in recent years and have increased the risk that a healthcare company will have to defend a false claim action, pay fines or be excluded from the Medicare, Medicaid or other federal and state healthcare programs as a result of an investigation arising out of such action.

Employees

As of December 31, 2005, we had 136 full-time equivalent employees. Of these, 115 employees were in research and development comprised of 77 in manufacturing, quality control and quality assurance, 33 in research and process development, and five members of senior management. Of the remaining employees, three were members of senior management and 18 were in administration. As of the same date, 18 of our employees had a Ph.D., M.D. or Pharm.D. degree. None of our employees is subject to a collective bargaining agreement. We consider our relationship with our employees to be good.

Reports

We make available free of charge through our website, www.favrille.com, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or to be furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.  Any information that is included on or linked to our Internet site is not a part of this report or any registration statement that incorporates this report by referenence.

Executive Officers and Directors of the Registrant

The following table sets forth information regarding our executive officers and directors as of December 31, 2005:

Name	Age	Positions
John P. Longenecker, Ph.D.	58	President, Chief Executive Officer and Director
Tamara A. Seymour	47	Chief Financial Officer and Vice President, Finance and Administration
Daniel P. Gold, Ph.D.	51	Chief Scientific Officer
David L.Guy	43	Chief Commercial Officer
Richard Murawski	57	Senior Vice President, Operations
John F. Bender, Pharm.D.	57	Vice President, Clinical Research
John C. Gutheil, M.D.	49	Vice President, Medical Affairs
Alice M. Wei	42	Vice President, Regulatory Affairs and Quality
Cam L. Garner	57	Chairman of the Board of Directors
Michael L. Eagle	58	Director
Antonio J. Grillo-Lopez, M.D.	66	Director
Peter Barton Hutt	71	Director
Douglas E. Kelly, M.D.	45	Director
Fred Middleton	56	Director
Arda Minocherhomjee, Ph.D.	52	Director
Wayne I. Roe	55	Director
Ivor Royston, M.D.	60	Director

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John P. Longenecker, Ph.D. has served as a member of our board of directors and as our President and Chief Executive Officer since February 2002. From March 1999 to February 2002, he served as President of SkyePharma, Inc. and was a member of the Executive Committee of SkyePharma PLC. In 1992, Dr. Longenecker joined DepoTech Corporation as its Senior Vice President of Research, Development and Operations and then served as its President and Chief Operating Officer from February 1998 to March 1999. From 1982 to 1992, he was at Scios, Inc. (now a Johnson & Johnson subsidiary), and served as its Vice President and Director of Development from 1986 to 1992. Dr. Longenecker received a bachelor’s degree in Chemistry from Purdue University and a Ph.D. in Biochemistry from The Australian National University in Canberra, Australia.

Tamara A. Seymour has served as our Chief Financial Officer since May 2001 and also as our Vice President of Finance and Administration since February 2004. From 1991 to May 2001, she served as consulting chief financial officer for a number of biotechnology companies. Her client list included CancerVax Corporation, LXN Corporation, VitaGen Incorporated and Chromagen. From 1988 through 1991, Ms. Seymour was Director of Finance with Agouron Pharmaceuticals, Inc. between 1980 and 1988, she worked as an accountant with Deloitte & Touche LLP and Coopers & Lybrand, Inc. (now PricewaterhouseCoopers LLP). Ms. Seymour is a Certified Public Accountant and received a bachelor’s degree in Business Administration with an emphasis in Accounting from Valdosta State University and an M.B.A. with an emphasis in Finance from Georgia State University.

Daniel P. Gold, Ph.D. co-founded Favrille in January 2000, served as our Executive Vice President of Research and Development from January 2000 to July 2003 and has served as our Chief Scientific Officer since July 2003. He was an Associate Professor at the Sidney Kimmel Cancer Center in San Diego from 1992 through 2003.  Dr. Gold received a bachelor’s degree in Biology from the University of California, Los Angeles, and a Ph.D. in Immunology from Tufts Medical School.

David L. Guy  joined Favrille as our Chief Commercial Officer in early December 2005.  Prior to joining Favrille, Mr. Guy served as Vice President, Global Strategic Marketing and Business Development, Oncology at Schering AG/Berlex from 2002 to 2005. Previously, he served as Director, Oncology Marketing at Genentech from 2000 to 2001.  Prior to Genentech, Mr. Guy spent six years at Sanofi-Aventis as U.S. Business Unit Head, Oncology (Sanofi) from 1994 to 2000 . Mr. Guy earned his Bachelor of Science degree in Biology with a specialization in Molecular Genetics from McMaster University in Hamilton, Ontario.

Richard Murawski has served as our Senior Vice President of Operations since June 2002. From June 1998 to May 2002, he was the Vice President of Global Biotech Operations of Baxter BioScience Corporation. In 1997 and 1998, he served as a consultant. Mr. Murawski was the Vice President of Operations of Cytogen from 1994 to 1997 and Director of Operations at Welgen (Wellcome) from 1990 to 1993. From 1971 to 1990, he served as Plant Manager for Schering-Plough. Mr. Murawski received a bachelor’s degree in Chemical Engineering from the Newark College of Engineering.

John F. Bender, Pharm.D. has served as our Vice President of Clinical Research since joining us in May 2001. From 1981 to 2001, he was at Pfizer Global Research and Development (formerly Parke-Davis), a division of Pfizer, Inc., and served as its Director of Clinical Research-Oncology from 1997 to 2001. At Pfizer, Dr. Bender was involved with the development of over 20 oncology and infectious disease compounds. He received a bachelor’s degree in Biology from Mount Saint Mary’s College, a bachelor’s degree in Pharmacy from the University of Maryland and a Pharm.D. from the University of Utah.

John C. Gutheil, M.D. has served as our Vice President of Medical Affairs since September 2002. From 1999 to September 2002, he served as Executive Director of Clinical Research and Development at Vical Incorporated. From 1997 to 1999, Dr. Gutheil served as Director of Clinical Research at the Sidney Kimmel Cancer Center in San Diego where he was the principal investigator on more than 50 clinical research studies. He received a bachelor’s degree in Biology from the University of California, San Diego, and an M.D. from the Medical College of Wisconsin and holds board certifications in both internal medicine and medical oncology.

Alice M. Wei has served as our Vice President of Regulatory Affairs and Quality since October 2002. From 1993 to September 2002, she was at IDEC Pharmaceuticals Corporation (now Biogen Idec), most recently as Department Head/Senior Director of Regulatory Affairs. Ms. Wei was Director of Regulatory Affairs, Quality Assurance and Quality Control at Anesta Corp. (now Cephalon, Inc.) from 1990 through 1993 and served in various regulatory positions at Immunetech Pharmaceuticals (now Elan Pharmaceuticals) and ICN Pharmaceuticals, Inc. (now Valeant Pharmaceuticals) from 1984 to 1990. She received a bachelor’s degree in Microbiology/Chemistry from the University of Texas at Arlington.

Cam L. Garner has served as a member of our board of directors since December 2000 and as Chairman of our board of directors since May 2001, and served as our acting Chief Executive Officer from August 2001 to February 2002. Mr. Garner recently co-founded specialty pharmaceutical companies, Verus Pharmaceuticals, Inc. and Cadence Pharmaceuticals, Inc.  He serves as Chairman and Chief Executive Officer of Verus Pharmaceuticals, Inc. and Chairman of Cadence Pharmaceuticals, Inc.  He was Chief Executive Officer of Dura Pharmaceuticals, Inc. from 1989 to 1995 and its Chairman and Chief Executive Officer from 1995 to 2000. In 1998, Mr. Garner co-founded DJ Pharma, Inc., and he served as its Chairman until 2000, when it was sold to Biovail Corporation. In 2001, he co-founded a specialty pharmaceutical company, Xcel Pharmaceuticals, Inc., which was acquired by Valeant Pharmaceuticals in 2005.  Mr. Garner also serves on the boards of directors of Somaxon Pharmaceuticals, Inc., a specialty pharmaceutical company and

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Pharmion Corporation, a pharmaceutical company, as well as a number of privately-held companies. He received a bachelor’s degree in Biology from Virginia Wesleyan and an M.B.A. from Baldwin-Wallace College.

Michael L. Eagle has served as a member of our board of directors since September 2003. He was Vice President-Manufacturing for Eli Lilly and Company from 1993 to April 2001. Mr. Eagle is a founding member of Barnard Life Sciences and currently serves as a member of the board of a number of privately-held companies.  Mr. Eagle received a bachelor’s degree in Engineering from Kettering University and an M.B.A. from the Krannert School of Management at Purdue University.

Antonio J. Grillo-Lopez, M.D. has served as a member of our board of directors since January 2001. He was Chief Medical Officer and Senior Vice President of Medical and Regulatory Affairs at IDEC Pharmaceuticals Corporation (now Biogen Idec) from 1992 to January 2001. Prior to 1992, Dr. Grillo-Lopez served as Executive Medical Director for International Clinical Research Development at DuPont Merck Pharmaceutical Co. and as Vice President of Clinical Therapeutics and Director of Clinical Oncology Research at Parke-Davis (now Pfizer). From 1980 to 1990, he was at the University of Michigan, most recently as an Associate Professor of Medicine. Dr. Grillo-Lopez currently serves as a director of Onyx Pharmaceuticals, Inc., a biopharmaceutical company. He received a bachelor’s degree in Natural Sciences from the University of Puerto Rico, College of Natural Sciences, and an M.D. from the University of Puerto Rico School of Medicine.

Peter Barton Hutt has served as a member of our board of directors since November 2003. Mr. Hutt has been a partner or senior counsel specializing in food and drug law in the Washington, D.C. law firm of Covington & Burling since 1968, except when he served as Chief Counsel for the FDA from 1971 to 1975. He is the co-author of a casebook used to teach food and drug law throughout the country and teaches a full course on this subject each year at Harvard Law School. Mr. Hutt currently serves on the board of directors of CV Therapeutics, Inc., a biopharmaceutical company, ISTA Pharmaceuticals, Inc., a specialty pharmaceutical company, Momenta Pharmaceuticals, Inc., a biotechnology company, Xoma, a biotechnology company, Introgen Therapeutics, Inc., a biopharmaceutical company, and privately-held biopharmaceutical companies and on venture capital advisory boards, including Polaris Venture Partners and the Sprout Group. Mr. Hutt received a bachelor’s degree in Economics and Political Science from Yale University, an LL.B. from Harvard Law School and an L.L.M. in Food and Drug Law from New York University Law School.

Douglas E. Kelly, M.D. has served as a member of our board of directors since May 2000. He is a General Partner of Alloy Ventures, an affiliate of certain holders of our capital stock. Prior to joining Alloy Ventures in 1993, Dr. Kelly worked with the European venture capital firms 3i Ventures and TVM Techno Venture Management. He was an early employee at Ligand Pharmaceuticals, Inc. from 1990 to 1991, and also worked as an independent consultant. Dr. Kelly is also a director of Pharsight, Inc., a clinical trials simulation company, and a number of privately-held companies. He received a bachelor’s degree in Biochemistry and Molecular Biology from the University of California, San Diego, an M.D. from the Albert Einstein College of Medicine and an M.B.A. from the Stanford University Graduate School of Business.

Fred Middleton has served as a member of our board of directors since May 2002. Since 1987, he has been a General Partner/Managing Director of Sanderling Ventures, a firm specializing in biomedical venture capital, and an affiliate of certain holders of our capital stock. From 1984 through 1986, he was Managing General Partner of Morgan Stanley Ventures, an affiliate of Morgan Stanley & Co. Prior to that, from 1978 to 1984, Mr. Middleton served as Vice President of Finance and Corporate Development, Chief Financial Officer, and President of Genentech Development Corporation for Genentech, Inc. He currently serves as Chairman of the Board of Stereotaxis, Inc., a biotechnology company, and also as a director of several privately-held companies. Mr. Middleton received a bachelor’s degree in Chemistry from the Massachusetts Institute of Technology and an M.B.A. with distinction from Harvard Business School.

Arda Minocherhomjee, Ph.D. has served as a member of our board of directors since March 2004. He is currently a partner of Chicago Growth Partners. Since 1992, Dr. Minocherhomjee has served in various capacities for William Blair & Company, L.L.C, an affiliate of certain holders of our capital stock, including, most recently, as a Principal. Since September 1998, Dr. Minocherhomjee has also served as a managing member of William Blair Capital Partners, an affiliate of William Blair & Company, L.L.C. He currently serves on the board of directors of CryoCor. Inc., a medical device company, as well as several privately-held pharmaceutical and medical device companies. Dr. Minocherhomjee received a master’s degree in Pharmacology from the University of Toronto and a Ph.D. and an M.B.A. from the University of British Columbia, and was a post-doctoral fellow in Pharmacology at the University of Washington Medical School.

Wayne I. Roe has served as a member of our board of directors since February 2001. He was the founding Chief Executive Officer and Chairman of Covance Health Economics and Outcomes Services, Inc. from 1988 to 1999 and previously served as Vice President for Economic and Health Policy for the Health Industry Manufacturers Association. He currently sits on the boards of directors of Aradigm Corporation, a biopharmaceutical company, ISTA Pharmaceuticals, Inc., a specialty pharmaceutical company, and a number of privately-held companies. Mr. Roe also serves on the executive committee of the Maryland Angels Fund. Mr. Roe received a bachelor’s degree in Economics from Union College and an M.A. in Economics from the University of Maryland.

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Ivor Royston, M.D. has served as a member of our board of directors since January 2000, and as our acting Chief Executive Officer from January 2000 to August 2001. He is a co-founder of Forward Ventures, a venture fund affiliated with certain holders of our capital stock. From 1990 to 2000, Dr. Royston served as the founding President and Chief Executive Officer of the non-profit Sidney Kimmel Cancer Center. He remains a member of the Board of Trustees of that organization. In 1986, Dr. Royston co-founded IDEC Pharmaceuticals Corporation (now Biogen Idec), and in 1978 he founded Hybritech, Inc. From 1978 to 1990, Dr. Royston served on the faculty of the medical school and cancer center at the University of California, San Diego. Dr. Royston also serves on the board of directors of CancerVax Corporation, a biotechnology company, Corautus Genetics, Inc., a biopharmaceutical company and Avalon Pharmaceuticals, Inc., a biopharmaceutical company. Dr. Royston received a bachelor’s degree in Human Biology and an M.D. from The Johns Hopkins University and completed post-doctoral training in internal medicine and medical oncology at Stanford University.

Item 1A.       Risk Factors

You should consider carefully the risk factors described below, together with the other information contained in this report. If any of the following risks actually occur, our business, financial condition, results of operations and future growth prospects would likely be materially and adversely affected. In these circumstances, the market price of our common stock could decline, and you may lose all or part of your investment in our common stock.

Risks Related to the Development of Our Product Candidates

We are dependent on the success of our lead product candidate, FavId, and we cannot be certain that it will be commercialized.

We have expended significant time, money and effort in the development of our lead product candidate, FavId, which is still in clinical development, has not yet received regulatory approval and may never be commercialized. In order to commercialize FavId, we will need to demonstrate to the FDA and other regulatory agencies that it satisfies rigorous standards of safety and effectiveness. We completed patient enrollment in a pivotal Phase 3 clinical trial 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 the treatment of indolent B-cell NHL or the other indications we are exploring, our ability to successfully commercialize FavId could be jeopardized by the emergence of a competitive product that exhibits greater efficacy, longer duration of response or other benefits. In addition, because our initial regulatory and marketing strategy contemplates the administration of FavId to patients following treatment with Rituxan, the commercial opportunity for FavId may be limited by the degree to which oncologists continue to use Rituxan to treat indolent B-cell NHL. Furthermore, to the extent FavId fails to gain market acceptance for its initial indication, it may be more difficult for us to generate sufficient credibility with physicians and patients to commercialize 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 currently preparing to file an IND for a product candidate, FAV-201, from one of these programs in patients with T-cell lymphoma. During the fourth quarter of 2005, we initiated preclinical studies to assess the applicability of our technology to autoimmune diseases, with an initial focus on multiple sclerosis. We cannot be certain that we will be able to successfully develop any product candidate from these development programs. We cannot be certain that the clinical development of FavId or any other product candidate in preclinical testing or clinical trials will be successful, that it will receive the regulatory approvals required to commercialize it, or that any of our other research programs will yield a product candidate suitable for entry into clinical trials. If we are unable to commercialize FavId or our other product candidates, we may be unable to generate sufficient revenues to attain or maintain profitability, our ability to raise additional capital will be impaired and our stock price may be negatively affected.

Failure to obtain product approvals by the FDA could harm our business.

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

• the FDA may not find that the biologic product candidate is sufficiently safe or effective;

• FDA officials may interpret data from preclinical testing and clinical trials differently than we do; and

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• the FDA may not find our manufacturing processes or facilities satisfactory.

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

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

• warning letters;

• fines and other civil penalties;

• unanticipated expenditures;

• delays in approving or refusal to approve a product candidate;

• product recall or seizure;

• interruption of production;

• operating restrictions;

• injunctions; and

• criminal prosecution.

Before we can seek regulatory approval of any of our product candidates, we must successfully complete clinical trials, which are uncertain.

Conducting clinical trials is a lengthy, time-consuming and expensive process, and the results of these trials are inherently uncertain. We have completed enrollment of patients in several Phase 2 clinical trials of FavId involving over 130 indolent B-cell NHL patients and are currently conducting follow-up evaluation of those patients. We completed enrollment of patients in a pivotal Phase 3 clinical trial of FavId for the treatment of follicular B-cell NHL in January 2006 and anticipate an analysis of the secondary endpoint, response improvement, during the fourth quarter of 2006 and final analysis of the primary endpoint, TTP, during the second half of 2007. Four additional Phase 2 clinical trials of FavId were ongoing during 2005 with one additional Phase 2 clinical trial planned for 2006. One of these clinical trials is being conducted under a separate physician-sponsored IND in the United States. A second of these is being conducted as a physician-sponsored clinical trial in Switzerland.  We are also developing our preclinical candidate FAV-201 for the treatment of T-cell lymphoma and we are currently preparing to file an IND.

We have received a Special Protocol Assessment, or SPA, from the FDA for our Phase 3 clinical trial. In the SPA process, the FDA reviewed the design, size and planned analysis of our Phase 3 clinical trial and provided comments regarding the trial’s adequacy to form a basis with respect to effectiveness for approval of a Biologics Licensing Application, or BLA, if the trial meets its predetermined objectives. We cannot assure you that we will be able to file a BLA for FavId until after we receive an analysis of the primary endpoint, TTP, of our ongoing Phase 3 clinical trial (assuming the TTP data is positive), which analysis is anticipated in the second half of 2007.  The FDA’s written agreement is binding, except in limited circumstances, such as when a substantial scientific issue essential to determining the safety or effectiveness of a product candidate is identified after the Phase 3 clinical trial is commenced. Despite having received an SPA, we may be required to conduct an additional Phase 3 clinical trial of FavId for the treatment of indolent B-cell NHL before we can apply for regulatory approval. Although the FDA typically requires successful results in two Phase 3 clinical trials to support marketing approval, the FDA has, on several occasions, approved products based on a single Phase 3 clinical trial that demonstrates a high level of statistical significance where there is an unmet need for a life-threatening condition. We currently plan to seek FDA approval of FavId based on our ongoing Phase 3 clinical trial alone. In the event that the FDA requires the results of a second Phase 3 clinical trial before accepting a BLA or before granting marketing approval of FavId, our launch of FavId would be delayed, possibly by several years, and we would incur significant costs in conducting the additional trial.

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

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

• inability to manufacture sufficient quantities of the product candidate for use in clinical trials;

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

• slower than expected rate of patient recruitment and enrollment;

• inability to 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, these results do not necessarily predict final results, and positive results in early trials may not be indicative of success in later trials. A number of companies in the pharmaceutical industry have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials. Negative or inconclusive results or adverse medical events during a clinical trial could cause us to repeat or terminate a clinical trial or require us to conduct additional trials. Our clinical trials may be suspended at any time for a variety of reasons, including if the FDA or we believe the patients participating in our trials are exposed to unacceptable health risks or if the FDA finds deficiencies in the conduct of these trials.

Failures or perceived failures in our clinical trials will directly delay our product development and regulatory approval process, damage our business prospects, make it difficult for us to establish collaboration and partnership relationships, and negatively affect our reputation and competitive position in the pharmaceutical community.

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

We may encounter delays in development and commercialization, or fail to obtain marketing approval, of FavId or any other product candidate that we may develop if we are unable to enroll enough patients to complete clinical trials. Our ability to enroll sufficient numbers of patients in our clinical trials depends on many factors, including the size of the patient population, the nature of the protocol, the proximity of patients to clinical sites, the eligibility criteria for the trial and competing clinical trials.  Although we completed 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 enrollment in our clinical trials and may do so in the future if additional clinical trials of FavId are required or if we clinically develop any of our other product candidates. Delays in planned patient enrollment may result in increased costs and harm our ability to complete our clinical trials and obtain regulatory approval.

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

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

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Risks Related to Our Financial Results and Need for Financing

We have incurred significant operating losses since inception and anticipate that we will continue to incur substantial losses and negative cash flow from operations for the foreseeable future.

We are a development stage company with a limited operating history. We have financed our operations through private placements of preferred stock, an initial public offering of our common stock and equipment and leasehold debt financing.  We have incurred losses in each year since our inception in 2000. Net losses were $35.9 million for the year ended December 31, 2005, $26.0 million in 2004, $13.3 million in 2003, $7.2 million in 2002, $3.8 million in 2001 and $1.0 million in 2000. As of December 31, 2005, we had an accumulated deficit of $115.4 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 for at least the next several years. This is due primarily to the expansion of our clinical trials and research and development programs, preparations to manufacture FavId on a commercial scale, and, to a lesser extent, general and administrative expenses. We also have substantial lease and debt obligations related to our new manufacturing and headquarters facilities impacting our operating expenses. We expect that our losses will fluctuate from quarter to quarter and that these fluctuations may be substantial. We cannot guarantee that we will successfully develop, manufacture, commercialize or market any products. As a result, we cannot guarantee that we will ever achieve or sustain product revenues or profitability.

We currently have no source of revenue and may never become profitable.

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

• successfully complete clinical trials for FavId;

• obtain regulatory approval for FavId, including regulatory approval for our commercial scale 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 the earliest. Further, we do not expect to achieve profitability for at least several years after generating material revenues. If we are unable to generate revenue, we will not become profitable, and we may be unable to continue our operations.

We will need substantial additional funds to continue operations, which we may not be able to raise on favorable terms, or at all.

We will need substantial additional funds for existing and planned preclinical studies and clinical trials, to continue research and development activities, for lease and debt obligations related to our manufacturing and headquarter facilities, and to establish manufacturing and marketing capabilities for any products we may develop. In addition, because we do not expect to generate revenues from the sale of our product candidates for several years, or at all, we will also need to raise additional capital to fund our operations.

We believe that our existing cash, which includes funds received from the March 2006 financing, cash equivalents and short-term investments, together with interest thereon, will be sufficient to meet our projected operating requirements through fiscal 2007.  We will need to raise additional funds in order to commercialize FavId, including the completion of the expansion and qualification of our manufacturing facility for commercial scale production. Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors, including the factors discussed elsewhere in this “Factors that May Affect Future Operating Results” section of this report. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect.

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

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

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• rate of progress toward obtaining regulatory approval for our product candidates;

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

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

• effects of competing technological and market developments;.

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

• the success of the commercialization of FavId.

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

We may seek to access the public or private equity markets whenever conditions are favorable, even if we do not have an immediate need for additional capital at that time. Additional funding may not be available to us, and, if available, may not be on acceptable terms. If we raise additional funds by issuing equity securities, stockholders will incur immediate dilution. If adequate funds are not available to us, we may be required to delay, reduce the scope of, or eliminate one or more of our research, development and clinical activities. Alternatively, we may need to seek funds through arrangements with collaborative partners or others that require us to relinquish rights to technologies or product candidates that we would otherwise seek to develop or commercialize ourselves. Any of these events could have a material adverse effect on our business, results of operations, financial condition or cash flow.

We are recording non-cash compensation expense that may result in an increase of our net losses for a given period.

Stock-based compensation represents an expense associated with the recognition of the difference between the deemed fair value of common stock at the time of an option grant or stock issuance and the option exercise price or price paid for the stock. Stock-based compensation is amortized over the vesting period of the option or issuance. As of December 31, 2005, deferred stock-based compensation related to option grants to our employees and non-employee directors totaled $5.7 million. Options granted to consultants, if any, for compensation purposes, must be remeasured at each reporting date during the vesting period. The remeasurement and the corresponding effect on the related expense may result in an increase in net losses for a given period.

In December 2004, the FASB revised Statement No. 123 (FAS 123R) Share-Based Payment, which requires companies to expense the estimated fair value of employee stock options and similar awards.  On April 15, 2005, the U.S. Securities and Exchange Commission adopted a new rule amending the compliance dates for FAS123R.  In accordance with the new rule, the accounting provisions of FAS 123R will be effective for the Company beginning in the first quarter of 2006.  The implementation of FAS123R will have a negative impact in the form of more non-cash compensation in the future.

Other Risks Related to Our Business and Industry

We currently depend on single source suppliers for critical raw materials for manufacturing. The loss of these suppliers could delay our clinical trials or prevent or delay commercialization of FavId.

We currently depend on single source suppliers for critical raw materials used in the manufacture of FavId. In particular, our manufacturing process for FavId requires a foreign protein derived from shellfish that is known as keyhole limpet hemocyanin, or KLH. We purchase KLH from biosyn Arzneimittel GmbH, or biosyn, which is currently the only supplier of KLH that has 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 under which biosyn has agreed to supply us with KLH and we have committed to annual KLH purchase requirements during the commercialization of FavId. An additional aggregate of up to $300,000 will be due upon the achievement of certain milestones, the timing of which is not known at this time. Either party may terminate the supply agreement upon a breach by the other party that is not cured within 60 days or other events relating to insolvency or bankruptcy. If we identify another supplier of KLH of suitable quality for our purposes, we will not be able to use the supplier as a second source of KLH for the commercial manufacture of FavId unless the KLH is tested to be comparable to the existing KLH.

In addition, we depend on a single source supplier for the cell growth media we use to produce FavId. We purchase this material from Expression Systems LLC, which in turn obtains several of the components used in the cell growth media from sole suppliers. We currently rely on purchase orders to obtain this material and do not have a supply agreement with Expression Systems. We intend to

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qualify a second source for the cell growth media or manufacture the cell growth media in house from commercially available raw materials but may not be able to do so.

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

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

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

If the quality or accuracy of the clinical data obtained by medical institutions and clinical investigators, including physician sponsors, is compromised due to their failure to adhere to applicable laws or our clinical protocols or for other reasons, we may not be able to obtain regulatory approval for or successfully commercialize FavId, or any other product candidates that we may develop. If any of our relationships with any of these organizations or individuals terminates, we believe that we would be able to enter into arrangements with alternative third parties. However, replacing any of these third parties would delay our clinical trials and could jeopardize our ability to commercialize FavId and our other product candidates on a timely basis, or at all.

Even if we obtain regulatory approval, we will continue to be subject to extensive government regulation that may cause us 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 product candidates, we will still be subject to extensive regulation. These regulations will impact many aspects of our operations, including production, record keeping, quality control, adverse event reporting, storage, labeling, advertising, promotion and personnel. In addition, the later discovery of previously unknown problems may result in restrictions of the product candidates, including their withdrawal from the market. Furthermore, regulatory approval may subject us to ongoing requirements for post-marketing studies. If we or any third party that we involve in our operations fail to comply with any continuing regulations, we may be subject to, among other things, product seizures, recalls, fines or other civil penalties, injunctions, suspensions or revocations of marketing licenses, operating restrictions and criminal prosecution.

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

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

We manufacture FavId for our ongoing Phase 3 and for the planned and ongoing Phase 1/2 clinical trials at our facility in San Diego. We currently lease approximately 80,000 square feet of space in a facility in San Diego, California under a long-term lease agreement. This space is used for our corporate headquarters and manufacturing and laboratory facilities. Our manufacturing facility consists of approximately 26,000 square feet of space in the facility. Our manufacturing facility is subject to the licensing requirements of the

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California Department of Health Services. Our facility was inspected and licensed by the California Department of Health Services. Our facility is subject to re-inspection at any time. Failure to maintain a license from the California Department of Health Services or to meet the inspection criteria of the California Department of Health Services would disrupt our manufacturing processes and prevent us from supplying FavId to patients. If an inspection by the California Department of Health Services indicates that there are deficiencies in our manufacturing process, we could be required to take remedial actions at potentially significant expense, and our facility may be temporarily or permanently closed.

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

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

We may experience difficulties in manufacturing FavId or any other product candidates that we may develop, which could prevent us from completing our ongoing clinical trials and commercializing these product candidates.

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

• failure to obtain a sufficient supply of key raw materials;

• difficulties in completing the development and validation of the specialized assays required to ensure the consistency of our product candidates, including FavId;

• difficulties in obtaining adequate tumor samples from treating physicians and hospitals;

• difficulties in manufacturing FavId for multiple patients simultaneously;

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

• failure to ensure adequate quality control and assurance in the manufacturing process as we increase the production quantities of FavId;

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

• failure to comply with regulatory requirements, such as FDA regulations and environmental laws;

• significant changes in regulatory requirements;

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

• shortages of qualified personnel.

In addition, because our manufacturing process only begins upon our receipt of a patient’s tumor biopsy, we cannot produce inventory reserves of our product candidate to be stored in anticipation of any of these potential manufacturing problems. The failure to produce an adequate supply of FavId could delay our clinical trials and, in turn, delay submission of a BLA for FavId and commercial launch.

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Similarly, any difficulties we experience in the manufacture and supply of other product candidates, such as FAV-201, would delay the clinical trials of those product candidates.

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

We currently rely on the availability and condition of our manufacturing facility in San Diego to manufacture FavId. We lease the property where 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, we will not be able to quickly or inexpensively replace our manufacturing capacity. This would significantly affect our ability to complete clinical trials of, and to manufacture and commercialize, FavId, or any other product candidates that we may develop.

In addition, our facilities have been subject to electrical blackouts as a result of a shortage of available electrical power. Although we have back-up emergency power generators to cover energy needs for key support systems, a lengthy outage could disrupt the operations of our facilities and clinical trials. While we carry business interruption insurance, this insurance may not be adequate. Any significant business interruption could cause delays in our product development and harm our business.

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

We plan to retain exclusive worldwide rights to FavId for oncology indications at least through the completion of our BLA filing with the FDA for approval to market FavId in the United States. If we are successful in obtaining BLA approval or foreign marketing approval for FavId, we will need to establish sales and marketing capabilities. In the United States, we plan to do this either by establishing our own sales force or by entering into a co-promotion arrangement with a sales and distribution partner. Outside of the United States, we plan to establish strategic collaborations for the development and marketing of FavId.

We do not presently possess the resources or experience necessary to market FavId or our other product candidates ourselves, and we currently have no arrangements for the promotion or distribution of our product candidates. Our future commercial success will depend on our ability to establish our own sales and marketing infrastructure or to collaborate with third parties that have greater sales and marketing experience and resources. Developing effective internal sales and marketing capabilities, which would include the hiring of a sales force, would require a significant amount of our financial resources and time.

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

To the extent that we enter into arrangements with third parties to perform sales, marketing and distribution services, our product revenues are likely to be lower than if we directly marketed and sold FavId, or any other product candidates that we may develop. If we are unable to establish adequate sales, 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 of our products that may be approved, our ability to generate revenue in the future will be limited.

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

• our ability to provide acceptable evidence of safety and efficacy;

• convenience and ease of administration;

• availability of alternative treatments;

• cost effectiveness;

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

• effectiveness of our regulatory and marketing strategies;

• prevalence and severity of adverse side effects;

• publicity concerning our products or competitive products; and

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

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

If we are unable to obtain acceptable prices or adequate coverage and reimbursement from third-party payors for FavId, or any other product candidates that we may develop, our revenues and prospects for profitability will suffer.

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

• governmental payors, such as Medicare and Medicaid;

• private health insurers, including managed care organizations; and

• other third-party payors.

Many patients will not be capable of paying for FavId, or any other product candidates that we may develop, themselves and will rely on third-party payors to pay for their medical needs. The federal and state governments, insurance companies, managed care organizations and other third-party payors are actively seeking to contain or reduce costs of health care in the United States and exert increasing influence on decisions regarding the use of, and reimbursement levels for, particular treatments. Such third-party payors, including Medicare, are scrutinizing newly approved medical products and services and may not cover or may limit coverage and reimbursement for our product candidates. In particular, third-party payors may limit the indications for which they will reimburse patients who use FavId, or any other product candidates that we may develop. Cost-control initiatives could cause us to decrease the price we might establish for FavId, or any other product candidates 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 provide adequate coverage and reimbursement levels for FavId, or any other product candidates that we may develop, our revenue and prospects for profitability will suffer.

If we are unable to establish or manage strategic collaborations in the future, our revenue and product development may be limited.

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

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

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

• significant time and effort from our management team;

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

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• effective allocation of our resources to multiple projects.

If we enter into development or commercialization collaborations, our success will in part depend on the performance of our corporate collaborators. We will not directly control the amount or timing of resources devoted by our corporate collaborators to activities related to our product candidates. Our corporate collaborators may not commit sufficient resources to our research and development programs or the commercialization, marketing or distribution of our product candidates. If any corporate collaborator fails to commit sufficient resources, our preclinical or clinical development related to the collaboration could be delayed or terminated. Also, our collaborators may pursue development or commercialization of other products, product candidates or alternative technologies in preference to our product candidates. Finally, our collaborators may terminate our relationships, and we may be unable to establish additional corporate collaborations in the future on acceptable terms, or at all.

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

Our strategy is focused on the research, development and commercialization of targeted immunotherapies for the treatment of cancer and other diseases of the immune system. The process of successfully developing product candidates is very time-consuming, expensive and unpredictable. We have only recently begun to direct significant effort toward the development of product candidates in addition to FavId, such as FAV-201 for T-cell lymphoma and a preclinical product candidate for the treatment of multiple sclerosis. We do not know whether our planned preclinical studies or clinical trials for these 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 will result in marketable products. Typically, there is a high rate of attrition for product candidates in preclinical and clinical trials. We do not anticipate that any of our product candidates will reach the market for at least several years.

We may not identify, develop or commercialize any additional new product candidates from our proprietary active immunotherapy technology. Our ability to develop successfully any of these product candidates depends on our ability to demonstrate safety and efficacy in humans through extensive preclinical testing and clinical trials and to obtain regulatory approval from the FDA and other regulatory authorities. Development of our product candidates will also depend substantially upon the availability of funding for our research and development programs.

If our competitors develop and market products that are more effective than our existing product candidates or others we may develop, or obtain marketing approval before we do, our commercial opportunity may be reduced or eliminated.

The development and commercialization of new pharmaceutical products for the treatment of cancer and autoimmune diseases is competitive, and we will face competition from numerous sources, including major pharmaceutical companies, specialty pharmaceutical companies and biotechnology companies worldwide. Many of our competitors have substantially greater financial and technical resources and development, production and marketing capabilities than we do. In addition, many of these companies have more experience than we do in preclinical testing, clinical trials and manufacturing of biologic therapeutics, as well as in obtaining FDA and foreign regulatory approvals. We will also compete with academic institutions, governmental agencies and private organizations that are conducting research in the fields of cancer and autoimmune disease. Competition among these entities to recruit and retain highly qualified scientific, technical and professional personnel and consultants is also intense.

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

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

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

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

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

• reliably and cost-effectively manufacture sufficient quantities of our products;

• maintain a proprietary position for our manufacturing process and other technology;

• price our products competitively;

• obtain appropriate reimbursement approvals for our products;

• establish an adequate sales and marketing force for our products; and

• attract and retain key personnel.

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

We are subject to new legislation, regulatory proposals and managed care initiatives that may increase our costs of compliance and adversely affect our ability to market our products, obtain collaborators and raise capital.

There have been a number of legislative and regulatory proposals aimed at changing the healthcare system and pharmaceutical industry, including reductions in the cost of prescription products and changes in the levels at which consumers and healthcare providers are reimbursed for purchases of pharmaceutical products. For example, the Prescription Drug and Medicare Improvement Act of 2003 was recently enacted. This legislation provides a new Medicare prescription drug benefit beginning in 2006 and mandates other reforms. Although we cannot predict the full effects on our business of the implementation of this new legislation, it is possible that the new benefit, which will be managed by private health insurers, pharmacy benefit managers and other managed care organizations, will result in decreased reimbursement for prescription drugs, which may further exacerbate industry-wide pressure to reduce the prices charged for prescription drugs. This could harm our ability to market our products and generate revenues.

We depend on attracting and retaining key scientific and management personnel to advance our technology, and the loss of these personnel could impair the development of our products.

Our success depends on our continued ability to attract, retain and motivate highly qualified management, clinical and scientific personnel and on our ability to develop and maintain important relationships with leading academic institutions, clinicians and scientists. We are highly dependent upon our 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 services of Dr. Longenecker or Dr. Gold, or one or more of our other members of senior management, could delay or prevent the successful completion of our pivotal Phase 3 clinical trial or the commercialization of FavId. Although we have employment agreements with each of our executives, their employment with us is “at will,” and each executive can terminate his or her agreement with us at any time. We do not carry “key person” insurance covering members of senior management, other than Drs. Longenecker and Gold. This insurance may not continue to be available on commercially reasonable terms and may prove inadequate to compensate us for the loss of their services.

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

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

As of December 31, 2005, we had 136 employees. Of these, 115 employees were in research and development comprised of 77 in manufacturing, quality control and quality assurance, 33 in research and process development, and five members of senior management. Of the remaining employees, three were members of senior management and 18 were in administration. We will need to expand our financial, managerial, operational and other resources in order to continue our clinical trials and commercialize FavId, FAV-201, or any other product candidates that we may develop. Future growth would impose significant added responsibilities on our management team, including the need to identify, recruit, maintain and integrate additional employees. Our ability to commercialize FavId, FAV-201, or any other product candidates that we may develop, and our future financial performance in general, will depend in

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part on our ability to manage any future growth effectively. In order to meet these challenges, we would need to:

• manage our clinical trials effectively;

• manage our research and development efforts effectively;

• develop our administrative, accounting and management information systems and controls; and

• hire, train and integrate additional management, administrative, manufacturing and sales and marketing personnel.

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

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

Our research and development and manufacturing activities involve the use of biological and hazardous materials that could be dangerous to human health, safety or the environment. Although we believe our safety procedures for handling and disposing of these materials comply with federal, state and local laws and regulations, we cannot entirely eliminate the risk of accidental injury or contamination from the use, storage, handling or disposal of these materials. In the event of contamination or injury, we could be held liable for any resulting damages, and any liability could exceed our resources. We currently maintain property and casualty insurance coverage which covers liability for hazardous and controlled materials. However, this insurance coverage may not be sufficient to cover our liability and we may not be able to obtain sufficient coverage in the future at a reasonable cost. In addition, we may incur significant costs complying with both existing and future environmental laws and regulations. In particular, we are subject to regulation by the Occupational Safety and Health Administration, or OSHA, and the Environmental Protection Agency, or EPA, and to regulation under the Toxic Substances Control Act and the Resource Conservation and Recovery Act. OSHA, the EPA or other agencies may adopt regulations that adversely affect our research and development programs.

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

Our business exposes us to potential liability risks that may arise from the clinical testing of our product candidates and the manufacture and sale of any approved products. These risks will exist even with respect to those product candidates that are approved for commercial sale by the FDA and manufactured in facilities regulated by the FDA. Any product liability claim or series of claims brought against us could significantly harm our business by, among other things, reducing demand for our products, injuring our reputation and creating significant adverse media attention and costly litigation. Plaintiffs have received substantial damage awards in some jurisdictions against pharmaceutical companies based upon claims for injuries allegedly caused by the use of their products. Any judgment against us that is in excess of 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 , which covers liability for up to 561 patients in our clinical trials. Although we believe our current insurance coverage is adequate, we cannot be certain that it will be sufficient. Furthermore, we cannot be certain that our current insurance coverage will continue to be available, or that increased coverage, 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 may not have sufficient capital resources to pay a judgment, in which case our creditors could levy claims against our assets, including our intellectual property.

We could be negatively impacted by future interpretation 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 candidates that we may develop, we will be subject to various federal and state laws pertaining to healthcare fraud and abuse, including anti-kickback laws and physician self-referral laws. Violations of these laws are punishable by criminal and civil sanctions, including, in some instances, imprisonment and 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 alter one or more of our practices to be in compliance with these laws. Healthcare fraud and abuse regulations are complex, and even minor, inadvertent irregularities can potentially give rise to claims that a statute or prohibition has been violated. Any violations of these laws, or any action against us for violation of these laws, even if we successfully defend against it, could result in a material adverse effect on our business, financial condition and results of operations. If there is a change in law, regulation or administrative or judicial interpretations, we may have to change our business practices or our existing business practices could be challenged as unlawful, which could have a material adverse effect on our business, financial condition and results of operations. In addition, some allegations under these laws have been claimed to violate the False Claims Act, discussed in more detail below.

In addition, if we are able to commercialize FavId or any other product candidates that we may develop, we could become subject to false claims litigation under federal statutes, which can lead to civil money penalties, criminal fines and imprisonment, and exclusion

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from participation in Medicare, Medicaid and other federal and state healthcare programs. These false claims statutes include the False Claims Act, which allows any person to bring suit on behalf of the federal government alleging the submission of false or fraudulent claims, or causing to present such false or fraudulent claims, under federal programs or contracts claims or other violations of the statute and to share in any amounts paid by the entity to the government in fines or settlement. These suits against biotechnology companies have increased significantly in recent years and have increased the risk that a healthcare company will have to defend a false claim action, pay fines or be excluded from the Medicare, Medicaid or other federal and state healthcare programs as a result of an investigation arising out of such action. We cannot assure you that we will not become subject to such litigation or, if we are not successful in defending against such actions, that such actions will not have a material adverse effect on our business, financial condition and results of operations. In addition, we cannot assure you that the costs of defending claims or allegations under the False Claims Act will not have a material adverse effect on our business, financial condition and results of operations.

Risks Related to Our Intellectual Property and Potential Litigation

If we are unable to obtain and maintain protection for our intellectual property, the value of our technology and products may be adversely affected.

Our business and competitive positions are dependent upon our ability to protect our proprietary technology. Our success will depend in large part on our ability to obtain and maintain patent protection for our product and technologies, preserve trade secrets and operate without infringing the intellectual property right of others. Because of the substantial length of time and expense associated with development of new products, we, along with the rest of the biopharmaceutical industry, place considerable importance on obtaining and maintaining patent protection for new technologies, products and processes. The patent positions of pharmaceutical, biopharmaceutical and biotechnology companies, including us, are generally uncertain and involve complex legal and factual questions. Our patent applications may not protect our technologies and products because, among other things:

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

• we may develop additional proprietary technologies that are not patentable;

• there is no guarantee that any patents issued to us, our collaborators or our licensors will provide a basis for a commercially viable product;

• there is no guarantee that any patents issued to us or our collaborators or our licensors will provide us with any competitive advantage;

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

• there is no guarantee that any patents previously issued to others or issued in the future will not have an adverse effect on our ability to do business.

We attempt to protect our intellectual property position by filing United States patent applications related to our proprietary technology, inventions and improvements that are important to the development of our business. Currently we own U.S. Patent No. 6,911,204 concerning the treatment of NHL with our technology together with four pending United States patent applications covering methods of treating immune system diseases, including B-cell and T-cell lymphomas, using our proprietary immunotherapy production methods, as well as methods for combining the idiotype immunotherapies with other therapies that are used to treat diseases of the immune system.

We also have three issued patents and 19 patent applications pending outside of the United States, and have received a notice that one  of these applications will issue as a patent. Limitations on patent protection in some countries outside the United States, and the differences in what constitutes patentable subject matter in these countries, may limit the protection we have under patents issued to us outside of the United States. In addition, laws of foreign countries may not protect our intellectual property to the same extent as would laws of the United States. In determining whether or not to seek a patent or to license any patent in a particular foreign country, we weigh the relevant costs and benefits, and consider, among other things, the market potential of our product candidates in the jurisdiction, and the scope and enforceability of patent protection afforded by the law of the jurisdiction. Failure to obtain adequate patent protection for our proprietary product candidates and technology would impair our ability to be commercially competitive in these markets.

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

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We are not able to prevent others, including potential competitors, from using certain types of patient-specific idiotype protein-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, comprising single idiotype proteins, and their use for the treatment of indolent B-cell NHL are in the public domain and therefore cannot be patented. Consequently, we may only be able to seek patent protection for methods of treating immune system diseases, including B-cell and T-cell lymphomas, using our proprietary immunotherapy production methods for making idiotype protein conjugates and compositions comprising such conjugates, as well as methods for combining the idiotype or T-cell receptor-based immunotherapies with other therapies that are used to treat diseases of the immune system. As a result, we may not be able to prevent other companies using different manufacturing processes from developing active immunotherapies that directly compete with FavId.

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

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

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

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

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

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

•Genentech and City of Hope National Medical Center hold patent rights related to the expression of recombinant antibodies;

•Genitope holds patent rights relating to immunotherapy using idiotype proteins produced using T-lymphoid cells for the treatment of B-Cell lymphoma;

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

The first patent listed above was issued to Genentech in 2001. We do not 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 be reexamined as to their patentability. If this patent reissues and we decide to attempt to obtain a license for this patent, we cannot guarantee that we would be able to obtain such a license on commercially reasonable terms, or at all.

Additionally, because patent prosecution can proceed in secret prior to issuance of a patent, third parties may obtain other patents with claims of unknown scope relating to our product candidates, which they could attempt to assert against us. Further, as we develop our products, we may infringe the current patents of third parties or patents that may issue in the future. Third parties could bring legal actions against us claiming damages and seeking to enjoin clinical testing, manufacturing and marketing of the affected product or products. If we become involved in any litigation, it could consume a substantial portion of our resources, regardless of the outcome of the litigation. If any of these actions are successful, in addition to any potential liability for damages, we could be required to obtain a license to continue to manufacture or market the affected product, in which case we may be required to pay substantial royalties or grant cross-licenses to our patents. However, there can be no assurance that any such license will be available on acceptable terms or at all. To enforce patents issued to us or to determine the scope and validity of other parties’ proprietary rights, we may also become

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involved in litigation or in interference proceedings declared by the United States Patent and Trademark Office, which could result in substantial costs to us, regardless of the outcome of the litigation, or an adverse decision as to the priority of our inventions. Ultimately, as a result of patent infringement claims, our business could be harmed and we could be prevented from commercializing a product, or forced to cease some aspect of our business operations.

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

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

Risks Related to the Securities Markets and Ownership of Our Common Stock

There has been no prior public market for our common stock, and the price of our common stock may be volatile and could decline significantly.

Until our IPO in February 2005, there was no public market for our common stock, and despite our IPO, an active public market for these shares may not develop or be sustained. Our stock price has traded in the range of $7.77 - $3.20 from the commencement of our IPO on February 2, 2005 to March 23, 2006.

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

• announcements of technological innovations or new products by us or our competitors;

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

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

• regulatory developments in the United States and foreign countries;

• success of our research efforts and clinical trials;

• any intellectual property infringement lawsuit in which we may become involved;

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

• actual or anticipated fluctuations in our operating results;

• changes in financial estimates or recommendations by securities analysts;

• sales of large blocks of our common stock;

• sales of our common stock by our executive officers, directors and significant stockholders;

• changes in accounting principles; and

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

Specifically, you may not be able to resell your shares at or above the price you paid for such shares. In addition, class action litigation has often been instituted against companies whose securities have experienced periods of volatility in market price. Any such litigation brought against us could result in 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 our existing officers, directors and principal stockholders may prevent other stockholders from influencing significant corporate decisions and depress our stock price.

As of December 31, 2005, our officers and directors, stockholders affiliated with our directors and those stockholders owning at least ten percent of our outstanding capital stock together beneficially held approximately 61.8% of our outstanding common stock on an as-converted basis. If some or all of these officers, directors and principal stockholders act together, they will be able to exert a significant degree of influence over our management and affairs and over matters requiring stockholder approval, including the election of directors, the merger, consolidation or sale of all or substantially all of our assets, and any other significant corporate transaction. The interests of this concentration of ownership may not always coincide with our interests or the interests of our other stockholders. For instance, officers, directors and principal stockholders, acting together, could cause us to enter into transactions or agreements that we would not otherwise consider. Similarly, this concentration of ownership may have the effect of delaying or preventing a change in control of us otherwise favored by our other stockholders. This concentration of ownership also could depress our stock price.

Provisions in our amended and restated certificate of incorporation and amended and restated bylaws and applicable Delaware law may prevent or discourage third parties or our stockholders from attempting to replace our management or influencing significant decisions.

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

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

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

• prohibiting cumulative voting in the election of directors;

• prohibiting stockholder actions by written consent;

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

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

• requiring advance notice for raising business matters or nominating directors at stockholders’ 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% or more of our common stock for five years unless the holder’s acquisition of our stock was approved in advance by our board of directors. Together, these charter and statutory provisions could make the removal of management more difficult and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our common stock.

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

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

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

Recently enacted and proposed changes in the laws and regulations affecting public companies, including the provisions of the

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Sarbanes-Oxley Act of 2002 and rules related to corporate governance and other matters subsequently adopted by the SEC and the Nasdaq Stock Market, could result in increased costs to us. The new rules and any related regulations that may be proposed in the future could make it more difficult or more costly for us to obtain certain types of insurance, including directors’ and officers’ liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers. We are presently evaluating and monitoring developments with respect to new and proposed rules and cannot predict or estimate the amount of the additional costs we may incur or the timing of such costs.

Item 1B.Unresolved Staff Comments

None.

Item 2.Properties

We lease approximately 80,000 square feet of space in San Diego, California under a lease agreement that expires on June 30, 2025, but may be extended at our option for two additional five-year periods. Included in our current lease agreement is a commitment to lease an adjacent 48,000 square foot facility upon termination of an existing lease between the landlord and a third party. If the landlord is unable to negotiate an early termination, then the third party lease will expire on November 30, 2006 and the landlord will deliver the additional space to us at that time. The lease term on the adjacent facility expires June 30, 2025, but may be terminated, at no cost to us, as of June 1, 2017, upon six months’ prior notice to the landlord. Currently, the 80,000 square feet of space houses our corporate offices and our manufacturing and laboratory facilities. We plan to dedicate the existing 80,000 square feet of space for the commercial-scale manufacturing of FavId if it is approved and to continue to support additional clinical trials. Construction of improvements for the expansion of manufacturing capacity in our facility is planned to begin June 2006. We plan to devote the adjacent 48,000 square foot facility to support our corporate headquarters and research and warehousing operations.

Item 3.Legal Proceedings

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

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

No matters were submitted to us by a vote of the security holders during the quarter ended December 31, 2005.

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PART II

Item 5.Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Common Stock Market Price

Our common stock commenced trading on the Nasdaq National Market on February 2, 2005 under the symbol “FVRL.” Prior to such time, there was no public market for our common stock. The table below sets forth the high and low sales prices of common stock:

	High	Low
February 2, 2005 – March 31, 2005	7.50	4.79
April 1, 2005 – June 30, 2005	5.24	3.46
July 1, 2005 – September 30, 2005	6.60	3. 83
October 1, 2005 – December 31, 2005	4.72	3.20

As of March 23, 2006 we had outstanding 28,920,426 shares of common stock held by approximately 2,600 stockholders including beneficial owners of the common stock whose shares are held in the names of various dealers, clearing agencies, banks brokers and other fiduciaries.

Dividends

We have never declared or paid any cash dividends on our capital stock. The payment of dividends by us on our common stock is limited by our debt agreements. We currently intend to retain all of our future earnings, if any, to finance the growth and development of our business. We do not intend to pay cash dividends on our common stock for the foreseeable future. Any future determination related to dividend policy will be made at the discretion of our board of directors.

Use of Proceeds from the Sale of Registered Securities

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

No offering expenses were paid directly or indirectly to any of our directors or officers (or their associates) or person owning ten percent or more of any class of our equity securities or to any other affiliates. All offering expenses were paid directly to others.

We had invested $40.9 million in proceeds from the offering, net of underwriting discounts and commissions but before expenses, in government agency securities, corporate bonds and notes and money market funds. Through December 31, 2005, we used approximately $11.8 million of the proceeds from our initial public offering to develop and prepare for filing a biologic license application, or BLA, for regulatory approval of FavId, for development of our other product candidates, for general and administrative expenses, and for working capital, including debt repayments.

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

Issuer Purchase Of Equity Securities

During the quarter ended December 31, 2005, we repurchased 2,219 restricted shares of common stock from employees whose employment had terminated. These restricted common stock shares had been issued upon the early exercise of employee options and upon termination had not yet vested.

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Item 6.Selected Financial Data

The following selected financial data set forth below should be read in conjunction with Financial Statements and Notes thereo included in Item 8 and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7. The selected financial data for the years ended December 31, 2005, 2004, and 2003 and the selected balance sheet data as of December 31, 2005 and 2004 are derived from our audited financial statements, which are included in Item 8. The selected financial data for the years ended 2002 and 2001 and the selected balance sheet data as of December 31, 2003, 2002 and 2001 are derived from our audited financial statements, which are not included in this report. Our historical results are not necessarily indicative of our future results.

	Years ended December 31,
	2005			2004			2003			2002			2001
Operating expenses:
Research and development	$	28,186		$	18,694		$	10,492		$	5,308		$	2,635
General and administrative	5,323			4,496			2,392			2,017			1,190
Amortization of stock-based compensation:
Research and development	1,406			1,196			114			—			—
General and administrative	1,453			1,220			41			—			—
Total operating expenses	36,368			25,606			13,039			7,325			3,825
Loss from operations	(36,368		)	(25,606		)	(13,039		)	(7,325		)	(3,825		)
Interest income	1,492			375			108			167			134
Interest expense	(703		)	(817		)	(332		)	(88		)	(67		)
Other income (expense)	(6		)	12			8			—			—
Loss on extinguishment of debt	(290		)	—			—			—			—
Total other income (expense), net	493			(430		)	(216		)	79			67
Net loss	(35,875		)	(26,036		)	(13,255		)	(7,246		)	(3,758		)
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		)	(51		)	—			—			—
Net loss applicable to common stockholders	$	(35,881	)	$	(54,190	)	$	(13,255	)	$	(7,246	)	$	(3,758	)
Historical net loss per share:
Basic and diluted	$	(1.99	)	$	(51.48	)	$	(16.97	)	$	(11.87	)	$	(8.51	)
Weighted-average shares—basic and diluted	18,060,992			1,052,624			781,054			610,709			441,608
Pro forma net loss per share (unaudited) (1):
Basic and diluted	$	(1.86	)	$	(4.85	)
Weighted-average shares—basic and diluted	19,295,408			11,182,712

	As of December 31,
	2005			2004			2003			2002			2001
	(in thousands)
Balance Sheet Data:
Cash and cash equivalents	$	12,065		$	25,065		$	5,610		$	10,030		$	977
Short-term investments	22,427			1,493			—			—			—
Working capital	28,986			22,176			3,466			9,226			591
Total assets	47,007			39,130			14,932			11,998			2,210
Debt (less current portion)	3,532			4,224			3,501			207			531
Redeemable convertible preferred stock	—			43,672			—			—			—
Deficit accumulated during the development stage	(115,383		)	(79,502		)	(25,312		)	(12,057		)	(4,811		)
Total stockholders’ equity (deficit)	35,714			(14,654		)	8,278			10,727			1,171

(1)See Note 1 of Notes to Financial Statements for a description of the method used to compute pro forma basic and diluted net loss per share and the number of shares used in computing historical and pro forma basic and diluted net loss per share.

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Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis together with our financial statements and accompanying notes included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. As a result of several factors, including those set forth under Item 1A of Part I and elsewhere in this Report, our actual results and the timing of selected events may differ materially from those anticipated in these forward-looking statements.

Overview

We are a biopharmaceutical company focused on the development and commercialization of targeted immunotherapies for the treatment of cancer and other diseases of the immune system. We have developed a proprietary technology that enables us to manufacture active immunotherapy products that are designed to stimulate a patient’s immune system to mount a specific and sustained response to disease. Our lead product candidate, FavId, is an active immunotherapy for the treatment of B-cell non-Hodgkin’s lymphoma, or NHL. FavId entered a pivotal Phase 3 clinical trial in follicular B-cell NHL in July 2004 with a target of 342 eligible patients and completed patient enrollment in January 2006. In addition, FavId has been evaluated in several multi-center, open-label Phase 2 clinical trials involving more than 130 patients.

We believe FavId may be effective in treating other types of B-cell NHL. Five additional Phase 2 clinical trials of FavId are either ongoing or expected to begin during 2006. One of these clinical trials is being conducted under a separate physician-sponsored Investigational New Drug, or IND, application in the United States. A second of these is being conducted as a physician-sponsored clinical trial in Switzerland. Moreover, we believe our active immunotherapy expertise and proprietary manufacturing technology will enable us to develop additional product candidates for other oncology indications, such as T-cell lymphoma, and for autoimmune diseases, with an initial focus on multiple sclerosis. We are currently developing a second product candidate, FAV-201, for the treatment of T-cell lymphoma and intend to initiate a Phase 1/2 clinical trial evaluating the safety and preliminary efficacy of FAV-201 in the first half of 2006. We have retained exclusive worldwide commercialization rights to all of our product candidates.

We were incorporated in Delaware in January 2000. As of December 31, 2005, we had not generated any revenues, and we had financed our operations and internal growth through private placements of our preferred stock, equipment and leasehold debt financings and the sale of common stock in our initial public offering or IPO in February 2005. We are a development stage company and have incurred significant losses since our inception in 2000, as we have devoted substantially all of our efforts to research and development activities, including clinical trials. As of December 31, 2005, our deficit accumulated during the development stage was approximately $115.4 million. We expect to incur substantial and increasing losses for the next several years as we:

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

• expand our research and development programs;

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

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

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Financial Operations Overview

Research and Development Expense.   Research and development expense consists primarily of costs associated with clinical trials of our product candidates, including the costs of manufacturing our product candidates, compensation and other expenses related to research and development personnel, facilities costs and depreciation. We charge all research and development expenses to operations as they are incurred. Our research and development activities are primarily focused on the development of FavId. We have completed enrollment in two Phase 2 clinical trials and continue to evaluate the results. We initiated our pivotal Phase 3 clinical trial of FavId following Rituxan in patients with follicular B-cell NHL in July 2004. We completed patient enrollment in the trial in January 2006.

From inception through December 31, 2005, we incurred costs of approximately $66.1 million associated with the research and development of FavId, which represents substantially all of our research and development costs to date. We expect our research and development costs to increase as we advance FavId and new product candidates into later stages of clinical development. While difficult to predict, we estimate that research and development costs required to complete the development of and file a Biologics Licensing Application, or BLA, for FavId will be an additional $65 million. We are unable to estimate with any certainty the costs we will incur in the continued development of other product candidates for commercialization. On an ongoing basis, we expect to expand our research and development activities to include clinical development of FAV-201 and preclinical research of treatments for autoimmune diseases, primarily multiple sclerosis.

Clinical development timelines, likelihood of success and total costs vary widely. Although we are currently focused primarily on FavId, we anticipate that we will make determinations as to which research and development projects to pursue and how much funding to direct toward each project on an on-going basis in response to the scientific and clinical success of each product candidate.

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

General and Administrative Expense.   General and administrative expenses consist primarily of compensation and other expenses related to our corporate administrative employees, legal fees and other professional services expenses. We anticipate increases in general and administrative expenses as we add personnel and continue to develop and prepare for commercialization of our product candidates.

Stock-Based Compensation Expense. Stock-based compensation expense represents the amortization of deferred stock-based compensation resulting from options, granted prior to our IPO, that  are considered compensatory because the deemed fair value of the underlying common stock for financial reporting purposes was greater than the exercise prices determined by the board of directors on the date of grant.

Interest Income. Interest income primarily consists of interest earned on our cash reserves, cash invested in money market funds, government securities, corporate notes and bonds and certificates of deposit.

Interest Expense.   Interest expense represents interest on our debt, including capital leases.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, expenses and related disclosures. Actual results could differ from those estimates. While our significant accounting policies are described in more detail in Note 1 of the Notes to Financial Statements included elsewhere in this report, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our financial statements:

Deferred Tax Asset Valuation Allowance.   Our estimate for the valuation allowance for deferred tax assets requires us to make significant estimates and judgments about our future operating results. Our ability to realize the deferred tax assets depends on our future taxable income as well as limitations on utilization. A deferred tax asset must be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized prior to its expiration. The projections of our operating results on which the establishment of a valuation allowance is based involve significant estimates regarding future demand for our products, competitive conditions, product development efforts, approvals of regulatory agencies and product cost. We have recorded a full valuation allowance on our net deferred tax assets as of December 31, 2005 and 2004, due to uncertainties related to

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our ability to utilize our deferred tax assets in the foreseeable future. These deferred tax assets primarily consist of certain net operating loss carryforwards and research and development tax credits.

Deferred Stock-Based Compensation.   In connection with the grant of stock options during the years ended December 31, 2005 and 2004, we recorded $350,000 and $9.4 million, respectively,  in deferred stock-based compensation within stockholders’ equity, respectively. Deferred stock-based compensation was reduced by amounts representing stock option cancellations and our repurchase of unvested restricted stock related to employee terminations of approximately $221,000 and $224,000 in 2005 and 2004, respectively. These options were considered compensatory because the deemed fair value of the underlying common stock for financial reporting purposes was greater than the exercise prices determined by the board of directors on the date of grant. The determination of the fair value prior to the Company’s IPO of the underlying shares of common stock involved subjective judgment and the consideration of a variety of factors, including the prices obtained in private placement transactions of other equity securities, and as a result the amount of the compensatory charge is not based on an objective measure such as the trading price of the common stock. As of December 31, 2005, we had an aggregate of $5.7 million of deferred stock-based compensation remaining to be amortized, as determined in accordance with APB 25.

Clinical Trial Accruals. In the normal course of business, we contract with numerous third-party clinical trial centers to perform various clinical trial activities in the on-going development of FavId. The financial terms of these agreements are subject to negotiation and variation from contract to contract may result in uneven payment flows. Payment under the contracts depend on factors such as the completion of individual patient’s treatments and the related required documentation. We record expenses for contracted clinical trial costs based upon patient enrollment and the dates that they receive treatment. These costs are a significant component of research and development expenses. The objective of our accrual policy is to match the recording of expenses in our financial statements to the actual services received and efforts expended. However, our estimates may not match the timing of actual services performed by the clinical trial centers, which may result in adjustments to our research and development expenses in future periods.

Short Term Investments.   We classify 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 in accumulated other comprehensive income which is reflected as a separate component of stockholders’ equity. The amortized cost of securities in this category is adjusted for amortization of premiums and accretions of discounts to maturity. Such amortization is included in interest income. Realized gains and losses are recorded in our statement of operations. If we believe that an other-than-temporary decline exists, it is our policy to record a write-down to reduce the investments to fair value and record the related charge as a realized loss.

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

Results of Operations

Comparison of Fiscal Years Ended December 31, 2005 to 2004

Research and Development.   Research and development expense increased from approximately $18.7 million in 2004 to $28.2 million in 2005. The increase of $9.5 million, or 51%, was primarily due to an increase of approximately $2.7 million in clinical trial site costs; an increase of $2.6 million associated with an increase in personnel from 92 employees to 115 employees to support our Phase 3 clinical trial initiated in July 2004; an increase of $2.2 million associated with supplies to support continued process and formulation development and the purchase of raw materials and supplies for our manufacture of Favid for our Phase 3 clinical trial, an increase of $1.0 million paid to third party vendors providing support services for our Phase 3 clinical trial, including randomization of patients, radiology and laboratory management; and an increase of $500,000 related to the operation of our manufacturing facility to support the production of FavId.

General and Administrative.   General and administrative expense increased from approximately $4.5 million in 2004 to $5.3 million in 2005. The increase of $800,000, or 18%, was primarily due to an increase of approximately $620,000 associated with an increase in personnel from 17 employees to 21 employees; an increase of approximately $640,000 in directors and officers liability insurance premiums and public company-related expenses incurred subsequent to our IPO; an increase of approximately $180,000  in recruiting and relocation expenses related to the increase in personnel;, an increase of approximately $157,000 in fees related to market research studies, all of which were partially offset by a decrease of approximately $790,000 due to non-recurring IPO related expenditures in 2004.

Amortization of Stock-Based Compensation.   In connection with the grant of stock options, we recorded deferred stock-based compensation of $350,000 and $9.4 million in 2005 and 2004, respectively. Deferred stock-based compensation was reduced by amounts representing stock option cancellations and our repurchases of unvested restricted stock of approximately $221,000 and $224,000 in 2005 and 2004, respectively. We recorded these amounts as components of stockholders’ equity and are amortizing the amounts, on a straight-line basis, as a non-cash charge to operations over the vesting period of the options. We recorded amortization

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of stock-based compensation of $2.9 million and $2.4 million in 2005 and 2004, respectively.

Interest Expense. Interest expense decreased from approximately $817,000 in 2004 to $703,000 in 2005. The decrease of $114,000, or 14%, was primarily due to repayments of approximately $5.5 million associated with our debt agreements with GE Technology Finance with interest rates ranging from 11.44% to 14.66%, offset by approximately $5.0 million of new borrowings under new debt agreements, with Oxford Finance Corporation (“Oxford”) and GE Capital Corporation with interest rates ranging from 9.34% to 10.93%.

Interest Income. Interest income increased from approximately $375,000 in 2004 to $1.5 million in 2005. The increase of $1.1 million, or 300%, was primarily a result of the increase in interest rates during  2005 and the higher average cash, cash equivalents and short term investments balance of $46.0 million available for investment during 2005 as compared to $28.9 million in 2004. The higher cash, cash equivalents and short term investments is due to the addition of net proceeds of $39.4 million from our IPO in February 2005.

Comparison of Fiscal Years Ended December 31, 2004 to 2003

Research and Development.   Research and development expense increased from approximately $10.5 million in 2003 to $18.7 million in 2004. The increase of $8.2 million, or 78%, was primarily due to an increase of $2.4 million associated with ongoing expenses for our new manufacturing facility, which our research and development staff began occupying in October 2003; an increase of $2.1 million associated with an increase in personnel from 61 full-time equivalent employees to 92 full-time equivalent employees to support our Phase 3 clinical trial initiated in July 2004; an increase of $1.4 million associated with supplies to support continued process and formulation development and the purchase of supplies for our manufacturing facility in anticipation of the Phase 3 clinical trial requirements; approximately $550,000 paid to third party vendors providing support services for our Phase 3 clinical trial, including randomization of patients, radiology and laboratory management services.

General and Administrative.   General and administrative expense increased from approximately $2.4 million in 2003 to $4.5 million in 2004. The increase of $2.1 million, or 89%, was primarily due to an increase of $839,000 associated with an increase in personnel from eight full-time equivalent employees to 17 full-time equivalent employees; an increase of $221,000 associated with our new manufacturing facility, which our administrative staff began occupying in May 2003; and an increase of $746,000 in initial public offering costs expensed in accordance with Staff Accounting Bulletin Topic 5A.

Amortization of Stock-Based Compensation.   We recorded deferred stock-based compensation of $9.4 million and $1.6 million in 2004 and 2003, respectively. We recorded these amounts as components of stockholders’ equity and are amortizing the amounts, on a straight-line basis, as a non-cash charge to operations over the vesting period of the options. We recorded amortization of stock-based compensation of $2.4 million and $155,000 in 2004 and 2003, respectively.

Interest Expense. Interest expense increased from approximately $332,000 in 2003 to $817,000 in 2004. The increase of $485,000, or 146%, was primarily due to interest payments associated with our debt agreements with GE Technology Finance and Oxford Finance.

Interest Income. Interest income increased from approximately $108,000 in 2003 to $375,000 in 2004. The increase of $267,000, or 247%, was primarily a result of interest income attributable to the $43.7 million in net proceeds received from the sale of our Series C preferred stock in March and April 2004.

Liquidity and Capital Resources

Sources of Liquidity

We have historically funded our operations primarily through the sale of our equity securities and equipment and leasehold debt financing. As of December 31, 2005, we had received proceeds from the sale of preferred stock of approximately $76.1 million, net of stock issuance costs of approximately $686,000, and proceeds from the sale of common stock in our IPO of approximately $39.4 million, net of underwriters’ discounts and commissions of approximately $3.1 million and offering expenses of approximately $1.4 million. In March 2006, we completed a private placement in which we issued and sold common stock and warrants to purchase common stock to certain investors, for an aggregate puchase price of approximately $45.4 million.

As of December 31, 2005, we had financed the purchase of equipment and leasehold improvements through debt totaling approximately $12.4 million, of which $6.1 million was outstanding at that date. These obligations are secured by certain purchased equipment and leasehold improvements and are due in monthly installments through May 2009. They bear interest at stated rates ranging from approximately 9.34% to 10.93%. The debt agreements subject us to certain financial and non-financial covenants. As of December 31, 2005, we were in compliance with the terms of the debt agreements.

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Cash Flows

As of December 31, 2005, cash, cash equivalents and short-term investments were approximately $34.5 million as compared to $26.6 million at December 31, 2004, an increase of approximately $7.9 million. The increase resulted primarily from the $39.4 million  in net proceeds received from our IPO during the first quarter of 2005, partially offset by net cash used to fund ongoing operations.

Net cash used in operating activities was approximately $29.6 million for the year ended December 31, 2005 reflecting the net loss for this period of $35.9 million, offset primarily by non-cash charges for depreciation and amortization of $1.8 million,  stock-based compensation of $2.9 million and deferred rent of $527,000 and an increase in accounts payable and accrued liabilities of $1.3 million. Net cash used in operating activities was approximately $20.6 million and $12.1 million for the years ended December 31, 2004 and 2003, respectively. The increase in net cash used in operating activities was primarily due to the increase in our clinical development activities for FavId, including enrollment and completion of two Phase 2 clinical trials and our initiation of our pivotal Phase 3 clinical trial in July 2004 and the associated costs of manufacturing product for those trials.

Net cash used in investing activities for the year ended December 31, 2005 totaled $22.7 million reflecting primarily the purchase of $33.0 million of short-term investments and the purchase of approximately $1.8 million property and equipment, partially offset by the maturity of approximately $12.0 million in short-term investments. Net cash used in investing activities was approximately $5.6 million and $7.4 for the years ended December 31, 2004 and 2003, respectively. For the year ended December 31, 2004, net cash used from investing activities is primarily due to the purchase of $4.3 million of property and equipment and $1.5 million in short-term investments. For the year ended December 31, 2003, net cash used from investing activities is the result of construction of leasehold improvements for our new manufacturing facility and the related equipment purchases of approximately $5.6 million. In addition, in 2003 we purchased approximately $1.6 million in money market fund investments to collateralize a letter of credit related to the lease agreement for our facility.

Net cash provided by financing activities for the year ended December 31, 2005 totaled $39.4 million, reflecting primarily the net proceeds from our IPO during the first quarter of 2005 of approximately $39.4 million. Net cash provided by financing activities was approximately $45.6 million and $15.0 million for the years ended December 31, 2004 and 2003, respectively. In 2004, the financing activities consisted primarily of net proceeds of approximately $43.6 million from the sale of our Series C preferred stock in March and April 2004 and net proceeds of debt financing of $3.7 million, offset by $2.1 in principal payments on the debt. In 2003, the financing activities consisted primarily of $5.4 million in proceeds from a line of credit for certain equipment and leasehold improvements and approximately $10.5 million in net proceeds from the sale of our Series B-2 preferred stock, partially offset by principal payments on our debt of $1.0 million.

Funding Requirements

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

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

• rate of progress toward obtaining regulatory approval for our product candidates;

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

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

• effects of competing technological and market developments; and

• the success of the commercialization of FavId.

Until we can generate significant cash from our operations, we expect to continue to fund our operations with existing cash resources that were primarily generated from the proceeds of offerings of our equity securities and from equipment and leasehold improvement debt financing. In addition, we may finance future cash needs through the sale of other equity securities, strategic collaboration agreements and debt financing. However, we may not be successful in obtaining collaboration agreements, or in receiving milestone or royalty payments under those agreements. In addition, we cannot be sure that our existing cash, cash equivalents and short-term investments will be adequate or that additional financing will be available when needed or that, if available, financing will be obtained on terms favorable to us or our stockholders. Having insufficient funds may require us to delay, scale back or eliminate some or all of our research or development programs or to relinquish greater or all rights to product candidates at an earlier stage of development or

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on less favorable terms than we would otherwise choose. Failure to obtain adequate financing may also adversely affect our ability to operate as a going concern. If we raise additional funds by issuing equity securities, substantial dilution to existing stockholders would likely result. If we raise additional funds by incurring debt financing, the terms of the debt may involve significant cash payment obligations as well as covenants and specific financial ratios that may restrict our ability to operate our business.

As of December 31, 2005, 2004 and 2003, we do not believe that we have invested in any variable interest entities. We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships. We do not have relationships or transactions with persons or entities that derive benefits from their non-independent relationship with us or our related parties other than what is disclosed in Note 7 of the Notes to Financial Statements included elsewhere in this report.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Contractual Obligations

The following summarizes our long-term contractual obligations as of December 31, 2005:

	Payments Due by Period
Contractual Obligations	Total		Less than 1 Year		1 to 3 Years		4 to 5 Years		More than 5 Years
	(in thousands)
Long-term debt obligations(1)	$	7,117	$	3,112	$	3,929	$	76	$	—
Capital lease obligations(2)	45		39		6		—		—
Operating lease obligations	99,417		2,152		8,305		9,279		79,681
License obligations(3)	20		10		10		—		—
Total	$	106,599	5,313		12,250		9,355		79,681

(1) Includes monthly principal and interest payments. The stated annual rates of interest on the loans range from 9.34% to 10.93%.

(2) Includes monthly principal and interest payments on capital leases. The effective annual rates of interest on the capital leases range from 5.18% to 21.67%.

(3) Includes an annual fee of $10,000 through our period of clinical development. Additional amounts due under the agreement beyond the clinical development period are based upon certain events occurring. As the timing of those events is unknown they have been excluded from the table.

Under terms of an existing supply agreement, we are obligated to pay fees of up to $300,000 based upon certain events occurring. As the timing of those events is unknown they have been excluded from the table.

We also enter into agreements with service providers and clinical sites that administer and conduct our clinical trials, respectively. We make payments to the service providers and sites based upon the number of patients enrolled. For the years ended December 31, 2005, 2004 and 2003, we had made aggregate payments of $5.1 million, $2.1 million and $738,000, respectively, in connection with our clinical trials. At this time, due to the variability associated with these agreements, we are unable to estimate with certainty the future patient enrollment costs we will incur and therefore have excluded these costs from the above table.

Purchase orders or contracts for the purchase of raw materials and other goods and services are not included in the table above. We are not able to determine the aggregate amount of such purchase orders that represents contractual obligations, as purchase orders may represent authorizations to purchase rather than binding agreements. Our purchase orders are based on our current manufacturing needs and are fulfilled by our vendors within relatively short time horizons.

As of December 31, 2005, we had $1.6 million in restricted cash associated with our facility lease.

Related Party Transactions

For a description of our related party transactions, see “Certain Relationships and Related Transactions.”

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Subsequent Event

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

The Company relied on the exemption from the registration requirements of the Securities Act of 1933, as amended (the “Act”), by virtue of Section 4(2) thereof and Rule 506 of Regulation D promulgated thereunder. The Company has agreed to file a registration statement with the Securities and Exchange Commission within 30 days after closing covering the resale of the shares of common stock issued in the private placement and the shares of common stock issuable upon exercise of the warrants issued in the private placement.

Each investor in the private placement represented that it was an accredited investor, as such term is defined in Regulation D under the Act, and that it was acquiring the common stock and warrants for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were affixed to the common stock and warrants issued in the private placement.

Recently Issued Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board, or FASB, issued SFAS No. 123 (revised 2004), Share-Based Payment, or (SFAS No. 123R) SFAS No. 123R, which will be effective for our first quarter of 2006, requires that employee stock-based compensation is measured based on its fair-value on the grant date and is treated as an expense that is reflected in the financial statements over the related service period. SFAS No. 123R applies to all employee equity awards granted after adoption and to the unvested portion of equity awards outstanding as of adoption. We currently anticipate adopting SFAS No. 123R using the modified-prospective method effective January 1, 2006. While we are currently evaluating the impact on our financial statements of the adoption of SFAS No. 123R, we anticipate that our adoption of SFAS No. 123R will have a significant impact on our results of operations for 2006 and future periods although our overall financial position will not be effected.

In June 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections-a replacement of APB No. 20 and FAS No. 3” (“SFAS No. 154”). SFAS No. 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to the newly adopted accounting principle. SFAS No. 154 also provides guidance for determining whether retrospective application of a change in accounting principle is impracticable and for reporting a change when retrospective application is impracticable. The correction of an error in previously issued financial statements is not an accounting change. However, the reporting of an error correction involves adjustments to previously issued financial statements similar to those generally applicable to reporting an accounting change retrospectively. Therefore, the reporting of a correction of an error by restating previously issued financial statements is also addressed by SFAS No. 154. SFAS No. 154 is required to be adopted in fiscal years beginning after December 15, 2005. We do not believe its adoption will have a material impact on our financial position, results of operation or cash flows.

Item 7A.Quantitative and Qualitative Disclosures About Market Risk

The primary objective of our investment activities is to preserve principal while maximizing income without significantly increasing risk. Some of the securities in which we invest may be subject to market risk. This means that a change in prevailing interest rates may cause the market value of the investment to fluctuate. To minimize this risk, we may maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including commercial paper, money market funds and direct or guaranteed obligations of the United States government. The risk associated with fluctuating interest rates is limited to our investment portfolio and we do not believe that a 1% change in interest rates would have a significant impact on our interest income. As of December 31, 2005, all of our short-term investments were government agency securities and our cash equivalents were held in checking accounts, money market funds, commercial paper and government agency securities.

Item 8.Financial Statements and Supplementary Data

The information required by this Item is included in Part IV, Item 15(a).

Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

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Item 9A.Controls and Procedures

As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of our management, including our chief executive officer and chief financial officer (collectively, our “certifying officers”), of the effectiveness of the design and operation of our disclosure controls and procedures. Based on their evaluation, our certifying officers concluded that these disclosure controls and procedures are effective in providing reasonable assurance that the information required to be disclosed by us in our periodic reports filed with the Securities and Exchange Commission (“SEC”) is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and SEC reports.

We believe that a controls system, no matter how well designed and operated, is based in part upon certain assumptions about the likelihood of future events, and, therefore, can only provide reasonable, not absolute, assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

Item 9B.Other Information

None.

PART III

Item 10Directors and Executive Officers of the Registrant

Directors and Executive Officers

See the section entitled “Executive Officers and Directors of the Registrant” in Part I, Item 1 hereof for certain information regarding executive officers and directors.

Section 16(a) Beneficial Ownership Reporting Compliance

We incorporate by reference the information contained under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement.

Code of Ethics

We have adopted the Favrille, Inc. Code of Business Conduct and Ethics that applies to all officers, directors and employees. The Code of Business Conduct and Ethics is available on our website at www.favrille.com. If we make any substantive amendments to the Code of Business Conduct and Ethics or grant any waiver from a provision of the Code to any executive officer or director, we will promptly disclose the nature of the amendment or waiver on its website.

Item 11.Executive Compensation

We incorporate by reference the information contained under the captions “Compensation of Directors,” “Compensation of Executive Officers,” “Report of the Compensation Committee of the Board of Directors on Executive Compensation,” “Performance Measurement Comparison” and “Compensation Committee Interlocks and Insider Participation” in the Proxy Statement.

Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Security Ownership of Certain Beneficial Owners and Management

We incorporate by reference the information contained under the caption “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in our definitive Proxy Statement for our June 14, 2006 annual meeting of stockholders, to be filed within 120 days after the end of the year covered by this Form 10-K pursuant Regulation 14A under the Securities Exchange Act of 1934, as amended.

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Securities Authorized for Issuance Under Equity Compensation Plans

The following table sets forth certain information with respect to all of our equity compensation plans in effect as of December 31, 2005:

Equity Compensation Plan Information

Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
	(a)	(b)		(c)
Equity compensation plans approved by security holders	1,682,237	$	2.50	379,799
Equity compensation plans not approved by security holders	—	—		—
Total	1,682,237	—		379,799

Item 13.Certain Relationships and Related Transactions

We incorporate by reference the information contained under the caption “Certain Relationships and Related Transactions” in our definitive Proxy Statement for our June 14, 2006 annual meeting of stockholders, to be filed within 120 days after the end of the year covered by this Form 10-K pursuant Regulation 14A under the Securities Exchange Act of 1934, as amended.

Item 14.Principal Accounting Fees and Services

We incorporate by reference the information contained under the caption “Principal Accountant Fees and Services” in our definitive Proxy Statement for our June 14, 2006 annual meeting of stockholders, to be filed within 120 days after the end of the year covered by this Form 10-K pursuant Regulation 14A under the Securities Exchange Act of 1934, as amended.

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PART IV

Item 15.Exhibits and Financial Statement Schedules

(a)The following documents are filed as part of, or incorporated by reference into, this Annual Report on Form 10-K.

(1)Financial Statements

The following Financial Statements of Favrille, Inc. are included in this Annual Report on Form 10-K beginning on page 52:

Report of Independent Registered Public Accounting Firm

Balance Sheets as of December 31, 2005 and 2004

Statements of Operations for each of the three years in the period ended December 31, 2005 and the period from January 21,
2000 (inception) to December 31, 2005

Statements of Stockholders’ Equity (Deficit) for each of the three years in the period ended December 31, 2005 and the period
from January 21, 2000 (inception) to December 31, 2005

Statements of Cash Flows for each of the three years in the period ended December 31, 2005 and the period from January 21,
2000 (inception) to December 31, 2005

Notes to Financial Statements

(2)Financial Statement Schedules

All schedules have been omitted because they are not applicable or the required information is included in the financial statements or notes thereto.

(3)Exhibits

The exhibits listed under Item 15(b) hereof are filed with, or incorporated by reference into, this Annual Report on Form 10-K.

50

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Favrille, Inc.

We have audited the accompanying balance sheets of Favrille, Inc. (a development stage company) (the Company) as of December 31, 2005 and 2004, and the related statements of operations, stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2005 and the period from January 21, 2000 (inception) to December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Favrille, Inc. at December 31, 2005 and 2004, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, and the period from January 21, 2000 (inception) to December 31, 2005, in conformity with U.S. generally accepted accounting principles.

	/s/ Ernst & Young LLP
San Diego, California
March 27, 2006

51

FAVRILLE, INC.

(a development stage company)

BALANCE SHEETS

(in thousands, except share and per share data)

	December 31,
	2005			2004
Assets
Current assets:
Cash and cash equivalents	$	12,065		$	25,065
Short-term investments	22,427			1,493
Receivables	372			19
Prepaid expenses and other current assets	563			694
Total current assets	35,427			27,271
Property and equipment, net	9,430			9,435
Restricted cash	1,550			1,606
Other assets	600			818
Total assets	$	47,007		$	39,130
Liabilities and stockholders’ equity (deficit)
Current liabilities:
Accounts payable and accrued liabilities	$	3,888		$	2,603
Current portion of debt	2,553			2,492
Total current liabilities	6,441			5,095
Debt, less current portion	3,532			4,224
Deferred rent	1,320			793
Commitments and contingencies
Redeemable convertible preferred stock, $0.001 par value:
Authorized shares, none at December 31, 2005 and 6,286,014 at December 31, 2004; Issued and outstanding shares-none at December 31, 2005 and 6,140,188 at December 31, 2004	—			43,672
Stockholders’ equity (deficit):
Preferred stock, $0.001 par value 5,000,000 shares authorized at December 31, 2005 and none at December 31, 2004; no shares issued and outstanding at December 31, 2005 and December 31, 2004	—			—
Convertible preferred stock, $0.001 par value:
Authorized shares, none at December 31, 2005 and 7,013,387 at December 31, 2004; Issued and outstanding shares-none at December 31, 2005 and 5,505,330 at December 31, 2004	—			6
Common stock, $0.001 par value:
Authorized shares, 75,000,000 and 15,402,410 at December 31, 2005 and December 31, 2004, respectively;
Issued and outstanding shares-20,329,046 and 1,838,714 at December 31, 2005 and December 31, 2004, respectively	20			2
Additional paid-in capital	156,882			73,324
Deferred stock-based compensation	(5,655		)	(8,386		)
Note receivable from stockholder	(96		)	(96		)
Accumulated other comprehensive loss	(54		)	(2		)
Deficit accumulated during the development stage	(115,383		)	(79,502		)
Total stockholders’ equity (deficit)	35,714			(14,654		)
Total liabilities and stockholders’ equity (deficit)	$	47,007		$	39,130

See accompanying notes.

52

FAVRILLE, INC.

(a development stage company)

STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

	Years ended December 31,									Period from January 21, 2000 (inception) to December 31,
	2005			2004			2003			2005
Operating expenses:
Research and development	$	28,186		$	18,694		$	10,492		$	66,140
General and administrative	5,323			4,496			2,392			15,779
Amortization of stock-based compensation:
Research and development	1,406			1,196			114			2,716
General and administrative	1,453			1,220			41			2,714
Total operating expenses	36,368			25,606			13,039			87,349
Interest income	1,492			375			108			2,409
Interest expense	(703		)	(817		)	(332		)	(2,007		)
Other income (expense)	(6		)	12			8			14
Loss on extinguishment of debt	(290		)	—			—			(290		)
Total other income (expense), net	493			(430		)	(216		)	126
Net loss	(35,875		)	(26,036		)	(13,255		)	(87,223		)
Deemed dividend—beneficial conversion feature for Series C redeemable convertible preferred stock	—			(28,103		)	—			(28,103		)
Accretion of Series C redeemable convertible preferred stock issuance costs	(6		)	(51		)	—			(57		)
Net loss applicable to common stockholders	$	(35,881	)	$	(54,190	)	$	(13,255	)	$	(115,383	)
Historical net loss per share:
Basic and diluted	$	(1.99	)	$	(51.48	)	$	(16.97	)
Weighted-average shares—basic and diluted	18,060,992			1,052,624			781,054
Pro forma net loss per share (unaudited):
Basic and diluted	$	(1.86	)	$	(4.85	)
Weighted-average shares—basic and diluted	19,295,408			11,182,712

See accompanying notes

53

FAVRILLE, INC.

(a development stage company)

STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

Period from January 21, 2000 (inception) to December 31, 2005

(in thousands, except share and per share data)

	Convertible Preferred Stock			Common stock				Additional Paid-In			Deferred Stock-Based			Note Receivable from			Accumulated Other Comprehensive		Deficit Accumulated During the Development			Total Stockholders’ Equity
	Shares	Amount		Shares		Amount		Capital			Compensation			Stockholder			Loss		Stage			(Deficit)
Issuance of common stock for cash	—	$	—	588,713		$	1	$	2		$	—		$	—		$	—	$	—		$	3
Issuance of Series A Convertible Preferred Stock, in May and June, net of issuance costs of $89,000	1,156,610	1		—		—		5,910			—			—			—		—			5,911
Net loss and comprehensive loss	—	—		—		—		—			—			—			—		(1,053		)	(1,053)
Balance at December 31, 2000	1,156,610	1		588,713		1		5,912			—			—			—		(1,053		)	4,861
Issuance of common stock for cash	—	—		50,119		—		26			—			—			—		—			26
Exercise of options to purchase common stock	—	—		39,128		—		20			—			—			—		—			20
Issuance of warrant in conjunction with credit agreement	—	—		—		—		22			—			—			—		—			22
Repurchase of common stock	—	—		(2,120	)	—		—			—			—			—		—			—
Net loss and comprehensive loss	—	—		—		—		—			—			—			—		(3,758		)	(3,758		)
Balance at December 31, 2001	1,156,610	1		675,840		1		5,980			—			—			—		(4,811		)	1,171
Issuance of common stock for cash	—	—		28,912		—		17			—			—			—		—			17
Issuance of Series B Convertible Preferred Stock net of issuance costs of $136,000	2,563,605	3		—		—		16,085			—			—			—		—			16,088
Conversion of Promissory Notes into Series B stock	103,123	—		—		—		653			—			—			—		—			653
Non-cash stock compensation	—	—		—		—		18			—			—			—		—			18
Issuance of common stock for license agreement	—	—		40,867		—		21			—			—			—		—			21
Issuance of options related to consulting agreement	—	—		—		—		1			—			—			—		—			1
Exercise of options to purchase common stock	—	—		196,474		—		102			—			(96		)	—		—			6
Repurchase of common stock at	—	—		(3,919	)	—		(2		)	—			—			—		—			(2		)
Net loss and comprehensive loss	—	—		—		—		—			—			—			—		(7,246		)	(7,246		)
Balance at December 31, 2002	3,823,338	4		938,174		1		22,875			—			(96		)	—		(12,057		)	10,727
Issuance of Series B-2 Convertible Preferred Stock	1,681,992	2		—		—		10,522			—			—			—		—			10,524
Issuance of common stock for license agreement	—	—		38,553		—		24			—			—			—		—			24
Issuance of options related to consulting agreement	—	—		—		—		16			—			—			—		—			16
Issuance of warrant in conjunction with credit agreement	—	—		—		—		84			—			—			—		—			84
Exercise of options to purchase common stock	—	—		6,056		—		4			—			—			—		—			4
Repurchase of common stock	—	—		(1,687	)	—		(1		)	—			—			—		—			(1		)
Deferred stock-based compensation related to issuance of stock options to employees	—	—		—		—		1,595			(1,595		)	—			—		—			—
Amortization of stock-based compensation	—	—		—		—		—			155			—			—		—			155
Net loss and comprehensive loss	—	—		—		—		—			—			—			—		(13,255		)	(13,255		)
Balance at December 31, 2003	5,505,330	6		981,096		1		35,119			(1,440		)	(96		)	—		(25,312		)	8,278

54

FAVRILLE, INC.

(a development stage company)

STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

Period from January 21, 2000 (inception) to December 31, 2005

(in thousands, except share and per share data)

	Convertible Preferred Stock					Common stock				Additional Paid-In			Deferred Stock-Based			Note Receivable from			Accumulated Other Comprehensive			Deficit Accumulated During the Development			Total Stockholders’ Equity
	Shares		Amount			Shares		Amount		Capital			Compensation			Stockholder			Loss			Stage			(Deficit)
Balance at December 31, 2003	5,505,330		$	6		981,096		$	1	$	35,119		$	(1,440	)	$	(96	)	$	—		$	(25,312	)	$	8,278
Issuance of options and warrant related to consulting agreement	—		—			—		—		169			—			—			—			—			169
Exercise of options to purchase common stock	—		—			889,266		1		555			—			—			—			—			556
Exercise of warrant to purchase common stock	—		—			9,638		—		6			—			—			—			—			6
Repurchase of common stock	—		—			(41,286	)	—		(26		)	—			—			—			—			(26		)
Issuance of warrant in conjunction with credit agreement	—		—			—		—		36			—			—			—			—			36
Deemed dividend—beneficial conversion feature for Series C redeemable convertible preferred stock	—		—			—		—		28,103			—			—			—			(28,103		)	—
Deferred stock-based compensation related to issuance of stock options to employees	—		—			—		—		9,362			(9,362		)	—			—			—			—
Accretion of Series C redeemable Preferred Stock issuance costs	—		—			—		—		—			—			—			—			(51		)	(51		)
Amortization of stock-based compensation	—		—			—		—		—			2,416			—			—			—			2,416
Comprehensive Loss:
Unrealized loss on cash equivalents and short-term investments	—		—			—		—		—			—			—			(2		)	—			(2		)
Net loss	—		—			—		—		—			—			—			—			(26,036		)	(26,036		)
Net comprehensive loss	—		—			—		—		—			—			—			—			—			(26,038		)
Balance at December 31, 2004	5,505,330		6			1,838,714		2		73,324			(8,386		)	(96		)	(2		)	(79,502		)	(14,654		)
Issuance of common stock related to initial public offering and follow on offering, net of approximately $4.6 million of issuance costs	—		—			6,285,000		6		39,436			—			—			—			—			39,442
Deferred stock-based compensation related to issuance of stock options to employees	—		—			—		—		350			(350		)	—			—			—			—
Deferred stock-based compensation related to cancellations of stock options to employees	—		—			—		—		(221		)	221			—			—			—
Exercise of options to purchase common stock	—		—			13,126		—		9			—			—			—			—			9
Issuance of common stock related to Employee Stock Purchase Plan	—		—			27,050		—		106			—			—			—			—			106
Repurchase of common stock	—		—			(12,188	)	—		(8		)	—			—			—			—			(8		)
Expiration of warrant	—		—			—		—		(27		)	—			—			—			—			(27		)
Issuance of warrant in conjunction with credit agreement	—		—			—		—		241			—			—			—			—			241
Conversion of Series C redeemable Preferred Stock to common stock	—		—			6,672,014		6		43,672			—			—			—			—			43,678
Conversion of preferred stock to common stock	(5,505,330	)	(6		)	5,505,330		6		—			—			—			—			—			—
Accretion of Series C redeemable Preferred Stock issuance costs	—		—			—		—		—			—			—			—			(6		)	(6		)
Amortization of stock-based compensation	—		—			—		—		—			2,860			—			—			—			2,860
Comprehensive Loss:
Unrealized loss on cash equivalents and short-term investments	—		—			—		—		—			—			—			(52		)	—			(52		)
Net loss	—		—			—		—		—			—			—			—			(35,875		)	(35,875		)
Net comprehensive loss	—		—			—		—		—			—			—			—			—			(35,927		)
Balance at December 31, 2005	—		$	—		20,329,046		$	20	$	156,882		$	(5,655	)	$	(96	)	$	(54	)	$	(115,383	)	$	35,714

See accompanying notes.

55

FAVRILLE, INC.

(a development stage company)

STATEMENTS OF CASH FLOWS

(in thousands)

	Years ended December 31,									Period from January 21, 2000 (inception) to December 31,
	2005			2004			2003			2005
Operating activities
Net loss	$	(35,875	)	$	(26,036	)	$	(13,255	)	$	(87,223	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	1,825			1,426			579			4,358
Issuance of options and warrants related to consulting agreements	—			169			16			186
Stock-based compensation	2,860			2,416			155			5,450
Non-cash interest expense	34			64			56			172
Loss on extinguishment on debt	(290		)	—			—			(290		)
Issuance of restricted common stock for license	—			—			24			24
Deferred rent	527			596			191			1,320
Amortization of premium/discount on short-term investments	6			(1		)	—			5
Accrued interest on short-term investments	(310		)	(4		)	—			(314		)
Unrealized loss on cash and cash equivalents	—			(1		)	—			(1		)
Changes in operating assets and liabilities:
Receivables	(43		)	(11		)	—			(58		)
Prepaid expenses and other assets	372			(154		)	(490		)	(865		)
Accounts payable and accrued liabilities	1,285			913			666			3,888
Net cash used in operating activities	(29,609		)	(20,623		)	(12,058		)	(73,348		)
Investing activities
Purchases of property and equipment	(1,805		)	(4,347		)	(5,558		)	(13,758		)
Purchases of short-term investments	(32,995		)	(1,493		)	—			(34,488		)
Maturities of short-term investments	12,003			—			—			12,003
Receivable, other	—			239			(239		)	—
Receivable from employee	—			30			30			—
Other assets	—			(50		)	(20		)	(70		)
Restricted cash	—			—			(1,582		)	(1,710		)
Sale of restricted cash	56			52			—			160
Net cash used in investing activities	(22,741		)	(5,569		)	(7,369		)	(37,863		)
Financing activities
Proceeds from debt	5,300			3,675			5,432			15,407
Payments on debt	(5,499		)	(2,119		)	(952		)	(9,083		)
Issuance of preferred stock, net	—			43,621			10,524			76,144
Deferred IPO issuances costs, net	—			(66		)	—			—
Proceeds from issuance of convertible promissory note	—			—			—			650
Issuance of common stock	39,557			562			4			40,195
Repurchase of restricted common stock	(8		)	(26		)	(1		)	(37		)
Net cash provided by financing activities	39,350			45,647			15,007			123,276
Net (decrease) increase in cash and cash equivalents	(13,000		)	19,455			(4,420		)	12,065
Cash and cash equivalents at beginning of period	25,065			5,610			10,030			—
Cash and cash equivalents at end of period	$	12,065		$	25,065		$	5,610		$	12,065
Supplemental disclosures of cash flow information:
Cash paid for interest	$	654		$	732		$	220		$	1,692
Supplemental non-cash financing activities:
Issuance of warrant related to line of credit agreement	$	241		$	36		$	84		$	383
Issuance of options and warrant related to consulting agreement	$	—		$	169		$	16		$	186
Issuance of preferred stock upon conversion of promissory note	$	—		$	—		$	—		$	650
Issuance of restricted common stock for license agreements	$	—		$	—		$	24		$	45
Deemed dividend—beneficial conversion feature for Series C redeemable convertible preferred stock	$	—		$	28,103		$	—		$	28,103
Accretion of Series C redeemable convertible preferred stock issuance costs	$	6		$	51		$	—		$	57
Conversion of Series C to common stock	$	43,678		$	—		$	—		$	43,678

See accompanying notes.

56

Favrille, Inc.

Notes to Financial Statements

1. Organization and Summary of Significant Accounting Policies

Organization and Business

Favrille, Inc. (the Company or Favrille) was incorporated in Delaware on January 21, 2000. The Company is a biopharmaceutical company focused on the research, development and commercialization of targeted immunotherapies for the treatment of cancer and diseases of the immune system. The Company’s lead product candidate, FavId, is based upon unique genetic information extracted from a patient’s tumor.  FavId is currently under investigation in a pivotal Phase 3 clinical trial for patients with follicular B-cell NHL and Phase 2 clinical trials in other B-cell NHL indications. The Company is developing additional applications based on its immunotherapy expertise and proprietary manufacturing technology, including a second product candidate, FAV-201, for the treatment of T-cell lymphoma.

The Company is a development stage company in the initial stage of its operations, and since inception, the Company has been engaged in organizational activities, including: recruiting personnel; establishing office facilities; conducting research and development and obtaining financing. From inception through December 31, 2005, the Company has incurred net losses of $87.2 million and has a deficit accumulated during the development stage of approximately $115.4 million.

Financial Statements Preparation

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts in the Company’s financial statements and the accompanying notes. Actual results could differ from those estimates. Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on reported results of operations.

Cash Equivalents and Short-Term Investments

Highly liquid investments with insignificant interest rate risk and original maturities of three months or less, when purchased, are classified as cash and cash equivalents. Cash equivalents are comprised of commercial paper and U.S. government debt securities. The carrying amounts approximate fair value due to the short maturities of these instruments. Investments with maturities greater than three months when purchased are classified as short-term investments. All of the Company’s short-term investments are classified as available-for-sale and are reported at fair value, as determined by quoted market prices, with any unrealized gains and losses, net of tax, recorded as a separate component of accumulated other comprehensive loss in stockholders’ equity. Unrealized gains and losses on investments accounted for all of the accumulated other comprehensive loss balance in the Statement of Stockholders’ Equity (Deficit). The Company manages its cash equivalents and short-term investments as a portfolio of highly marketable securities, all of which are intended to be available for the Company’s current operations.

Clinical Trial Accruals

In the normal course of business, we contract with numerous third-party clinical trial centers to perform various clinical trial activities in the on-going development of FavId. The financial terms of these agreements are subject to negotiation and variation from contract to contract may result in uneven payment flows. Payment under the contracts depend on factors such as the completion of individual patient’s treatments and the related required documentation. We record expenses for contracted clinical trial costs based upon patient enrollment and the dates that they receive treatment.  These costs are a significant component of research and development expenses.  The objective of our accrual policy is to match the recording of expenses in our financial statements to the actual services received and efforts expended. However, our estimates may not match the timing of actual services performed by the clinical trial centers, which may result in adjustments to our research and development expenses in future periods.

Concentration of Credit Risk

Financial instruments, that potentially subject the Company to significant credit risk, consist primarily of cash and cash equivalents, short-term investments and restricted cash. The Company maintains cash deposits in federally insured financial institutions in excess of federally insured limits. Management believes that the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held. In addition, the Company invests in a variety of financial instruments and, by policy, limits the amount of credit exposure with any one issuer.

57

Fair Value of Financial Instruments

The carrying amount of cash equivalents, short-term investments, receivables, accounts payable and accrued expenses are considered to be representative of their respective fair value because of the short-term nature of those items. Based on the borrowing rates currently available to the Company for loans with similar terms, management believes the fair value of the long-term debt approximates its carrying value.

Property and Equipment

Property and equipment are stated on the basis of cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets (three to seven years). Leasehold improvements are stated at cost and amortized over the shorter of the life of the lease term or the useful life of the asset.

Impairment of Long-Lived Assets

In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company assesses the recoverability of the affected long-lived assets by determining whether the carrying value of such assets can be recovered through the undiscounted future operating cash flows. If impairment is indicated, the Company measures the amount of such impairment by comparing the fair value to the carrying value. While the Company’s current and historical operating losses and cash flows are indicators of impairment, the Company believes the future cash flows to be received from the long-lived assets will exceed the assets’ carrying value. Accordingly, there have been no indicators of impairment through December 31, 2005 or 2004.

Deferred Rent

Rent expense is recorded on a straight-line basis over the term of the lease. The difference between rent expense and amounts paid under the lease agreements is recorded as deferred rent in the accompanying balance sheets.

Research and Development

Research and development costs are expensed as incurred, and costs consist primarily of costs associated with the clinical trials of the Company’s product candidates, compensation and other expenses for research and development personnel, supplies, costs for consultants, facility costs, amortization of purchased technology and depreciation.

Patent Costs

Costs related to filing and pursuing patent applications are expensed as incurred as recoverability of such expenditures is uncertain.

Comprehensive Loss

In accordance with SFAS No. 130, Reporting Comprehensive Income, all components of comprehensive loss are reported in the financial statements in the period in which they are recognized. Comprehensive loss is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. Net loss and other comprehensive loss, including foreign currency translation adjustments and unrealized gains and losses on investments, are reported, net of their related tax effect, to arrive at comprehensive loss. The Company has disclosed its comprehensive loss in the statement of stockholders’ equity (deficit).

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Stock-Based Compensation

The Company records compensation expense for employee stock options based upon their intrinsic value on the date of grant pursuant to Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees.  Prior to the IPO, the Company established the exercise price based on the fair value of the Company’s stock at the date of grant as determined by the Board of Directors (the Board). In determining the fair value of the common stock, the Board considered (i) the advancement of the Company’s technology, (ii) the Company’s financial position and (iii) the fair value of the Company’s preferred stock as determined in arm’s-length transactions. Therefore, the options had no intrinsic value upon grant and no expense is recorded upon issuance. With respect to certain options granted during 2005 and 2004, the Company had recorded deferred compensation of $350,000 and $9.4 million, respectively, for the incremental difference at the grant date between the fair value per share determined by the Board and the deemed fair value per share determined solely for financial reporting purposes. Deferred stock-based compensation is recognized and amortized on a straight-line basis over the vesting period of the related options, generally four years.

Pro forma information regarding net loss is required by SFAS No. 123 and has been determined as if the Company had accounted for its stock-based employee compensation under the fair value method prescribed in SFAS No. 123. The fair value of the options was estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions for the years ended December 31, 2005, 2004 and 2003:

	Stock Option Plans						Employee Stock Purchase Plans
	2005		2004		2003		2005		2004	2003
Weighted average risk-free interest rate	4.30	%	2.83	%	3.04	%	4.41	%	N/A	N/A
Volatility	70	%	70	%	70	%	70	%	N/A	N/A
Dividend yield	0	%	0	%	0	%	0	%	N/A	N/A
Weighted average expected life (years)	4.0		4.0		5.0		1.8		N/A	N/A

The Company accounts for stock option grants and similar equity instruments granted to non-employees under the fair value method, in accordance with Emerging Issues Task Force (EITF) Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services and SFAS No. 123.

Had compensation cost for the Company’s outstanding employee stock options and purchases under the employee stock purchase plans been determined based on the fair value at the grant dates for those options consistent with the provisions of SFAS No. 123, the pro forma effects of stock-based compensation on net loss and basic and diluted net loss per share would have been changed to the following:

	Years ended December 31,									Period from January 21, 2000 (inception) to December 31,
	2005			2004			2003			2005
	(in thousands, except per share data)
Net loss applicable to common stockholders as reported:	$	(35,881	)	$	(54,190	)	$	(13,255	)	$	(115,383	)
Add: Stock-based employee compensation expense included in net loss	2,860			2,416			155			5,430
Deduct: Stock-based employee compensation expense determined under fair value method for all awards	(3,217		)	(2,564		)	(192		)	(6,000		)
Pro forma net loss applicable to common stockholders	$	(36,238	)	$	(54,338	)	$	(13,292	)	$	(115,953	)
Net loss per share:
As reported—Basic and Diluted	$	(1.99	)	$	(51.48	)	$	(16.97	)
Pro forma—Basic and Diluted	$	(2.01	)	$	(51.62	)	$	(17.02	)

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The pro forma effect on net loss for all periods presented may not be representative of the pro forma effect on reported net income or loss in future years due to the uncertainty of stock option grant volume and potential change in assumptions driven by market factors.

Income Taxes

In accordance with SFAS No. 109, Accounting for Income Taxes, a deferred tax asset or liability is determined based on the difference between the financial statement and tax basis of assets and liabilities as measured on the balance sheet date based upon enacted tax rates, which will be in effect when these differences reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period such tax rate changes are enacted. A valuation allowance is established when necessary to reduce deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized prior to its expiration.  A full valuation allowance was recorded on the Company’s net deferred tax assets as of December 31, 2005 and 2004, due to uncertainties related to the Company’s ability to utilize deferred tax assets in the foreseeable future.  These deferred tax assets primarily consist of certain net operating loss carryforwards and research and development tax credits.

Net Loss per Common Share

Net loss per share is calculated in accordance with SFAS No. 128, Earnings Per Share and Staff Accounting Bulletin (SAB) No. 98. Basic loss per share is calculated using the weighted average number of common shares outstanding during each period, without consideration for common stock equivalents. Diluted loss per share includes the dilutive effect of common equivalent shares outstanding for the period determined using the treasury-stock method. For purposes of this calculation, common stock subject to repurchase by the Company, preferred stock, options and warrants are considered to be common stock equivalents and are only included in the calculation of diluted earnings per share when their effect is dilutive.

Pro forma net loss per share has been calculated as described above. The pro forma shares used to compute basic and diluted net loss per share represent the weighted-average common shares outstanding, reduced by the weighted-average unvested common shares subject to repurchase, and include the assumed automatic conversion of all outstanding shares of preferred stock that automatically converted into shares of common stock upon the closing of our initial public offering  (IPO), in February 2005, using the as-if converted method as of the date of issuance.

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	Years ended December 31,
	2005			2004			2003
	(in thousands, except per share data)
Historical:
Numerator:
Net loss	$	(35,875	)	$	(26,036	)	$	(13,255	)
Deemed dividend—beneficial conversion feature for Series C redeemable convertible preferred stock	—			(28,103		)	—
Accretion of Series C redeemable convertible stock issuance costs	(6		)	(51		)	—
Net loss applicable to common stockholders	$	(35,881	)	$	(54,190	)	$	(13,255	)
Denominator:
Weighted-average common shares	18,496,815			1,539,072			950,600
Weighted-average unvested common shares subject to repurchase	(435,823		)	(486,448		)	(169,546		)
Denominator for basic and diluted earnings per share	18,060,992			1,052,624			781,054
Basic and diluted net loss per share	$	(1.99	)	$	(51.48	)	$	(16.97	)
Pro forma:
Net loss applicable to common stockholders	$	(35,881	)	$	(54,190	)
Pro forma basic and diluted net loss per share (unaudited)	$	(1.86	)	$	(4.85	)
Shares used above	18,060,992			1,052,624
Pro forma adjustments to reflect weighted-average affect of conversion of preferred stock (unaudited)	1,234,416			10,130,088
Pro forma shares used to compute basic and diluted net loss per share (unaudited)	19,295,408			11,182,712
	As of December 31,
	2005			2004			2003
Historical outstanding antidilutive securities not included in diluted net loss per share calculation:
Common stock equivalents:
Redeemable convertible preferred stock	—			6,672,014			—
Convertible preferred stock	—			5,505,330			5,505,330
Stock warrants	127,499			47,057			49,108
Options to purchase common stock	1,682,237			959,753			469,301
Common stock subject to repurchase	288,683			599,325			127,865
	2,098,419			13,783,479			6,151,604

Segment Information

The Company adopted the provisions of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 requires public companies to report financial and descriptive information about their reportable operating segments. The Company identifies its operating segments based on how management internally evaluates separate financial information, business activities and management responsibility. The Company believes it operates in a single business segment, therefore this standard did not have a material impact on the Company’s financial statements.

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Recent Accounting Pronouncements

As permitted by SFAS No. 123, we currently account for share-based payments to employees using APB No. 25’s intrinsic value method and as such, generally recognize no compensation cost for employee stock options.  In December 2004, the FASB revised Statement No. 123 (FAS 123R) Share-Based Payment, which requires companies to expense the estimated fair value of employee stock options and similar awards.  On April 15, 2005, the U.S. Securities and Exchange Commission adopted a new rule amending the compliance dates for FAS123R.  In accordance with the new rule, the accounting provisions of FAS 123R will be effective for the Company beginning in the first quarter of 2006.  The Company tentatively expects to adopt the provisions of FAS 123R using a modified prospective application.  FAS123R, which provides certain changes to the method for valuing share-based compensation among other changes, will apply to new awards and to awards that are outstanding on the effective date and are subsequently modified or cancelled.  Compensation expense for outstanding awards for which the requisite service had not been rendered as of the effective date will be recognized over the remaining service period using the compensation cost calculated for pro forma disclosure purposes under FAS 123.  The impact of adoption of SFAS No. 123R cannot be predicted at this time because it will depend on levels of share-based payments granted in the future and the assumptions for the variables which impact the computation.  However, had the Company adopted SFAS 123R in prior periods, the impact of that standard would have approximated the impact under SFAS123 as described in the disclosure of proforma net loss and loss per share  Accordingly, the adoption of fair value method required under SFAS 123R, Share-Based Payment, will have a significant impact on our results of operations, although it will have no impact on our overall financial position.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections - replacement of APB Opinion No. 20 and FASB Statement No. 3.   SFAS 154 changes the accounting for and reporting of a change in accounting principle by requiring retrospective application to prior periods’ financial statements of changes in accounting principle unless impracticable. SFAS 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005. We do not expect the adoption of SFAS 154 to have a material impact on our results of operations, financial position or cash flows.

2. Financial Statement Information

Short-term Investments

Short-term investments by security type at December 31, 2005, were as follows (in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Government Agency Securities	$	10,427	$	—	$	(31	)	$	10,396
Corporate Bonds and Notes	8,784		—		(14		)	8,770
Asset –Backed Securities	3,270		—		(9		)	3,261
	$	22,481	$	—	$	(54	)	$	22,427

All investments that have gross unrealized losses have been held for less than twelve months. At December 31, 2005 and 2004, the Company had unrealized losses on short-term investments of approximately $54,000 and $2,000, respectively. These unrealized losses are included in the statement of stockholders’ equity as other comprehensive loss.  Contractual maturities of short-term investments are due in one year or less.  There have been no significant realized gains or losses on investments since the inception of the Company.

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Property and Equipment

Property and equipment consisted of the following (in thousands):

	December 31,
	2005			2004
Lab equipment	$	3,749		$	3,538
Manufacturing equipment	2,998			2,489
Computer, software and office equipment	2,606			1,584
Leasehold improvements	4,299			4,243
Construction in process	7			—
	13,659			11,854
Accumulated depreciation and amortization	(4,229		)	(2,419		)
	$	9,430		$	9,435

Total depreciation expense, including amortization for assets under capital lease, for the years ended December 31, 2005, 2004 and 2003, and the period from January 21, 2000 (inception) to December 31, 2005 was $1.8 million, $1.4 million, $575,000 and $4.3 million, respectively.

Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities consisted of the following (in thousands):

	December 31,
	2005		2004
Accounts payable	$	1,295	$	872
Accrued clinical trial costs	825		325
Accrued compensation	832		505
Accrued liabilities	936		611
Accrued IPO expenses	—		290
	$	3,888	$	2,603

3. Commitments and Contingencies

Equipment Lines of Credit

During March 2003, the Company entered into a loan and security agreement under which the lender agreed to extend to the Company a line of credit equal to $7.0 million.  Borrowings under the line of credit bore interest at rates ranging from 11.44% to 14.66% per annum and were collateralized by certain items of the financed equipment and leasehold improvements. Principal and interest, related to each draw, were payable monthly over 36 months or 42 months, and the Company was required to make final terminal payments equal to 7.50% or 12.75% of the original principal amount of each drawdown.  Monthly payments were made from time of each drawdown through November 2005.  In December 2005, the Company repaid all of the outstanding principal and interest of approximately $2.9 million, of which approximately $200,000 had been prepaid at the time of the borrowings and an early termination fee of approximately $290,000, which the Company recorded as a loss on extinguishment of debt.  At December 31, 2004, the Company had borrowings outstanding under the line of credit of $4.6 million.

During December 2005, the Company entered into loan and security agreement with a lender and an amendment to a loan and security agreement with another lender (Agreements) under which the lenders agreed to extend to the Company a line of credit equal to $20.0 million.  As a condition of the Agreements, on December 30, 2005, the Company borrowed $3.0 million against the line of credit to repay the outstanding balance of existing loan and security agreements executed in March 2003.  Borrowings for this draw bear interest at a rate of 10.89% per annum, with principal and interest payable monthly over 24 months.  The Agreements state that the remaining proceeds are to be used solely for the purchase of eligible equipment and certain leasehold improvements through December 2007.  Borrowings against the line of credit will be structured as promissory notes with the interest rate fixed at the time of each draw based on the three-year treasury bill.  Such borrowings are to be secured by all existing and future assets of the Company excluding intellectual property and repaid, monthly, over 36 to 42 months, depending upon the nature of the equipment financed.  The Company has agreed not to pledge its intellectual property to any third party or permit a third party to restrict the Company’s ability to pledge its intellectual property.  However, the Company retains the right to grant non-exclusive licenses of its intellectual property in

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the ordinary course of business and non-exclusive and exclusive licenses of its intellectual property in connection with joint ventures and corporate collaborations in the ordinary course of business.  The Company’s ability to borrow the remaining approximately $17 million available under the line of credit is contingent upon the Company obtaining at least $20 million in additional equity financing by March 31, 2006.  The Agreements contain a restrictive financial covenant requiring the Company maintain a minimum of $15.0 million in available cash, cash equivalent and short-term investment accounts.  In addition, the Agreements subject the Company to certain non-financial covenants.  As of December 31, 2005, the Company was in compliance with the terms of the Agreements.

During July 2004, the Company entered into a loan and security agreement under which the lender agreed to extend to the Company a line of credit equal to $2.5 million. In June 2005, the lender increased the line of credit by $1.6 million, which created a total line of credit facility of $4.1 million. The proceeds were used solely for the purchase of eligible equipment, leasehold improvements and software.  Borrowings under the line of credit bear interest at 9.34% and 10.93% per annum and are collateralized by certain of the financed equipment. Principal and interest, related to each draw, are payable monthly over 36 months or 42 months. The loan and security agreement subjects the Company to certain financial and non-financial covenants. As of December 31, 2005, the

Company was in compliance with the terms of the loan and security agreement.  As of December 31, 2005 and 2004, the Company had borrowings outstanding under the loan and security agreement totaling $3.3 million and $1.9 million respectively.

Future minimum principal payments due under the above loan and security agreements are as follows at December 31 (in thousands):

2006	$	2,607
2007	2,883
2008	769
2009	74
Total	6,333
Less: Amounts representing debt discount	(289		)
Net loan	6,044
Less: Current portion	2,522
Long-term portion	$	3,522

The current portion and long-term portion, above, excludes $31,000 and $10,000, respectively, in capital leases payments, included in the capital lease disclosures.

Leases

The Company leased its research facilities from a related party (Note 7) under a non-cancelable operating lease that expired on March 31, 2004. The lease required the Company to pay for its share of maintenance, insurance and property taxes. As a security deposit for the facility lease, the Company executed a letter of credit in favor of the landlord, secured by a certificate of deposit for approximately $45,000. The certificate of deposit matured in March 2004 and was not renewed.

In January 2003, the Company entered into a 15 and one-half year lease for approximately 49,000 square feet of manufacturing, laboratory and office space. The lease had stated rental increases over the lease term. Under the terms of the lease agreement, the Company was required to pay a security deposit of approximately $152,000 and execute a $1.5 million letter of credit in favor of the landlord, which is secured by a restricted investment in money market funds. The restricted investment is included in restricted cash in the accompanying balance sheets. The lease required the Company to pay for its share of maintenance, insurance and property taxes. In July 2004, the Company amended its current facility lease to add an additional 14,000 square feet of office space. The lease term on the additional space expired July 31, 2008, but could be extended at the Company’s option for two additional two year periods. In August 2005, the Company amended its current facility lease to add the remaining 17,000 square feet of space in order to occupy the entire building.  The lease term on the additional space expired January 31, 2007.  In November 2005, the Company terminated this lease upon executing an amended and restated lease agreement as noted below.

In November 2005, the Company entered into an amended and restated lease agreement (Lease Agreement) with its

landlord to expand its existing facility to support commercial-scale manufacturing of FavId.  This 80,000-square foot facility (Existing Facility) will be devoted to manufacturing .  The landlord will provide the Company with a tenant improvement allowance of $10

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million for the Existing Facility.  In addition, the Company has committed to lease an adjacent 48,000-square foot facility (New

Facility) to house Favrille’s corporate headquarters and research and warehousing operations.  The landlord will provide the Company with a tenant improvement allowance of $1.2 million for the New Facility.

Existing Facility  Under the Lease Agreement, monthly base rent for the Existing Facility will average approximately $168,000 for the period November 2005 through January 2007.  Monthly rent will be approximately $288,000 per month beginning in February 2007 and then will increase by 3.5% annually commencing in February 2008.  The Lease Agreement further required the Company to increase the security deposit provided to the landlord from approximately $166,000 to approximately $355,000, upon execution of the Lease Agreement.  In addition, prior to any distribution of the tenant improvement allowance, the Company is required to deliver to the landlord an amendment to the existing letter of credit to increase the amount from approximately $1.5 million to approximately $3.5 million, which amount will be subject to increases, reductions and reinstatements under specified circumstances.  The Company is responsible for all operating costs and real estate taxes incurred with respect to the Existing Facility and is required to maintain insurance at specified minimum levels during the term of the Lease Agreement.  In addition, the Company is obligated to pay the landlord monthly management fees equal to 2.25% of the applicable base rent during the term of the Lease Agreement and an additional fee equal to 1% of the construction costs incurred in connection with tenant improvements.  Unless earlier terminated, the Lease Agreement will expire June 30, 2025, but the Company has the option to extend the term of the Lease Agreement for two additional five-year periods.  Construction of the tenant improvements is expected to begin in June 2006.

New Facility.  Upon termination of an existing lease between the landlord and a third party with respect to the New Facility, the Company and the landlord have committed to execute an amendment to the Lease Agreement (Amendment) pursuant to which the Company would lease the New Facility.  If the landlord is unable to negotiate such early termination, then the third party lease will expire on November 30, 2006 and the landlord has agreed to deliver the New Facility to the Company at that time.  The Amendment would provide for the Company’s lease of the New Facility to commence on the earlier of the 91^st day after the landlord tenders possession of the New Facility to the Company for purposes of making tenant improvements (but in no event earlier than February 28, 2006) or March 1, 2007.  The base rent for the New Facility would increase by 3.5% annually commencing on the first anniversary of the commencement of the lease for the New Facility.  However, during the first 12 months of the lease, the Company would be obligated to pay only 50% of the base rent and operating expenses.  The provisions of the Lease Agreement regarding operating costs, real estate taxes, insurance, monthly management fees and tenant improvement fees for the Existing Facility would also apply to the New Facility.  Unless earlier terminated, the Company’s lease of the New Facility would expire on June 30, 2025, but the Company has the option to extend the term of the Lease Agreement for two additional five-year periods.  The Company would have a one-time right to terminate its lease of the New Facility effective as of June 1, 2017, upon six months’ prior notice to the landlord.

In May 2003, the Company entered into a 36-month capital lease for the purchase of certain property and equipment.  The lease bears an annual interest rate of 6.57%, with interest and principal due monthly.  In January 2004, the Company entered into two capital leases, for the purchase of certain property and equipment, with terms of 60 months and 36 months, respectively. The capital leases bear effective annual interest rates of 5.18% and 21.67%, respectively, with interest and principal due monthly.

Future annual minimum payments under capital leases and non-cancelable operating leases are as follows at December 31 (in thousands):

	Operating Leases		Capital Leases
2006	$	2,152	$	34
2007	3,900		5
2008	4,405		6
2009	4,560		—
2010	4,719		—
Thereafter	79,681		—
Total minimum lease payments	$	99,417	45
Less: Amount representing interest			4
Present value of future minimum lease payments			41
Less: Current portion			31
Long-term portion			$	10

The minimum lease payments above include payments to be made related to the New Facility.

Rental expense, including equipment rental, for the years ended December 31, 2005, 2004 and 2003, and the period from January 21, 2000 (inception) to December 31, 2005 and was  $2.4 million, $2.5 million, $1.3 million and $7.1 million, respectively.

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4. License Agreements

In April 2002, the Company issued 40,867 shares of restricted common stock to a company whose major stockholder is a founder of Favrille, in exchange for a worldwide, perpetual, royalty-free license for certain technology. The fair value attributed to the license of $21,000 was based on the fair value of the common stock as determined by the Board and is included in other assets and is being amortized over the estimated life of the technology, which is five years. Amortization of approximately $4,200, $4,200, $4,200 and $15,500 has been recorded as research and development expense during the years ended December 31, 2005, 2004 and 2003, and the period from January 21, 2000 (inception) to December 31, 2005, respectively.

In September 2003, the Company entered into an exclusive license and intellectual property assignment agreement with a non-profit organization with which the Company shares a common director (the License Agreement). Under the terms of the License Agreement, the Company licensed certain intellectual property developed and or acquired by one of the Company’s founders while he was an employee of the licensor. In consideration for the licensed technology, the Company issued an aggregate of 38,553 shares of common stock to the licensor and one of its collaborators. The fair value attributed to the license of $24,000 was based on the fair value of the common stock as determined by the Board. The fair value of the license was charged to research and development expense in 2003 due to the early stage of development of the technology and the lack of alternative future uses for it.

In December 2003, the Company entered into a non-exclusive worldwide fee-bearing royalty-free license agreement for certain patent rights. In consideration for the patent rights, the Company paid an initial fee of $20,000 and the first annual payment of $10,000 upon execution of the agreement in 2003 and is committed to annual payments of $10,000 through the Company’s clinical development period (anticipated to end in 2007) and, after commercialization of its first product candidate, an aggregate of $225,000 in annual fees and a milestone payment. The annual payment is recorded as research and development expense. The initial fee has been recorded as a license fee and is amortized to research and development expense over a five-year period, the estimated life of the technology. Expense related to the license agreement for the years ended December 31, 2005, 2004 and 2003 and the period from January 21, 2000 (inception) to December 31, 2005 totaled approximately $14,000, $14,000, and $1,200 and $29,200, respectively.

In November 2004, the Company entered into a supply and license agreement with one of its vendors in which it made a $50,000 milestone payment, upon execution of the agreement.  An additional aggregate of $300,000 may be due upon the occurrence of certain events. The initial term of the agreement is 96 months and is automatically renewable for 12 month periods unless terminated by written notice by either party.  Either party may terminate the agreement earlier upon a breach by the other party that is not cured within 60 days or other events relating to insolvency or bankruptcy. The initial milestone payment was recorded as a license fee and is amortized to research and development expense over an eight-year period, the initial term of the agreement.  During 2005, the Company purchased the required minimum raw material under the agreement.  Expense related to the agreement for the years ended December 31, 2005 and 2004 and the period from January 21, 2000 (inception) to December 31, 2005 totaled approximately $241,000 and $1,000 and $242,000, respectively.

5. Stockholders’ Equity

Initial Public Offering

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

Authorized Capital Stock

On February 7, 2005, the Company filed an amended and restated certificate of incorporation to provide for authorized capital stock of 75,000,000 shares of common stock and 5,000,000 shares of undesignated preferred stock.

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Series C Redeemable Convertible Preferred Stock Deemed Dividend

The 2004 Series C financing, involved the sale of preferred stock at a price per share below the Company’s anticipated initial public offering price. Accordingly, pursuant to EITF 98-5, Accounting for Convertible Securities with Beneficial Conversion Features, the Company recorded a deemed dividend on the Series C shares of $28.1 million, which is the difference in the gross proceeds from the Series C offering and the underlying value of the conversion shares (adjusted for a conversion price adjustment feature). The $28.1 million deemed dividend has been entirely recognized in the year ended 2004, as an adjustment to the net loss applicable to common stockholders since the preferred stock was convertible, at any time, at the option of the holder, and was not mandatorily redeemable. In accordance with EITF 00-27, Application of Issue No. 98-5 to Certain Convertible Instruments, the Company calculated the deemed dividend of $28.1 million using the most favorable conversion price of $6.33 per conversion share.

Convertible Preferred Stock

Effective immediately prior to the initial closing of the IPO in February 2005, shares of Series A, B, B-2 and C convertible preferred stock then outstanding were converted into an aggregate of 12,177,344 shares of the Company’s common stock.

Restricted Stock

In January 2000, the Company issued approximately 396,000 restricted shares of the Company’s common stock to certain employees with vesting over a three-year period. During 2002 and 2001, the Company issued an additional 9,638 and 50,119, respectively, of restricted shares of common stock to certain directors and consultants. The restricted stock vests monthly, over a period of two to four years. In addition, during 2005, 2004, 2003 and the period from January 21, 2000 (inception) to December 31, 2005, the Company issued 1,536, 706,268, 5,065 and 942,950 shares, respectively, of restricted shares of common stock upon the early exercise of stock options, as noted below. The options generally vest over four years. Included in the restricted stock issued in 2002 are 185,060 shares of common stock issued upon the early exercise of options by an officer of the Company through a full recourse promissory note for $96,000. The note receivable from stockholder is reflected in stockholders’ equity in the accompanying balance sheets and has a maturity date of April 19, 2006. During the years ended December 31, 2005, 2004, 2003 and the period from January 21, 2000 (inception) to December 31, 2005, the Company had repurchased approximately 12,188, 41,286, 1,687 and 59,077 unvested shares, respectively. As of December 31, 2005 and 2004, 288,683 shares and 599,994 shares, respectively, were unvested and subject to repurchase by the Company.

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Stock Options

As amended, the 2001 Equity Incentive Plan (the Equity Incentive Plan) is authorized to issue approximately 2.8 million shares of common stock under various instruments. Options granted under the Equity Incentive Plan generally expire no later than ten years from the date of grant (five years for a 10% stockholder). Options generally vest over a period of four years. Prior to the Company’s IPO in February 2005, all options granted under the Equity Incentive Plan allowed for early exercise prior to the option becoming fully vested.

The exercise price of incentive stock options must be equal to at least the fair value of the Company’s common stock on the date of grant, and the exercise price of non-statutory stock options may be no less than 85% of the fair value of the Company’s common stock on the date of grant. The exercise price of any option granted to a 10% stockholder may not be less than 110% of the fair value of the Company’s common stock on the date of grant.

The stock option activity is summarized below (shares in thousands):

	Shares		Approximate Weighted-average exercise price
Outstanding at December 31, 2000	—		$	—
Granted	69		0.52
Exercised	(39	)	0.52
Cancelled	—		—
Outstanding at December 31, 2001	30		0.52
Granted	361		0.57
Exercised	(196	)	0.53
Cancelled	(4	)	0.54
Outstanding at December 31, 2002	191		0.61
Granted	312		0.63
Exercised	(6	)	0.60
Cancelled	(28	)	0.62
Outstanding at December 31, 2003	469		0.62
Granted	1,389		0.64
Exercised	(889	)	0.63
Cancelled	(10	)	0.62
Outstanding at December 31, 2004	959		0.63
Granted	792		4.74
Exercised	(13	)	3.36
Cancelled	(56	)	2.56
Outstanding at December 31, 2005	1,682		2.50

The weighted-average fair value of options granted during 2005, 2004 and 2003, and for the period from January 31, 2000 (inception) to December 31, 2005 was $2.85, $6.88, $6.14 and $4.80, respectively. At December 31, 2005, 420,831 outstanding options were exercisable.  In 2004 and 2003, all outstanding options were exercisable, and options to purchase 226,477 and 88,559 shares, respectively, were vested. Exercise prices of outstanding options at December 31, 2005 and 2004 ranged from approximately $0.52 to $5.65 and $0.52 to $0.73 per share, respectively. The weighted-average remaining contractual life of the options outstanding at December 31, 2005 and 2004 was 8.75 years and 9.18 years, respectively.

At December 31, 2005, the Company had issued more shares than available for future issuance or grant under the Equity Incentive Plan, creating a deficit of approximately 40,020 shares.  The deficit will be offset on the first day in 2006 as provided under the Equity Incentive Plan Share Reserve Provision, which increases the plan shares on the first day of each fiscal year, beginning in 2006, equal to the least of: i) 5% of the Company’s outstanding shares of Common Stock on the day preceding the first day of such fiscal year; ii) 1.3 million shares of common stock; or iii) an amount determined by the Board.  At December 31, 2004, 683,000 shares remained available for future issuance or grant under the Equity Incentive Plan.

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The following table summarizes information as of December 31, 2005 concerning options outstanding:

	Options Outstanding				Options Exercisable
Range of Exercise Prices	Options Outstanding	Weighted Average Remaining Contractual Life in Years	Weighted Average Exercise Price		Options Exercisable	Weighted Average Exercise Price of Options Exercisable
$0.52 - $0.52	7,227	5.86	$	0.52	7,150	$	0.52
$0.63 - $0.63	863,280	8.14	$	0.63	348,194	$	0.63
$0.73 - $3.46	81,799	9.08	$	1.11	11,487	$	0.73
$3.50 - $3.50	190,000	9.92	$	3.50	—	$	—
$3.89 - $4.64	51,446	9.68	$	4.29	—	$	—
$4.75 - $4.75	1,156	9.72	$	4.75	—	$	—
$5.00 - $5.00	2,312	9.60	$	5.00	—	$	—
$5.03 - $5.03	5,500	9.58	$	5.03	—	$	—
$5.50 - $5.50	426,056	9.24	$	5.50	54,000	$	5.50
$5.65 - $5.65	53,454	9.24	$	5.65	—	$	—
$0.52 - $5.65	1,682,230	8.75	$	2.50	420,831	$	1.26

Non-Employee Directors’ Stock Option Plan

In December 2004, the Board approved the 2005 Non-Employee Directors’ Stock Option Plan (the Directors’ Plan), which became effective on the closing date (February 7, 2005) of the registration statement filed in connection with the Company’s IPO.

The Directors’ Plan provides for the automatic grant of non-statutory options to purchase shares of common stock to non-employee directors.  An aggregate of 420,000 shares of common stock have been reserved for future issuance under the Directors’ Plan.  This amount will be increased annually on the first day of the Company’s fiscal year, from 2005 to 2013, by the lesser of  90,000 shares of common stock or an amount determined by the Board.  As of December 31, 2005, no options to purchase common stock had been granted.

Employee Stock Purchase Plan

In December 2004, the Board approved the 2005 Employee Stock Purchase Plan (the Purchase Plan) which became effective on the closing date (February 7, 2005) of the registration statement filed in connection with the Company’s IPO.

Under the Purchase Plan, the Company may issue up to 300,000 shares of common stock to eligible employees who elect to participate in the Purchase Plan.  This amount will be increased annually on the first day of the Company’s fiscal year, from 2005 to 2013, by the lesser of i) 2% of the Company’s outstanding shares of Common Stock on the day preceding such fiscal year, ii) 50,000 shares of Common Stock or iii) an amount determined by the Board.  Employees participating in the Purchase Plan will obtain the right to purchase shares of Common Stock at the lower of 85% of the Common Stock closing price on the first day of the offering period or 85% of the Common Stock closing price on the purchase date.  The initial offering period commenced upon the closing date (February 7, 2005) of the Company’s IPO and will be approximately 24 to 27 months in duration, with purchase dates occurring every six months.  As of December 31, 2005, employees had  purchased 27,050 shares of Common Stock under the Purchase Plan.

Warrants

In March 2001, in conjunction with its line of credit agreement, the Company issued a warrant to purchase up to an aggregate of 40,000 shares of the Company’s Series A Preferred Stock at an exercise price of approximately $1.00 per share. The warrant is exercisable through the later of March 15, 2008 or five years after the Company’s initial public offering. The Company determined the fair value of the warrant on the grant date, using the Black-Scholes pricing model, of $22,400, which was recorded as a debt discount and was amortized over the term of the line of credit. The assumptions used in determining the fair value of the warrants were a risk-free interest rate of 4.3%; dividend yield of 0%; expected volatility of 60%; and an expected life of five years. Amortization of approximately $500, $4,900 and $22,400 was recorded as interest expense during the years ended December 31, 2004 and 2003, and for the period from January 21, 2000 (inception) to December 31, 2004, respectively. On May 15, 2005, the warrant agreement was amended to allow the warrant holder to purchase up to an aggregate of 7,710 shares of the Company’s Common Stock at an exercise price of approximately $5.19 per share.  As of December 31, 2005, the warrant remained outstanding.

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In March 2003, in conjunction with its loan and security agreement, the Company issued warrants to purchase up to an aggregate of approximately 114,755 shares of the Company’s Series B Preferred Stock at an exercise price of approximately $1.22 per share. The warrants are exercisable through March 20, 2010. The Company determined the fair value of the warrants on the grant date, using the Black-Scholes pricing model, of $84,000, which is recorded as a debt discount and is being amortized over the term of the loan and security agreement. The assumptions used in determining the fair value of the warrants were a risk-free interest rate of 3.0%; dividend yield of 0%; expected volatility of 70%; and an expected life of five years. Amortization of approximately $17,000, $35,000, and $84,000 was recorded as interest expense during the years ended December 31, 2005 and 2004, and for the period from January 21, 2000 (inception) to December 31, 2005, respectively.  Under the terms of the warrant agreement, upon the Company completing it IPO, the underlying preferred stock shares of the warrants converted into common stock shares.  As a result, the underlying warrants were converted into warrants to purchase an aggregate of approximately 22,121 shares of the Company’s Common Stock at an exercise price of approximately $6.33 per share.  As of December 31, 2005, the warrants remained outstanding.

In December 2005, in conjunction with a loan and security agreement, the Company issued warrants to purchase up to an aggregate of 97,668 shares of the Company’s Common Stock at an exercise price of approximately $4.10 per share. The warrants are exercisable through December 30, 2010. The Company determined the fair value of the warrants on the grant date, using the Black-Scholes pricing model, of $241,000, which is recorded as a debt discount and is being amortized over 24 months, which is equal to the repayment term of the promissory note under the loan and security agreement. The assumptions used in determining the fair value of the warrants were a risk-free interest rate of 4.35%; dividend yield of 0%; expected volatility of 70%; and an expected life of five years.  As of December 31, 2005, the warrants remained outstanding and no interest expense had been recorded.

The weighted-average exercise price of warrants outstanding as of December 31, 2005, 2004 and 2003 was approximately $4.55, $5.02 and $3.91, respectively. The weighted-average fair value of warrants granted during 2005, 2004, 2003 and for the period from January 31, 2000 (inception) to December 31, 2005 was $2.47, $5.14, $3.79 and $2.73, respectively. The weighted-average

remaining contractual life of the warrants outstanding at December 31, 2005 and 2004 was 4.70 years and 5.29 years, respectively.

Common Stock Reserved for Future Issuance

The following shares of common stock were reserved for future issuance at December 31, (in thousands):

	2005	2004
Conversion of Series A preferred stock	—	1,156
Conversion of Series B preferred stock	—	2,667
Conversion of Series B-2 preferred stock	—	1,682
Conversion of Series C redeemable preferred stock	—	6,672
Warrants for the purchase of Series A preferred stock	—	8
Warrants for the purchase of Series B preferred stock	—	22
Warrants for the purchase of Series C redeemable preferred stock	—	7
Warrant for the purchase of common stock	127	10
Common stock options
Granted and outstanding	1,682	959
Reserved for future issuance	380	683
Common stock reserved for Employee Stock Purchase Plan	273	—
	2,462	13,866

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6. Income Taxes

Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2005 and 2004 are shown below. A valuation allowance of $36.7 million and $21.2 million as of December 31, 2005 and 2004 has been recognized to offset the net deferred tax assets as realization of such net assets has not met “the more likely than not” threshold required under SFAS No. 109.

	December 31,
	2005			2004
	(in thousands)
Deferred tax assets:
Net operating loss carryforwards	$	31,738		$	19,333
Tax credits	4,860			1,878
Deferred rent	538			323
Deferred compensation	262			212
Other	22			6
Total deferred tax assets	37,420			21,752
Valuation allowance for deferred tax assets	(36,696		)	(21,165		)
Net deferred tax assets	724			587
Deferred tax liabilities:
Depreciation and amortization	(724		)	(587		)
Net deferred taxes	$	—		$	—

Reconciliation of the statutory federal income tax to the Company’s effective tax:

	December 31,
	2005			2004			2003
	(in thousands)
Tax at federal statutory rate	$	(12,556	)	$	(9,113	)	$	(4,639	)
State, net of federal benefit	(1,836		)	(1,327		)	(735		)
Tax credits	(2,355		)	(800		)	(522		)
Change in valuation allowance	15,531			10,100			5,663
Permanent differences – Stock based compensation	1,001			883			55
Permanent differences – Other	589			242			120
Other	(374		)	15			58
Provision for income taxes	$	—		$	—		$	—

At December 31, 2005, 2004 and 2003, the Company had federal tax net operating loss carryforwards of approximately $77.8 million, $47.5 million and $24.5 million, respectively. At December 31, 2005, 2004 and 2003, the Company had California tax net operating loss carryforwards of approximately $78.5 million, $47.3 million and $24.5 million, respectively. The federal and California tax loss carryforwards will begin expiring in 2020 and 2012, respectively, unless previously utilized. At December 31, 2005, the Company also had federal and California research and development tax credit carryforwards totaling approximately $3.3 million and $2.2 million, respectively. The federal research and development tax credit carryforward will begin expiring in 2020 unless previously utilized. At December 31, 2005, the Company had a California manufacturer’s investment credit carryforward of approximately $141,000.

Internal Revenue Code § 382 and § 383 limit the availability of income tax net operating losses and tax credit carryforwards that arise prior to certain cumulative changes in a corporation’s ownership resulting in change of control of the Company should such changes in ownership occur. Pursuant to Internal Revenue Code § 382 and § 383, use of the Company’s net operating loss and credit carryforwards may be limited if a cumulative change in ownership of more than 50% occurs within a three-year period.

7. Related Party Transactions

In September 2000, the Company entered into a lease agreement with a non-profit organization with which the Company shares a common director. The related rent expense was $124,000, $476,000 and $1.6 million for the years ended December 31, 2004, 2003 and for the period from January 21, 2000 (inception) to December 31, 2004, respectively. The lease agreement expired on March 31, 2004.

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In February 2001, April 2003 and April 2005, the Company entered into consulting agreements with one of its directors (the Director).  Under the terms of the consulting agreements the Director would provide agreed upon services to the Company and receive compensation based upon an hourly rate. The initial term of the consulting agreements are one year but the agreements automatically renew in one year increments unless otherwise terminated by the parties. The Director is no longer providing services under the February 2001 or April 2003 agreements. For the years ended December 31, 2005, 2004 and 2003, and the period from January 21, 2000 (inception) to December 30, 2005, the Director received compensation of approximately $6,000, $7,000, $12,000 and $61,000, respectively.

In March 2003, the Company entered into a consulting agreement with one of its major investors (the Investor). The Investor designated a consultant to provide certain administrative, business and technical support to the Company. Compensation under the agreement included a fee of $8,500 per month to be paid to the Investor for performance of services provided by the consultant. In addition, a warrant for the purchase of up to 19,277 shares of the Company’s Common Stock was issued to the consultant (Note 5). The agreement terminated in 2005.  For the years ended December 31, 2005, 2004 and 2003, and the period from January 21, 2000 (inception) to December 31, 2005, the Company paid the Investor approximately $70,000, $150,000, $93,000 and $313,000 respectively, including reimbursement of ordinary business expenses.

In July 2004 and July 2005, the Company entered into consulting agreements with a family member of one of its executive officers (the Consultant) to provide agreed upon services to the Company and receive compensation based upon an hourly rate.  The term of the consulting agreements are one year but the agreements automatically renew in one year increments unless otherwise terminated by the parties.  The Consultant is no longer providing services under the July 2004 agreement.  The July 2005 agreement was terminated in March 2006.  For the years ended December 31, 2005 and 2004, and the period from January 21, 2000 (inception) to December 31, 2005, the Company paid the Consultant approximately $75,000, $19,000 and $94,000 respectively, including reimbursement of ordinary business expenses.

8. Quarterly Financial Data (unaudited)

The following table summarizes certain of the Company’s operating results by quarter for 2005 and 2004 (in thousands):

	2005
	First			Second			Third			Fourth			Total
Net loss:	$	(8,405	)	$	(9,373	)	$	(8,524	)	$	(9,573	)	$	(35,875	)
Accretion of Series C redeemable convertible preferred stock issuance costs (a):	(6		)	—			—			—			(6		)
Net loss applicable to common stockholders (a):	$	(8,411	)	$	(9,373	)	$	(8,524	)	$	(9,573	)	$	(35,881	)
Net loss per share applicable to common stockholders (a):	$	(0.69	)	$	(0.47	)	$	(0.43	)	$	(0.48	)	$	(1.99	)

	2004
	First			Second			Third			Fourth			Total
Net loss applicable to common stockholders (a):	$	(21,330	)	$	(17,926	)	$	(7,311	)	$	(7,622	)	$	(54,190	)
Net loss per share applicable to common stockholders (a):	$	(24.15	)	$	(17.11	)	$	(6.64	)	$	(6.48	)	$	(51.48	)

(a)  The sum of the four quarters will not agree to the year total due to rounding within a quarter.

9. Subsequent Events

On March 6, 2006, the Company entered into a securities purchase agreement relating to a private placement in which the Company issued and sold to certain investors, for an aggregate purchase price of approximately $45.4 million, 8,555,133 shares of its common stock and warrants to purchase up to 2,994,288 shares of its common stock at an exercise price of $5.26 per share.  At the closing, investors in the private placement paid $5.26 per share of common stock and an additional purchase price equal to $0.125 per share underlying the warrants.

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Certain of the Company’s existing stockholders, including two members of our board of directors, Ivor Royston, M.D. and Fred Middleton, and funds affiliated with Forward Ventures, Sanderling Ventures, Alloy Ventures and William Blair Capital Partners, invested in the private placement.  Dr. Royston, Mr. Middleton, Doug Kelly, M.D. and Arda Minocherhomjee, Ph.D., members of our board of directors, are associated with Forward Ventures, Sanderling Ventures, Alloy Ventures and William Blair Capital Partners, respectively.

The Company has agreed to file a registration statement with the Securities and Exchange Commission within 30 days after closing covering the resale of the shares of common stock issued in the private placement and the shares of common stock issuable upon exercise of the warrants issued in the private placement.

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Index to Exhibits

15.  (b) The following exhibits are filed as part of, or incorporated into, the 2005 Favrille, Inc. Annual Report on Form 10-K:

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.(2)
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”).(6)
4.5	Form of Warrant issued pursuant to the Securities Purchase Agreement.(6)
4.6	Warrant to purchase 48,834 shares of Common Stock dated December 30, 2005 issued to General Electric Capital Corporation.
4.7	Warrant to purchase 48,834 shares of Common Stock dated December 30, 2005 issued to Oxford Finance Corporation.
10.1	Form of Indemnity Agreement for Registrant’s directors and officers.(1)(2)
10.2	Amended and Restated 2001 Equity Incentive Plan and Form of Stock Option Agreement thereunder.(1)(2)
10.3	2005 Non-Employee Directors’ Stock Option Plan and Form of Stock Option Agreement thereunder.(1)(2)
10.4	2005 Employee Stock Purchase Plan and Form of Offering Document thereunder.(1)(2)
10.5	Employment Agreement dated January 6, 2005 between the Registrant and John P. Longenecker, Ph.D.(1)(2)
10.6	Office Lease dated January 31, 2003 between the Registrant and Kilroy Realty, L.P.(1)
10.7	First Amendment to Lease dated July 7, 2004 between the Registrant and Kilroy Realty, L.P.(1)
10.8	Master Security Agreement dated July 26, 2004 between the Registrant and Oxford Finance Corporation.(1)
10.9	Loan and Security Agreement No. 24-0117 dated March 20, 2003 among the Registrant, Heller Financial Leasing, Inc. and Lighthouse Capital Partners IV, L.P.(1)
10.10	Supply Agreement made on November 12, 2004 between the Registrant and Biosyn Arzneimittel GmbH.(1)(3)
10.11	Employment Agreement dated January 6, 2005 between the Registrant and Tamara A. Seymour.(1)(2)
10.12	Employment Agreement dated January 6, 2005 between the Registrant and Daniel P. Gold, Ph.D.(1)(2)
10.13	Employment Agreement dated January 6, 2005 between the Registrant and Alice Wei.(1)(2)
10.14	Employment Agreement dated January 6, 2005 between the Registrant and John F. Bender, Pharm.D.(1)(2)
10.15	Employment Agreement dated January 6, 2005 between the Registrant and Richard Murawski.(1)(2)
10.16	Employment Agreement dated January 6, 2005 between the Registrant and John G. Gutheil, M.D.(1)(2)
10.17	Employment Agreement dated December 1, 2005 between the Registrant and David L. Guy.(2)
10.18	Form of Employment Agreement between the Registrant and its executive officers.(1)(2)
10.19	Letter Agreement dated May 28, 2004 between the Registrant and Oxford Finance Corporation.(4)
10.20	Amendment dated June 16, 2005 to the Master Security Agreement dated July 26, 2004 between the Registrant and Oxford Finance Corporation.(4)
10.21	Letter Agreement dated June 27, 2005 between the Registrant and Oxford Finance Corporation.(4)
10.22	Third Amendment to Lease dated July 7, 2005 between Registrant and Kilroy, L.P.(4)

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10.23	Amended and Restated Office Lease dated October 31, 2005 between the Registrant and Kilroy Realty, L.P.(5)
10.24	Master Security Agreement dated December 30, 2005 between the Registrant and General Electric Capital Corporation.
10.25	Amendment dated December 30, 2005 to  the Master Security Agreement dated December 30, 2005 between the Registrant and General Electric Capital Corporation.
10.26	Promissory Note dated December 30, 2005 between the Registrant and General Electric Capital Corporation.
10.27	Amendment dated December 30, 2005 to the Master Security Agreement dated July 26, 2004 between the Registrant and Oxford Finance Corporation.
10.28	Promissory Note dated December 30, 2005 between the Registrant and Oxford Finance Corporation.
23.1	Consent of Independent Registered Public Accounting Firm.
24.1	Power of Attorney. Reference is made to the signature page of this report.
31.1	Certification of principal executive officer required by Rule 13a-14(a) or Rule 15d-14(a).
31.2	Certification of principal accounting officer required by Rule 13a-14(a) or Rule 15d-14(a).
32.1	Certification by the Chief Executive Officer and the Chief Financial Officer of Favrille, Inc., as required by Rule 13a-14(b) or 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C.1350)

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

(2)Indicates management contract or compensatory plan.

(3)Confidential treatment has been granted with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.

(4)Filed on August 12, 2005 as an exhibit to the Company’s Quarterly Report on Form 10-Q and incorporated herein by reference.

(5)Filed on November 14, 2005 as an exhibit to the Company’s Quarterly Report on Form 10-Q and incorporated herein by reference.

(6)Filed as an exhibit to the Company’s Current Report on Form 8-K dated March 6, 2006 and incorporated herein by reference.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

FAVRILLE, INC.
By:	/s/ JOHN P. LONGENECKER, PH.D.
John P. Longenecker  President and Chief Executive Officer

Dated: March 29, 2006

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints John P. Longenecker, Ph.D. and Tamara Seymour, and each of them, acting individually, as his or her attorney-in-fact, each with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this annual report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/s/ JOHN P. LONGENECKER, PH.D.	President, Chief Executive Officer and	March 29, 2006
John P. Longenecker	Director (Principal Executive Officer)
/s/ TAMARA SEYMOUR	Chief Financial Officer	March 29, 2006
Tamara Seymour	(Principal Financial and Accounting Officer)
/s/ CAM L. GARNER	Director	March 29, 2006
Cam L. Garner
/s/ MICHAEL L. EAGLE	Director	March 29, 2006
Michael L. Eagle
/s/ ANTONIO J. GRILLO-LOPEZ, M.D.	Director	March 29, 2006
Antonio J. Grillo-Lopez
/s/ PETER BARTON HUTT	Director	March 29, 2006
Peter Barton Hutt
/s/ DOUGLAS E. KELLY, M.D.	Director	March 29, 2006
Douglas E. Kelly, M.D.

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/s/ FRED MIDDLETON	Director	March 29, 2006
Fred Middleton
/s/ ARDA MINOCHERHOMJEE, PH.D.	Director	March 29, 2006
Arda Minocherhomjee, Ph.D.
/s/ WAYNE I. ROE	Director	March 29, 2006
Wayne I. Roe
/s/ IVOR ROYSTON, M.D.	Director	March 29, 2006
Ivor Royston, M.D.

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EXHIBIT INDEX

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”).(6)
4.5	Form of Warrant issued pursuant to the Securities Purchase Agreement.(6)
4.6	Warrant to purchase 48,834 shares of Common Stock dated December 30, 2005 issued to General Electric Capital Corporation.
4.7	Warrant to purchase 48,834 shares of Common Stock dated December 30, 2005 issued to Oxford Finance Corporation.
10.1	Form of Indemnity Agreement for Registrant’s directors and officers.(1)(2)
10.2	Amended and Restated 2001 Equity Incentive Plan and Form of Stock Option Agreement thereunder.(1)(2)
10.3	2005 Non-Employee Directors’ Stock Option Plan and Form of Stock Option Agreement thereunder.(1)(2)
10.4	2005 Employee Stock Purchase Plan and Form of Offering Document thereunder.(1)(2)
10.5	Employment Agreement dated January 6, 2005 between the Registrant and John P. Longenecker, Ph.D.(1)(2)
10.6	Office Lease dated January 31, 2003 between the Registrant and Kilroy Realty, L.P.(1)
10.7	First Amendment to Lease dated July 7, 2004 between the Registrant and Kilroy Realty, L.P.(1)
10.8	Master Security Agreement dated July 26, 2004 between the Registrant and Oxford Finance Corporation.(1)
10.9	Loan and Security Agreement No. 24-0117 dated March 20, 2003 among the Registrant, Heller Financial Leasing, Inc. and Lighthouse Capital Partners IV, L.P.(1)
10.10	Supply Agreement made on November 12, 2004 between the Registrant and Biosyn Arzneimittel GmbH.(1)(3)
10.11	Employment Agreement dated January 6, 2005 between the Registrant and Tamara A. Seymour.(1)(2)
10.12	Employment Agreement dated January 6, 2005 between the Registrant and Daniel P. Gold, Ph.D.(1)(2)
10.13	Employment Agreement dated January 6, 2005 between the Registrant and Alice Wei.(1)(2)
10.14	Employment Agreement dated January 6, 2005 between the Registrant and John F. Bender, Pharm.D.(1)(2)
10.15	Employment Agreement dated January 6, 2005 between the Registrant and Richard Murawski.(1)(2)
10.16	Employment Agreement dated January 6, 2005 between the Registrant and John G. Gutheil, M.D.(1)(2)
10.17	Employment Agreement dated December 1, 2005 between the Registrant and David L. Guy.(2)
10.18	Form of Employment Agreement between the Registrant and its executive officers.(1)(2)
10.19	Letter Agreement dated May 28, 2004 between the Registrant and Oxford Finance Corporation.(4)
10.20	Amendment dated June 16, 2005 to the Master Security Agreement dated July 26, 2004 between the Registrant and Oxford Finance Corporation.(4)
10.21	Letter Agreement dated June 27, 2005 between the Registrant and Oxford Finance Corporation.(4)
10.22	Third Amendment to Lease dated July 7, 2005 between Registrant and Kilroy, L.P.(4)

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10.23	Amended and Restated Office Lease dated October 31, 2005 between the Registrant and Kilroy Realty, L.P.(5)
10.24	Master Security Agreement dated December 30, 2005 between the Registrant and General Electric Capital Corporation.
10.25	Amendment dated December 30, 2005 to  the Master Security Agreement dated December 30, 2005 between the Registrant and General Electric Capital Corporation.
10.26	Promissory Note dated December 30, 2005 between the Registrant and General Electric Capital Corporation.
10.27	Amendment dated December 30, 2005 to the Master Security Agreement dated July 26, 2004 between the Registrant and Oxford Finance Corporation.
10.28	Promissory Note dated December 30, 2005 between the Registrant and Oxford Finance Corporation.
23.1	Consent of Independent Registered Public Accounting Firm.
24.1	Power of Attorney. Reference is made to the signature page of this report.
31.1	Certification of principal executive officer required by Rule 13a-14(a) or Rule 15d-14(a).
31.2	Certification of principal accounting officer required by Rule 13a-14(a) or Rule 15d-14(a).
32.1	Certification by the Chief Executive Officer and the Chief Financial Officer of Favrille, Inc., as required by Rule 13a-14(b) or 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C.1350)

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

(2)Indicates management contract or compensatory plan.

(3)Confidential treatment has been granted with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.

(4)Filed on August 12, 2005 as an exhibit to the Company’s Quarterly Report on Form 10-Q and incorporated herein by reference.

(5)Filed on November 14, 2005 as an exhibit to the Company’s Quarterly Report on Form 10-Q and incorporated herein by reference.

(6)Filed as an exhibit to the Company’s Current Report on Form 8-K dated March 6, 2006 and incorporated herein by reference.

EX-4.6

Exhibit 4.6

COMMON STOCK WARRANT

NEITHER THIS WARRANT NOR THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. NO SALE OR DISPOSITION MAY BE EFFECTED EXCEPT IN COMPLIANCE WITH RULE 144 UNDER SAID ACT OR WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL FOR THE HOLDER, SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT OR RECEIPT OF A NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION.

WARRANT TO PURCHASE SHARES OF COMMON STOCK

Dated:   December 30, 2005

THIS CERTIFIES THAT, for value received, General Electric Capital Corporation, (“Holder”) is entitled to subscribe for and purchase that number of shares as set forth in Section 1 of the fully paid and nonassessable Common Stock (the “Shares” or the “Common Stock”) of FAVRILLE INC., a Delaware corporation (the “Company”), at the Warrant Price (as hereinafter defined), subject to the provisions and upon the terms and conditions hereinafter set forth. As used herein, the term “Common Stock” shall mean the Company’s presently authorized Common Stock.

1.Warrant Price and Number of Shares.  The Warrant Price per share shall initially be deemed to be the average of the closing bid and asked prices of the Common Stock over the twenty (20) trading days immediately prior to the Closing Date, subject to adjustment as provided in Section 7 below. The Closing Date shall be deemed to be the actual “as of date” of the December 2005 Amendment between Holder and the Company. The Number of Shares shall equal Two Hundred Thousand Dollars ($200,000) divided by the Warrant Price per share.

2.Conditions to Exercise.  The purchase right represented by this Warrant may be exercised at any time, or from time to time, in whole or in part during the term commencing on the date hereof and ending on 5:00 P.M. Eastern Standard time on the fifth (5^th) annual anniversary of this Warrant.

3.Method of Exercise; Payment; Issuance of Shares; Issuance of New Warrant.

(a)Cash Exercise. Subject to Section 2 hereof, the purchase right represented by this Warrant may be exercised by the Holder hereof, in whole or in part, by the surrender of this Warrant (with a duly executed Notice of Exercise in the form attached hereto) at the principal office of the Company (as set forth in Section 19 below) and by payment to the Company, by check, of an amount equal to the then applicable Warrant Price per share multiplied by the number of shares then being purchased. In the event of any exercise of the rights represented by this Warrant, certificates for the shares of stock so purchased shall be in the name of, and delivered to, the Holder hereof, or as such Holder may direct (subject to the terms of transfer contained herein and upon payment by such Holder hereof of any applicable transfer taxes). Such delivery shall be made within 10 days after exercise of the Warrant and at the Company’s expense and, unless this Warrant has been fully exercised or expired, a new Warrant having terms and conditions substantially identical to this Warrant and representing the portion of the Shares, if any, with respect to which this Warrant shall not have been exercised, shall also be issued to the Holder hereof within 10 days after exercise of the Warrant.

(b)Net Issue Exercise. In lieu of exercising this Warrant pursuant to Section 3(a), Holder may elect to receive shares equal to the value of this Warrant (or of any portion thereof remaining unexercised) by surrender of this Warrant at the principal office of the Company together with notice of such election, in which event the Company shall issue to Holder the number of shares of the Company’s Common Stock computed using the following formula:

X = Y (A-B)

A

1

Where X = the number of shares of Common Stock to be issued to Holder.

Y = the number of shares of Common Stock purchasable under this Warrant (at the date of such calculation).

A = the Fair Market Value of one share of the Company’s Common Stock (at the date of such calculation).

B = Warrant Price per share (as adjusted to the date of such calculation).

(c)Fair Market Value. For purposes of this Section 3, Fair Market Value of one share of the Company’s Common Stock shall mean:

(i)If the Common Stock is traded on Nasdaq or Over-The-Counter or on an exchange, the per share Fair Market Value for the Common Stock will be the average of the closing bid and asked prices of the Common Stock quoted in the Over-The-Counter Market Summary or the closing price quoted on any exchange on which the Common Stock is listed, whichever is applicable, as published in the Western Edition of The Wall Street Journal for the ten (10) trading days prior to the date of determination of Fair Market Value; or

(ii)In any other instance, the per share Fair Market Value for the Common Stock shall be as determined in good faith by the Company’s Board of Directors unless Holder elects to have such fair market value determined by an appraiser, which election must be made by Holder within ten (10) business days of the date the Company notifies Holder of the fair market value as determined by its Board of Directors. In the event of such an appraisal, the cost thereof shall be borne by the Holder unless such appraisal results in a fair market value in excess of 115% of that determined by the Company’s Board of Directors, in which event the Company shall bear the cost of such appraisal.

In the event of 3(c)(ii) above, the Company’s Board of Directors shall prepare a certificate, to be signed by an authorized Officer of the Company, setting forth in reasonable detail the basis for and method of determination of the per share Fair Market Value of the Common Stock. The Board will also certify to the Holder that this per share Fair Market Value will be applicable to all holders of the Company’s Common Stock that require a fair market value determination as of the same date as Holder.

(d)Automatic Exercise. To the extent this Warrant is not previously exercised, it shall be automatically exercised in accordance with Sections 3(b) and 3(c) hereof (even if not surrendered) immediately before its expiration.

4.Representations and Warranties of Holder and Restrictions on Transfer Imposed by the Securities Act of 1933.

(a)Representations and Warranties by Holder. The Holder represents and warrants to the Company with respect to this purchase as follows:

(i)The Holder has substantial experience in evaluating and investing in private placement transactions of securities of companies similar to the Company so that the Holder is capable of evaluating the merits and risks of its investment in the Company and has the capacity to protect its interests. The Holder is an “accredited investor” as that term is defined in Rule 501 promulgated under the Securities Act of 1933, as amended (the “Act”).

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(ii)The Holder is acquiring the Warrant and the Shares of Common Stock issuable upon exercise of the Warrant (collectively the “Securities”) for investment for its own account and not with a view to, or for resale in connection with, any distribution thereof. The Holder understands that the Securities have not been registered under the Act by reason of a specific exemption from the registration provisions of the Act, which depends upon, among other things, the bona fide nature of the investment intent as expressed herein. In this connection, the Holder understands that, in the view of the Securities and Exchange Commission (the “SEC”), the statutory basis for such exemption may be unavailable if this representation was predicated solely upon a present intention to hold the Securities for the minimum capital gains period specified under tax statutes, for a deferred sale, for or until an increase or decrease in the market price of the Securities or for a period of one year or any other fixed period in the future.

(iii)The Holder acknowledges that the Securities must be held indefinitely unless subsequently registered under the Act or an exemption from such registration is available. The Holder is aware of the provisions of Rule 144 promulgated under the Act (“Rule 144”) which permits limited resale of securities purchased in a private placement subject to the satisfaction of certain conditions, including, in case the securities have been held for more than one but less than two years, the existence of a public market for the shares, the availability of certain public information about the Company, the resale occurring not less than one year after a party has purchased and paid for the security to be sold, the sale being through a “broker’s transaction” or in a transaction directly with a “market maker” (as provided by Rule 144(f)) and the number of shares or other securities being sold during any three-month period not exceeding specified limitations.

(iv)The Holder further understands that at the time the Holder wishes to sell the Securities there may be no public market upon which such a sale may be effected, and that even if such a public market exists, the Company may not be satisfying the current public information requirements of Rule 144, and that in such event, the Holder may be precluded from selling the Securities under Rule 144 unless a) a one-year minimum holding period has been satisfied and b) the Holder was not at the time of the sale nor at any time during the three-month period prior to such sale an affiliate of the Company.

(v)The Holder has had an opportunity to discuss the Company’s business, management and financial affairs with its management and an opportunity to review the Company’s facilities. The Holder understands that such discussions, as well as the written information issued by the Company, were intended to describe the aspects of the Company’s business and prospects which it believes to be material but were not necessarily a thorough or exhaustive description.

(vi)This Warrant and the Shares issuable upon exercise of this Warrant (and the securities issuable, directly or indirectly, upon conversion of the Shares, if any) may not be transferred or assigned in whole or in part without compliance with applicable federal and state securities laws by the transferor and the transferee (including, without limitation, the delivery of investment representation letters and legal opinions reasonably satisfactory to the Company, as reasonably requested by the Company) and the transferee agrees to be bound by all of the terms and conditions of this Warrant. The Company shall not require Holder to provide an opinion of counsel if the transfer is to any other affiliate of Holder. Additionally, the Company shall also not require an opinion of counsel if there is no material question as to the availability of Rule 144, including without limitation, the availability of current information as referenced in Rule 144(c), Holder represents that it has complied with Rule 144(d) and (e) in reasonable detail, the selling broker represents that it has complied with Rule 144(f), and the Company is provided with a copy of Holder’s notice of proposed sale.

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(b)Legends. Each certificate representing the Securities shall be endorsed with the following legend:

THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE TRANSFERRED UNLESS COVERED BY AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT, A “NO ACTION” LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION WITH RESPECT TO SUCH TRANSFER, A TRANSFER MEETING THE REQUIREMENTS OF RULE 144 OF THE SECURITIES AND EXCHANGE COMMISSION, OR (IF REASONABLY REQUIRED BY THE COMPANY) AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY SUCH TRANSFER IS EXEMPT FROM SUCH REGISTRATION.

The Company need not enter into its stock register a transfer of Securities unless the conditions specified in the foregoing legend are satisfied. The Company may also instruct its transfer agent not to register the transfer of any of the Shares unless the conditions specified in the foregoing legend are satisfied.

(c)Removal of Legend and Transfer Restrictions. The legend relating to the Act endorsed on a certificate pursuant to paragraph 4(b) of this Warrant and the stop transfer instructions with respect to the Securities represented by such certificate shall be removed and the Company shall issue a certificate without such legend to the Holder of the Securities if (i) the Securities are registered under the Act and a prospectus meeting the requirements of Section 10 of the Act is available or (ii) the Holder provides to the Company an opinion of counsel for the Holder reasonably satisfactory to the Company, or a no-action letter or interpretive opinion of the staff of the SEC reasonably satisfactory to the Company, to the effect that public sale, transfer or assignment of the Securities may be made without registration and without compliance with any restriction such as Rule 144.

5.Condition of Transfer or Exercise of Warrant. It shall be a condition to any transfer or exercise of this Warrant that at the time of such transfer or exercise, the Holder shall provide the Company with a representation in writing that the Holder or transferee is acquiring this Warrant and the shares of Common Stock to be issued upon exercise, for investment purposes only and not with a view to any sale or distribution, or will provide the Company with a statement of pertinent facts covering any proposed distribution. As a further condition to any transfer of this Warrant or any or all of the shares of Common Stock issuable upon exercise of this Warrant, other than a transfer registered under the Act, the Company must have received a legal opinion, in form and substance satisfactory to the Company and its counsel, reciting the pertinent circumstances surrounding the proposed transfer and stating that such transfer is exempt from the registration and prospectus delivery requirements of the Act. Each certificate evidencing the shares issued upon exercise of the Warrant or upon any transfer of the shares (other than a transfer registered under the Act or any subsequent transfer of shares so registered) shall, at the Company’s option, contain a legend in form and substance satisfactory to the Company and its counsel, restricting the transfer of the shares to sales or other dispositions exempt from the requirements of the Act.

As further condition to each transfer, the Holder shall surrender this Warrant to the Company and the transferee shall receive and accept a Warrant, of like tenor and date, executed by the Company.

6.Stock Fully Paid; Reservation of Shares.  All Shares which may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be fully paid and nonassessable, and free from all taxes, liens, and charges with respect to the issue thereof. During the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized, and reserved for issuance upon exercise of the purchase rights evidenced by this Warrant, a sufficient number of shares of its Common Stock to provide for the exercise of the rights represented by this Warrant.

7.Adjustment for Certain Events.  In the event of changes in the outstanding Common Stock by reason of stock dividends, split-ups, recapitalizations, reclassifications, mergers, consolidations, combinations or exchanges of shares, separations, reorganizations, liquidations, or the like, the number and class of shares available under the

4

Warrant in the aggregate and the Warrant Price shall be correspondingly adjusted, as appropriate, by the Board of Directors of the Company. The adjustment shall be such as will give the Holder of this Warrant upon exercise for the same aggregate Warrant Price the total number, class and kind of shares as it would have owned had the Warrant been exercised prior to the event and had it continued to hold such shares until after the event requiring adjustment.

8.Notice of Adjustments.  Whenever any Warrant Price shall be adjusted pursuant to Section 7 hereof, the Company shall prepare a certificate signed by its chief financial officer setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated, and the Warrant Price and number of shares issuable upon exercise of the Warrant after giving effect to such adjustment, and shall cause copies of such certificate to be mailed (by certified or registered mail, return receipt required, postage prepaid) within thirty (30) days of such adjustment to the Holder of this Warrant as set forth in Section 19 hereof.

9.Intentionally omitted.

10.Transferability of Warrant. This Warrant is transferable on the books of the Company at its principal office by the registered Holder hereof upon surrender of this Warrant properly endorsed, subject to compliance with Section 5 and applicable federal and state securities laws. The Company shall issue and deliver to the transferee a new Warrant representing the Warrant so transferred. Upon any partial transfer, the Company will issue and deliver to Holder a new Warrant with respect to the Warrant not so transferred.

11.Intentionally omitted.

12.No Fractional Shares.  No fractional share of Common Stock will be issued in connection with any exercise hereunder, but in lieu of such fractional share the Company shall make a cash payment therefor upon the basis of the Warrant Price then in effect.

13.Charges, Taxes and Expenses. Issuance of certificates for shares of Common Stock upon the exercise of this Warrant shall be made without charge to the Holder for any United States or state of the United States documentary stamp tax or other incidental expense with respect to the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the Holder.

14.No Shareholder Rights Until Exercise. This Warrant does not entitle the Holder hereof to any voting rights or other rights as a shareholder of the Company prior to the exercise hereof.

15.Registry of Warrant. The Company shall maintain a registry showing the name and address of the registered Holder of this Warrant. This Warrant may be surrendered for exchange or exercise, in accordance with its terms, at such office or agency of the Company, and the Company and Holder shall be entitled to rely in all respects, prior to written notice to the contrary, upon such registry.

16.Loss, Theft, Destruction or Mutilation of Warrant. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and, in the case of loss, theft, or destruction, of indemnity reasonably satisfactory to it, and, if mutilated, upon surrender and cancellation of this Warrant, the Company will execute and deliver a new Warrant, having terms and conditions substantially identical to this Warrant, in lieu hereof.

17.Miscellaneous.

(a)Issue Date.  The provisions of this Warrant shall be construed and shall be given effect in all respect as if it had been issued and delivered by the Company on the date hereof.

(b)Successors.  This Warrant shall be binding upon any successors or assigns of the Company.

(c)Governing Law.  This Warrant shall be governed by and construed in accordance with the laws of the State of Connecticut.

5

(d)Headings.  The headings used in this Warrant are used for convenience only and are not to be considered in construing or interpreting this Warrant.

(e)Saturdays, Sundays, Holidays.  If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday or a Sunday or shall be a legal holiday in the State of California, then such action may be taken or such right may be exercised on the next succeeding day not a legal holiday.

18.No Impairment. The Company shall not by any action including, without limitation, amending its articles or certificate of incorporation or by-laws, any reorganization, transfer of assets, consolidation, merger, share exchange dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of the Warrant or impair the ability of the Holder(s) to realize upon the intended economic value hereof, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate to protect the rights of the Holder(s) hereof against impairment.

19.Addresses. Any notice required or permitted hereunder shall be in writing and shall be mailed by overnight courier, registered or certified mail, return receipt required, and postage pre-paid, or otherwise delivered by hand or by messenger, addressed as set forth below, or at such other address as the Company or the Holder hereof shall have furnished to the other party.

If to the Company:	Favrille, Inc.
	10421 Pacific Center Court
	San Diego, CA 92121
	Attn: Chief Financial Officer
If to the Holder:	General Electric Capital Corporation
	83 Wooster Heights Road, 5th Floor
	Danbury, CT 06810
	Attn: Senior Risk Officer

20.Modification and Waiver. The Warrant and any provision hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the Company and the Holder of the Warrant.

6

IN WITNESS WHEREOF, FAVRILLE INC., has caused this Warrant to be executed by an officer thereunto duly authorized.

Dated as of December 30, 2005.

FAVRILLE INC.
By:	/s/ Tamara A. Seymour
Name:	Tamara A. Seymour
Title:	CFO

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NOTICE OF EXERCISE

TO:

1.The undersigned Warrantholder (“Holder”) elects to acquire shares of the Common Stock (the “Common Stock”) of      , (the “Company”), pursuant to the terms of the Stock Purchase Warrant dated December 30, 2005 (the “Warrant”).

2.The Holder exercises its rights under the Warrant as set forth below:

oThe Holder elects to purchase        shares of Common Stock as provided in Section 3(a), (c) and tenders herewith a check in the amount of $      as payment of the purchase price.

oThe Holder elects to convert the purchase rights into shares of Common Stock as provided in Section 3(b), (c) of the Warrant.

3.The Holder surrenders the Warrant with this Notice of Exercise.

4.The Holder represents that it is acquiring the aforesaid shares of Common Stock for investment and not with a view to, or for resale in connection with, distribution and that the Holder has no present intention of distributing or reselling the shares unless in compliance with all applicable federal and state securities laws.

5.Please issue a certificate representing the shares of the Common Stock in the name of the Holder or in such other name as is specified below:

Name:

Address:

Taxpayer I.D.:

	General Electric Capital Corporation
By:
Name:
Title:
Date:

8

EX-4.7

Exhibit 4.7

COMMON STOCK WARRANT

NEITHER THIS WARRANT NOR THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. NO SALE OR DISPOSITION MAY BE EFFECTED EXCEPT IN COMPLIANCE WITH RULE 144 UNDER SAID ACT OR WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL FOR THE HOLDER, SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT OR RECEIPT OF A NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION.

WARRANT TO PURCHASE SHARES OF COMMON STOCK

Dated:   December 30, 2005

THIS CERTIFIES THAT, for value received, Oxford Finance Corporation, (“Holder”) is entitled to subscribe for and purchase that number of shares as set forth in Section 1 of the fully paid and nonassessable Common Stock (the “Shares” or the “Common Stock”) of FAVRILLE INC., a Delaware corporation (the “Company”), at the Warrant Price (as hereinafter defined), subject to the provisions and upon the terms and conditions hereinafter set forth. As used herein, the term “Common Stock” shall mean the Company’s presently authorized Common Stock.

1.Warrant Price and Number of Shares.  The Warrant Price per share shall initially be deemed to be the average of the closing bid and asked prices of the Common Stock over the twenty (20) trading days immediately prior to the Closing Date, subject to adjustment as provided in Section 7 below. The Closing Date shall be deemed to be the actual “as of date” of the December 2005 Amendment between Holder and the Company. The Number of Shares shall equal Two Hundred Thousand Dollars ($200,000) divided by the Warrant Price per share.

2.Conditions to Exercise.  The purchase right represented by this Warrant may be exercised at any time, or from time to time, in whole or in part during the term commencing on the date hereof and ending on 5:00 P.M. Eastern Standard time on the fifth (5^th) annual anniversary of this Warrant.

3.Method of Exercise; Payment; Issuance of Shares; Issuance of New Warrant.

(a)Cash Exercise. Subject to Section 2 hereof, the purchase right represented by this Warrant may be exercised by the Holder hereof, in whole or in part, by the surrender of this Warrant (with a duly executed Notice of Exercise in the form attached hereto) at the principal office of the Company (as set forth in Section 19 below) and by payment to the Company, by check, of an amount equal to the then applicable Warrant Price per share multiplied by the number of shares then being purchased. In the event of any exercise of the rights represented by this Warrant, certificates for the shares of stock so purchased shall be in the name of, and delivered to, the Holder hereof, or as such Holder may direct (subject to the terms of transfer contained herein and upon payment by such Holder hereof of any applicable transfer taxes). Such delivery shall be made within 10 days after exercise of the Warrant and at the Company’s expense and, unless this Warrant has been fully exercised or expired, a new Warrant having terms and conditions substantially identical to this Warrant and representing the portion of the Shares, if any, with respect to which this Warrant shall not have been exercised, shall also be issued to the Holder hereof within 10 days after exercise of the Warrant.

(b)Net Issue Exercise. In lieu of exercising this Warrant pursuant to Section 3(a), Holder may elect to receive shares equal to the value of this Warrant (or of any portion thereof remaining unexercised) by surrender of this Warrant at the principal office of the Company together with notice of such election, in which event the Company shall issue to Holder the number of shares of the Company’s Common Stock computed using the following formula:

X = Y (A-B)

A

1

Where X = the number of shares of Common Stock to be issued to Holder.

Y = the number of shares of Common Stock purchasable under this Warrant (at the date of such calculation).

A = the Fair Market Value of one share of the Company’s Common Stock (at the date of such calculation).

B = Warrant Price per share (as adjusted to the date of such calculation).

(c)Fair Market Value. For purposes of this Section 3, Fair Market Value of one share of the Company’s Common Stock shall mean:

(i)If the Common Stock is traded on Nasdaq or Over-The-Counter or on an exchange, the per share Fair Market Value for the Common Stock will be the average of the closing bid and asked prices of the Common Stock quoted in the Over-The-Counter Market Summary or the closing price quoted on any exchange on which the Common Stock is listed, whichever is applicable, as published in the Western Edition of The Wall Street Journal for the ten (10) trading days prior to the date of determination of Fair Market Value; or

(ii)In any other instance, the per share Fair Market Value for the Common Stock shall be as determined in good faith by the Company’s Board of Directors unless Holder elects to have such fair market value determined by an appraiser, which election must be made by Holder within ten (10) business days of the date the Company notifies Holder of the fair market value as determined by its Board of Directors. In the event of such an appraisal, the cost thereof shall be borne by the Holder unless such appraisal results in a fair market value in excess of 115% of that determined by the Company’s Board of Directors, in which event the Company shall bear the cost of such appraisal.

In the event of 3(c)(ii) above, the Company’s Board of Directors shall prepare a certificate, to be signed by an authorized Officer of the Company, setting forth in reasonable detail the basis for and method of determination of the per share Fair Market Value of the Common Stock. The Board will also certify to the Holder that this per share Fair Market Value will be applicable to all holders of the Company’s Common Stock that require a fair market value determination as of the same date as Holder.

(d)Automatic Exercise. To the extent this Warrant is not previously exercised, it shall be automatically exercised in accordance with Sections 3(b) and 3(c) hereof (even if not surrendered) immediately before its expiration.

4.Representations and Warranties of Holder and Restrictions on Transfer Imposed by the Securities Act of 1933.

(a)Representations and Warranties by Holder. The Holder represents and warrants to the Company with respect to this purchase as follows:

(i)The Holder has substantial experience in evaluating and investing in private placement transactions of securities of companies similar to the Company so that the Holder is capable of evaluating the merits and risks of its investment in the Company and has the capacity to protect its interests. The Holder is an “accredited investor” as that term is defined in Rule 501 promulgated under the Securities Act of 1933, as amended (the “Act”).

2

(ii)The Holder is acquiring the Warrant and the Shares of Common Stock issuable upon exercise of the Warrant (collectively the “Securities”) for investment for its own account and not with a view to, or for resale in connection with, any distribution thereof. The Holder understands that the Securities have not been registered under the Act by reason of a specific exemption from the registration provisions of the Act, which depends upon, among other things, the bona fide nature of the investment intent as expressed herein. In this connection, the Holder understands that, in the view of the Securities and Exchange Commission (the “SEC”), the statutory basis for such exemption may be unavailable if this representation was predicated solely upon a present intention to hold the Securities for the minimum capital gains period specified under tax statutes, for a deferred sale, for or until an increase or decrease in the market price of the Securities or for a period of one year or any other fixed period in the future.

(iii)The Holder acknowledges that the Securities must be held indefinitely unless subsequently registered under the Act or an exemption from such registration is available. The Holder is aware of the provisions of Rule 144 promulgated under the Act (“Rule 144”) which permits limited resale of securities purchased in a private placement subject to the satisfaction of certain conditions, including, in case the securities have been held for more than one but less than two years, the existence of a public market for the shares, the availability of certain public information about the Company, the resale occurring not less than one year after a party has purchased and paid for the security to be sold, the sale being through a “broker’s transaction” or in a transaction directly with a “market maker” (as provided by Rule 144(f)) and the number of shares or other securities being sold during any three-month period not exceeding specified limitations.

(iv)The Holder further understands that at the time the Holder wishes to sell the Securities there may be no public market upon which such a sale may be effected, and that even if such a public market exists, the Company may not be satisfying the current public information requirements of Rule 144, and that in such event, the Holder may be precluded from selling the Securities under Rule 144 unless a) a one-year minimum holding period has been satisfied and b) the Holder was not at the time of the sale nor at any time during the three-month period prior to such sale an affiliate of the Company.

(v)The Holder has had an opportunity to discuss the Company’s business, management and financial affairs with its management and an opportunity to review the Company’s facilities. The Holder understands that such discussions, as well as the written information issued by the Company, were intended to describe the aspects of the Company’s business and prospects which it believes to be material but were not necessarily a thorough or exhaustive description.

(vi)This Warrant and the Shares issuable upon exercise of this Warrant (and the securities issuable, directly or indirectly, upon conversion of the Shares, if any) may not be transferred or assigned in whole or in part without compliance with applicable federal and state securities laws by the transferor and the transferee (including, without limitation, the delivery of investment representation letters and legal opinions reasonably satisfactory to the Company, as reasonably requested by the Company) and the transferee agrees to be bound by all of the terms and conditions of this Warrant. The Company shall not require Holder to provide an opinion of counsel if the transfer is to any other affiliate of Holder. Additionally, the Company shall also not require an opinion of counsel if there is no material question as to the availability of Rule 144, including without limitation, the availability of current information as referenced in Rule 144(c), Holder represents that it has complied with Rule 144(d) and (e) in reasonable detail, the selling broker represents that it has complied with Rule 144(f), and the Company is provided with a copy of Holder’s notice of proposed sale.

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(b)Legends. Each certificate representing the Securities shall be endorsed with the following legend:

THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE TRANSFERRED UNLESS COVERED BY AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT, A “NO ACTION” LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION WITH RESPECT TO SUCH TRANSFER, A TRANSFER MEETING THE REQUIREMENTS OF RULE 144 OF THE SECURITIES AND EXCHANGE COMMISSION, OR (IF REASONABLY REQUIRED BY THE COMPANY) AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY SUCH TRANSFER IS EXEMPT FROM SUCH REGISTRATION.

The Company need not enter into its stock register a transfer of Securities unless the conditions specified in the foregoing legend are satisfied. The Company may also instruct its transfer agent not to register the transfer of any of the Shares unless the conditions specified in the foregoing legend are satisfied.

(c)Removal of Legend and Transfer Restrictions. The legend relating to the Act endorsed on a certificate pursuant to paragraph 4(b) of this Warrant and the stop transfer instructions with respect to the Securities represented by such certificate shall be removed and the Company shall issue a certificate without such legend to the Holder of the Securities if (i) the Securities are registered under the Act and a prospectus meeting the requirements of Section 10 of the Act is available or (ii) the Holder provides to the Company an opinion of counsel for the Holder reasonably satisfactory to the Company, or a no-action letter or interpretive opinion of the staff of the SEC reasonably satisfactory to the Company, to the effect that public sale, transfer or assignment of the Securities may be made without registration and without compliance with any restriction such as Rule 144.

5.Condition of Transfer or Exercise of Warrant. It shall be a condition to any transfer or exercise of this Warrant that at the time of such transfer or exercise, the Holder shall provide the Company with a representation in writing that the Holder or transferee is acquiring this Warrant and the shares of Common Stock to be issued upon exercise, for investment purposes only and not with a view to any sale or distribution, or will provide the Company with a statement of pertinent facts covering any proposed distribution. As a further condition to any transfer of this Warrant or any or all of the shares of Common Stock issuable upon exercise of this Warrant, other than a transfer registered under the Act, the Company must have received a legal opinion, in form and substance satisfactory to the Company and its counsel, reciting the pertinent circumstances surrounding the proposed transfer and stating that such transfer is exempt from the registration and prospectus delivery requirements of the Act. Each certificate evidencing the shares issued upon exercise of the Warrant or upon any transfer of the shares (other than a transfer registered under the Act or any subsequent transfer of shares so registered) shall, at the Company’s option, contain a legend in form and substance satisfactory to the Company and its counsel, restricting the transfer of the shares to sales or other dispositions exempt from the requirements of the Act.

As further condition to each transfer, the Holder shall surrender this Warrant to the Company and the transferee shall receive and accept a Warrant, of like tenor and date, executed by the Company.

6.Stock Fully Paid; Reservation of Shares.  All Shares which may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be fully paid and nonassessable, and free from all taxes, liens, and charges with respect to the issue thereof. During the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized, and reserved for issuance upon exercise of the purchase rights evidenced by this Warrant, a sufficient number of shares of its Common Stock to provide for the exercise of the rights represented by this Warrant.

7.Adjustment for Certain Events.  In the event of changes in the outstanding Common Stock by reason of stock dividends, split-ups, recapitalizations, reclassifications, mergers, consolidations, combinations or exchanges of shares, separations, reorganizations, liquidations, or the like, the number and class of shares available under the Warrant in the aggregate and the Warrant Price shall be correspondingly adjusted, as appropriate, by the Board of

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Directors of the Company. The adjustment shall be such as will give the Holder of this Warrant upon exercise for the same aggregate Warrant Price the total number, class and kind of shares as it would have owned had the Warrant been exercised prior to the event and had it continued to hold such shares until after the event requiring adjustment.

8.Notice of Adjustments.  Whenever any Warrant Price shall be adjusted pursuant to Section 7 hereof, the Company shall prepare a certificate signed by its chief financial officer setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated, and the Warrant Price and number of shares issuable upon exercise of the Warrant after giving effect to such adjustment, and shall cause copies of such certificate to be mailed (by certified or registered mail, return receipt required, postage prepaid) within thirty (30) days of such adjustment to the Holder of this Warrant as set forth in Section 19 hereof.

9.Intentionally omitted.

10.Transferability of Warrant. This Warrant is transferable on the books of the Company at its principal office by the registered Holder hereof upon surrender of this Warrant properly endorsed, subject to compliance with Section 5 and applicable federal and state securities laws. The Company shall issue and deliver to the transferee a new Warrant representing the Warrant so transferred. Upon any partial transfer, the Company will issue and deliver to Holder a new Warrant with respect to the Warrant not so transferred.

11.Intentionally omitted.

12.No Fractional Shares.  No fractional share of Common Stock will be issued in connection with any exercise hereunder, but in lieu of such fractional share the Company shall make a cash payment therefor upon the basis of the Warrant Price then in effect.

13.Charges, Taxes and Expenses. Issuance of certificates for shares of Common Stock upon the exercise of this Warrant shall be made without charge to the Holder for any United States or state of the United States documentary stamp tax or other incidental expense with respect to the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the Holder.

14.No Shareholder Rights Until Exercise. This Warrant does not entitle the Holder hereof to any voting rights or other rights as a shareholder of the Company prior to the exercise hereof.

15.Registry of Warrant. The Company shall maintain a registry showing the name and address of the registered Holder of this Warrant. This Warrant may be surrendered for exchange or exercise, in accordance with its terms, at such office or agency of the Company, and the Company and Holder shall be entitled to rely in all respects, prior to written notice to the contrary, upon such registry.

16.Loss, Theft, Destruction or Mutilation of Warrant. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and, in the case of loss, theft, or destruction, of indemnity reasonably satisfactory to it, and, if mutilated, upon surrender and cancellation of this Warrant, the Company will execute and deliver a new Warrant, having terms and conditions substantially identical to this Warrant, in lieu hereof.

17.Miscellaneous.

(a)Issue Date.  The provisions of this Warrant shall be construed and shall be given effect in all respect as if it had been issued and delivered by the Company on the date hereof.

(b)Successors.  This Warrant shall be binding upon any successors or assigns of the Company.

(c)Governing Law.  This Warrant shall be governed by and construed in accordance with the laws of the State of California.

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(d)Headings.  The headings used in this Warrant are used for convenience only and are not to be considered in construing or interpreting this Warrant.

(e)Saturdays, Sundays, Holidays.  If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday or a Sunday or shall be a legal holiday in the State of California, then such action may be taken or such right may be exercised on the next succeeding day not a legal holiday.

18.No Impairment. The Company shall not by any action including, without limitation, amending its articles or certificate of incorporation or by-laws, any reorganization, transfer of assets, consolidation, merger, share exchange dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of the Warrant or impair the ability of the Holder(s) to realize upon the intended economic value hereof, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate to protect the rights of the Holder(s) hereof against impairment.

19.Addresses. Any notice required or permitted hereunder shall be in writing and shall be mailed by overnight courier, registered or certified mail, return receipt required, and postage pre-paid, or otherwise delivered by hand or by messenger, addressed as set forth below, or at such other address as the Company or the Holder hereof shall have furnished to the other party.

If to the Company:	Favrille, Inc.
	10421 Pacific Center Court
	San Diego, CA 92121
	Attn: Chief Financial Officer
If to the Holder:	Oxford Finance Corporation
	133 N. Fairfax Street
	Alexandria, VA 22314
	Attn: Chief Financial Officer

20.Modification and Waiver. The Warrant and any provision hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the Company and the Holder of the Warrant.

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IN WITNESS WHEREOF, FAVRILLE INC., has caused this Warrant to be executed by an officer thereunto duly authorized.

Dated as of December 30, 2005.

FAVRILLE INC.
By:	/s/ Tamara A. Seymour
Name:	Tamara A. Seymour
Title:	CFO

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NOTICE OF EXERCISE

TO:

1.The undersigned Warrantholder (“Holder”) elects to acquire shares of the Common Stock (the “Common Stock”) of     , (the “Company”), pursuant to the terms of the Stock Purchase Warrant dated December      , 2005 (the “Warrant”).

2.The Holder exercises its rights under the Warrant as set forth below:

oThe Holder elects to purchase        shares of Common Stock as provided in Section 3(a), (c) and tenders herewith a check in the amount of $      as payment of the purchase price.

oThe Holder elects to convert the purchase rights into shares of Common Stock as provided in Section 3(b), (c) of the Warrant.

3.The Holder surrenders the Warrant with this Notice of Exercise.

4.The Holder represents that it is acquiring the aforesaid shares of Common Stock for investment and not with a view to, or for resale in connection with, distribution and that the Holder has no present intention of distributing or reselling the shares unless in compliance with all applicable federal and state securities laws.

5.Please issue a certificate representing the shares of the Common Stock in the name of the Holder or in such other name as is specified below:

Name:

Address:

Taxpayer I.D.:

	Oxford Finance Corporation
By:
Name:
Title:
Date:

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EX-10.17

Exhibit 10.17

EMPLOYMENT AGREEMENT

BY AND BETWEEN

FAVRILLE, INC.

AND

DAVID GUY

TABLE OF CONTENTS

		PAGE
1.	EMPLOYMENT	1
2.	LOYAL AND CONSCIENTIOUS PERFORMANCE; EXCLUSIVE PROPERTY	2
3.	COMPENSATION OF EXECUTIVE	2
4.	TERMINATION	3
5.	CONFIDENTIAL AND PROPRIETARY INFORMATION	6
6.	ASSIGNMENT AND BINDING EFFECT	6
7.	SURVIVAL	6
8.	NOTICES	7
9.	CHOICE OF LAW	7
10.	INTEGRATION	7
11.	AMENDMENT	7
12.	WAIVER	7
13.	SEVERABILITY	8
14.	INTERPRETATION; CONSTRUCTION	8
15.	REPRESENTATIONS AND WARRANTIES	8
16.	COUNTERPARTS	8
17.	REFERENCES	8
18.	ARBITRATION	8
19.	TRADE SECRETS OF OTHERS	9
20.	ADVERTISING; WAIVER	9

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EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (the “Agreement”) is made and entered into effective as of December 1, 2005 (the “Effective Date”) by and between FAVRILLE, INC., a Delaware corporation (the “Company”), and DAVID GUY (“Executive”).  The Company and Executive are collectively referred to herein as the “Parties,” and each is individually referred to herein as a “Party.”

Recitals

A.            The Company desires assurance of the association and services of Executive in order to retain Executive’s experience, skills, abilities, background and knowledge, and is willing to engage Executive’s services on the terms and conditions set forth in this Agreement.

B.            Executive desires to be in the employ of the Company and is willing to accept such employment on the terms and conditions set forth in this Agreement.

Agreement

In consideration of the foregoing recitals and the mutual promises and covenants herein contained, and for other good and valuable consideration, the Parties, intending to be legally bound, agree as follows:

1.     Employment.

1.1          Term.  The Company hereby employs Executive, and Executive hereby accepts employment by the Company, upon the terms and conditions set forth in this Agreement.  The term of this Agreement shall begin on the Effective Date and shall continue until it is terminated pursuant to Section 4 (the “Term”).  On the last day of the Term, Executive shall immediately resign from all positions with the Company.  Notwithstanding anything herein to the contrary, either Party may terminate Executive’s employment under this Agreement at any time, with or without Cause (as defined in Subsection 4.6(b)), subject to the terms and conditions of Sections 4 and5.

1.2          Title.  Executive shall have the title of Chief Commercial Officer of the Company and shall serve in such other capacity or capacities as the Board of Directors of the Company (the “Board”) may prescribe from time to time.  Executive shall report to the Chief Executive Officer of the Company (the “CEO”) and the Board.

1.3          Duties.  Executive shall do and perform all services, acts or things necessary or advisable to manage and conduct the business of the Company and that are normally associated with the position of Chief Commercial Officer, consistent with the bylaws of the Company and as required by the CEO and the Board.

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1.4          Policies and Practices.  The employment relationship between the Parties shall be governed by the policies and practices established by the Company and the Board.  Executive hereby acknowledges that Executive has read the Company’s Employee Handbook, which, along with this Agreement, shall govern the terms and conditions of Executive’s employment with the Company.  In the event that the terms of this Agreement differ from or are in conflict with the Company’s policies or practices or the Company’s Employee Handbook, the terms of this Agreement shall control. Normal working hours are from 8:00 a.m. to 5:00 p.m., Monday through Friday. As an exempt salaried employee, you will be expected to work additional hours as required by the nature of your work assignments.

1.5          Location.  Unless the Parties otherwise agree in writing, during the Term, Executive shall perform the services Executive is required to perform pursuant to this Agreement at the Company’s offices located in San Diego, California, or at any other place the Company maintains a principal office; provided, however, that the Company may from time to time require Executive to travel temporarily to other locations in connection with the Company’s business.

2.     Loyal and Conscientious Performance; Exclusive Property.

2.1          Loyalty.  During Executive’s employment by the Company, Executive shall devote Executive’s full business energies, interest, abilities and productive time to the proper and efficient performance of Executive’s duties under this Agreement.

2.2          Exclusive Property.  Executive agrees that all business procured by Executive on behalf of the Company, and all Company-related business opportunities and plans made known to Executive, while employed by the Company are and shall remain the exclusive property of the Company.

3.     Compensation of Executive.

3.1          Base Salary.  The Company shall pay Executive a base salary of $250,000 per year, less payroll deductions and all required withholdings payable in regular periodic payments in accordance with Company policy.  Such base salary shall be subject to annual review and prorated for any partial year of employment on the basis of a 365-day fiscal year.

3.2          Stock Options.  Upon the commencement of Executive’s employment with the Companyand subject to approval of the Board or the Compensation Committee and the terms of the Company’s Amended and Restated 2001Equity Incentive Plan, as may be amended from time to time (the “Plan”), Executive will be granted a stock option (the “Option”) under the Plan to purchase shares of the Company’s common stock (the “Common Stock”).  To the maximum extent possible, the Option shall be an Incentive Stock Option as such term is defined in Section 422 (“Section 422”) of the Internal Revenue Code of 1986, as amended.  The Option will be governed by and granted pursuant to the Plan and a separate Grant Notice and Stock Option Agreement, in substantially the form attached hereto as EXHIBIT A, as may be amended from time to time upon the approval of the Board or the Compensation Committee.  The exercise price per share of the Option will be equal to the fair market value of the Common Stock established on the date of grant subject to any limitations under Section 422 and approval by the

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Board or the Compensation Committee.  The Option will be subject to vesting over four years so long as Executive provides Continuous Service (as defined in the Plan) to the Company or an Affiliate in accordance with the Plan, according to the following schedule: 25% of the shares subject to the Option will vest on the first anniversary of the date of grant and 1/48^th of the shares subject to the Option will vest monthly thereafter over the next three years.

3.3          Employment Taxes.  All of Executive’s compensation shall be subject to customary withholding taxes and any other employment taxes as are commonly required to be collected or withheld by the Company.

3.4          Benefits.  Executive shall, in accordance with Company policy and the terms of the applicable plan documents, be eligible for the following standard Company benefits: medical, dental and vision insurance, as well as participation in the Company’s Section 125 flexible spending plan and participation in the Company’s 401(k) plan, subject to the terms of those plans. Executive also shall, in accordance with Company policy and the terms of the applicable plan documents, be eligible to participate in benefits under any executive benefit plan or arrangement which may be in effect from time to time and made available to the Company’s executive or key management employees. The Company reserves the right to modify benefits from time to time as it deems necessary in its sole discretion. Executive will also be eligible for paid time off in accordance with the Company’s flexible “time-off” plan. Executive will accrue flexible “time-off” at a rate of 25 days per year and will be entitled to 12 holidays per year. The Company reserves the right to modify its policies from time to time as it deems necessary in its sole discretion.

4.     Termination.

4.1          Termination for Complete Disability.  Executive’s employment with the Company shall terminate effective upon the date of Executive’s Complete Disability (as defined in Subsection4.6(a)).

4.2          Termination by the Company.  Executive’s employment with the Company may be terminated by the Company as follows:

(a)           For Cause.  The Company may terminate Executive’s employment under this Agreement at any time for “Cause” (as defined in Subsection4.6(b)) by delivery of written notice to Executive specifying the Cause or Causes relied upon for such termination.  Any notice of termination given pursuant to this Subsection 4.2(a) shall effect termination as of the date specified in such notice or, in the event no such date is specified, two business days after written notice is given to Executive.

(b)           Without Cause.  The Company may terminate Executive’s employment under this Agreement at any time and for any reason by delivery of written notice of such termination to Executive.  Any notice of termination given pursuant to this Subsection4.2(b) shall effect termination as of the date specified in such notice or, in the event no such date is specified, two weeks after written notice is given to Executive.

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4.3          Termination by Executive.  Executive may terminate Executive’s employment with the Company at any time.

4.4          Compensation upon Termination.

(a)           Death or Complete Disability.  If Executive’s employment by the Company is terminated by Executive’s death or Complete Disability, the Company shall pay to Executive’s heirs or Executive, as applicable, Executive’s base salary and accrued and unused vacation benefits earned through the date of termination at the rate in effect at the time of such termination, less standard deductions and withholdings, and the Company shall thereafter have no further obligations to Executive and/or Executive’s heirs under this Agreement.

(b)           With Cause.  If Executive’s employment is terminated by the Company for Cause, the Company shall pay Executive’s base salary and accrued and unused vacation benefits earned through the date of termination at the rate in effect at the time of such termination, less standard deductions and withholdings, and the Company shall thereafter have no further obligations to Executive under this Agreement.

(c)           Without Cause. If the Company terminates Executive’s employment without Cause, the Company shall pay Executive’s base salary and accrued and unused vacation earned through the date of termination at the rate in effect at the time of such termination, less standard deductions and withholdings.  In addition, subject to the limitations set forth in Subsection 4.5(d) and upon Executive’s furnishing to the Company an effective release and waiver of claims, in substantially the form attached hereto as EXHIBIT B (the “Release and Waiver”), Executive also shall be entitled to:

i.              The equivalent of Executive’s annual base salary in effect at the time of termination for a period of 9 months (the “Severance Period”), in each case, less standard deductions and withholdings, to be paid over a period of 9 months after the date of termination pursuant to the Company’s standard payroll practices;

ii.            In the event Executive elects continued coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”), the Company shall reimburse Executive for the same portion of Executive’s COBRA health insurance premium that it paid during Executive’s employment up until the earlier of either (i) the last day of the Severance Period or (ii) the date on which Executive begins full-time employment with another company, organization or business entity; and

iii.           The accelerated vesting of the portion of any outstanding option to purchase Common Stock held by Executive on the date of termination that would have otherwise vested during the Severance Period, so that each such portion is vested and exercisable as of the date of termination to the extent such portion would otherwise become vested and exercisable as of the end of the Severance Period.

(d)           Termination of Obligations.  Notwithstanding any provisions in this Agreement to the contrary, including any provisions contained in this Subsection4.5, the

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Company’s obligations, and Executive’s rights, pursuant to Subsection4.5(c) shall cease and be rendered a nullity immediately should Executive violate any provision of Section 2 and Section 5, or should Executive violate the terms and conditions of either Executive’s Proprietary Information and Inventions Agreement or Nondisclosure Agreement with the Company (discussed in Subsection 5.1).

4.5          Definitions.  For purposes of this Agreement, the following terms shall have the following meanings:

(a)           Complete Disability.  “Complete Disability” shall mean the inability of Executive to perform Executive’s duties under this Agreement because Executive has become permanently disabled within the meaning of any policy of disability income insurance covering employees of the Company then in force.  In the event the Company has no policy of disability income insurance covering employees of the Company in force when Executive becomes disabled, the term “Complete Disability” shall mean the inability of Executive to perform Executive’s duties under this Agreement by reason of any incapacity, physical or mental, that the Board, based upon medical advice or an opinion provided by a licensed physician acceptable to the Board, determines to have incapacitated Executive from satisfactorily performing all of Executive’s usual services for the Company for a period of at least 120 days during any 12-month period (whether or not consecutive).  Based upon such medical advice or opinion, the determination of the Board shall be final and binding and the date such determination is made shall be the date of such Complete Disability for purposes of this Agreement.

(b)           For Cause.  “Cause” for the Company to terminate Executive’s employment hereunder shall mean the occurrence of any of the following events:

(i)            Executive’s conviction of any felony or any crime involving fraud or dishonesty;

(ii)           Executive’s participation (whether by affirmative act or omission) in a fraud, act of dishonesty or other act of misconduct against the Company and/or an Affiliate;

(iii)         Conduct by Executive which, based upon a good faith and reasonable factual investigation by the Board, demonstrates Executive’s gross unfitness to serve;

(iv)          Executive’s violation of any fiduciary duty or duty of loyalty owed to the Company and/or an Affiliate;

(v)            Executive’s breach of any material term of any material contract between Executive and the Company and/or an Affiliate;

(vi)          Executive’s violation of any material Company policy; and

(vii)         Executive’s violation of state or federal law in connection with the performance of Executive’s job.

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The determination that a termination is for Cause shall be made by the Board in its sole and exclusive judgment and discretion.

5.     Confidential and Proprietary Information.

5.1          As a condition of employment, Executive agrees to execute and abide by the terms of Proprietary Information and Inventions Agreement, in substantially the form attached hereto as EXHIBIT C, and a Nondisclosure Agreement, in substantially the form attached hereto as EXHIBIT D.

5.2          Executive recognizes that Executive’s employment with the Company will involve contact with information of substantial value to the Company that is not generally known in the trade and that gives the Company an advantage over its competitors who do not know or use it, including but not limited to, techniques, designs, drawings, processes, inventions know how, strategies, marketing, and/or advertising plans or arrangements, developments, equipment, prototypes, sales, supplier, service provider, vendor, distributor and customer information, and business and financial information relating to the business, products, services, practices and techniques of the Company (hereinafter referred to as “Confidential and Proprietary Information”).  Executive will at all times regard and preserve as confidential such Confidential and Proprietary Information obtained by Executive from whatever source and will not, either during Executive’s employment with the Company or thereafter, publish or disclose any part of such Confidential and Proprietary Information in any manner at any time, or use the same except on behalf of the Company, without the prior written consent of the Company.

6.     Assignment and Binding Effect.  Neither this Agreement nor any rights or obligations hereunder shall be assignable by Executive.  This Agreement shall be binding upon and inure to the benefit of the Company and its successors, assigns and legal representatives.

7.     SURVIVAL.  Subsections 4.4(c) and 4.4(d) and Sections 5, 6, 7, 8, 9, 18 and 19 shall survive the termination of this Agreement.

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8.     NOTICES.  All notices or demands of any kind required or permitted to be given by the Company or Executive under this Agreement shall be given in writing and shall be personally delivered (and receipted for) or faxed during normal business hours or mailed by certified mail, return receipt requested, postage prepaid, addressed as follows:

If to the Company:

Favrille, Inc.

10421 Pacific Center Court

San Diego, CA  92121

Phone: (858) 526-8000

Fax: (858) 597-7040

Attn:  Chief Financial Officer

If to Executive:

Any such written notice shall be deemed given on the earlier of the date on which such notice is personally delivered or three days after its deposit in the United States mail as specified above.  Either Party may change its address for notices by giving notice to the other Party in the manner specified in this Section 8.

9.     CHOICE OF LAW.  This Agreement is made in San Diego, California.  This Agreement shall be construed and interpreted in accordance with the internal laws of the State of California, excluding its conflicts of laws principles.

10.  INTEGRATION.  Except as provided in Executive’s Proprietary Information and Inventions Agreement and Nondisclosure Agreement with the Company, the Plan and the related Plan documents, this Agreement, including EXHIBIT B hereto, contains the complete, final and exclusive agreement of the Parties relating to the terms and conditions of Executive’s employment with the Company and the termination of Executive’s employment, and supersedes all prior and contemporaneous oral and written employment agreements or arrangements between the Parties. To the extent this Agreement conflicts with the Proprietary Information and Inventions Agreement or the Nondisclosure Agreement, the terms of such Proprietary Information and Inventions Agreement or Nondisclosure Agreement, respectively, shall control.

11.  AMENDMENT.  This Agreement cannot be amended or modified except by a written agreement signed by Executive and the Company.

12.  WAIVER.  No term, covenant or condition of this Agreement or any breach thereof shall be deemed waived, except with the written consent of the Party against whom the wavier is claimed, and any waiver or any such term, covenant, condition or breach shall not be deemed to be a waiver of any preceding or succeeding breach of the same or any other term, covenant, condition or breach.

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13.  SEVERABILITY.  The finding by a court of competent jurisdiction of the unenforceability, invalidity or illegality of any provision of this Agreement shall not render any other provision of this Agreement unenforceable, invalid or illegal.  Such court shall have the authority to modify or replace the invalid or unenforceable term or provision with a valid and enforceable term or provision that most accurately represents the Parties’ intention with respect to the invalid or unenforceable term or provision.

14.  INTERPRETATION; CONSTRUCTION.  The headings set forth in this Agreement are for convenience of reference only and shall not be used in interpreting this Agreement.  This Agreement has been drafted by legal counsel representing the Company, but Executive has been encouraged to consult with, and has had the opportunity to consult with, Executive’s own independent counsel and tax advisors with respect to the terms of this Agreement.  The Parties acknowledge that each Party and its counsel have reviewed and revised, or had an opportunity to review and revise, this Agreement, and the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement.

15.  REPRESENTATIONS AND WARRANTIES.  Executive represents and warrants that Executive is not restricted or prohibited, contractually or otherwise, from entering into and performing each of the terms and covenants contained in this Agreement, and that Executive’s execution and performance of this Agreement will not violate or breach any other agreements between Executive and any other person or entity.

16.  COUNTERPARTS.  This Agreement may be executed in two counterparts, each of which shall be deemed an original, both of which together shall constitute one and the same instrument.

17.  REFERENCES.  References herein to a “Section” or a “Subsection” shall be to a Section or a Subsection, respectively, of this Agreement.

18.  ARBITRATION.  To ensure the rapid and economical resolution of disputes that may arise in connection with Executive’s employment with the Company, the Parties agree that any and all disputes, claims, or causes of action, in law or equity, arising from or relating to Executive’s employment, or the termination of that employment, will be resolved, to the fullest extent permitted by law, by final, binding and confidential arbitration in San Diego, California conducted by the Judicial Arbitration and Mediation Services/Endispute, Inc. (“JAMS”), or its successors, under the then current rules of JAMS for employment disputes; provided that the arbitrator shall:  (a) have the authority to compel adequate discovery for the resolution of the dispute and to award such relief as would otherwise be permitted by law; and (b) issue a written arbitration decision including the arbitrator’s essential findings and conclusions and a statement of the award.  Each Party shall be entitled to all rights and remedies that such Party would be entitled to pursue in a court of law.  The Company shall pay all arbitration fees.  Nothing in this Agreement is intended to prevent either Party from obtaining injunctive relief in court to prevent irreparable harm pending the conclusion of any such arbitration.

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19.  TRADE SECRETS OF OTHERS.  It is the understanding of the Parties that Executive shall not divulge to the Company and/or an Affiliate any confidential information or trade secrets belonging to others, including Executive’s former employers, nor shall the Company and/or an Affiliate seek to elicit from Executive any such information.  Consistent with the foregoing, Executive shall not provide to the Company and/or an Affiliate, and the Company and/or an Affiliate shall not request, any documents or copies of documents containing such information.

20.  ADVERTISING; WAIVER.  Executive agrees to permit the Company and/or an Affiliate, and persons or other organizations authorized by the Company and/or an Affiliate, to use, publish and distribute advertising or sales promotional literature concerning the products and/or services of the Company and/or an Affiliate, or the machinery and equipment used in the provision thereof, in which Executive’s name and/or pictures of Executive taken in the course of Executive’s provision of services to the Company and/or an Affiliate, appear.  Executive hereby waives and releases any claim or right Executive may otherwise have arising out of such use, publication or distribution.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

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IN WITNESS WHEREOF, the Parties have executed this Agreement as of the date first above written.

FAVRILLE, INC.
By:		/s/ John P. Longenecker, PhD.
Name:				John P. Longenecker, Ph.D.
Its:	President and Chief Executive Officer
Dated:			December 1, 2005
EXECUTIVE:
/s/ David L. Guy
[EXECUTIVE]
Dated:				December 5, 2005

[SIGNATURE PAGE TO EMPLOYMENT AGREEMENT]

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EXHIBIT A

FORM OF STOCK OPTION AGREEMENT

EXHIBIT B

RELEASE AND WAIVER OF CLAIMS

In consideration of the payments and other benefits set forth in Section 4 of the Employment Agreement dated                , to which this form is attached, I, DAVID GUY, hereby furnish FAVRILLE, INC., a Delaware corporation (the “Company”), with the following release and waiver (“Release and Waiver”).

In exchange for the consideration provided to me by the Employment Agreement that I am not otherwise entitled to receive, I hereby generally and completely release the Company and its directors, officers, employees, shareholders, partners, agents, attorneys, predecessors, successors, parent and subsidiary entities, insurers, Affiliates, and assigns from any and all claims, liabilities and obligations, both known and unknown, that arise out of or are in any way related to events, acts, conduct, or omissions occurring prior to my signing this Release and Waiver.  This general release includes, but is not limited to: (1) all claims arising out of or in any way related to my employment with the Company or the termination of that employment; (2) all claims related to my compensation or benefits from the Company, including, but not limited to, salary, bonuses, commissions, vacation pay, expense reimbursements, severance pay, fringe benefits, stock, stock options, or any other ownership interests in the Company; (3) all claims for breach of contract, wrongful termination, and breach of the implied covenant of good faith and fair dealing; (4) all tort claims, including, but not limited to, claims for fraud, defamation, emotional distress, and discharge in violation of public policy; and (5) all federal, state, and local statutory claims, including, but not limited to, claims for discrimination, harassment, retaliation, attorneys’ fees, or other claims arising under the federal Civil Rights Act of 1964 (as amended), the federal Americans with Disabilities Act of 1990, the federal Age Discrimination in Employment Act of 1967 (as amended) (“ADEA”), and the California Fair Employment and Housing Act (as amended).

I also acknowledge that I have read and understand Section 1542 of the California Civil Code which reads as follows:  “A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor.”I hereby expressly waive and relinquish all rights and benefits under that section and any law of any jurisdiction of similar effect with respect to any claims I may have against the Company.

I acknowledge that, among other rights, I am waiving and releasing any rights I may have under ADEA, that this Release and Waiver is knowing and voluntary, and that the consideration given for this Release and Waiver is in addition to anything of value to which I was already entitled as an executive of the Company.  If I am 40 years of age or older upon execution of this Release and Waiver, I further acknowledge that I have been advised, as required by the Older Workers Benefit Protection Act, that:  (a) the release and waiver granted herein does not relate to claims under the ADEA which may arise after this Release and Waiver is executed; (b) I have the right to consult with an attorney prior to executing this Release and Waiver (although I may choose voluntarily not to do so); and (c) I have twenty-one (21) days from the date of termination of my employment with the Company in which to consider this Release and Waiver (although I may choose voluntarily to execute this Release and Waiver earlier); (d) I have seven (7) days following the execution of this Release and Waiver to revoke my consent to this Release and

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Waiver; and (e) this Release and Waiver shall not be effective until the seven (7) day revocation period has expired.

If I am less than 40 years of age upon execution of this Release and Waiver, I acknowledge that I have the right to consult with an attorney prior to executing this Release and Waiver (although I may choose voluntarily not to do so); and (c) I have five (5) days from the date of termination of my employment with the Company in which to consider this Release and Waiver (although I may choose voluntarily to execute this Release and Waiver earlier).

I acknowledge my continuing obligations under my Proprietary Information and Inventions Agreement, a copy of which is attached hereto (the “Proprietary Agreement”).  Pursuant to the Proprietary Information and Inventions Agreement I understand that among other things, I must not use or disclose any confidential or proprietary information of the Company and I must immediately return all Company property and documents (including all embodiments of proprietary information) and all copies thereof in my possession or control.  I understand and agree that my right to the severance pay I am receiving in exchange for my agreement to the terms of this Release and Waiver is contingent upon my continued compliance with my Proprietary Information & Inventions Agreement.

This Release and Waiver and the Proprietary Agreement constitute the complete, final and exclusive embodiment of the entire agreement between the Company and me with regard to the subject matter hereof.  I am not relying on any promise or representation by the Company that is not expressly stated herein.  This Release and Waiver may only be modified by a writing signed by both me and a duly authorized officer of the Company.

Date:	By:
		DAVID GUY

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EXHIBIT C

FAVRILLE, INC.

PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT

In consideration of my employment or continued employment by FAVRILLE, INC., a Delaware corporation the “Company”), and the compensation now and hereafter paid to me, I, DAVID GUY], hereby agree as follows:

1.             NONDISCLOSURE

1.1          Recognition of Company’s Rights; Nondisclosure.  At all times during my employment and thereafter, I will hold in strictest confidence and will not disclose, use, lecture upon or publish any of the Company’s and/or its Affiliates’ Proprietary Information (defined below), except as such disclosure, use or publication may be required in connection with my work for the Company, or unless an officer of the Company expressly authorizes such in writing.  I will obtain Company’s written approval before publishing or submitting for publication any material (written, verbal, or otherwise) that relates to my work at Company and/or incorporates any Proprietary Information.  I hereby assign to the Company any rights I may have or acquire in such Proprietary Information and recognize that all Proprietary Information shall be the sole property of the Company and its assigns.  For purposes of this Agreement,  “Affiliate” means, with respect to any specific entity, any other entity that, directly or indirectly, through one or more intermediaries, controls, is controlled by or is under common control with such specified entity.

1.2          Proprietary Information. The term “Proprietary Information” shall mean any and all confidential and/or proprietary knowledge, data or information of the Company and/or its Affiliates.  By way of illustration but not limitation, “Proprietary Information” includes (a) trade secrets, inventions, mask works, ideas, processes, formulas, source and object codes, data, programs, other works of authorship, know-how, improvements, discoveries, developments, designs and techniques (hereinafter collectively referred to as “Inventions”); and (b) information regarding plans for research, development, new products, marketing and selling, business plans, budgets and unpublished financial statements, licenses, prices and costs, suppliers and customers; and (c) information regarding the skills and compensation of other employees of the Company and/or its Affiliates.  Notwithstanding the foregoing, it is understood that, at all such times, I am free to use information which is generally known in the trade or industry, which is not gained as result of a breach of this Agreement, and my own, skill, knowledge, know-how and experience to whatever extent and in whichever way I wish.

1.3          Third Party Information.  I understand, in addition, that the Company has received and in the future will receive from third parties confidential or proprietary information (“ThirdPartyInformation”) subject to a duty on the Company’s part to maintain the confidentiality of such information and to use it only for certain limited purposes.  During the term of my employment and thereafter, I will hold Third Party Information in the strictest confidence and will not disclose to anyone (other than Company personnel who need to know such information in connection with their work for the Company) or use, except in connection with my work for the Company, Third Party Information unless expressly authorized by an officer of the Company in writing.

1.4          No Improper Use of Information of Prior Employers and Others.  During my employment by the Company I will not improperly use or disclose any confidential information or trade secrets, if any, of any former employer or any other person to whom I have an obligation of confidentiality, and I will not bring onto the premises of the Company any unpublished documents or any property belonging to any former employer or any other person to whom I have an obligation of confidentiality unless consented to in writing by that former employer or person.  I will use in the performance of my duties only information which is generally known and used by persons with training and experience comparable to my own, which is common knowledge in the industry or otherwise legally in the public domain, or which is otherwise provided or developed by the Company.

2.             ASSIGNMENT OF INVENTIONS.

2.1          Proprietary Rights.  The term “Proprietary Rights” shall mean all trade secret, patent, copyright, mask work and other intellectual property rights throughout the world.

2.2          Prior Inventions.  Inventions, if any, patented or unpatented, which I made prior to the commencement of my employment with the Company are excluded from the scope of this Agreement.  To preclude any possible uncertainty, I have set forth on Exhibit C-2 (Previous Inventions) attached hereto a

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complete list of all Inventions that I have, alone or jointly with others, conceived, developed or reduced to practice or caused to be conceived, developed or reduced to practice prior to the commencement of my employment with the Company, that I consider to be my property or the property of third parties and that I wish to have excluded from the scope of this Agreement (collectively referred to as “Prior Inventions”).  If disclosure of any such Prior Invention would cause me to violate any prior confidentiality agreement, I understand that I am not to list such Prior Inventions in Exhibit C-2 but am only to disclose a cursory name for each such invention, a listing of the party(ies) to whom it belongs and the fact that full disclosure as to such inventions has not been made for that reason.  A space is provided on Exhibit C-2 for such purpose.  If no such disclosure is attached, I represent that there are no Prior Inventions.  If, in the course of my employment with the Company, I incorporate a Prior Invention into a Company product, process or machine, the Company is hereby granted and shall have a nonexclusive, royalty-free, irrevocable, perpetual, worldwide license (with rights to sublicense through multiple tiers of sublicensees) to make, have made, modify, use and sell such Prior Invention.  Notwithstanding the foregoing, I agree that I will not incorporate, or permit to be incorporated, Prior Inventions in any Company Inventions without the Company’s prior written consent.

2.3          Assignment of Inventions.  Subject to Sections2.4 and 2.6, I hereby assign and agree to assign in the future (when any such Inventions or Proprietary Rights are first reduced to practice or first fixed in a tangible medium, as applicable) to the Company all my right, title and interest in and to any and all Inventions (and all Proprietary Rights with respect thereto) whether or not patentable or registrable under copyright or similar statutes, made or conceived or reduced to practice or learned by me, either alone or jointly with others, during the period of my employment with the Company.  Inventions assigned to the Company, or to a third party as directed by the Company pursuant to this Section2, are hereinafter referred to as “CompanyInventions”.

2.4          Nonassignable Inventions.  This Agreement does not apply to an Invention which qualifies fully as a nonassignable Invention under Section2870 of the California Labor Code (hereinafter “Section2870”).  I have reviewed the notification on Exhibit C-1 (Limited Exclusion Notification) and agree that my signature acknowledges receipt of the notification.

2.5          Obligation to Keep Company Informed.  During the period of my employment and for six (6) months after termination of my employment with the Company, I will promptly disclose to the Company fully and in writing all Inventions authored, conceived or reduced to practice by me, either alone or jointly with others.  In addition, I will promptly disclose to the Company all patent applications filed by me or on my behalf within a year after termination of employment.  At the time of each such disclosure, I will advise the Company in writing of any Inventions that I believe fully qualify for protection under Section 2870; and I will at that time provide to the Company in writing all evidence necessary to substantiate that belief.  The Company will keep in confidence and will not use for any purpose or disclose to third parties without my consent any confidential information disclosed in writing to the Company pursuant to this Agreement relating to Inventions that qualify fully for protection under the provisions of Section 2870.  I will preserve the confidentiality of any Invention that does not fully qualify for protection under Section 2870.

2.6          Government or Third Party.  I also agree to assign all my right, title and interest in and to any particular Company Invention to a third party, including without limitation the United States, as directed by the Company.

2.7          Works for Hire.  I acknowledge that all original works of authorship which are made by me (solely or jointly with others) within the scope of my employment and which are protectable by copyright are “works made for hire”, pursuant to United States Copyright Act (17 U.S.C., Section 101).

2.8          Enforcement of Proprietary Rights.  I will assist the Company in every proper way to obtain, and from time to time enforce, United States and foreign Proprietary Rights relating to Company Inventions in any and all countries.  To that end I will execute, verify and deliver such documents and perform such other acts (including appearances as a witness) as the Company may reasonably request for use in applying for, obtaining, perfecting, evidencing, sustaining and enforcing such Proprietary Rights and the assignment thereof.  In addition, I will execute, verify and deliver assignments of such Proprietary Rights to the Company or its designee.  My obligation to assist the Company with respect to Proprietary Rights relating to such Company Inventions in any and all countries shall continue beyond the termination of my employment, but the Company shall compensate me at a reasonable rate after my termination for the time actually spent by me at the Company’s request on such assistance.

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In the event the Company is unable for any reason, after reasonable effort, to secure my signature on any document needed in connection with the actions specified in the preceding paragraph, I hereby irrevocably designate and appoint the Company and its duly authorized officers and agents as my agent and attorney in fact, which appointment is coupled with an interest, to act for and in my behalf to execute, verify and file any such documents and to do all other lawfully permitted acts to further the purposes of the preceding paragraph with the same legal force and effect as if executed by me.  I hereby waive and quitclaim to the Company any and all claims, of any nature whatsoever, which I now or may hereafter have for infringement of any Proprietary Rights assigned hereunder to the Company.

3.             RECORDS.  I agree to keep and maintain adequate and current records (in the form of notes, sketches, drawings and in any other form that may be required by the Company) of all Proprietary Information developed by me and all Inventions made by me during the period of my employment at the Company, which records shall be available to and remain the sole property of the Company at all times.

4.             ADDITIONAL ACTIVITIES.  I agree that during the period of my employment by the Company I will not, without the Company’s express written consent, engage in any employment or business activity which is competitive with, or would otherwise conflict with, my employment by the Company.  I agree further that for the period of my employment by the Company and for one (l) year after the date of termination of my employment by the Company I will not induce any employee of the Company to leave the employ of the Company.

5.             NO CONFLICTING OBLIGATION.  I represent that my performance of all the terms of this Agreement and as an executive of the Company does not and will not breach any agreement to keep in confidence information acquired by me in confidence or in trust prior to my employment by the Company.  I have not entered into, and I agree I will not enter into, any agreement either written or oral in conflict herewith.

6.             RETURN OF COMPANY DOCUMENTS.  When I leave the employ of the Company, I will deliver to the Company any and all drawings, notes, memoranda, specifications, devices, formulas, and documents, together with all copies thereof, and any other material containing or disclosing any Company Inventions, Third Party Information or Proprietary Information of the Company.  I further agree that any property situated on the Company’s premises and owned by the Company, including disks and other storage media, filing cabinets or other work areas, is subject to inspection by Company personnel at any time with or without notice.  Prior to leaving, I will cooperate with the Company in completing and signing the Company’s termination statement.

7.             LEGAL AND EQUITABLE REMEDIES.  Because my services are personal and unique and because I may have access to and become acquainted with the Proprietary Information of the Company, the Company shall have the right to enforce this Agreement and any of its provisions by injunction, specific performance or other equitable relief, without bond and without prejudice to any other rights and remedies that the Company may have for a breach of this Agreement.

8.             NOTICES.  Any notices required or permitted hereunder shall be given to the appropriate party at the address specified below or at such other address as the Party shall specify in writing.  Such notice shall be deemed given upon personal delivery to the appropriate address or if sent by certified or registered mail, three (3) days after the date of mailing.

9.             NOTIFICATION OF NEW EMPLOYER.  In the event that I leave the employ of the Company, I hereby consent to the notification of my new employer of my rights and obligations under this Agreement.

10.          GENERAL PROVISIONS.

10.1        Governing Law; Consent to Personal Jurisdiction.  This Agreement will be governed by and construed according to the laws of the State of California, as such laws are applied to agreements entered into and to be performed entirely within California between California residents.  I hereby expressly consent to the personal jurisdiction of the state and federal courts located in San Diego County, California for any lawsuit filed there against me by Company arising from or related to this Agreement.

10.2        Severability.  In case any one or more of the provisions contained in this Agreement shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect the other provisions of this Agreement, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein.  If moreover, any one or more of the provisions contained in this Agreement shall for any reason be held to be excessively broad as to duration, geographical scope, activity or subject, it shall be construed by limiting and reducing it, so as to be enforceable to the extent

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compatible with the applicable law as it shall then appear.

10.3        Successors and Assigns.  This Agreement will be binding upon my heirs, executors, administrators and other legal representatives and will be for the benefit of the Company, its successors, and its assigns.

10.4        Survival.  The provisions of this Agreement shall survive the termination of my employment and the assignment of this Agreement by the Company to any successor in interest or other assignee.

10.5        Employment.  I agree and understand that nothing in this Agreement shall confer any right with respect to continuation of employment by the Company, nor shall it interfere in any way with my right or the Company’s right to terminate my employment at any time, with or without Cause.

10.6        Waiver.  No waiver by the Company of any breach of this Agreement shall be a waiver of any preceding or succeeding breach.  No waiver by the Company of any right under this Agreement shall be construed as a waiver of any other right.  The Company shall not be required to give notice to enforce strict adherence to all terms of this Agreement.

10.7        Entire Agreement.  The obligations pursuant to Sections1 and 2 of this Agreement shall apply to any time during which I was previously employed, or am in the future employed, by the Company as a consultant if no other agreement governs nondisclosure and assignment of inventions during such period.  This Agreement is the final, complete and exclusive agreement of the Parties with respect to the subject matter hereof and supersedes and merges all prior discussions between us.  No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, will be effective unless in writing and signed by the Party to be charged.  Any subsequent change or changes in my duties, salary or compensation will not affect the validity or scope of this Agreement.

This Agreement shall be effective as of the first day of my employment with the Company, namely:                           , 2004.

I HAVE READ THIS AGREEMENT CAREFULLY AND UNDERSTAND ITS TERMS.  I HAVE COMPLETELY FILLED OUT EXHIBIT C-1 TO THIS AGREEMENT.

Dated:	12/5/05
(Signature)
/s/ David Guy
David Guy
ACCEPTED AND AGREED TO:
FAVRILLE, INC.
10421 Pacific Center Court
San Diego, CA 92121
By:
Title:
Dated:

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EXHIBIT C-1

LIMITED EXCLUSION NOTIFICATION

THIS IS TO NOTIFY EXECUTIVE in accordance with Section 2872 of the California Labor Code that the foregoing Agreement between Executive and the Company does not require Executive to assign or offer to assign to the Company any invention that Executive developed entirely on your own time without using the Company’s equipment, supplies, facilities or trade secret information except for those inventions that either:

1.Relate at the time of conception or reduction to practice of the invention to the Company’s business, or actual or demonstrably anticipated research or development of the Company;

2.Result from any work performed by Executive for the Company.

To the extent a provision in the foregoing Agreement purports to require Executive to assign an invention otherwise excluded from the preceding paragraph, the provision is against the public policy of this state and is unenforceable.

This limited exclusion does not apply to any patent or invention covered by a contract between the Company and the United States or any of its agencies requiring full title to such patent or invention to be in the United States.

I ACKNOWLEDGE RECEIPT of a copy of this notification.

	/s/ David L. Guy
	[EXECUTIVE]
	Date:	12/5/05
WITNESSED BY:
Sheila Rodgers
(PRINTED NAME OF REPRESENTATIVE)

EXHIBIT C-2

TO:             FAVRILLE, INC.

FROM:            [EXECUTIVE]

DATE:                                         , 2004

SUBJECT:      Previous Inventions

1.             Except as listed in Section2 below, the following is a complete list of all inventions or improvements relevant to the subject matter of my employment by FAVRILLE, INC. (the “Company”) that have been made or conceived or first reduced to practice by me alone or jointly with others prior to my engagement by the Company:

o            No inventions or improvements.

o            See below:

o            Additional sheets attached.

2.             Due to a prior confidentiality agreement, I cannot complete the disclosure under Section1 above with respect to inventions or improvements generally listed below, the proprietary rights and duty of confidentiality with respect to which I owe to the following party(ies):

	Invention or Improvement	Party(ies)	Relationship
1.
2.
3.

o            Additional sheets attached.

EXHIBIT D

FAVRILLE, INC.

NONDISCLOSURE AGREEMENT

EX-10.24

Exhibit 10.24

MASTER SECURITY AGREEMENT

Dated as of December 30, 2005(“Agreement”)

THIS AGREEMENT is between General Electric Capital Corporation (together with its successors and assigns, if any, “Secured Party”) and Favrille, Inc. (“Debtor”). Secured Party has an office at 83 Wooster Heights Road, 5th Floor, Danbury, CT  06810. Debtor is a corporation organized and existing under the laws of the state of Delaware. Debtor’s mailing address and chief place of business is 10421 Pacific Center Court, San Diego, CA 92121.

1.CREATION OF SECURITY INTEREST.

Debtor grants to Secured Party, its successors and assigns, a security interest in and against all property listed on any collateral schedule now or in the future annexed to or made a part of this Agreement (“Collateral Schedule”), and in and against all additions, attachments, accessories and accessions to such property, all substitutions, replacements or exchanges therefore, and all insurance and/or other proceeds thereof (all such property is individually and collectively called the “Collateral”). This security interest is given to secure the payment and performance of all debts, obligations and liabilities of any kind whatsoever of Debtor to Secured Party, now existing or arising in the future under or in connection with this Agreement, including but not limited to the payment and performance of certain Promissory Notes from time to time identified on any Collateral Schedule (collectively “Notes” and each a “Note”), and any renewals, extensions and modifications of such debts, obligations and liabilities (such Notes, debts, obligations and liabilities are called the “Indebtedness”). Debtor acknowledges that, Secured Party shall be under no obligation to release the Collateral unless and until all Indebtedness of Debtor to Secured Party has been paid and satisfied; provided, however, Secured Party, in its sole and exclusive discretion, may elect to release some of the Collateral without prejudice to Secured Party’s security interest in the remaining Collateral. Unless otherwise provided by applicable law, notwithstanding anything to the contrary contained in this Agreement, to the extent that Secured Party asserts a purchase money security interest in any items of Collateral (“PMSI Collateral”): (i) the PMSI Collateral shall secure only that portion of the Indebtedness which has been advanced by Secured Party to enable Debtor to purchase, or acquire rights in or the use of such PMSI Collateral (the “PMSI Indebtedness”), and (ii) no other Collateral shall secure the PMSI Indebtedness. Upon the payment in full of all of the Indebtedness, and termination of Secured Party’s commitment to lend hereunder, this Agreement shall terminate and Secured Party shall, at the cost and expense of Debtor, execute and deliver to Debtor all such documents and instruments as shall be necessary to evidence termination of the security interests created hereunder.

2.REPRESENTATIONS, WARRANTIES AND COVENANTS OF DEBTOR.

Debtor represents, warrants and covenants as of the date of this Agreement and as of the date of each Collateral Schedule that:

(a)Debtor’s exact legal name is as set forth in the preamble of this Agreement and Debtor is, and will remain, duly organized, existing and in good standing under the laws of the State set forth in the preamble of this Agreement, has its chief executive offices at the location specified in the preamble, and is, and will remain, duly qualified and licensed in every jurisdiction wherever necessary to carry on its business and operations except where the failure to do so could not reasonably be expected to have a material adverse effect on Debtor’s financial condition, business or operations;

(b)Debtor has adequate power and capacity to enter into, and to perform its obligations under this Agreement, each Note and any other documents evidencing, or given in connection with, any of the Indebtedness (all of the foregoing are called the “Debt Documents”);

(c)This Agreement and the other Debt Documents have been duly authorized, executed and delivered by Debtor and constitute legal, valid and binding agreements enforceable in accordance with their terms, except to the extent that the enforcement of remedies may be limited under applicable bankruptcy and insolvency laws or similar laws affecting creditors’ rights generally and by general principles of equity;

(d)No approval, consent or withholding of objections is required from any governmental authority or instrumentality with respect to the entry into, or performance by Debtor of any of the Debt Documents, except any already obtained;

(e)The entry into, and performance by, Debtor of the Debt Documents will not (i) violate any of the organizational documents of Debtor or any judgment, order, law or regulation applicable to Debtor, or (ii) result in any breach of or constitute a default under any contract to which Debtor is a party, or result in the creation of any lien, claim or encumbrance on any of Debtor’s property (except for liens in favor of Secured Party) pursuant to any indenture, mortgage, deed of trust, bank loan, credit agreement, or other agreement or instrument to which Debtor is a party;

(f)There are no suits or proceedings pending in court or before any commission, board or other administrative agency against or affecting Debtor which could, in the aggregate, have a material adverse effect on Debtor, its business or operations, or its ability to perform its obligations under the Debt Documents, nor does Debtor have reason to believe that any such suits or proceedings are threatened;

(g)All financial statements delivered to Secured Party in connection with the Indebtedness have been prepared in accordance with generally accepted accounting principles, and since the date of the most recent financial statement, there has been no material adverse change in Debtors financial condition;

Initial /

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(h)The Collateral is not, and will not be, used by Debtor for personal, family or household purposes;

(i)The Collateral is, and will remain, in good condition and repair, ordinary wear and tear excepted, and Debtor will not be negligent in its care and use;

(j)All of the tangible Collateral is located at the locations set forth on each Collateral Schedule. Debtor shall give the Secured Party 30 days prior written notice of any relocation of any Collateral;

(k)Except for Permitted Liens and Permitted Transfers (as defined below), Debtor is, and will remain, the sole and lawful owner, and in possession of, the Collateral, and has the sole right and lawful authority to grant the security interest described in this Agreement (for all purposes of this Agreement, “Permitted Transfers” means (i) the disposal of worn-out or obsolete Collateral,  (ii) transfers to Secured Party, and (iii) transfers for maintenance and repair;

(l)The Collateral is, and will remain, free and clear of all liens, claims and encumbrances of any kind whatsoever, except for  (i) liens in favor of Secured Party,  (ii) liens for taxes not yet due or for taxes being contested in good faith and which do not involve, in the judgment of Secured Party, any risk of the sale, forfeiture or loss of any of the Collateral, and  (iii) inchoate material men’s, mechanic’s, repairmen’s and similar liens arising by operation of law in the normal course of business for amounts which are not delinquent (all of such liens are called  “Permitted Liens”).

(m)All federal, state and local tax returns required to be filed by Debtor have been filed with the appropriate governmental agencies and all taxes due and payable by Debtor have been timely paid except as contested in good faith and by appropriate proceedings and for which adequate reserves have been established. Debtor will pay when due all taxes, assessments and other liabilities except as contested in good faith and by appropriate proceedings and for which adequate reserves have been established;

(n)No event or condition exists under any material agreement, instrument or document to which Debtor is a party or may be subject, or by which Debtor or any of its properties are bound, which constitutes a default or an event of default thereunder, or will, with the giving of notice, passage of time, or both, would constitute a default or event of default thereunder;

(o)All reports, certificates, schedules, notices and financial information submitted by Debtor to the Secured Party pursuant to this Agreement shall be certified as presented fairly in all material respects when made by the president or chief financial officer of Debtor;

(p)   Debtor shall give the Secured Party prompt written notice of any event, occurrence or other matter which has resulted or may result in a material adverse change in its financial condition, which would impair the ability of Debtor to perform its obligations hereunder or under any of the other financing agreements to which it is a party or of Secured Party to enforce the Indebtedness or realize upon the Collateral; and

(q)Debtor has previously delivered to the Secured Party a certificate signed by the Debtor and entitled “Perfection Certificate” (the “Perfection Certificate”). The Debtor represents and warrants to the Secured Party as follows: (a) the Debtor’s exact legal name is that indicated on the Perfection Certificate and on the signature page hereof, (b) the Debtor is an organization of the type, and is organized in the jurisdiction set forth in the Perfection Certificate, (c) the Perfection Certificate accurately sets forth the Debtor’s organizational identification number or accurately states that the Debtor has none, (d) the Perfection Certificate accurately sets forth the Debtor’s place of business or, if more than one, its chief executive office, as well as the Debtor’s mailing address, if different, (e) all other information set forth on the Perfection Certificate pertaining to the Debtor is accurate and complete, and (f) that there has been no change in any information provided in the Perfection Certificate since the date on which it was executed by the Debtor which Debtor has not previously notified to Secured Party.

3.COLLATERAL.

(a)Until the declaration of any default, Debtor shall remain in possession of the Collateral; except that Secured Party shall have the right to possess  (i) any chattel paper or instrument that constitutes a part of the Collateral, and  (ii) any other Collateral in which Secured Party’s security interest may be perfected only by possession. Secured Party may inspect any of the Collateral during normal business hours after giving Debtor reasonable prior notice.

(b)Debtor shall  (i) use the Collateral only in its trade or business,  (ii) maintain all of the Collateral in good operating order and repair, normal wear and tear excepted,  (iii) use and maintain the Collateral only in compliance with manufacturers recommendations and all applicable laws, and  (iv) keep all of the Collateral free and clear of all liens, claims and encumbrances (except for Permitted Liens).

(c)Secured Party does not authorize and Debtor agrees it shall not  (i) part with possession of any of the Collateral (except to Secured Party or for maintenance and repair), (ii) remove any of the Collateral from the continental United States, or  (iii) sell, rent, lease, mortgage, license, grant a security interest in or otherwise transfer or encumber (except for Permitted Liens and Permitted Transfers) any of the Collateral.

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(d)Debtor shall pay promptly when due all taxes, license fees, assessments and public and private charges levied or assessed on any of the Collateral, on its use, or on this Agreement or any of the other Debt Documents except as contested in good faith and by appropriate proceedings and for which adequate reserves have been established. If Debtor fails, after 10 days, to discharge taxes, liens, security interests or other encumbrances at any time levied or placed on the Collateral or to otherwise effect compliance with the terms of this Agreement or any of the other Debt Documents, at  its option, Secured Party may do so. Debtor agrees to reimburse Secured Party, on demand, all reasonable costs and expenses incurred by Secured Party in connection with such payment or performance and agrees that such reimbursement obligation shall constitute Indebtedness.

(e)Debtor shall, at all times, keep accurate and complete records of the Collateral, and Secured Party shall have the right to inspect and make copies of all of Debtor’s books and records relating to the Collateral during normal business hours, after giving Debtor reasonable prior notice.

(f)Debtor agrees and acknowledges that any third person who may at any time possess all or any portion of the Collateral shall be deemed to hold, and shall hold, the Collateral as the agent of, and as pledge holder for, Secured Party. Secured Party may at any time give notice to any third person described in the preceding sentence that such third person is holding the Collateral as the agent of, and as pledge holder for, the Secured Party.

4.INSURANCE.

(a)Debtor shall at all times bear the entire risk of any loss, theft, damage to, or destruction of, any of the Collateral from any cause whatsoever.

(b)   Debtor agrees to keep the Collateral insured against loss or damage by fire and extended coverage perils, theft, burglary, and for any or all Collateral, which are vehicles, for risk of loss by collision, and if requested by Secured Party, against such other risks as Secured Party may reasonably require. The insurance coverage shall be in an amount no less than the full replacement value of the Collateral, and deductible amounts, insurers and policies shall be reasonably acceptable to Secured Party. Debtor shall deliver to Secured Party policies or certificates of insurance evidencing such coverage. Each policy shall name Secured Party as a loss payee, shall provide for coverage to Secured Party regardless of the breach by Debtor of any warranty or representation made therein, shall not be subject to co-insurance, and shall provide that coverage may not be canceled or materially altered by the insurer except upon thirty (30) days prior written notice to Secured Party. Debtor appoints Secured Party as its attorney-in-fact to make proof of loss, claim for insurance and adjustments with insurers, and to receive payment of and execute or endorse all documents, checks or drafts in connection with insurance payments. Secured Party shall not act as Debtor’s attorney-in-fact unless Debtor is in default. Proceeds of insurance shall be applied, at the option of Secured Party if a default has occurred and is continuing, to repair or replace the Collateral or to reduce any of the Indebtedness. If a default has not occurred and is continuing, proceeds of insurance shall be paid to Debtor.

5.REPORTS.

(a)Debtor shall promptly notify Secured Party of  (i) any change in the name of Debtor,  (ii) any change in the state of its incorporation or registration,  (iii) any relocation of its chief executive offices,  (iv) any of the Collateral being lost, stolen, missing, destroyed, materially damaged or worn out, or (v) any lien, claim or encumbrance other than Permitted Liens attaching to or being made against any of the Collateral.

(b)Debtor will deliver to Secured Party within one hundred and twenty (120) days of the close of each fiscal year of Debtor, Debtor’s complete financial statements including a balance sheet, income statement, statement of shareholders’equity and statement of cash flows, each prepared in accordance with generally accepted accounting principles consistently applied, audited by a recognized firm of certified public accountants reasonably satisfactory to Secured Party. Debtor will deliver to Secured Party copies of all Forms 10-K and 10-Q, if any, within 30 days after the dates on which they are filed with the Securities and Exchange Commission. As long as Debtor is privately owned and has no obligation to file its financial statements with the SEC, Debtor will deliver to Secured Party copies of Debtor’s monthly financial statements including a balance sheet, income statement and statement of cash flows, eachprepared byDebtor in accordance with generally accepted accounting principles consistently applied by Debtor andcertified by Debtor’s chief financial officer, within forty-five (45) days after the close of each month. Debtor will deliver to Secured Party promptly upon request of Secured Party, in form satisfactory to Secured Party, such other and additional information as Secured Party may reasonably request from time to time.

6.FURTHER ASSURANCES.

(a)Debtor shall, upon request of Secured Party, furnish to Secured Party such further information, execute and deliver to Secured Party such documents and instruments (including, without limitation, Uniform Commercial Code financing statements) and shall do such other acts and things as Secured Party may at any time reasonably request relating to the perfection or protection of the security interest created by this Agreement or for the purpose of carrying out the intent of this Agreement. Without limiting the foregoing, Debtor shall cooperate and do all acts deemed necessary or advisable by Secured Party to continue in Secured Party a perfected first security interest in the Collateral, and shall use reasonable efforts to obtain and furnish to

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Secured Party any subordinations, releases, landlord waivers, lessor waivers, mortgagee waivers, or control agreements, and similar documents as may be from time to time reasonably requested by, and in form and substance satisfactory to, Secured Party.

(b)Debtor shall perform any and all acts reasonably requested by the Secured Party to establish, maintain and continue the Secured Party’s security interest and liens in the Collateral, including but not limited to, executing or authenticating financing statements and such other instruments and documents when and as reasonably requested by the Secured Party. Debtor hereby authorizes Secured Party through any of Secured Party’s employees, agents or attorneys to file any and all financing statements, including, without limitation, any original filings, continuations, transfers or amendments thereof required to perfect Secured Party’s security interest and liens in the Collateral under the UCC without authentication or execution by Debtor. Debtor hereby irrevocably authorizes the Secured Party at any time and from time to time to file in any filing office in any Uniform Commercial Code jurisdiction any initial financing statement(s) and amendments thereto that (a) indicate the Collateral (i) is subject to the Secured Party’s security interest, regardless of whether any particular asset comprised in the Collateral falls within the scope of Article 9 of the Uniform Commercial Code of the State or such jurisdiction, or (ii) as being of an equal or lesser scope or with greater detail, and (b) provide any other information required by part 5 of Article 9 of the Uniform Commercial Code of the State or such other jurisdiction for the sufficiency or filing office acceptance of any financing statement or amendment, including (i) whether the Debtor is an organization, the type of organization and any organization identification number issued to the Debtor, and (ii) in the case of a financing statement filed as a fixture filing, a sufficient description of real property to which the Collateral relates. The Debtor agrees to furnish any such information to the Secured Party promptly upon the Secured Party’s request.

(c)Debtor shall indemnify and defend the Secured Party, its successors and assigns, and their respective directors, officers and employees, from and against all claims, actions and suits (including, without limitation, related reasonable attorneys’ fees) of any kind whatsoever arising, directly or indirectly, in connection with any of the Collateral except any claims, actions and suits arising out of Secured Party’s gross negligence or wilful misconduct..

7.DEFAULT AND REMEDIES.

(a)Debtor shall be in default under this Agreement and each of the other Debt Documents if:

(i)Debtor breaches its obligation to pay within 7 days of when due any installment or other amount due or coming due under any of the Debt Documents;

(ii)Debtor, without the prior written consent of Secured Party, attempts to or does sell, rent, lease, license, mortgage, grant a security interest in, or otherwise transfer or encumber (except for Permitted Liens and Permitted Transfers) any of the Collateral;

(iii)Debtor breaches any of its insurance obligations under Section 4;

(iv)Debtor breaches any of its other non-payment obligations under any of the Debt Documents and fails to cure that breach within thirty (30) days after written notice from Secured Party;

(v)Any warranty, representation or statement made by Debtor in any of the Debt Documents or otherwise in connection with any of the Indebtedness shall be false or misleading in any material respect as of the date made;

(vi)Any of the Collateral is subjected to attachment, execution, levy, seizure or confiscation in any legal proceeding or otherwise, or if any legal or administrative proceeding is commenced against Debtor or any of the Collateral,which in the good faith judgment of Secured Party subjects any of the Collateral to a material risk of attachment, execution, levy, seizure or confiscation and no bond is posted or protective order obtained to negate such risk;

(vii)Debtor breaches or is in default under any other agreement between Debtor and Secured Party and such breach or default is not cured by Debtor or waived by Secured Party within the applicable cure period;

(viii) Debtor or any guarantor or other obligor for any of the Indebtedness (collectively “Guarantor”) dissolves, terminates its existence, becomes insolvent or ceases to do business as a going concern;

(ix)If Debtor or any Guarantor is a natural person, Debtor or any such Guarantor dies or becomes incompetent;

(x)A receiver is appointed for all or of any part of the property of Debtor or any Guarantor, or Debtor or any Guarantor makes any assignment for the benefit of creditors;

(xi)Debtor or any Guarantor files a petition under any bankruptcy, insolvency or similar law, or any such petition is filed against Debtor or any Guarantor and is not dismissed within forty-five (45) days;

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(xii)Debtor’s improper filing of an amendment or termination statement relating to a filed financing statement describing the Collateral.

(xiii) Debtor shall merge with or consolidate into any other entity or sell all or substantially all of its assets or in any manner terminate its existence except where no default has occurred and is continuing or would exist after giving effect to the transaction;

(xiv) Debtor is a privately held corporation, more than 25% of Debtor’s voting capital stock, or effective control of Debtor’s voting capital stock, issued and outstanding from time to time, is not retained by the holders of such stock on the date the Agreement is executed (other than due to the sale of Debtor’s equity securities in a public offering or to venture capital investors);

(xv)Debtor is a publicly held corporation, there shall be a change in the ownership of Debtor’s stock such that Debtor is no longer subject to the reporting requirements of the Securities Exchange Act of 1934 or no longer has a class of equity securities registered under Section 12 of the Securities Act of 1933; and

(xvi) Debtor defaults under any other financing arrangement between Debtor and a third party resulting in the acceleration by such third party of any indebtedness owed by Debtor to such third party in an amount in excess of $150,000;

(xvii)Secured Party shall have determined in its sole and good faith judgment that there has been a material adverse change in the financial condition of Debtor from the date hereof, or a change or event shall have occurred which would impair the ability of Debtor to perform its obligations hereunder or under any of the other financing agreements to which it is a party or of Secured Party to enforce the Indebtedness or realize upon the Collateral; and

(xviii)Debtor breaches any of its obligations under Section 2(r).

(b)If Debtor is in default, the Secured Party, at its option, may declare any or all of the Indebtedness to be immediately due and payable, without demand or notice to Debtor or any Guarantor. The accelerated obligations and liabilities shall bear interest (both before and after any judgment) until paid in full at the lower of eighteen percent (18%) per annum or the maximum rate not prohibited by applicable law.

(c)Upon the occurrence of a default and during the continuance thereof, Secured Party shall have all of the rights and remedies of a Secured Party under the Uniform Commercial Code, and under any other applicable law. Without limiting the foregoing, Secured Party shall have the right to  (i) notify any account debtor of Debtor or any obligor on any instrument which constitutes part of the Collateral to make payment to the Secured Party,  (ii) with or without legal process, enter any premises where the Collateral may be and take possession of and remove the Collateral from the premises or store it on the premises,  (iii) sell the Collateral at public or private sale, in whole or in part, and have the right to bid and purchase at said sale, or  (iv) lease or otherwise dispose of all or part of the Collateral, applying proceeds from such disposition to the obligations then in default. If requested by Secured Party, Debtor shall promptly assemble the Collateral and make it available to Secured Party at a place to be designated by Secured Party, which is reasonably convenient to both parties. Secured Party may also render any or all of the Collateral unusable at the Debtor’s premises and may dispose of such Collateral on such premises without liability for rent or costs. Any notice that Secured Party is required to give to Debtor under the Uniform Commercial Code of the time and place of any public sale or the time after which any private sale or other intended disposition of the Collateral is to be made shall be deemed to constitute reasonable notice if such notice is given to the last known address of Debtor at least  ten (10) days prior to such action. Upon the occurrence and during the continuation of  a default, Debtor hereby appoints Secured Party as Debtor’s attorney-in-fact, with full authority in Debtor’s place and stead and in Debtor’s name or otherwise, from time to time, to take any action and to execute any instrument which Secured Party may deem necessary or advisable to accomplish the purpose of this Agreement.

(d)Upon the occurrence of a default and during the continuance thereof, proceeds from any sale or lease or other disposition shall be applied: first, to all costs of repossession, storage, and disposition including without limitation reasonable attorneys’, appraisers’, and auctioneers’ fees; second, to discharge the obligations then in default; third, to discharge any other Indebtedness of Debtor to Secured Party, whether as obligor, endorser, guarantor, surety or indemnitor; fourth, to expenses incurred in paying or settling liens and claims against the Collateral; and lastly, to Debtor, if there exists any surplus. Debtor shall remain fully liable for any deficiency.

(e)Debtor agrees to pay all reasonable attorneys’ fees and other costs incurred by Secured Party in connection with the enforcement, assertion, defense or preservation of Secured Party’s rights and remedies under this Agreement, or if prohibited by law, such lesser sum as may be permitted. Debtor further agrees that such fees and costs shall constitute Indebtedness.

(f)Secured Party’s rights and remedies under this Agreement or otherwise arising are cumulative and may be exercised singularly or concurrently. Neither the failure nor any delay on the part of the Secured Party to exercise any right, power or privilege under this Agreement shall operate as a waiver, nor shall any single or partial exercise of any right, power or privilege preclude any other or further exercise of that or any other right, power or privilege. SECURED PARTY SHALL NOT BE DEEMED TO HAVE WAIVED ANY OF ITS RIGHTS UNDER THIS AGREEMENT OR UNDER ANY OTHER AGREEMENT, INSTRUMENT OR PAPER SIGNED BY DEBTOR UNLESS SUCH WAIVER IS EXPRESSED IN WRITING AND SIGNED BY SECURED PARTY. A waiver on any one occasion shall not be construed as a bar to or waiver of any right or remedy on any future occasion.

(g)DEBTOR AND SECURED PARTY UNCONDITIONALLY WAIVE THEIR RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT, ANY OF THE OTHER DEBT DOCUMENTS, ANY OF THE INDEBTEDNESS SECURED HEREBY, ANY DEALINGS BETWEEN DEBTOR AND SECURED PARTY RELATING TO THE SUBJECT MATTER OF THIS TRANSACTION OR ANY RELATED TRANSACTIONS, AND/OR THE RELATIONSHIP THAT IS BEING ESTABLISHED BETWEEN DEBTOR AND SECURED PARTY. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT. THIS WAIVER IS IRREVOCABLE. THIS WAIVER MAY NOT BE MODIFIED

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EITHER ORALLY OR IN WRITING. THE WAIVER ALSO SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT, ANY OTHER DEBT DOCUMENTS, OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THIS TRANSACTION OR ANY RELATED TRANSACTION. THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.

8.MISCELLANEOUS.

(a)This Agreement, any Note and/or any of the other Debt Documents may be assigned, in whole or in part, by Secured Party without notice to Debtor (provided that, unless a default has occurred and is continuing, Secured Party will not assign this Agreement, the Note, or any other Debt Document to a competitor of Debtor or any affiliate thereof), and Debtor agrees not to assert against any such assignee, or assignee’s assigns, any defense, set-off, recoupment claim or counterclaim which Debtor has or may at any time have against Secured Party for any reason whatsoever. Debtor agrees that if Debtor receives written notice of an assignment from Secured Party, Debtor will pay all amounts payable under any assigned Debt Documents to such assignee or as instructed by Secured Party. Debtor also agrees to confirm in writing receipt of the notice of assignment as may be reasonably requested by Secured Party or assignee.

(b)All notices to be given in connection with this Agreement shall be in writing, shall be addressed to the parties at their respective addresses set forth in this Agreement (unless and until a different address may be specified in a written notice to the other party), and shall be deemed given  (i) on the date of receipt if delivered in hand or by facsimile transmission,  (ii) on the next business day after being sent by express mail, and  (iii) on the fourth business day after being sent by regular, registered or certified mail. As used herein, the term “business day” shall mean and include any day other than Saturdays, Sundays, or other days on which commercial banks in New York, New York are required or authorized to be closed.

(c)Secured Party may correct patent errors and fill in all blanks in this Agreement or in any Collateral Schedule consistent with the agreement of the parties.

(d)Time is of the essence of this Agreement. This Agreement shall be binding, jointly and severally, upon all parties described as the “Debtor” and their respective heirs, executors, representatives, successors and assigns, and shall inure to the benefit of Secured Party, its successors and assigns.

(e)This Agreement and its Collateral Schedules constitute the entire agreement between the parties with respect to the subject matter of this Agreement and supersede all prior understandings (whether written, verbal or implied) with respect to such subject matter. THIS AGREEMENT AND ITS COLLATERAL SCHEDULES SHALL NOT BE CHANGED OR TERMINATED ORALLY OR BY COURSE OF CONDUCT, BUT ONLY BY A WRITING SIGNED BY BOTH PARTIES. Section headings contained in this Agreement have been included for convenience only, and shall not affect the construction or interpretation of this Agreement.

(f)This Agreement shall continue in full force and effect until all of the Indebtedness has been indefeasibly paid in full to Secured Party or its assignee. The surrender, upon payment or otherwise, of any Note or any of the other documents evidencing any of the Indebtedness shall not affect the right of Secured Party to retain the Collateral for such other Indebtedness as may then exist. This Agreement shall automatically be reinstated if Secured Party is ever required to return or restore the payment of all or any portion of the Indebtedness (all as though such payment had never been made).

(g)DEBTOR AGREES THAT SECURED PARTY AND/OR ITS SUCCESSORS AND ASSIGNS SHALL HAVE THE OPTION BY WHICH STATE LAWS THIS AGREEMENT SHALL BE GOVERNED AND CONSTRUED: (A) THE LAWS OF THE STATE OF CONNECTICUT; OR (B) IF COLLATERAL HAS BEEN PLEDGED TO SECURE THE LIABILITIES, THEN BY THE LAWS OF THE STATE OR STATES WHERE THE COLLATERAL IS LOCATED, AT SECURED PARTY’S OPTION. THIS CHOICE OF STATE LAWS IS EXCLUSIVE TO THE SECURED PARTY. DEBTOR SHALL NOT HAVE ANY OPTION TO CHOOSE THE LAWS BY WHICH THIS AGREEMENT SHALL BE GOVERNED.  DEBTOR ACKNOWLEDGES THAT THIS AGREEMENT IS BEING SIGNED BY THE SECURED PARTY IN PARTIAL CONSIDERATION OF SECURED PARTY’S RIGHT TO ENFORCE IN THE JURISDICTION STATED ABOVE. DEBTOR CONSENTS TO JURISDICTION IN THE STATE OF CONNECTICUT OR THE STATE IN WHICH ANY COLLATERAL IS LOCATED AND VENUE IN ANY FEDERAL OR STATE COURT IN THE STATE OF CONNECTICUT OR THE STATE IN WHICH COLLATERAL IS LOCATED FOR SUCH PURPOSES AND WAIVES ANY AND ALL RIGHTS TO CONTEST SAID JURISDICTION AND VENUE AND ANY OBJECTION THAT SAID COUNTY IS NOT CONVENIENT. DEBTOR WAIVES ANY RIGHTS TO COMMENCE ANY ACTION AGAINST SECURED PARTY IN ANY JURISDICTION EXCEPT CONNECTICUT, OR IF SECURED PARTY CHOOSES TO LITIGATE IN A STATE WHERE COLLATERAL IS  LOCATED THEN IN SUCH COUNTY AND STATE. SECURED PARTY AND DEBTOR HEREBY EACH EXPRESSLY WAIVE ANY AND ALL RIGHTS TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER

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PARTY WITH RESPECT TO ANY MATTER WHATSOEVER RELATING TO, ARISING OUT OF OR IN ANY WAY CONNECTED WITH THE LOAN, THE DOCUMENTS AND/OR THE TRANSACTIONS WHICH ARE THE SUBJECT OF THE DOCUMENTS

(h)Secured Party acknowledges that Debtor has paid to Secured Party a $50,000 Facility Fee. Debtor agrees that Lender may retain $25,000 of the Facility Fee to cover transaction costs. Secured Party agrees that it will apply the remaining $25,000 of the Facility Fee to the first installment of principal and interest due under the first Note issued pursuant to this Agreement.

(i)In handling any confidential information of Debtor, Secured Party will exercise the same degree of care that it exercises for its own proprietary information, but disclosure of information may be made:  (i) to Secured Party’s subsidiaries or affiliates in connection with their present or prospective business relations with Debtor; (ii) to prospective transferees or purchasers of any interest in the Indebtedness, provided that the prospective transferee or purchaser agrees in writing with Secured Party  to keep such information confidential to the same extent as required of Secured Party hereunder, (iii) as required by law, regulation, subpoena or other order, (iv) as required in connection with Secured Party’s examination or audit, and (v) as Secured Party considers appropriate in exercising remedies under this Agreement. Confidential information does not include information that either (a) is in the public domain or in Secured Party’s possession when disclosed to Secured Party, or becomes part of the public domain after disclosure to Secured Party through no fault of Secured Party, or (b) is disclosed to Secured Party by a third party, if Secured Party does not know that the third party is prohibited from disclosing the information.

IN WITNESS WHEREOF, Debtor and Secured Party, intending to be legally bound hereby, have duly executed this Agreement in one or more counterparts, each of which shall be deemed to be an original, as of the day and year first aforesaid.

SECURED PARTY:				DEBTOR:
General Electric Capital Corporation				Favrille, Inc.
By:	/s/ John Edel			By:		/s/ Tamara A. Seymour
Name:			John Edel	Name:		Tamara A. Seymour
Title:		SVP		Title:	CFO

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EX-10.25

Exhibit 10.25

AMENDMENT NO. 1

THIS AMENDMENT NO. 1 (this “Amendment”) is made as of the 30th day of December 2005, between General Electric Capital Corporation (“Secured Party”) and Favrille, Inc. (“Debtor”) in connection with that certain Master Security Agreement, dated as of December 30, 2005 (the “Agreement”). The terms of this Amendment are hereby incorporated into the Agreement as though fully set forth therein. Secured Party and Debtor mutually desire to amend the Agreement as set forth below. Section references below refer to the section numbers of the Agreement.

1.In connection with this Amendment, Secured Party is making a One Million Four Hundred Ninety Eight Thousand Six Hundred Seventy Seven Dollars and Twenty Six Cents ($1,498,677.26) loan to Debtor on or before December 31, 2005 pursuant to the terms of a Note of even date therewith  (the “GECC Loan”). Concurrently with such loan, Oxford Finance Corporation (“Oxford”) is also making a One Million Four Hundred Ninety Eight Thousand Six Hundred Seventy Seven Dollars and Twenty Seven Cents ($1,498,677.27) loan to Debtor on or before December 31, 2005 (the “Oxford Loan”). The proceeds of the GECC Loan and the Oxford Loan shall be used to pay all of Debtor’s remaining indebtedness to Lighthouse Capital and Secured Party (other than the GECC Loan). Except for the GECC Loan and the Oxford Loan, Debtor shall not be permitted to incur any Additional Indebtedness to either Secured Party or Oxford unless, among other things: (i) Debtor receives at least Twenty Million Dollars ($20,000,000) in gross cash proceeds from one or more sales of its capital stock after the date hereof but on or before March 31, 2006, (ii) Oxford consents to such Additional Indebtedness, (iii) Secured Party consents to such Additional Indebtedness at its sole discretion made in good faith, (iv) no default under the Agreement exists or would exist as a result of the incurrence of such indebtedness. The preceding sentence does not constitute a commitment by Secured Party to extend further loans to Debtor.

2.Debtor hereby grants a security interest in the Collateral (including the Additional Collateral) to Secured Party to secure all of the Indebtedness to Secured Party now existing or arising in the future.

2A.Subsection 2(j) of the Agreement is hereby amended in its entirety to read as follows:

(j) Intentionally deleted.

2B.Subsection 2(k) of the Agreement is hereby amended in its entirety to read as follows:

(k) Except for Permitted Liens and Permitted Transfers (as defined below), Debtor is, and will remain the sole and lawful owner, and in possession of, the Collateral, and has the sole right and lawful authority to grant the security interest described in this Agreement for all purposes of this Agreement. “Permitted Transfers” means (i) the disposal of worn-out or obsolete Collateral, (ii) transfers to Secured Party, (iii) transfers for maintenance and repair, (iv) the conveyance, sale, lease, transfer or disposition of Inventory in the ordinary course of business, (v) non-exclusive licenses of Debtor’s Intellectual

Property in the ordinary course of business and non-exclusive and exclusive licenses of Debtor’s Intellectual Property in connection with joint ventures and corporate collaborations in the ordinary course of business, and (vi) the creation of Permitted Liens.

3.Subsection 2(l) of the Agreement is hereby amended in its entirety to read as follows:

(l)The Collateral is, and will remain, free and clear of all liens, claims and encumbrances of any kind whatsoever, except for: (i) liens in favor of Secured Party, (ii) liens in favor of Oxford, (iii) liens for taxes not yet due or for taxes being contested in good faith and which do not involve, in the judgment of Secured Party, any risk of the sale, forfeiture or loss of any of the Collateral, (iv) inchoate material men’s, mechanic’s, repairmen’s and similar liens arising by operation of law in the normal course of business for amounts which are not delinquent, (v) Liens existing on the date hereof and which are listed in Schedule B, (vi) Liens not to exceed $250,000 in the aggregate in any fiscal year (A) upon or in any Equipment acquired or held by Debtor to secure the purchase price of such Equipment or Additional Indebtedness incurred solely for the purpose of financing the acquisition or lease of such Equipment, or (B) existing on such Equipment at the time of its acquisition provided that the Lien is confined solely to the Equipment so acquired and improvements thereon and the proceeds of such Equipment, (vii) Liens arising from judgments, decrees or attachments in circumstances not constituting a default under Section 7(a)(vi), (viii)Liens in favor of financial institutions arising in connection with Debtor’s deposit accounts or securities accounts held at such institutions to secure payment of fees and similar costs and expenses subject to Debtor’s compliance with Section 3(v) hereof, (ix) non-exclusive licenses of Debtor’s Intellectual Property in the ordinary course of business and non-exclusive and exclusive licenses of Debtor’s Intellectual Property in connection with joint ventures and corporate collaborations in the ordinary course of business, (x) leases or subleases of real property granted in the ordinary course of Debtor’s business, including in connection with Debtor’s leased real property or leased premises, (xi) banker’s liens, rights of setoff and similar Liens incurred on deposits made in the ordinary course of business subject to Debtor’s compliance with Section 3(v) hereof, (xii) Liens to secure payment of worker’s compensation, employment insurance, old age pensions or other social security obligations of Debtor in each case arising in the ordinary course of business of Debtor provided, they have no priority over any of Secured Party’s Lien, (xiii) easements, reservations, rights-of-way, restrictions, minor defects or irregularities in title and similar charges or encumbrances affecting real property not constituting a material adverse effect on the business or condition (financial or otherwise) of Debtor or otherwise materially impairing the conduct of Debtor’s business, (xiv) Deposit or pledges to secure the performance of bids, tenders, contracts, public or statutory obligations, surety, indemnity, performance or other similar binds or similar obligations arising in the ordinary course of business, (xv) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of custom duties in connection with the importation of goods, (xvi) any interest or title of a licensor or sublicensor to Debtor under any license of Intellectual Property, and (xvii) Liens incurred in connection with the extension, renewal or refinancing of the Additional Indebtedness secured by Liens described above so long as it constitutes Permitted Indebtedness, but any extension, renewal or replacement Lien must be limited to the property encumbered by the existing Lien and the then outstanding principal amount of

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the Additional Indebtedness may not increase (all of such liens are called “Permitted Liens”).

4.The following Subsections are hereby added to Section 2 of the Agreement:

(r)Debtor shall not create, incur, assume or permit to exist any Additional Indebtedness except Permitted Indebtedness;

(s)Debtor will (i) protect, defend and maintain the validity and enforceability of the Intellectual Property and promptly advise Secured Party in writing of material infringements and (ii) not allow any Intellectual Property material to Debtor’s business to be abandoned, forfeited or dedicated to the public without Secured Party’s written consent;

(t)Transactions with Affiliates. Debtor shall not, without the prior written consent of Secured Party, directly or indirectly enter into or permit to exist any material transaction with any Affiliate of Debtor except for transactions that are in the ordinary course of Debtor’s business, upon fair and reasonable terms that are no less favorable to Debtor than would be obtained in an arm’s length transaction with a nonaffiliated Person;

(u)Primary Account and Wire Transfer Instructions. Debtor maintains its primary operating account (the “Primary Operating Account”) with the financial institution set forth below and the Wire Transfer Instructions for the Primary Operating Account are as follows:

Silicon Valley Bank

ABA No.: XXXXXXXXX

Account No.:  XXXXXXXXXX

Account Name:  Checking Account

Debtor hereby agrees that Loans will be advanced to the account specified above and regularly scheduled payments will be automatically debited from the same account through an ACH structure acceptable to Secured Party; provided, however, the GECC Loan shall be disbursed directly to the account listed in the proceeds application form executed by Debtor as of the date of this Amendment.  In addition to the Primary Operating Account identified hereinabove, Debtor maintains the following other deposit and investment accounts and the deposit and securities accounts pledged to Silicon Valley Bank pursuant to that certain Security Agreement to Secure a Letter of Credit dated as of March 17, 2003 (the “SVB Security Agreement”) between Debtor and Silicon Valley Bank to secure Debtor’s reimbursement obligations in connection with a standby letter of credit (the “SVB Letter of Credit”)issued in favor of Kilroy Realty Corp. (the “SVB Accounts”):

1.Morgan Stanley

Acct#: XX-XXXXX

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Contact: Thomas Piliero

555 California St. #1400

San Francisco, CA 94104

Tel: 415-576-2016

Fax: 415-576-2060

Email: Thomas.piliero@morganstanley.com

2.State Street (for Capital Advisors Group)

Acct#: XXXXXX

Contact: Glen Fuzy

389 Passaic Ave.

Fairfield, NJ 07004

Tel: 973-808-0869

Fax: 973-808-0783

Email: gfuzy@capitaladvisors.com

3.Bear Stearns

Acct#: XXX-XXXXX

Contact: Vlad Feygin

383 Madison Ave.

New York, NY 10179

Tel: 212-272-7562

Fax: 917-849-0809

Email: vfeygin@bear.com

4.Silicon Valley Bank Accounts:

3003 Tasman Drive

Santa Clara, CA 95054

Contact: Marisa Matthews

Tel: 858-784-3355

1.Checking Account  Acct#: XXXXXXXXXX

2.Flex Spending  Acct#: XXXXXXXXXX

3.Money Market  Acct#: XXXXXXXXXX

4.Payroll Account  Acct#: XXXXXXXXXX

5.Cash Reserve Account  Acct#: XXXXXXXXXX

(v)Secured Party’s Expenses. Debtor shall pay to Secured Party the Secured Party’s Expenses as and when due and payable. Secured Party acknowledges receipt from Debtor of a facility fee in the amount of $50,000 (the “2005 Facility Fee”). Debtor agrees that $25,000 of the 2005 Facility Fee is fully earned by Secured Party and nonrefundable. Secured Party agrees to apply $25,000 of the 2005 Facility Fee toward its Secured Party’s Expenses incurred in connection with the preparation, negotiation and delivery of this Amendment and related documents; the remainder of the $25,000 of the 2005 Facility Fee may be retained by Secured Party. Secured Party agrees that it will apply the remaining $25,000 of the Facility Fee to the partial

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payment of the first installment of principal and interest under the Note evidencing the GECC Loan.

5.The following Subsections are hereby added to Section 3 of the Agreement:

(g)Receivables. As to each and every Receivable (a) it is a bona fide existing obligation, valid and enforceable against the Account Debtor for a sum certain for sales of goods shipped or delivered, or goods leased, or services rendered in the ordinary course of business; (b) all supporting documents, instruments, chattel paper and other evidence of indebtedness, if any, delivered by Debtor to the Secured Party with respect to each Receivable are complete and correct in all material respects and valid and enforceable in accordance with their terms, and to the best of Debtor’s knowledge all signatures and endorsements of the Account Debtor that appear thereon are genuine, and to the best of Debtor’s knowledge all signatories and endorsers of the Account Debtor have full capacity to contract; (c) to the best of the Debtor’s knowledge, the Account Debtor is liable for and will make payment of the amount expressed in such Receivable according to its terms; (d) to the best of Debtor’s knowledge, it is not subject to any discount, deduction, setoff, counterclaim, return, allowance or special terms of payment; (e) to the best of Debtor’s knowledge, it is subject to no dispute, defense or offset, real or claimed; (f) it is not subject to any prohibition or limitation upon assignment; (g) it has not been redated or reissued in satisfaction of prior Receivables; (h) the Debtor has full right and power to grant the Secured Party a security interest therein and the security interest granted in such Receivable to the Secured Party in this Agreement, when perfected, will be a valid first security interest which will inure to the benefit of the Secured Party without further action. The warranties set out herein shall be deemed to have been made with respect to each and every Receivable now owned or hereafter acquired by the Debtor.

(h)Bailees. Except as set forth in Schedule A, the Inventory is not now and shall not at any time hereafter be stored with a bailee, warehouseman, or similar party without the Secured Party’s prior written consent. If any Inventory is so stored, the Debtor will, concurrent with storing such Inventory, cause any such bailee, warehouseman, or similar party to issue and deliver to the Secured Party, in a form acceptable to the Secured Party, warehouse receipts in the Secured Party’s name evidencing the storage of the Inventory. All such warehouse receipts do and will evidence ownership of the Inventory stored by the issuers thereof, and the holder thereof is and will continue to be the owner of good and marketable title of same, free and clear of any Liens or encumbrances except for Permitted Liens. All such warehouse receipts are and will be genuine, valid and enforceable by the holder thereof in accordance with their terms and all statements thereon are and will be true and accurate in all material respects.

(i)Change of Address, Name or Jurisdiction. All of the Collateral is located in and will in the future be in the possession of the Debtor at its address stated above or at such other addresses as may be set forth on the attached Schedule A. The Debtor has not at any time within the past four (4) months either changed its name or changed the state of

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jurisdiction in which it is organized and existing, as set forth above. The Debtor has not maintained its chief executive office at any other location, or maintained Inventory or Equipment or its records with respect to the Receivables at any other location, other than as set forth above or on the attached Schedule A, and shall not do so hereafter except upon prior written notice to the Secured Party. The Secured Party shall be entitled to rely upon the foregoing unless it receives 14 days’ advance written notice of a change in the Debtor’s name, state of jurisdiction, address of the Debtor’s chief executive offices or change of location of the Collateral or records with respect to the Receivables.

(j)Schedules of Receivables. Upon the written request of Secured Party, Debtor shall deliver to the Secured Party schedules of all outstanding Receivables. Such schedules shall be in form reasonably satisfactory to the Secured Party and shall show the age of such Receivables in intervals of not more than thirty (30) days, and contain such other information and be accompanied by such supporting documents as the Secured Party may from time to time reasonably prescribe. The Debtor shall also deliver to the Secured Party copies of the Debtor’s invoices, sales journals, evidences of shipment or delivery and such other schedules and information as the Secured Party may reasonably request. The items to be provided under this Section are to be prepared and delivered to the Secured Party from time to time solely for its convenience in maintaining records of the Collateral and the Debtor’s failure to give any of such items to the Secured Party shall not affect, terminate, modify or otherwise limit the Secured Party’s security interest granted herein.

(k)Consignment. If at any time any of the Inventory is placed by the Debtor on consignment with any person or entity (“Consignee”), the Debtor shall, prior to the delivery of such consigned Inventory:

a.Provide the Secured Party with all consignment agreements and other instruments and documentation to be used in connection with such consignment, all of which agreements, instruments, and documentation shall be reasonably acceptable in form and substance to the Secured Party;

b.Prepare and file appropriate financing statements with respect to any consigned Inventory showing the Consignee as debtor, the Debtor as secured party, and the Secured Party as assignee of the Debtor;

c.Prepare and file appropriate financing statements with respect to any consigned Inventory showing the Debtor as debtor, and the Secured Party as secured party;

d.After all financing statements referred to in the previous two subsections have been filed, conduct a search of all filings made against the Consignee in the jurisdiction in which the Consignee is located within the meaning of Section 9307 of the Code, and deliver to the Secured Party copies of the results of all such searches; and

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e.Notify, in writing, all creditors of the Consignee that are or may be holders of security interests in the Inventory to be consigned, that the Debtor expects to deliver certain Inventory to the Consignee, all of which Inventory shall be described in such notice by item or type.

(l)Fixtures. Debtor shall not permit any item of the Equipment to become a fixture to real estate or an accession to other property without the prior written consent of the Secured Party, and the Equipment is now and shall at all times remain personal property except with the Secured Party’s prior written consent. If any of the Collateral is or will be attached to real estate in such a manner as to become a fixture under applicable state law and if such real estate is encumbered, the Debtor will obtain from the holder of each Lien or encumbrance a written consent and subordination to the security interest hereby granted, or a written disclaimer of any interest in the Collateral, in a form acceptable to the Secured Party.

(m)Chattel Paper. Debtor shall promptly, upon request by the Secured Party, deliver, assign, and endorse to the Secured Party all chattel paper and all other documents held by the Debtor in connection therewith.

(n)Copies of Government Contracts. Debtor shall make available to the Secured Party, at the request of the Secured Party, a copy of each Government Contract in which the Secured Party has a security interest and a copy of each amendment thereto or modification thereof which changes the price of such contract or the amount funded to pay for such contract, except to the extent that furnishing such copies may be prohibited by government security regulations. Attached hereto as Schedule B is a complete list of all Government Contracts under which Receivables now exist or may hereafter arise, identified by the names of the contracting parties thereto, the date thereof and the number identifying the Government Contract or agreement and providing information in the form specified by the Secured Party from time to time regarding the contracting officer, the identity of any sureties and the disbursing officer, whether progress payments are to be made and the rate thereof, whether the Government Contract or agreement has been fully performed and such other information as the Secured Party may reasonably request. A true, complete and correct copy of each such Government Contract (including all modifications thereto and notice of exercise of options thereunder) now existing has been provided to the Secured Party by the Debtor, except to the extent that furnishing such copies may be prohibited by government security regulations. The Debtor shall as soon as practicable (but in no event later than five days prior to the date of execution thereof) notify the Secured Party of any additional Government Contracts, or any renewals or extensions of any Government Contract or the exercise of any options thereunder or modifications thereof, identified by the names of the contracting parties thereto, the date thereof and the number identifying the Government Contract or agreement and providing information in the form specified by the Secured Party from time to time regarding the contracting officer, the identity of any sureties and the disbursing officer, whether progress payments are to be made and the rate thereof, and such other information as the Secured Party may reasonably request, and a true, complete and correct copy of each such Government Contract, amendment

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or modification or exercise of option shall be provided to the Secured Party by the Debtor no later than the date of execution thereof, except to the extent that furnishing such copies may be prohibited by government security regulations.

(o)Claims and Disputes. Immediately upon learning thereof, Debtor shall report to the Secured Party any reclamation, return or repossession of goods, any claim or dispute asserted by any Account Debtor or other obligor, and any other matter affecting the value and enforceability or collectability of any of the Collateral where the amount in question exceeds $50,000. In addition, the Debtor shall, at its sole cost and expense (including attorneys’ fees), settle any and all such claims and disputes and indemnify and protect the Secured Party against any liability, loss or expense arising therefrom or out of any such reclamation, return or repossession of goods, provided, however, that the Secured Party, upon the occurrence and during the continuance of a default hereunder, if it shall so elect, shall have the right at all times to settle, compromise, adjust or litigate all claims or disputes directly with the Account Debtor or other obligor upon such terms and conditions as the Secured Party deems advisable and charge all costs and expenses thereof (including reasonable attorneys’ fees) to the Debtor’s account and add them to the principal amount of the Indebtedness.

(p)Government Contracts Are Binding, Etc. Debtor shall take the necessary or appropriate steps to ensure that all Government Contracts have been, or if arising hereafter will be, legally awarded and binding on the parties thereto; no payment has been or will be made by the Debtor, any Affiliate of Debtor, or any person acting on their behalf, to any person that was, is or will be contingent upon the award of any Government Contract in violation of applicable procurement law or that would otherwise be in violation of applicable procurement law (including, but not limited to, the Federal Acquisition Regulations, the Defense Acquisition Regulations, the Federal Procurement Regulations and the Armed Services Procurement Regulations); to the best of Debtor’s knowledge, there is no claim that has been asserted by any government agency or authority concerning the award or performance of any Government Contract and immediately upon learning thereof, the Debtor shall immediately notify the Secured Party of the assertion of any such claim or the existence of any basis therefor; neither the Debtor nor any director, employee or Affiliate of Debtor has been debarred or suspended from participation in the award of contracts with the federal government or any state or local government, or any agency or instrumentality thereof, or is a party to or the subject of any pending or to the best of Debtor’s knowledge threatened proceeding or investigation relating to debarment or suspension, and immediately upon learning thereof the Debtor shall immediately notify the Secured Party of the occurrence of any of the foregoing or the existence of any basis therefor; and neither the Debtor nor any Affiliate of Debtor, nor any officer, director or employee of any of them, is permanently or temporarily enjoined or barred from engaging in or continuing any conduct or practice relating to the conduct of their business, or enjoining or requiring any of them to take any action of any kind relating thereto, and immediately upon learning thereof ,the Debtor shall immediately notify the Secured Party of the occurrence of any of the foregoing or the existence of any basis therefor.

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(q)No Provisions Prohibiting Assignment of Government Contracts. Debtor shall take the necessary or appropriate steps to ensure that each Government Contract (i) does not and will not contain any provision prohibiting assignment thereof as provided herein, (ii) contains a “no set-off” clause or does not permit any set-off against or reduction of the obligation to make payments thereunder for liability of the Debtor to the government because of re-negotiation, fine, penalty (other than as specifically permitted by the federal Assignment of Claims Act with respect to Government Contracts with the federal government), taxes, social security contributions, or withholding or failing to withhold taxes, social security contributions or similar amounts, whether arising from or independent of the Government Contract. Immediately upon learning thereof, the Debtor shall promptly notify the Secured Party of any claimed set-off or reduction or the disallowance of progress payment requests.

(r)Cost Accounting and Procurement Systems. The Debtor’s cost accounting and procurement systems are and at all times have been, and will continue to be, in compliance with all applicable legal requirements except where the failure to comply would not have a material adverse effect on Debtor’s financial condition, business or operations.

(s)Compliance with Assignment Requirements for Government Contracts. The Debtor is now in compliance and hereby covenants and agrees that the Debtor will in the future comply with any and all of the requirements of Title 31 Section 3727 and Title 31 Section 15 of the United States Code and any similar state or local law and all rules and regulations relating thereto, as amended, where such statutes, rules and regulations are applicable to a particular Receivable, and shall at all times take all such other action as may be necessary to facilitate and/or ensure perfection of the Secured Party’s security interest in and the assignment to the Secured Party of any Government Account and Government Contract.

(t)Information Concerning Government Contracts. At the request of the Secured Party, Debtor shall submit to the Secured Party for the Secured Party’s approval each Government Contract which the Debtor desires to be included in determining eligible Government Accounts, and provide such other information concerning such Government Contract as the Secured Party may reasonably request.

(u)Domain Name. Debtor shall take the necessary or appropriate steps to ensure that the identity and location of the servers used in connection with the Debtor’s domain name and the identity of the party having control over the domain name server and of the administrative contact with the registry have been disclosed to the Secured Party promptly upon request. The Debtor shall not change the domain name server without notification to the Secured Party. The Debtor shall maintain the trademark of the domain name by defending against any infringement suits and by policing the trademark. The Debtor shall renew the domain name registration during the loan term. The Debtor shall make all payments to the domain name registrar necessary to maintain the domain name.

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(v)Account Control Agreements. Debtor shall at all times maintain all Cash Equivalents owned by Debtor on deposit in a Deposit Account or accounts holding securities in Debtor’s name at the institutions identified in Section 2(u) or at one or more other institutions disclosed to Secured Party (a “Third Party Institution”) and which accounts are covered by an account control agreement in favor of Secured Party (the terms of which shall be acceptable to Secured Party). At any time that the Cash Equivalents or any portion thereof are held in an account or accounts in one or more Third Party Institutions, the related account control agreement shall provide that Secured Party is to receive a copy of the account statements delivered to Debtor. With respect to each such Deposit Account, Debtor, Secured Party, and each Third Party Institution with which a Deposit Account is maintained, shall enter into a written agreement, granting Secured Party control of the Deposit Account and providing that the Third Party Institution will comply with instructions originated by the Secured Party directing disposition of the funds in the Deposit Account without further consent by Debtor. Such account control agreement may in accordance with the provisions thereof provide terms under which Debtor may remove funds from the Deposit Account prior to Secured Party’s exercise of control; provided all funds in or transferred into the Deposit Account on or after the effectiveness of this Agreement shall be subject to the security interest granted under this Agreement. Notwithstanding the foregoing, an account control agreement shall not be required for Debtor’s accounts maintained with Morgan Stanley so long as all of the following apply: (i) all of Debtor’s accounts at Morgan Stanley do not exceed in the aggregate at any time after December 21, 2005, Two Million Five Hundred Thousand Dollars ($2,500,000), (ii) Debtor provides evidence to Secured Party reasonably satisfactory to Secured Party on or before May 1, 2006 that Debtor has closed all of its accounts maintained by Morgan Stanley and transferred all such funds and securities to another of Debtor’s accounts or account which are covered by an account control agreement in favor of Secured Party, and (iii)  any of Debtor’s unrestricted cash maintained by Morgan Stanley shall not be counted when determining the $15,000,000 threshold requirement of Section 3(z).

Secured Party agrees that unless a default under the Agreement has occurred and is continuing, (i) it will not send a notice of exclusive control or any similar notice to any depository bank or any securities intermediary with respect to any Deposit Account or account holding securities of Debtor or (ii) exercise proxies with respect to any securities in an account holding securities of Debtor (and will permit Debtor to exercise such proxies).

The provisions of this Section 3(v) shall not apply to the SVB Accounts so long as the SVB Security Agreement remains in effect.

(w) Distributions. Debtor shall not (i) pay any dividends or make any distributions on its equity securities; (ii) purchase, redeem, retire, defease or otherwise acquire for value any of its equity securities (other than repurchases pursuant to the terms of employee stock purchase plans, employee restricted stock agreements or similar arrangements in an aggregate amount not to exceed One Hundred Thousand Dollars ($100,000)); (iii) return any capital to any holder of its equity securities as such; (iv) make any

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distribution of assets, equity securities, obligations or securities to any holder of its equity securities as such; or (v) set apart any sum for any such purpose; provided, however, Debtor may pay dividends payable solely in common stock.

(x)Indebtedness Payments. Debtor shall not (i) prepay, redeem, purchase, defease or otherwise satisfy in any manner prior to the scheduled repayment thereof any Additional Indebtedness for borrowed money or capital lease obligations except for (x) Debtor’s remaining indebtedness to Lighthouse Capital and GECC (other than the GECC Loan) (y) Additional Indebtedness owing to Secured Party or Oxford in accordance with the notes evidencing the same (provided that any such prepayment shall be made pro rata as between Secured Party and Oxford based on the outstanding Additional Indebtedness owed to each), and (z) prepayment or termination of the SVB Letter of Credit and the related reimbursement obligations, (ii) amend, modify or otherwise change the terms of any Additional Indebtedness for borrowed money or lease obligations so as to accelerate the scheduled repayment thereof except as provided by (x), (y) or (z) above, or (iii) repay any notes to officers, directors or shareholders except as expressly provided for in a duly executed subordination agreement in favor of, and approved by Secured Party.

(y)Negative Pledge Regarding Intellectual Property. Debtor shall not sell, transfer, assign, mortgage, pledge, lease, grant a security interest in, or encumber any of its Intellectual Property, or enter into any agreement, document, instrument or other arrangement (except with or in favor of Secured Party) with any entity which directly or indirectly prohibits or has the effect of prohibiting Debtor from selling, transferring, assigning, mortgaging, pledging, leasing, granting a security interest in or upon, or encumbering any of Debtor’s Intellectual Property; provided, however, that Debtor may grant non-exclusive licenses of Debtor’s Intellectual Property in the ordinary course of business and non-exclusive and exclusive licenses of Debtor’s Intellectual Property in connection with joint ventures and corporate collaborations in the ordinary course of business.

(z)Minimum Cash Balances. In the event Debtor’s aggregate unrestricted Cash Equivalents in accounts covered by account control agreements in favor of Secured Party fall below Fifteen Million Dollars ($15,000,000), then Debtor shall, within three (3) business days, cause a standby letter of credit to be issued to Secured Party in the amount of the outstanding principal amount of the Indebtedness from a financial institution and in a form satisfactory to Secured Party.

6.The following Subsections are hereby added to Section 7 of the Agreement:

(xix) Debtor breaches any of its obligations under Sections 3(v), (w), (x), (y) or (z);

7.The following Section 9 is hereby added to the Agreement as follows:

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Section 9. Definitions.

As used herein, the following terms, when initial capital letters are used, shall have the respective meanings set forth below. In addition, all terms defined in the Code shall have the meanings given therein unless otherwise defined herein.

Defined Terms. As used in this Agreement, the following terms shall have the following meanings, unless the context otherwise requires:

“Account Debtor” shall mean the account debtor or any customer of the Debtor who is obligated or indebted to the Debtor with respect to any of the Receivables and/or the prospective purchaser with respect to any contract right, and/or any party or organization who enters into or proposes to enter into any contract or other arrangement with the Debtor pursuant to which the Debtor is to deliver any personal property or perform any service.

“Additional Collateral” shall have the meaning as set forth in that Collateral Schedule No. 001 dated December 30, 2005 executed and delivered concurrently with the Amendment No. 1 dated December 30, 2005 to the Agreement.

“Additional Indebtedness” means, with respect to Debtor or any of its subsidiaries, the aggregate amount of, without duplication, (a) all obligations of such Person for borrowed money, (b) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (c) all obligations of such Person to pay the deferred purchase price of property or services (excluding trade payables aged less than one hundred eighty (180) days), (d) all capital lease obligations of such Person, (e) all obligations or liabilities of others secured by a Lien on any asset of such Person, whether or not such obligation or liability is assumed, (f) all obligations or liabilities of others guaranteed by such Person, and (g) any other obligations or liabilities which are required by GAAP to be shown as debt on the balance sheet of such Person. Unless otherwise indicated, the term “Additional Indebtedness” shall include all Indebtedness of Debtor and all of its subsidiaries.

“Affiliate” of a Person is a Person that owns or controls directly or indirectly the Person, any Person that controls or is controlled by or is under common control with the Person, and each of that Person’s senior executive officers, directors, and partners and, for any Person that is a limited liability company, that Person’s managers and members.

“Amendment” means the Amendment No. 1 between Debtor and Secured Party and dated as of December 30, 2005.

“Cash Equivalents” means the sum outstanding, at any one time, of (i) all cash (in United States dollars) owned by Debtor at such time plus (ii) the fair market value of all cash equivalents and short term investments (as those terms are defined by GAAP) owned by Debtor at such time.

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“Code” means the Connecticut Uniform Commercial Code (including revised Article 9 thereof).

“Collateral” means the Collateral as defined in the Agreement including the Additional Collateral.

“Consignee” has the meaning given such capitalized term in Section 3(k).

“Debt Documents” has the meaning given such capitalized term in Section 2(b).

“Default Rate” is the lower of eighteen percent (18%) per annum or the maximum rate not prohibited by applicable law.

“Deposit Account” means a demand, time, savings, passbook, or similar account maintained with a bank.

“Equipment” shall mean (a) all goods and equipment of the Debtor of every type and description, now owned and hereafter acquired and wherever located, including, without limitation, all imbedded software, machinery, motor vehicles and other rolling stock, furniture, furnishings, tools, dies, fittings, accessories, all substitutions therefore, leasehold improvements, fixtures, and materials and supplies relating to any of the foregoing; (b) all present and future documents of title and trust receipts relating to any of the foregoing; (c) all present and future rights, claims and causes of action of Debtor in connection with purchases of (or contracts for the purchase of), or warranties relating to, or damages to, goods held or to be held by the Debtor as equipment; (d) all present and future warranties, manuals and other written materials (and packaging thereof or relating thereto) relating to any of the foregoing; and (e) all present and future general intangibles of the Debtor in any way relating to any of the foregoing.

“Government Accounts” shall mean all accounts arising out of any Government Contract.

“Government Contract” shall mean any contract between the Debtor and the United States Government, any state or local government or any agency thereof, and all amendments thereto.

“Indebtedness” has the meaning given such capitalized term in Section 1.

“Intellectual Property” shall mean (a) all of the Debtor’s right, title and interest, whether now owned or existing or hereafter acquired or arising, in and to all domestic and foreign copyrights, copyright registrations and copyright applications, whether or not registered or filed with any governmental authority, together with (i) all renewals thereof, (ii) all present and future rights of the Debtor under all present and future license agreements relating thereto, whether the Debtor is licensee or licensor thereunder, (iii) all income, royalties, damages and payments now or

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hereafter due and/or payable to the Debtor thereunder or with respect thereto, including, without limitation, damages and payments for past, present or future infringements thereof, (iv) all of the Debtor’s present and future claims, causes of action and rights to sue for past, present or future infringements thereof, and (v) all rights corresponding thereto throughout the world (collectively “Copyright Rights”); (b) all of the Debtor’s right, title and interest, whether now owned or existing or hereafter acquired or arising, in and to all United States and foreign patents, and pending and abandoned United States and foreign patent applications, including, without limitation, the inventions and improvements described or claimed therein, together with(i) any reissues, divisions, continuations, certificates of re-examination, extensions and continuations-in-part thereof, (ii) all present and future rights of the Debtor under all present and future license agreements relating thereto, whether the Debtor is licensee or licensor thereunder, (iii) all income, royalties, damages and payments now or hereafter due and/or payable to the Debtor thereunder or with respect thereto, including, without limitation, damages and payments for past, present or future infringements thereof, (iv) all of the Debtor’s present and future claims, causes of action and rights to sue for past, present or future infringements thereof, and (v) all rights corresponding thereto throughout the world (collectively “Patent Rights”); (c) all of the Debtor’s right, title and interest, whether now owned or existing or hereafter acquired or arising, in and to all domestic and foreign trademarks, trademark registrations, trademark applications and trade names, whether or not registered or filed with any governmental authority, together with (i) all renewals thereof, (ii) all present and future rights of the Debtor under all present and future license agreements relating thereto, whether the Debtor is licensee or licensor thereunder, (iii) all income, royalties, damages and payments now or hereafter due and/or payable to the Debtor thereunder or with respect thereto, including, without limitation, damages and payments for past, present or future infringements thereof, (iv) all of the Debtor’s present and future claims, causes of action and rights to sue for past, present or future infringements thereof, and (v) all rights corresponding thereto throughout the world (collectively “Trademark Rights”); (d) all present and future licenses and license agreements of the Debtor, and all rights of the Debtor under or in connection therewith, whether the Debtor is licensee or licensor thereunder, including, without limitation, any present or future franchise agreements under which the Debtor is franchisee or franchisor, together with (i) all renewals thereof, (ii) all income, royalties, damages and payments now or hereafter due and/or payable to the Debtor thereunder or with respect thereto, including, without limitation, damages and payments for past, present or future infringements thereof, (iii) all claims, causes of action and rights to sue for past, present or future infringements thereof, and (iv) all rights corresponding thereto throughout the world (collectively “License Rights”); (e)  all present and future trade secrets of the Debtor; and (f) all other present and future intellectual property of the Debtor.

“Inventory” shall mean and include (a) all goods now owned or hereafter acquired by the Debtor, which are held for sale or lease by the Debtor or are furnished or to be furnished by the Debtor under contracts of service, (b) all raw materials, work in

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process, finished goods, packaging materials, and other materials and supplies of every kind used or consumed in connection with the manufacture, production, packing, shipping, advertising or sale of such goods, (c) all proceeds and products from the sale or other disposition of such goods, including all goods returned, repossessed, or acquired by the Debtor by way of substitution or replacement, and all additions and accessions thereto, and all documents and instruments (as those terms are defined in the Code) covering such goods; (d) all the Debtor’s rights as an unpaid seller, including stoppage in transit, detinue and reclamation; and (e) all of the above owned by the Debtor or in which the Debtor now has or in which the Debtor may hereafter acquire an interest, whether in transit or in the Debtor’s constructive or actual possession or held by the Debtor or others for the Debtor’s account (including any of the above held on consignment), including, without limitation, all of the above which may be located on the Debtor’s premises or upon the premises of any carriers, forwarding agents, truckers, warehousemen, vendors, selling agents, finishers, converters or other third parties who may have possession, temporary or otherwise, thereof.

“Lien(s)” shall mean any voluntary or involuntary mortgage, pledge, deed of trust, assignment, security interest, encumbrance, hypothecation, lien, or charge of any kind (including any conditional sale or other title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing, and the filing of, or agreement to give, any financing statement under the Uniform Commercial Code or comparable law of any jurisdiction).

“Loan” means an advance of credit by Secured Party to Debtor.

“Note” has the meaning given such capitalized term in Section 1.

“Payment” or “Payments” shall mean any check, draft, cash or any other remittance or credit in payment or on account of any or all of the Receivables and the cash proceeds of any returned, rejected or repossessed goods, the sale or lease of which gave rise to a Receivable.

“Permitted Indebtedness” means and includes: (i) Indebtedness of Debtor to Secured Party; (ii) Additional Indebtedness of Debtor to Oxford under the Oxford Loan and future Additional Indebtedness of Debtor to Oxford as to which Secured Party gives its prior consent at its sole discretion made in good faith; (iii) Additional Indebtedness arising from the endorsement of instruments in the ordinary course of business; (iv) Additional Indebtedness existing on the date hereof and set forth in Schedule B; (v) Subordinated Indebtedness; (vi) Additional Indebtedness not to exceed $250,000 in the aggregate in any fiscal year of Debtor secured by Liens described in clause (vi) of the definition of Permitted Liens in Section 2(l) and provided such Additional Indebtedness does not exceed the lesser of cost or fair market value of the Equipment financed with such Additional Indebtedness; (vii) other Additional Indebtedness not otherwise permitted by Section 2(r) not exceeding $100,000 in the aggregate at any time;  (viii) Additional Indebtedness with respect to

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surety bonds and like obligations with respect to performance contracts in the ordinary course of business; (ix) Additional Indebtedness of Debtor to any subsidiary of Debtor so long as the terms thereof do not require Debtor to pay more than $100,000 in aggregate amount in any fiscal year to its subsidiaries; and (x) the extension, renewal or refinancing of the Additional Indebtedness described above so long as it constitutes Permitted Indebtedness, but the then outstanding principal amount of the Additional Indebtedness may not increase or the terms modified to impose more burdensome terms upon the Debtor.

“Permitted Liens” has the meaning given such capitalized term in Section 2(l).

“Person” is any individual, sole proprietorship, partnership, limited liability company, joint venture, company association, trust, unincorporated organization, association, corporation, institution, public benefit corporation, firm, joint stock company, estate, entity or government agency.

“Primary Operating Account” has the meaning given such capitalized term in Section 2(u).

“Receivables” shall mean “account” as defined in the Code.

“Secured Party’s Expenses” means all reasonable costs or expenses (including reasonable attorneys’ fees and expenses) incurred in connection with the preparation, negotiation, documentation, administration and funding of the Debt Documents; and Secured Party’s reasonable attorneys’ fees, costs and expenses incurred in amending, modifying, enforcing or defending the Debt Documents (including fees and expenses of appeal or review), including the exercise of any rights or remedies afforded hereunder or under applicable law, whether or not suit is brought, whether before or after bankruptcy or insolvency, including without limitation all fees and costs incurred by Secured Party in connection with Secured Party’s enforcement of its rights in a bankruptcy or insolvency proceeding filed by or against Debtor or its property.

“Subordinated Indebtedness” means Additional Indebtedness subordinated to the Indebtedness of Debtor to Secured Party on terms and conditions acceptable to Secured Party in its sole discretion made in good faith.

Schedule A — Collateral Locations

Schedule B — Listing of Additional Indebtedness and Existing Permitted Liens

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TERMS USED, BUT NOT OTHERWISE DEFINED HEREIN SHALL HAVE THE MEANINGS GIVEN TO THEM IN THE AGREEMENT. ON AND AFTER THE DATE HEREOF, EACH REFERENCE TO THE AGREEMENT IN THE AGREEMENT OR IN ANY OTHER DOCUMENT SHALL MEAN THE AGREEMENT AS AMENDED BY THIS AMENDMENT. EXCEPT AS EXPRESSLY AMENDED HEREBY, THE AGREEMENT SHALL REMAIN IN FULL FORCE AND EFFECT.  IF THERE IS ANY CONFLICT BETWEEN THE PROVISIONS OF THE AGREEMENT AND THIS AMENDMENT, THEN THIS AMENDMENT SHALL CONTROL. THIS AMENDMENT MAY BE EXECUTED IN ANY NUMBER OF COUNTERPARTS, INCLUDING BY ELECTRONIC OR FACSIMILE TRANSMISSION, EACH OF WHICH WHEN SO DELIVERED SHALL BE DEEMED AN ORIGINAL, BUT ALL SUCH COUNTERPARTS TAKEN TOGETHER SHALL CONSTITUTE BUT ONE AND THE SAME INSTRUMENT. THIS AMENDMENT, THE AGREEMENT, ANY NOTE AND THE COLLATERAL SCHEDULES CONSTITUTE AND CONTAIN THE ENTIRE AGREEMENT OF DEBTOR AND SECURED PARTY WITH RESPECT TO THEIR RESPECTIVE SUBJECT MATTERS, AND SUPERSEDE ANY AND ALL PRIOR AGREEMENTS, CORRESPONDENCE AND COMMUNICATIONS.

[Remainder of page left blank; signature page follows]

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IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 1 by signature of their respective authorized representative set forth below.

General Electric Capital Corporation				Favrille, Inc.
By:	/s/ John Edel			By:	/s/ Tamara A. Seymour
Name:			John Edel	Name:			Tamara A. Seymour
Title:		SVP		Title:		CFO

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EX-10.26

Exhibit 10.26

Promissory Note Collateral Schedule 001

PROMISSORY NOTE

To Master Security Agreement dated as of

December 30, 2005

(Date)

FOR VALUE RECEIVED, Favrille, Inc., a Delaware corporation, located at the address stated below (“Maker”) promises, jointly and severally if more than one, to pay to the order of General Electric Capital Corporation or any subsequent holder hereof (each, a “Payee”) at its office located at 83 Wooster Heights Road, Fifth Floor, Danbury, CT  06810 or at such other place as Payee or the holder hereof may designate, the principal sum of One Million Four Hundred Ninety Eight Thousand Six Hundred Seventy Seven Dollars and Twenty Six Cents ($1,498,677.26), with interest on the unpaid principal balance, from the date hereof through and including the dates of payment, at a fixed interest rate of ten and eighty-nine hundredths percent (10.89%) per annum, in twenty-four (24) consecutive monthly installments of principal and interest as follows:

Periodic Installment	Amount
1-24	$	69,773.59

each (“Periodic Installment”) and a final installment which shall be in the amount of the total outstanding principal and interest.  The first Periodic Installment shall be due and payable on or before February 1, 2006 and the following Periodic Installments shall be due and payable on the first day of each succeeding month (each, a “Payment Date”) beginning March 1, 2006.  Such installments have been calculated on the basis of a 360-day year of twelve 30-day months.  Each payment may, at the option of the Payee, be calculated and applied on an assumption that such payment would be made on its due date. Maker agrees to pay any initial partial month interest payment from the date of this Note to the first day of the following month (“Interim Interest”).

The acceptance by Payee of any payment which is less than payment in full of all amounts due and owing at such time shall not constitute a waiver of Payee’s right to receive payment in full at such time or at any prior or subsequent time.

The Maker hereby expressly authorizes the Payee to insert the date value is actually given in the blank space on the face hereof and on all related documents pertaining hereto.

This Note may be secured by a security agreement, chattel mortgage, pledge agreement or like instrument (each of which is hereinafter called a “Security Agreement” and any Security Agreement, this Note and any other document evidencing or securing this loan is hereinafter called a “Debt Document”).

Time is of the essence hereof.  If any installment or any other sum due under this Note or any Security Agreement is not received within 7 days of when due, the Maker agrees to pay, in addition to the amount of each such installment or other sum, a late payment charge of five percent (5%) of the amount of said installment or other sum, but not exceeding any lawful maximum.  If (i) Maker fails to make payment of any amount due hereunder within 7 days after the same becomes due and payable; or  (ii) Maker is in default under, or fails to perform under any term or condition contained in any Security Agreement and such default or failure to perform is not cured within the applicable cure period, if any, then the entire principal sum remaining unpaid, together with all accrued interest thereon and any other sum payable under this Note or any Security Agreement, at the election of Payee, shall immediately become due and payable, with interest thereon at the lesser of eighteen percent (18%) per annum or the highest rate not prohibited by applicable law from the date of such accelerated maturity until paid (both before and after any judgment).

Maker may prepay in full any indebtedness hereunder upon five (5) days’ notice to the Payee. The prepayment shall be accompanied by payment of (i) all accrued and unpaid interest on the outstanding principal balance of this Note on the date of prepayment and (ii) a premium of 6% of the principal prepaid if such prepayment shall occur in Year 1, a premium of 4% of the principal prepaid if such prepayment shall occur in Year 2 and a premium of 2% of the principal prepaid if such prepayment shall occur in Year 3 and thereafter. Year 1 will mean the period consisting of the 1st through the 12th installments under this Note and subsequent years will refer to the subsequent twelve monthly payment periods.

The Maker and all sureties, endorsers, guarantors or any others (each such person, other than the Maker, an “Obligor”) who may at any time become liable for the payment hereof jointly and severally consent hereby to any and all extensions of time, renewals, waivers or modifications of, and all substitutions or releases of, security or of any party primarily or secondarily liable on this Note or any Security Agreement or any term and provision of either, which may be made, granted or consented to by Payee, and agree that suit may be brought and maintained against any one or more of them, at the election of Payee without joinder of any other as a party thereto, and that Payee shall not be required first to foreclose, proceed against, or exhaust any security hereof in order to enforce payment of this Note.  The Maker and each Obligor hereby waives presentment, demand for payment, notice of nonpayment, protest, notice of protest, notice of dishonor,

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and all other notices in connection herewith, as well as filing of suit (if permitted by law) and diligence in collecting this Note or enforcing any of the security hereof, and agrees to pay (if and to the extent permitted by law) all expenses incurred in collection, including Payee’s reasonable attorneys’ fees.

Maker and Payee intend to strictly comply with all applicable federal and Connecticut laws, including applicable usury laws (or the usury laws of any jurisdiction whose usury laws are deemed to apply to the Note or any other Debt Document despite the intention and desire of the parties to apply the usury laws of the State of Connecticut).  Accordingly, the provisions of this paragraph shall govern and control over every other provision of this Note or any other Debt Document which conflicts or is inconsistent with this Section, even if such provision declares that it controls.  As used in this paragraph, the term “interest” includes the aggregate of all charges, fees, benefits or other compensation which constitute interest under applicable law, provided that, to the maximum extent permitted by applicable law, (a) any non-principal payment shall be characterized as an expense or as compensation for something other than the use, forbearance or detention of money and not as interest, and (b) all interest at any time contracted for, reserved, charged or received shall be amortized, prorated, allocated and spread, in equal parts during the full term of the obligations.  In no event shall Maker or any other person be obligated to pay, or Payee have any right or privilege to reserve, receive or retain, (a) any interest in excess of the maximum amount of non-usurious interest permitted under the laws of the State of Connecticut or the applicable laws (if any) of the United States or of any other state, or (b) total interest in excess of the amount which Payee could lawfully have contracted for, reserved, received, retained or charged had the interest been calculated for the full term of the obligations.  On each day, if any, that the interest rate (the “Stated Rate”) called for under this Note or any other Debt Document exceeds the maximum non-usurious rate, the rate at which interest shall accrue shall automatically be fixed by operation of this sentence at the maximum non-usurious rate for that day.  Thereafter, interest shall accrue at the Stated Rate unless and until the Stated Rate again exceeds the maximum non-usurious rate, in which case, the provisions of the immediately preceding sentence shall again automatically operate to limit the interest accrual rate to the maximum non-usurious rate.  The daily interest rates to be used in calculating interest at the maximum non-usurious rate shall be determined by dividing the applicable maximum non-usurious rate by the number of days in the calendar year for which such calculation is being made.  None of the terms and provisions contained in this Note or in any other Debt Document which directly or indirectly relate to interest shall ever be construed without reference to this paragraph, or be construed to create a contract to pay for the use, forbearance or detention of money at an interest rate in excess of the maximum non-usurious rate.  If the term of any obligation is shortened by reason of acceleration of maturity as a result of any  default or by any other cause, or by reason of any required or permitted prepayment, and if for that (or any other) reason Payee at any time, including but not limited to, the stated maturity, is owed or receives (and/or has received) interest in excess of interest calculated at the maximum non-usurious rate, then and in any such event all of any such excess interest shall be canceled automatically as of the date of such acceleration, prepayment or other event which produces the excess, and, if such excess interest has been paid to Payee, it shall be credited pro tanto against the then-outstanding principal balance of Maker’s obligations to Payee, effective as of the date or dates when the event occurs which causes it to be excess interest, until such excess is exhausted or all of such principal has been fully paid and satisfied, whichever occurs first, and any remaining balance of such excess shall be promptly refunded to its payor.

THE MAKER HEREBY UNCONDITIONALLY WAIVES ITS RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF, DIRECTLY OR INDIRECTLY, THIS NOTE, ANY OF THE RELATED DOCUMENTS, ANY DEALINGS BETWEEN MAKER AND PAYEE RELATING TO THE SUBJECT MATTER OF THIS TRANSACTION OR ANY RELATED TRANSACTIONS, AND/OR THE RELATIONSHIP THAT IS BEING ESTABLISHED BETWEEN MAKER AND PAYEE.  THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT (INCLUDING, WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS.)  THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS NOTE, ANY RELATED DOCUMENTS, OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THIS TRANSACTION OR ANY RELATED TRANSACTION.  IN THE EVENT OF LITIGATION, THIS NOTE MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.

This Note and any Security Agreement constitute the entire agreement of the Maker and Payee with respect to the subject matter hereof and supersedes all prior understandings, agreements and representations, express or implied.

No variation or modification of this Note, or any waiver of any of its provisions or conditions, shall be valid unless in writing and signed by an authorized representative of Maker and Payee.  Any such waiver, consent, modification or change shall be effective only in the specific instance and for the specific purpose given.

Any provision in this Note or any Security Agreement which is in conflict with any statute, law or applicable rule shall be deemed omitted, modified or altered to conform thereto.

Upon receipt of an affidavit of an officer of Payee as to the loss, theft, destruction or mutilation of this Note or any Debt Document which is not of public record, and, in the case of any such loss, theft, destruction or mutilation, upon surrender and cancellation of such Note or other Debt Document, Maker will issue, in lieu thereof, a replacement Note or other Debt Document in the same principal amount thereof and otherwise of like tenor.

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It is understood and agreed that this Note and all of the Debt Documents were negotiated and have been or will be delivered to Payee in the State of Connecticut, which State the parties agree has a substantial relationship to the parties and to the underlying transactions embodied by this Note and the Debt Documents. Maker agrees to furnish to Payee at Payee’s office in Danbury, CT, all further instruments, certifications and documents to be furnished hereunder.    The parties also agree that if collateral is pledged to secure the debt evidenced by this Note, that the state or states in which such collateral is located each have a substantial relationship to the parties and to the underlying transaction embodied by this Note and the Debt Documents.

MAKER AGREES THAT THE PAYEE OF THIS NOTE SHALL HAVE THE OPTION BY WHICH STATE LAWS THIS NOTE SHALL BE GOVERNED AND CONSTRUED: (A) THE LAWS OF THE STATE OF CONNECTICUT; OR (B) IF COLLATERAL HAS BEEN PLEDGED TO SECURE THE DEBT EVIDENCED BY THIS NOTE, THEN BY THE LAWS OF THE STATE OR STATES WHERE THE COLLATERAL IS LOCATED, AT PAYEE’S OPTION.  THIS CHOICE OF STATE LAWS IS EXCLUSIVE TO THE PAYEE OF THIS NOTE.  MAKER SHALL NOT HAVE ANY OPTION TO CHOOSE THE LAWS BY WHICH THIS NOTE SHALL BE GOVERNED.  MAKER AND GUARANTORS HEREBY CONSENT TO THE EXERCISE OF JURISDICTION OVER IT BY ANY FEDERAL COURT SITTING IN CONNECTICUT OR ANY CONNECTICUT COURT SELECTED BY PAYEE, FOR THE PURPOSES OF ANY AND ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THE NOTE, THE LOAN AGREEMENT AND ALL OTHER DOCUMENTS.  MAKER AND GUARANTORS IRREVOCABLY WAIVE, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH PROCEEDING BROUGHT IN ANY SUCH COURT, ANY CLAIM BASED ON THE CONSOLIDATION OF PROCEEDINGS IN SUCH COURTS IN WHICH PROPER VENUE MAY LIE IN DIVERGENT JURISDICTIONS, AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.  MAKER AND GUARANTORS HEREBY IRREVOCABLY WAIVE, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS NOTE, THE OTHER DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY.

	Favrille, Inc.
/s/ Miguel Petro	By:	/s/ Tamara A. Seymour
(Witness)
Miguel Petro	Name:			Tamara A. Seymour
(Print name)
10421 Pacific Center Court, San Diego, CA 92121	Title:		CFO
(Address)
	Federal Tax ID #:					33-0892797
	Address: 10421 Pacific Center Court
					San Diego, CA 92121

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EX-10.27

Exhibit 10.27

AMENDMENT NO. 3

THIS AMENDMENT NO. 3 (this “Amendment”) is made as of the 30th day of December 2005, between Oxford Finance Corporation (“Secured Party”) and Favrille, Inc. (“Debtor”) in connection with that certain Master Security Agreement, dated as of July 26, 2004, as amended by an Amendment dated as of December 29, 2004, as further amended by an Amendment date as of June 16, 2005 (as so amended, the “Agreement”). The terms of this Amendment are hereby incorporated into the Agreement as though fully set forth therein. Secured Party and Debtor mutually desire to amend the Agreement as set forth below. Section references below refer to the section numbers of the Agreement.

1.In connection with this Amendment, Secured Party is making a One Million Four Hundred Ninety Eight Thousand Six Hundred Seventy Seven Dollars and Twenty Seven Cents ($1,498,677.27) loan to Debtor on or before December 31, 2005 pursuant to the terms of a Note of even date therewith  (the “Oxford Loan”). Concurrently with such loan, General Electric Capital Corporation (“GECC”) is also making a One Million Four Hundred Ninety Eight Thousand Six Hundred Seventy Seven Dollars and Twenty  Six Cents ($1,498,677.26) loan to Debtor on or before December 31, 2005 (the “GECC Loan”). The proceeds of the Oxford Loan and the GECC Loan shall be used to pay all of Debtor’s remaining indebtedness to Lighthouse Capital and GECC (other than the GECC Loan). Except for the Oxford Loan and the GECC Loan, Debtor shall not be permitted to incur any Additional Indebtedness to either Secured Party or GECC unless, among other things: (i) Debtor receives at least Twenty Million Dollars ($20,000,000) in gross cash proceeds from one or more sales of its capital stock after the date hereof but on or before March 31, 2006, (ii) GECC consents to such  Additional Indebtedness, (iii) Secured Party consents to such  Additional Indebtedness at its sole discretion made in good faith, (iv) no default under the Agreement exists or would exist as a result of the incurrence of such indebtedness. The preceding sentence does not constitute a commitment by Secured Party to extend further loans to Debtor.

2.Debtor hereby grants a security interest in the Collateral (including the Additional Collateral) to Secured Party to secure all of the Indebtedness to Secured Party now existing or arising in the future.

2A.Subsection 2(j) of the Agreement is hereby amended in its entirety to read as follows:

(j) Intentionally deleted.

2B.Subsection 2(k) of the Agreement is hereby amended in its entirety to read as follows:

(k) Except for Permitted Liens and Permitted Transfers (as defined below), Debtor is, and will remain the sole and lawful owner, and in possession of, the Collateral, and has the sole right and lawful authority to grant the security interest described in this Agreement for all purposes of this Agreement. “Permitted Transfers” means (i) the disposal of worn-out or obsolete Collateral, (ii) transfers to Secured Party, (iii) transfers for maintenance and repair, (iv) the conveyance, sale, lease, transfer or disposition of Inventory in the ordinary course of business, (v) non-exclusive licenses of Debtor’s Intellectual Property in the ordinary course of business and non-exclusive and exclusive licenses of Debtor’s Intellectual

Property in connection with joint ventures and corporate collaborations in the ordinary course of business, and (vi) the creation of Permitted Liens.

3.Subsection 2(l) of the Agreement is hereby amended in its entirety to read as follows:

(l) The Collateral is, and will remain, free and clear of all liens, claims and encumbrances of any kind whatsoever, except for: (i) liens in favor of Secured Party, (ii) liens in favor of GECC, (iii) liens for taxes not yet due or for taxes being contested in good faith and which do not involve, in the judgment of Secured Party, any risk of the sale, forfeiture or loss of any of the Collateral, (iv) inchoate material men’s, mechanic’s, repairmen’s and similar liens arising by operation of law in the normal course of business for amounts which are not delinquent, (v) Liens existing on the date hereof and which are listed in Schedule B, (vi) Liens not to exceed $250,000 in the aggregate in any fiscal year (A) upon or in any Equipment acquired or held by Debtor to secure the purchase price of such Equipment or Additional Indebtedness incurred solely for the purpose of financing the acquisition or lease of such Equipment, or (B) existing on such Equipment at the time of its acquisition provided that the Lien is confined solely to the Equipment so acquired and improvements thereon and the proceeds of such Equipment, (vii) Liens arising from judgments, decrees or attachments in circumstances not constituting a default under Section 7(a)(vi), (viii)Liens in favor of financial institutions arising in connection with Debtor’s deposit accounts or securities accounts held at such institutions to secure payment of fees and similar costs and expenses subject to Debtor’s compliance with Section 3(v) hereof, (ix) non-exclusive licenses of Debtor’s Intellectual Property in the ordinary course of business and non-exclusive and exclusive licenses of Debtor’s Intellectual Property in connection with joint ventures and corporate collaborations in the ordinary course of business, (x) leases or subleases of real property granted in the ordinary course of Debtor’s business, including in connection with Debtor’s leased real property or leased premises, (xi) banker’s liens, rights of setoff and similar Liens incurred on deposits made in the ordinary course of business subject to Debtor’s compliance with Section 3(v) hereof, (xii) Liens to secure payment of worker’s compensation, employment insurance, old age pensions or other social security obligations of Debtor in each case arising in the ordinary course of business of Debtor provided, they have no priority over any of Secured Party’s Lien, (xiii) easements, reservations, rights-of-way, restrictions, minor defects or irregularities in title and similar charges or encumbrances affecting real property not constituting a material adverse effect on the business or condition (financial or otherwise) of Debtor or otherwise materially impairing the conduct of Debtor’s business, (xiv) Deposit or pledges to secure the performance of bids, tenders, contracts, public or statutory obligations, surety, indemnity, performance or other similar binds or similar obligations arising in the ordinary course of business, (xv) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of custom duties in connection with the importation of goods, (xvi) any interest or title of a licensor or sublicensor to Debtor under any license of Intellectual Property, and (xvii) Liens incurred in connection with the extension, renewal or refinancing of the Additional Indebtedness secured by Liens described above so long as it constitutes Permitted Indebtedness, but any extension, renewal or replacement Lien must be limited to the property encumbered by the existing Lien and the then outstanding principal amount of

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the Additional Indebtedness may not increase (all of such liens are called “Permitted Liens”).

 4.The following Subsections are hereby added to Section 2 of the Agreement:

(r)Debtor shall not create, incur, assume or permit to exist any Additional Indebtedness except Permitted Indebtedness;

(s)Debtor will (i) protect, defend and maintain the validity and enforceability of the Intellectual Property and promptly advise Secured Party in writing of material infringements and (ii) not allow any Intellectual Property material to Debtor’s business to be abandoned, forfeited or dedicated to the public without Secured Party’s written consent;

(t)Transactions with Affiliates. Debtor shall not, without the prior written consent of Secured Party, directly or indirectly enter into or permit to exist any material transaction with any Affiliate of Debtor except for transactions that are in the ordinary course of Debtor’s business, upon fair and reasonable terms that are no less favorable to Debtor than would be obtained in an arm’s length transaction with a nonaffiliated Person;

(u)Primary Account and Wire Transfer Instructions. Debtor maintains its primary operating account (the “Primary Operating Account”) with the financial institution set forth below and the Wire Transfer Instructions for the Primary Operating Account are as follows:

Silicon Valley Bank

ABA No.: XXXXXXXXX

Account No.:  XXXXXXXXXX

Account Name:  Checking Account

Debtor hereby agrees that Loans will be advanced to the account specified above and regularly scheduled payments will be automatically debited from the same account through an ACH structure acceptable to Secured Party; provided, however, the Oxford Loan shall be disbursed directly to the account listed in the proceeds application form executed by Debtor as of the date of this Amendment. In addition to the Primary Operating Account identified hereinabove, Debtor maintains the following other deposit and investment accounts and the deposit and securities accounts pledged to Silicon Valley Bank pursuant to that certain Security Agreement to Secure a Letter of Credit dated as of March 17, 2003 (the “SVB Security Agreement”) between Debtor and Silicon Valley Bank to secure Debtor’s reimbursement obligations in connection with a standby letter of credit (the “SVB Letter of Credit”)issued in favor of Kilroy Realty Corp. (the “SVB Accounts”):

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1.Morgan Stanley

Acct#: XX-XXXXX

Contact: Thomas Piliero

555 California St. #1400

San Francisco, CA 94104

Tel: 415-576-2016

Fax: 415-576-2060

Email: Thomas.piliero@morganstanley.com

2.State Street (for Capital Advisors Group)

Acct#: XXXXXX

Contact: Glen Fuzy

389 Passaic Ave.

Fairfield, NJ 07004

Tel: 973-808-0869

Fax: 973-808-0783

Email: gfuzy@capitaladvisors.com

3.Bear Stearns

Acct#: XXX-XXXXX

Contact: Vlad Feygin

383 Madison Ave.

New York, NY 10179

Tel: 212-272-7562

Fax: 917-849-0809

Email: vfeygin@bear.com

4.Silicon Valley Bank Accounts:

3003 Tasman Drive

Santa Clara, CA 95054

Contact: Marisa Matthews

Tel: 858-784-3355

1.Checking Account  Acct#: XXXXXXXXXX

2.Flex Spending  Acct#: XXXXXXXXXX

3.Money Market  Acct#: XXXXXXXXXX

4.Payroll Account  Acct#: XXXXXXXXXX

5.Cash Reserve Account  Acct#: XXXXXXXXXX

(v)Secured Party’s Expenses.   Debtor shall pay to Secured Party the Secured Party’s Expenses as and when due and payable. Secured Party acknowledges receipt from Debtor of a facility fee in the amount of $50,000 (the “2005 Facility Fee”). Debtor agrees that $25,000 of the 2005 Facility Fee is fully earned by Secured Party and nonrefundable. Secured Party agrees to apply $25,000 of the 2005 Facility Fee toward its Secured Party’s Expenses incurred in connection with the preparation, negotiation and delivery of this Amendment and related documents; the remainder of the $25,000 of the 2005 Facility Fee may be retained by Secured Party. Secured Party agrees that it will apply the remaining $25,000 of the Facility Fee to the partial

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payment of the first installment of principal and interest under the Note evidencing the Oxford Loan.

5.The following Subsections are hereby added to Section 3 of the Agreement:

(g)Receivables.   As to each and every Receivable (a) it is a bona fide existing obligation, valid and enforceable against the Account Debtor for a sum certain for sales of goods shipped or delivered, or goods leased, or services rendered in the ordinary course of business; (b) all supporting documents, instruments, chattel paper and other evidence of indebtedness, if any, delivered by Debtor to the Secured Party with respect to each Receivable are complete and correct in all material respects and valid and enforceable in accordance with their terms, and to the best of Debtor’s knowledge all signatures and endorsements of the Account Debtor that appear thereon are genuine, and to the best of Debtor’s knowledge all signatories and endorsers of the Account Debtor have full capacity to contract; (c) to the best of the Debtor’s knowledge, the Account Debtor is liable for and will make payment of the amount expressed in such Receivable according to its terms; (d) to the best of Debtor’s knowledge, it is not subject to any discount, deduction, setoff, counterclaim, return, allowance or special terms of payment; (e) to the best of Debtor’s knowledge, it is subject to no dispute, defense or offset, real or claimed; (f) it is not subject to any prohibition or limitation upon assignment; (g) it has not been redated or reissued in satisfaction of prior Receivables; (h) the Debtor has full right and power to grant the Secured Party a security interest therein and the security interest granted in such Receivable to the Secured Party in this Agreement, when perfected, will be a valid first security interest which will inure to the benefit of the Secured Party without further action. The warranties set out herein shall be deemed to have been made with respect to each and every Receivable now owned or hereafter acquired by the Debtor.

(h)Bailees.   Except as set forth in Schedule A, the Inventory is not now and shall not at any time hereafter be stored with a bailee, warehouseman, or similar party without the Secured Party’s prior written consent. If any Inventory is so stored, the Debtor will, concurrent with storing such Inventory, cause any such bailee, warehouseman, or similar party to issue and deliver to the Secured Party, in a form acceptable to the Secured Party, warehouse receipts in the Secured Party’s name evidencing the storage of the Inventory. All such warehouse receipts do and will evidence ownership of the Inventory stored by the issuers thereof, and the holder thereof is and will continue to be the owner of good and marketable title of same, free and clear of any Liens or encumbrances except for Permitted Liens. All such warehouse receipts are and will be genuine, valid and enforceable by the holder thereof in accordance with their terms and all statements thereon are and will be true and accurate in all material respects.

(i)Change of Address, Name or Jurisdiction.   All of the Collateral is located in and will in the future be in the possession of the Debtor at its address stated above or at such other addresses as may be set forth on the attached Schedule A. The Debtor has not at any time within the past four (4) months either changed its name or changed the state of

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jurisdiction in which it is organized and existing, as set forth above. The Debtor has not maintained its chief executive office at any other location, or maintained Inventory or Equipment or its records with respect to the Receivables at any other location, other than as set forth above or on the attached Schedule A, and shall not do so hereafter except upon prior written notice to the Secured Party. The Secured Party shall be entitled to rely upon the foregoing unless it receives 14 days’ advance written notice of a change in the Debtor’s name, state of jurisdiction, address of the Debtor’s chief executive offices or change of location of the Collateral or records with respect to the Receivables.

(j)Schedules of Receivables.   Upon the written request of Secured Party, Debtor shall deliver to the Secured Party schedules of all outstanding Receivables. Such schedules shall be in form reasonably satisfactory to the Secured Party and shall show the age of such Receivables in intervals of not more than thirty (30) days, and contain such other information and be accompanied by such supporting documents as the Secured Party may from time to time reasonably prescribe. The Debtor shall also deliver to the Secured Party copies of the Debtor’s invoices, sales journals, evidences of shipment or delivery and such other schedules and information as the Secured Party may reasonably request. The items to be provided under this Section are to be prepared and delivered to the Secured Party from time to time solely for its convenience in maintaining records of the Collateral and the Debtor’s failure to give any of such items to the Secured Party shall not affect, terminate, modify or otherwise limit the Secured Party’s security interest granted herein.

(k)Consignment.   If at any time any of the Inventory is placed by the Debtor on consignment with any person or entity (“Consignee”), the Debtor shall, prior to the delivery of such consigned Inventory:

a.Provide the Secured Party with all consignment agreements and other instruments and documentation to be used in connection with such consignment, all of which agreements, instruments, and documentation shall be reasonably acceptable in form and substance to the Secured Party;

b.Prepare and file appropriate financing statements with respect to any consigned Inventory showing the Consignee as debtor, the Debtor as secured party, and the Secured Party as assignee of the Debtor;

c.Prepare and file appropriate financing statements with respect to any consigned Inventory showing the Debtor as debtor, and the Secured Party as secured party;

d.After all financing statements referred to in the previous two subsections have been filed, conduct a search of all filings made against the Consignee in the jurisdiction in which the Consignee is located within the meaning of Section 9307 of the Code, and deliver to the Secured Party copies of the results of all such searches; and

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e.Notify, in writing, all creditors of the Consignee that are or may be holders of security interests in the Inventory to be consigned, that the Debtor expects to deliver certain Inventory to the Consignee, all of which Inventory shall be described in such notice by item or type.

(l)Fixtures.   Debtor shall not permit any item of the Equipment to become a fixture to real estate or an accession to other property without the prior written consent of the Secured Party, and the Equipment is now and shall at all times remain personal property except with the Secured Party’s prior written consent. If any of the Collateral is or will be attached to real estate in such a manner as to become a fixture under applicable state law and if such real estate is encumbered, the Debtor will obtain from the holder of each Lien or encumbrance a written consent and subordination to the security interest hereby granted, or a written disclaimer of any interest in the Collateral, in a form acceptable to the Secured Party.

(m)Chattel Paper.   Debtor shall promptly, upon request by the Secured Party, deliver, assign, and endorse to the Secured Party all chattel paper and all other documents held by the Debtor in connection therewith.

(n)Copies of Government Contracts.   Debtor shall make available to the Secured Party, at the request of the Secured Party, a copy of each Government Contract in which the Secured Party has a security interest and a copy of each amendment thereto or modification thereof which changes the price of such contract or the amount funded to pay for such contract, except to the extent that furnishing such copies may be prohibited by government security regulations. Attached hereto as Schedule B is a complete list of all Government Contracts under which Receivables now exist or may hereafter arise, identified by the names of the contracting parties thereto, the date thereof and the number identifying the Government Contract or agreement and providing information in the form specified by the Secured Party from time to time regarding the contracting officer, the identity of any sureties and the disbursing officer, whether progress payments are to be made and the rate thereof, whether the Government Contract or agreement has been fully performed and such other information as the Secured Party may reasonably request. A true, complete and correct copy of each such Government Contract (including all modifications thereto and notice of exercise of options thereunder) now existing has been provided to the Secured Party by the Debtor, except to the extent that furnishing such copies may be prohibited by government security regulations. The Debtor shall as soon as practicable (but in no event later than five days prior to the date of execution thereof) notify the Secured Party of any additional Government Contracts, or any renewals or extensions of any Government Contract or the exercise of any options thereunder or modifications thereof, identified by the names of the contracting parties thereto, the date thereof and the number identifying the Government Contract or agreement and providing information in the form specified by the Secured Party from time to time regarding the contracting officer, the identity of any sureties and the disbursing officer, whether progress payments are to be made and the rate thereof, and such other information as the Secured Party may reasonably request, and a true, complete and correct copy of each such Government Contract, amendment

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or modification or exercise of option shall be provided to the Secured Party by the Debtor no later than the date of execution thereof, except to the extent that furnishing such copies may be prohibited by government security regulations.

(o)Claims and Disputes.   Immediately upon learning thereof, Debtor shall report to the Secured Party any reclamation, return or repossession of goods, any claim or dispute asserted by any Account Debtor or other obligor, and any other matter affecting the value and enforceability or collectability of any of the Collateral where the amount in question exceeds $50,000. In addition, the Debtor shall, at its sole cost and expense (including attorneys’ fees), settle any and all such claims and disputes and indemnify and protect the Secured Party against any liability, loss or expense arising therefrom or out of any such reclamation, return or repossession of goods, provided, however, that the Secured Party, upon the occurrence and during the continuance of a default hereunder, if it shall so elect, shall have the right at all times to settle, compromise, adjust or litigate all claims or disputes directly with the Account Debtor or other obligor upon such terms and conditions as the Secured Party deems advisable and charge all costs and expenses thereof (including reasonable attorneys’ fees) to the Debtor’s account and add them to the principal amount of the Indebtedness.

(p)Government Contracts Are Binding, Etc.   Debtor shall take the necessary or appropriate steps to ensure that all Government Contracts have been, or if arising hereafter will be, legally awarded and binding on the parties thereto; no payment has been or will be made by the Debtor, any Affiliate of Debtor, or any person acting on their behalf, to any person that was, is or will be contingent upon the award of any Government Contract in violation of applicable procurement law or that would otherwise be in violation of applicable procurement law (including, but not limited to, the Federal Acquisition Regulations, the Defense Acquisition Regulations, the Federal Procurement Regulations and the Armed Services Procurement Regulations); to the best of Debtor’s knowledge, there is no claim that has been asserted by any government agency or authority concerning the award or performance of any Government Contract and immediately upon learning thereof, the Debtor shall immediately notify the Secured Party of the assertion of any such claim or the existence of any basis therefor; neither the Debtor nor any director, employee or Affiliate of Debtor has been debarred or suspended from participation in the award of contracts with the federal government or any state or local government, or any agency or instrumentality thereof, or is a party to or the subject of any pending or to the best of Debtor’s knowledge threatened proceeding or investigation relating to debarment or suspension, and immediately upon learning thereof the Debtor shall immediately notify the Secured Party of the occurrence of any of the foregoing or the existence of any basis therefor; and neither the Debtor nor any Affiliate of Debtor, nor any officer, director or employee of any of them, is permanently or temporarily enjoined or barred from engaging in or continuing any conduct or practice relating to the conduct of their business, or enjoining or requiring any of them to take any action of any kind relating thereto, and immediately upon learning thereof ,the Debtor shall immediately notify the Secured Party of the occurrence of any of the foregoing or the existence of any basis therefor.

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(q)No Provisions Prohibiting Assignment of Government Contracts.   Debtor shall take the necessary or appropriate steps to ensure that each Government Contract (i) does not and will not contain any provision prohibiting assignment thereof as provided herein, (ii) contains a “no set-off” clause or does not permit any set-off against or reduction of the obligation to make payments thereunder for liability of the Debtor to the government because of re-negotiation, fine, penalty (other than as specifically permitted by the federal Assignment of Claims Act with respect to Government Contracts with the federal government), taxes, social security contributions, or withholding or failing to withhold taxes, social security contributions or similar amounts, whether arising from or independent of the Government Contract. Immediately upon learning thereof, the Debtor shall promptly notify the Secured Party of any claimed set-off or reduction or the disallowance of progress payment requests.

(r)Cost Accounting and Procurement Systems.   The Debtor’s cost accounting and procurement systems are and at all times have been, and will continue to be, in compliance with all applicable legal requirements except where the failure to comply would not have a material adverse effect on Debtor’s financial condition, business or operations.

(s)Compliance with Assignment Requirements for Government Contracts.   The Debtor is now in compliance and hereby covenants and agrees that the Debtor will in the future comply with any and all of the requirements of Title 31 Section 3727 and Title 31 Section 15 of the United States Code and any similar state or local law and all rules and regulations relating thereto, as amended, where such statutes, rules and regulations are applicable to a particular Receivable, and shall at all times take all such other action as may be necessary to facilitate and/or ensure perfection of the Secured Party’s security interest in and the assignment to the Secured Party of any Government Account and Government Contract.

(t)Information Concerning Government Contracts.   At the request of the Secured Party, Debtor shall submit to the Secured Party for the Secured Party’s approval each Government Contract which the Debtor desires to be included in determining eligible Government Accounts, and provide such other information concerning such Government Contract as the Secured Party may reasonably request.

(u)Domain Name.   Debtor shall take the necessary or appropriate steps to ensure that the identity and location of the servers used in connection with the Debtor’s domain name and the identity of the party having control over the domain name server and of the administrative contact with the registry have been disclosed to the Secured Party promptly upon request. The Debtor shall not change the domain name server without notification to the Secured Party. The Debtor shall maintain the trademark of the domain name by defending against any infringement suits and by policing the trademark. The Debtor shall renew the domain name registration during the loan term. The Debtor shall make all payments to the domain name registrar necessary to maintain the domain name.

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(v)Account Control Agreements.   Debtor shall at all times maintain all Cash Equivalents owned by Debtor on deposit in a Deposit Account or accounts holding securities in Debtor’s name at the institutions identified in Section 2(u) or at one or more other institutions disclosed to Secured Party (a “Third Party Institution”) and which accounts are covered by an account control agreement in favor of Secured Party (the terms of which shall be acceptable to Secured Party). At any time that the Cash Equivalents or any portion thereof are held in an account or accounts in one or more Third Party Institutions, the related account control agreement shall provide that Secured Party is to receive a copy of the account statements delivered to Debtor. With respect to each such Deposit Account, Debtor, Secured Party, and each Third Party Institution with which a Deposit Account is maintained, shall enter into a written agreement, granting Secured Party control of the Deposit Account and providing that the Third Party Institution will comply with instructions originated by the Secured Party directing disposition of the funds in the Deposit Account without further consent by Debtor. Such account control agreement may in accordance with the provisions thereof provide terms under which Debtor may remove funds from the Deposit Account prior to Secured Party’s exercise of control; provided all funds in or transferred into the Deposit Account on or after the effectiveness of this Agreement shall be subject to the security interest granted under this Agreement. Notwithstanding the foregoing, an account control agreement shall not be required for Debtor’s accounts maintained with Morgan Stanley so long as all of the following apply: (i) all of Debtor’s accounts at Morgan Stanley do not exceed in the aggregate at any time after December 21, 2005, Two Million Five Hundred Thousand Dollars ($2,500,000), (ii) Debtor provides evidence to Secured Party reasonably satisfactory to Secured Party on or before May 1, 2006 that Debtor has closed all of its accounts maintained by Morgan Stanley and transferred all such funds and securities to another of Debtor’s accounts or account which are covered by an account control agreement in favor of Secured Party, and (iii)  any of Debtor’s unrestricted cash maintained by Morgan Stanley shall not be counted when determining the $15,000,000 threshold requirement of Section 3(z).

Secured Party agrees that unless a default under the Agreement has occurred and is continuing, (i) it will not send a notice of exclusive control or any similar notice to any depository bank or any securities intermediary with respect to any Deposit Account or account holding securities of Debtor or (ii) exercise proxies with respect to any securities in an account holding securities of Debtor (and will permit Debtor to exercise such proxies).

The provisions of this Section 3(v) shall not apply to the SVB Accounts so long as the SVB Security Agreement remains in effect.

(w)Distributions.   Debtor shall not (i) pay any dividends or make any distributions on its equity securities; (ii) purchase, redeem, retire, defease or otherwise acquire for value any of its equity securities (other than repurchases pursuant to the terms of employee stock purchase plans, employee restricted stock agreements or similar arrangements in an aggregate amount not to exceed One Hundred Thousand Dollars ($100,000)); (iii) return any capital to any holder of its equity securities as such; (iv) make any

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distribution of assets, equity securities, obligations or securities to any holder of its equity securities as such; or (v) set apart any sum for any such purpose; provided, however, Debtor may pay dividends payable solely in common stock.

(x)Indebtedness Payments.   Debtor shall not (i) prepay, redeem, purchase, defease or otherwise satisfy in any manner prior to the scheduled repayment thereof any Additional Indebtedness for borrowed money or capital lease obligations except for (x) Debtor’s remaining indebtedness to Lighthouse Capital and GECC (other than the GECC Loan) (y) Additional Indebtedness owing to Secured Party or GECC in accordance with the notes evidencing the same (provided that any such prepayment shall be made pro rata as between Secured Party and GECC based on the outstanding Additional Indebtedness owed to each), and (z) prepayment or termination of the SVB Letter of Credit and the related reimbursement obligations, (ii) amend, modify or otherwise change the terms of any Additional Indebtedness for borrowed money or lease obligations so as to accelerate the scheduled repayment thereof except as provided by (x), (y) or (z) above, or (iii) repay any notes to officers, directors or shareholders except as expressly provided for in a duly executed subordination agreement in favor of, and approved by Secured Party.

(y)Negative Pledge Regarding Intellectual Property.   Debtor shall not sell, transfer, assign, mortgage, pledge, lease, grant a security interest in, or encumber any of its Intellectual Property, or enter into any agreement, document, instrument or other arrangement (except with or in favor of Secured Party) with any entity which directly or indirectly prohibits or has the effect of prohibiting Debtor from selling, transferring, assigning, mortgaging, pledging, leasing, granting a security interest in or upon, or encumbering any of Debtor’s Intellectual Property; provided, however, that Debtor may grant non-exclusive licenses of Debtor’s Intellectual Property in the ordinary course of business and non-exclusive and exclusive licenses of Debtor’s Intellectual Property in connection with joint ventures and corporate collaborations in the ordinary course of business.

(z)Minimum Cash Balances.   In the event Debtor’s aggregate unrestricted Cash Equivalents in accounts covered by account control agreements in favor of Secured Party fall below Fifteen Million Dollars ($15,000,000), then Debtor shall, within three (3) business days, cause a standby letter of credit to be issued to Secured Party in the amount of the outstanding principal amount of the Indebtedness from a financial institution and in a form satisfactory to Secured Party.

6.The following Subsections are hereby added to Section 7 of the Agreement:

(xix) Debtor breaches any of its obligations under Sections 3(v), (w), (x), (y) or (z);

7.The following Section 9 is hereby added to the Agreement as follows and replaces Section 8(j) of the Agreement in its entirety:

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Section 9.  Definitions.

As used herein, the following terms, when initial capital letters are used, shall have the respective meanings set forth below. In addition, all terms defined in the Code shall have the meanings given therein unless otherwise defined herein.

Defined Terms.   As used in this Agreement, the following terms shall have the following meanings, unless the context otherwise requires:

“Account Debtor” shall mean the account debtor or any customer of the Debtor who is obligated or indebted to the Debtor with respect to any of the Receivables and/or the prospective purchaser with respect to any contract right, and/or any party or organization who enters into or proposes to enter into any contract or other arrangement with the Debtor pursuant to which the Debtor is to deliver any personal property or perform any service.

“Additional Collateral” shall have the meaning as set forth in that Collateral Schedule No. 13 dated December 30, 2005 executed and delivered concurrently with the Amendment No. 3 dated December 30, 2005 to the Agreement.

“Additional Indebtedness” means, with respect to Debtor or any of its subsidiaries, the aggregate amount of, without duplication, (a) all obligations of such Person for borrowed money, (b) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (c) all obligations of such Person to pay the deferred purchase price of property or services (excluding trade payables aged less than one hundred eighty (180) days), (d) all capital lease obligations of such Person, (e) all obligations or liabilities of others secured by a Lien on any asset of such Person, whether or not such obligation or liability is assumed, (f) all obligations or liabilities of others guaranteed by such Person, and (g) any other obligations or liabilities which are required by GAAP to be shown as debt on the balance sheet of such Person. Unless otherwise indicated, the term “Additional Indebtedness” shall include all Indebtedness of Debtor and all of its subsidiaries.

“Affiliate” of a Person is a Person that owns or controls directly or indirectly the Person, any Person that controls or is controlled by or is under common control with the Person, and each of that Person’s senior executive officers, directors, and partners and, for any Person that is a limited liability company, that Person’s managers and members.

“Amendment” means the Amendment No. 3 between Debtor and Secured Party and dated as of December 30, 2005.

“Cash Equivalents” means the sum outstanding, at any one time, of (i) all cash (in United States dollars) owned by Debtor at such time plus (ii) the fair market value of all cash equivalents and short term investments (as those terms are defined by GAAP) owned by Debtor at such time.

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“Code” means the Virginia Uniform Commercial Code (including revised Article 9 thereof).

“Collateral” means the Collateral as defined in the Agreement including the Additional Collateral.

“Consignee” has the meaning given such capitalized term in Section 3(k).

“Debt Documents” has the meaning given such capitalized term in Section 2(b).

“Default Rate” is the lower of eighteen percent (18%) per annum or the maximum rate not prohibited by applicable law.

“Deposit Account” means a demand, time, savings, passbook, or similar account maintained with a bank.

“Equipment” shall mean (a) all goods and equipment of the Debtor of every type and description, now owned and hereafter acquired and wherever located, including, without limitation, all imbedded software, machinery, motor vehicles and other rolling stock, furniture, furnishings, tools, dies, fittings, accessories, all substitutions therefore, leasehold improvements, fixtures, and materials and supplies relating to any of the foregoing; (b) all present and future documents of title and trust receipts relating to any of the foregoing; (c) all present and future rights, claims and causes of action of Debtor in connection with purchases of (or contracts for the purchase of), or warranties relating to, or damages to, goods held or to be held by the Debtor as equipment; (d) all present and future warranties, manuals and other written materials (and packaging thereof or relating thereto) relating to any of the foregoing; and (e) all present and future general intangibles of the Debtor in any way relating to any of the foregoing.

“Government Accounts” shall mean all accounts arising out of any Government Contract.

“Government Contract” shall mean any contract between the Debtor and the United States Government, any state or local government or any agency thereof, and all amendments thereto.

“Indebtedness” has the meaning given such capitalized term in Section 1.

“Intellectual Property” shall mean (a) all of the Debtor’s right, title and interest, whether now owned or existing or hereafter acquired or arising, in and to all domestic and foreign copyrights, copyright registrations and copyright applications, whether or not registered or filed with any governmental authority, together with (i) all renewals thereof, (ii) all present and future rights of the Debtor under all present and future license agreements relating thereto, whether the Debtor is licensee or licensor thereunder, (iii) all income, royalties, damages and payments now or

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hereafter due and/or payable to the Debtor thereunder or with respect thereto, including, without limitation, damages and payments for past, present or future infringements thereof, (iv) all of the Debtor’s present and future claims, causes of action and rights to sue for past, present or future infringements thereof, and (v) all rights corresponding thereto throughout the world (collectively “Copyright Rights”); (b) all of the Debtor’s right, title and interest, whether now owned or existing or hereafter acquired or arising, in and to all United States and foreign patents, and pending and abandoned United States and foreign patent applications, including, without limitation, the inventions and improvements described or claimed therein, together with(i) any reissues, divisions, continuations, certificates of re-examination, extensions and continuations-in-part thereof, (ii) all present and future rights of the Debtor under all present and future license agreements relating thereto, whether the Debtor is licensee or licensor thereunder, (iii) all income, royalties, damages and payments now or hereafter due and/or payable to the Debtor thereunder or with respect thereto, including, without limitation, damages and payments for past, present or future infringements thereof, (iv) all of the Debtor’s present and future claims, causes of action and rights to sue for past, present or future infringements thereof, and (v) all rights corresponding thereto throughout the world (collectively “Patent Rights”); (c) all of the Debtor’s right, title and interest, whether now owned or existing or hereafter acquired or arising, in and to all domestic and foreign trademarks, trademark registrations, trademark applications and trade names, whether or not registered or filed with any governmental authority, together with (i) all renewals thereof, (ii) all present and future rights of the Debtor under all present and future license agreements relating thereto, whether the Debtor is licensee or licensor thereunder, (iii) all income, royalties, damages and payments now or hereafter due and/or payable to the Debtor thereunder or with respect thereto, including, without limitation, damages and payments for past, present or future infringements thereof, (iv) all of the Debtor’s present and future claims, causes of action and rights to sue for past, present or future infringements thereof, and (v) all rights corresponding thereto throughout the world (collectively “Trademark Rights”); (d) all present and future licenses and license agreements of the Debtor, and all rights of the Debtor under or in connection therewith, whether the Debtor is licensee or licensor thereunder, including, without limitation, any present or future franchise agreements under which the Debtor is franchisee or franchisor, together with (i) all renewals thereof, (ii) all income, royalties, damages and payments now or hereafter due and/or payable to the Debtor thereunder or with respect thereto, including, without limitation, damages and payments for past, present or future infringements thereof, (iii) all claims, causes of action and rights to sue for past, present or future infringements thereof, and (iv) all rights corresponding thereto throughout the world (collectively “License Rights”); (e)  all present and future trade secrets of the Debtor; and (f) all other present and future intellectual property of the Debtor.

“Inventory” shall mean and include (a) all goods now owned or hereafter acquired by the Debtor, which are held for sale or lease by the Debtor or are furnished or to be furnished by the Debtor under contracts of service, (b) all raw materials, work in

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process, finished goods, packaging materials, and other materials and supplies of every kind used or consumed in connection with the manufacture, production, packing, shipping, advertising or sale of such goods, (c) all proceeds and products from the sale or other disposition of such goods, including all goods returned, repossessed, or acquired by the Debtor by way of substitution or replacement, and all additions and accessions thereto, and all documents and instruments (as those terms are defined in the Code) covering such goods; (d) all the Debtor’s rights as an unpaid seller, including stoppage in transit, detinue and reclamation; and (e) all of the above owned by the Debtor or in which the Debtor now has or in which the Debtor may hereafter acquire an interest, whether in transit or in the Debtor’s constructive or actual possession or held by the Debtor or others for the Debtor’s account (including any of the above held on consignment), including, without limitation, all of the above which may be located on the Debtor’s premises or upon the premises of any carriers, forwarding agents, truckers, warehousemen, vendors, selling agents, finishers, converters or other third parties who may have possession, temporary or otherwise, thereof.

“Lien(s)” shall mean any voluntary or involuntary mortgage, pledge, deed of trust, assignment, security interest, encumbrance, hypothecation, lien, or charge of any kind (including any conditional sale or other title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing, and the filing of, or agreement to give, any financing statement under the Uniform Commercial Code or comparable law of any jurisdiction).

“Loan” means an advance of credit by Secured Party to Debtor.

“Note” has the meaning given such capitalized term in Section 1.

“Payment” or “Payments” shall mean any check, draft, cash or any other remittance or credit in payment or on account of any or all of the Receivables and the cash proceeds of any returned, rejected or repossessed goods, the sale or lease of which gave rise to a Receivable.

“Permitted Indebtedness” means and includes: (i) Indebtedness of Debtor to Secured Party; (ii) Additional Indebtedness of Debtor to GECC under the GECC Loan and future Additional Indebtedness of Debtor to GECC as to which Secured Party gives its prior consent at its sole discretion made in good faith; (iii) Additional Indebtedness arising from the endorsement of instruments in the ordinary course of business; (iv) Additional Indebtedness existing on the date hereof and set forth in Schedule B; (v) Subordinated Indebtedness; (vi) Additional Indebtedness not to exceed $250,000 in the aggregate in any fiscal year of Debtor secured by Liens described in clause (vi) of the definition of Permitted Liens in Section 2(l) and provided such Additional Indebtedness does not exceed the lesser of cost or fair market value of the Equipment financed with such Additional Indebtedness; (vii) other Additional Indebtedness not otherwise permitted by Section 2(r) not exceeding $100,000 in the aggregate at any time;  (viii) Additional Indebtedness with respect to

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surety bonds and like obligations with respect to performance contracts in the ordinary course of business; (ix) Additional Indebtedness of Debtor to any subsidiary of Debtor so long as the terms thereof do not require Debtor to pay more than $100,000 in aggregate amount in any fiscal year to its subsidiaries; and (x) the extension, renewal or refinancing of the Additional Indebtedness described above so long as it constitutes Permitted Indebtedness, but the then outstanding principal amount of the Additional Indebtedness may not increase or the terms modified to impose more burdensome terms upon the Debtor.

“Permitted Liens” has the meaning given such capitalized term in Section 2(l).

“Person” is any individual, sole proprietorship, partnership, limited liability company, joint venture, company association, trust, unincorporated organization, association, corporation, institution, public benefit corporation, firm, joint stock company, estate, entity or government agency.

“Primary Operating Account” has the meaning given such capitalized term in Section 2(u).

“Receivables” shall mean “account” as defined in the Code.

“Secured Party’s Expenses” means all reasonable costs or expenses (including reasonable attorneys’ fees and expenses) incurred in connection with the preparation, negotiation, documentation, administration and funding of the Debt Documents; and Secured Party’s reasonable attorneys’ fees, costs and expenses incurred in amending, modifying, enforcing or defending the Debt Documents (including fees and expenses of appeal or review), including the exercise of any rights or remedies afforded hereunder or under applicable law, whether or not suit is brought, whether before or after bankruptcy or insolvency, including without limitation all fees and costs incurred by Secured Party in connection with Secured Party’s enforcement of its rights in a bankruptcy or insolvency proceeding filed by or against Debtor or its property.

“Subordinated Indebtedness” means Additional Indebtedness subordinated to the Indebtedness of Debtor to Secured Party on terms and conditions acceptable to Secured Party in its sole discretion made in good faith.

8.Each of the Notes issued prior to the date of this Amendment is hereby amended as follows:

(a)The words “5 days” that appear in the first and third lines of the fifth full paragraph of the Notes (commencing with the words “Time is of the essence hereof”) are hereby amended to read “7 days”.

(b)The words “all accrued and unpaid interest on the principal and the outstanding principal balance of this Note on the date of prepayment” that appear in clause (i) of the sixth full

16

paragraph of the Notes (commencing with the words “Maker may prepay in full….”) are hereby amended to read “all accrued and unpaid interest on the outstanding principal balance of this Note on the date of prepayment”.

Schedule A – Collateral Locations

Schedule B – Listing of Additional Indebtedness and Existing Permitted Liens

TERMS USED, BUT NOT OTHERWISE DEFINED HEREIN SHALL HAVE THE MEANINGS GIVEN TO THEM IN THE AGREEMENT. ON AND AFTER THE DATE HEREOF, EACH REFERENCE TO THE AGREEMENT IN THE AGREEMENT OR IN ANY OTHER DOCUMENT SHALL MEAN THE AGREEMENT AS AMENDED BY THIS AMENDMENT. EXCEPT AS EXPRESSLY AMENDED HEREBY, THE AGREEMENT SHALL REMAIN IN FULL FORCE AND EFFECT. IF THERE IS ANY CONFLICT BETWEEN THE PROVISIONS OF THE AGREEMENT AND THIS AMENDMENT, THEN THIS AMENDMENT SHALL CONTROL. THIS AMENDMENT MAY BE EXECUTED IN ANY NUMBER OF COUNTERPARTS, INCLUDING BY ELECTRONIC OR FACSIMILE TRANSMISSION, EACH OF WHICH WHEN SO DELIVERED SHALL BE DEEMED AN ORIGINAL, BUT ALL SUCH COUNTERPARTS TAKEN TOGETHER SHALL CONSTITUTE BUT ONE AND THE SAME INSTRUMENT. THIS AMENDMENT, THE AGREEMENT, ANY NOTE AND THE COLLATERAL SCHEDULES CONSTITUTE AND CONTAIN THE ENTIRE AGREEMENT OF DEBTOR AND SECURED PARTY WITH RESPECT TO THEIR RESPECTIVE SUBJECT MATTERS, AND SUPERSEDE ANY AND ALL PRIOR AGREEMENTS, CORRESPONDENCE AND COMMUNICATIONS.

[Remainder of page left blank; signature page follows]

17

IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 3 by signature of their respective authorized representative set forth below.

Oxford Finance Corporation				Favrille, Inc.
By:	/s/ Michael J. Altenburger			By:	/s/ Tamara A. Seymour
Name:			Michael J. Altenburger	Name:			Tamara A. Seymour
Title:		Chief Financial Officer		Title:		CFO

18

SCHEDULES TO AMENDMENT NO. 3

FAVRILLE, INC.

Schedule A

(1) Certain Inventory is and has been stored with NuFactor/FFF Enterprises, Inc., 41093 County Center Drive, Temecula, CA  92591.

(2) Debtor  has previously maintained the following locations or places of business:

10865 Altman Row # 150, San Diego, CA  92121

3366 N. Torrey Pines Ct. # 220, La Jolla, CA  92037

Schedule B

Existing Liens:

(1) The security interest granted to Silicon Valley Bank pursuant to the SVB Security Agreement.

(2) The financing statements set forth in the table below:

UCC Filing Report

Jurisdiction	Debtor	Secured Party	Date of Filing	Instrument No.
CA	Favrille, Inc.	Silicon Valley Bank	04/27/2001	01-12160764
CA	Favrille, Inc.	Silicon Valley Bank	12/12/2005	05-70516216-continuation of initial financing statement #01-12160764
CA	Favrille, Inc.	Wells Fargo Financial Leasing, Inc.	03/12/2004	04-08260370
DE	Favrille, Inc.	Silicon Valley Bank	08/07/2001	10786413
DE	Favrille, Inc.	Silicon Valley Bank	10/12/2001	11377881-amendment to initial financing statement #10786413 to add collateral
DE	Favrille, Inc.	Silicon Valley Bank	05/25/2004	41452749-amendment to initial financing statement #10786413 to delete collateral
DE	Favrille, Inc.	Silicon Valley Bank	09/28/2001	11258305
DE	Favrille, Inc.	Silicon Valley Bank	05/25/2004	41452756-amendment to initial financing statement #11258305 to delete collateral
DE	Favrille, Inc.	Heller Financial Leasing, Inc.	10/21/2002	22637001
DE	Favrille, Inc.	Heller Financial Leasing, Inc.	03/19/2003	30689318-amendment to initial financing statement #22637001 to restate collateral description
DE	Favrille, Inc.	Heller Financial Leasing, Inc. as Lender and as Agent for Lighthouse Capital Partners, IV, L.P.	03/19/2003	30689839-amendment to initial financing statement #22637001 to change secured party’s name
DE	Favrille, Inc.	Silicon Valley Bank	03/18/2003	30668171
DE	Favrille, Inc.	US Bancorp	05/15/2003	31249906
DE	Favrille, Inc.	Oxford Finance Corporation	09/03/2004	42497719
DE	Favrille, Inc.	Oxford Finance Corporation	11/04/2004	43153071
DE	Favrille, Inc.	Oxford Finance Corporation	12/30/2004	43688191
DE	Favrille, Inc.	Oxford Finance Corporation	06/09/2005	51800656-amendment to initial financing statement #43688191 to restate collateral description
DE	Favrille, Inc.	Oxford Finance Corporation	04/28/2005	51439638
DE	Favrille, Inc.	Oxford Finance Corporation	06/28/2005	51992107
DE	Favrille, Inc.	Oxford Finance Corporation	11/01/2005	53469344
DE	Favrille, Inc.	Oxford Finance Corporation	11/30/2005	53769750-amendment to initial financing statement #53469344 to restate collateral description

1

Note:  All the financing statements in favor of Silicon Valley Bank are in the process of being terminated, with the exception of the financing statement filed on 03/18/2003 (# 30668171).

Government Contracts:

None.

Additional Indebtedness:

Reimbursement obligations to Silicon Valley Bank in connection with the SVB Letter of Credit.

2

EX-10.28

Exhibit 10.28

Promissory Note Collateral Schedule 13

PROMISSORY NOTE

To Master Security Agreement No. 4081063

December 30, 2005

(Date)

FOR VALUE RECEIVED, Favrille, Inc., a  Delaware corporation, located at the address stated below (“Maker”) promises, jointly and severally if more than one, to pay to the order of Oxford Finance Corporation or any subsequent holder hereof (each, a “Payee”) at its office located at 133 N. Fairfax Street, Alexandria, VA 22314 or at such other place as Payee or the holder hereof may designate, the principal sum of One Million Four Hundred Ninety Eight Thousand Six Hundred Seventy Seven Dollars and Twenty Seven Cents($1,498,677.27), with interest on the unpaid principal balance, from the date hereof through and including the dates of payment, at a fixed interest rate of ten and eighty-nine hundredths percent (10.89%) per annum, in twenty-four (24) consecutive monthly installments of principal and interest as follows:

Periodic Installment	Amount
1-24	$	69,773.59

each (“Periodic Installment”) and a final installment which shall be in the amount of the total outstanding principal and interest.  The first Periodic Installment shall be due and payable on or before  February 1, 2006 and the following Periodic Installments shall be due and payable on the first day of each succeeding month (each, a “Payment Date”) beginning March 1, 2006.  Such installments have been calculated on the basis of a 360-day year of twelve 30-day months.  Each payment may, at the option of the Payee, be calculated and applied on an assumption that such payment would be made on its due date. Maker agrees to pay any initial partial month interest payment from the date of this Note to the first day of the following month (“Interim Interest”).

The acceptance by Payee of any payment which is less than payment in full of all amounts due and owing at such time shall not constitute a waiver of Payee’s right to receive payment in full at such time or at any prior or subsequent time.

The Maker hereby expressly authorizes the Payee to insert the date value is actually given in the blank space on the face hereof and on all related documents pertaining hereto.

This Note may be secured by a security agreement, chattel mortgage, pledge agreement or like instrument (each of which is hereinafter called a “Security Agreement” and any Security Agreement, this Note and any other document evidencing or securing this loan is hereinafter called a “Debt Document”).

Time is of the essence hereof.  If any installment or any other sum due under this Note or any Security Agreement is not received within 7 days of when due, the Maker agrees to pay, in addition to the amount of each such installment or other sum, a late payment charge of five percent (5%) of the amount of said installment or other sum, but not exceeding any lawful maximum.  If (i) Maker fails to make payment of any amount due hereunder within 7 days after the same becomes due and payable; or  (ii) Maker is in default under, or fails to perform under any term or condition contained in any Security Agreement and such default or failure to perform is not cured within the applicable cure period, if any, then the entire principal sum remaining unpaid, together with all accrued interest thereon and any other sum payable under this Note or any Security Agreement, at the election of Payee, shall immediately become due and payable, with interest thereon at the lesser of eighteen percent (18%) per annum or the highest rate not prohibited by applicable law from the date of such accelerated maturity until paid (both before and after any judgment).

Maker may prepay in full any indebtedness hereunder upon five (5) days’ notice to the Payee. The prepayment shall be accompanied by payment of (i) all accrued and unpaid interest on the outstanding principal balance of this Note on the date of prepayment and (ii) a premium of 6% of the principal prepaid if such prepayment shall occur in Year 1, a premium of 4% of the principal prepaid if such prepayment shall occur in Year 2 and a premium of 2% of the principal prepaid if such prepayment shall occur in Year 3 and thereafter. Year 1 will mean the period consisting of the 1st through the 12th installments under this Note and subsequent years will refer to the subsequent twelve monthly payment periods.

The Maker and all sureties, endorsers, guarantors or any others (each such person, other than the Maker, an “Obligor”) who may at any time become liable for the payment hereof jointly and severally consent hereby to any and all extensions of time, renewals, waivers or modifications of, and all substitutions or releases of, security or of any party primarily or secondarily liable on this Note or any Security Agreement or any term and provision of either, which may be made, granted or consented to by Payee, and agree that suit may be brought and maintained against any one or more of them, at the election of Payee without joinder of any other as a party thereto, and that Payee shall not be required first to foreclose, proceed against, or exhaust any security hereof in order to enforce payment of this Note.  The Maker and each Obligor hereby waives presentment, demand for payment, notice of nonpayment, protest, notice of protest, notice of dishonor,

1

and all other notices in connection herewith, as well as filing of suit (if permitted by law) and diligence in collecting this Note or enforcing any of the security hereof, and agrees to pay (if and to the extent permitted by law) all expenses incurred in collection, including Payee’s reasonable attorneys’ fees.

Maker and Payee intend to strictly comply with all applicable federal and Virginia laws, including applicable usury laws (or the usury laws of any jurisdiction whose usury laws are deemed to apply to the Note or any other Debt Document despite the intention and desire of the parties to apply the usury laws of the Commonwealth of Virginia).  Accordingly, the provisions of this paragraph shall govern and control over every other provision of this Note or any other Debt Document which conflicts or is inconsistent with this Section, even if such provision declares that it controls.  As used in this paragraph, the term “interest” includes the aggregate of all charges, fees, benefits or other compensation which constitute interest under applicable law, provided that, to the maximum extent permitted by applicable law, (a) any non-principal payment shall be characterized as an expense or as compensation for something other than the use, forbearance or detention of money and not as interest, and (b) all interest at any time contracted for, reserved, charged or received shall be amortized, prorated, allocated and spread, in equal parts during the full term of the obligations.  In no event shall Maker or any other person be obligated to pay, or Payee have any right or privilege to reserve, receive or retain, (a) any interest in excess of the maximum amount of non-usurious interest permitted under the laws of the Commonwealth of Virginia or the applicable laws (if any) of the United States or of any other state, or (b) total interest in excess of the amount which Payee could lawfully have contracted for, reserved, received, retained or charged had the interest been calculated for the full term of the obligations.  On each day, if any, that the interest rate (the “Stated Rate”) called for under this Note or any other Debt Document exceeds the maximum non-usurious rate, the rate at which interest shall accrue shall automatically be fixed by operation of this sentence at the maximum non-usurious rate for that day.  Thereafter, interest shall accrue at the Stated Rate unless and until the Stated Rate again exceeds the maximum non-usurious rate, in which case, the provisions of the immediately preceding sentence shall again automatically operate to limit the interest accrual rate to the maximum non-usurious rate.  The daily interest rates to be used in calculating interest at the maximum non-usurious rate shall be determined by dividing the applicable maximum non-usurious rate by the number of days in the calendar year for which such calculation is being made.  None of the terms and provisions contained in this Note or in any other Debt Document which directly or indirectly relate to interest shall ever be construed without reference to this paragraph, or be construed to create a contract to pay for the use, forbearance or detention of money at an interest rate in excess of the maximum non-usurious rate.  If the term of any obligation is shortened by reason of acceleration of maturity as a result of any  default or by any other cause, or by reason of any required or permitted prepayment, and if for that (or any other) reason Payee at any time, including but not limited to, the stated maturity, is owed or receives (and/or has received) interest in excess of interest calculated at the maximum non-usurious rate, then and in any such event all of any such excess interest shall be canceled automatically as of the date of such acceleration, prepayment or other event which produces the excess, and, if such excess interest has been paid to Payee, it shall be credited pro tanto against the then-outstanding principal balance of Maker’s obligations to Payee, effective as of the date or dates when the event occurs which causes it to be excess interest, until such excess is exhausted or all of such principal has been fully paid and satisfied, whichever occurs first, and any remaining balance of such excess shall be promptly refunded to its payor.

THE MAKER HEREBY UNCONDITIONALLY WAIVES ITS RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF, DIRECTLY OR INDIRECTLY, THIS NOTE, ANY OF THE RELATED DOCUMENTS, ANY DEALINGS BETWEEN MAKER AND PAYEE RELATING TO THE SUBJECT MATTER OF THIS TRANSACTION OR ANY RELATED TRANSACTIONS, AND/OR THE RELATIONSHIP THAT IS BEING ESTABLISHED BETWEEN MAKER AND PAYEE.  THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT (INCLUDING, WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS.)  THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS NOTE, ANY RELATED DOCUMENTS, OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THIS TRANSACTION OR ANY RELATED TRANSACTION.  IN THE EVENT OF LITIGATION, THIS NOTE MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.

This Note and any Security Agreement constitute the entire agreement of the Maker and Payee with respect to the subject matter hereof and supersedes all prior understandings, agreements and representations, express or implied.

No variation or modification of this Note, or any waiver of any of its provisions or conditions, shall be valid unless in writing and signed by an authorized representative of Maker and Payee.  Any such waiver, consent, modification or change shall be effective only in the specific instance and for the specific purpose given.

Any provision in this Note or any Security Agreement which is in conflict with any statute, law or applicable rule shall be deemed omitted, modified or altered to conform thereto.

Upon receipt of an affidavit of an officer of Payee as to the loss, theft, destruction or mutilation of this Note or any Debt Document which is not of public record, and, in the case of any such loss, theft, destruction or mutilation, upon surrender and cancellation of such Note or other Debt Document, Maker will issue, in lieu thereof, a replacement Note or other Debt Document in the same principal amount thereof and otherwise of like tenor.

2

It is understood and agreed that this Note and all of the Debt Documents were negotiated and have been or will be delivered to Payee in the Commonwealth of Virginia, which State the parties agree has a substantial relationship to the parties and to the underlying transactions embodied by this Note and the Debt Documents. Maker agrees to furnish to Payee at Payee’s office in Alexandria, VA, all further instruments, certifications and documents to be furnished hereunder.    The parties also agree that if collateral is pledged to secure the debt evidenced by this Note, that the state or states in which such collateral is located each have a substantial relationship to the parties and to the underlying transaction embodied by this Note and the Debt Documents.

MAKER AGREES THAT THE PAYEE OF THIS NOTE SHALL HAVE THE OPTION BY WHICH STATE LAWS THIS NOTE SHALL BE GOVERNED AND CONSTRUED: (A) THE LAWS OF THE COMMONWEALTH OF VIRGINIA; OR (B) IF COLLATERAL HAS BEEN PLEDGED TO SECURE THE DEBT EVIDENCED BY THIS NOTE, THEN BY THE LAWS OF THE STATE OR STATES WHERE THE COLLATERAL IS LOCATED, AT PAYEE’S OPTION.  THIS CHOICE OF STATE LAWS IS EXCLUSIVE TO THE PAYEE OF THIS NOTE.  MAKER SHALL NOT HAVE ANY OPTION TO CHOOSE THE LAWS BY WHICH THIS NOTE SHALL BE GOVERNED.  MAKER AND GUARANTORS HEREBY CONSENT TO THE EXERCISE OF JURISDICTION OVER IT BY ANY FEDERAL COURT SITTING IN VIRGINIA OR ANY VIRGINIA COURT SELECTED BY PAYEE, FOR THE PURPOSES OF ANY AND ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THE NOTE, THE LOAN AGREEMENT AND ALL OTHER DOCUMENTS.  MAKER AND GUARANTORS IRREVOCABLY WAIVE, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH PROCEEDING BROUGHT IN ANY SUCH COURT, ANY CLAIM BASED ON THE CONSOLIDATION OF PROCEEDINGS IN SUCH COURTS IN WHICH PROPER VENUE MAY LIE IN DIVERGENT JURISDICTIONS, AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.  MAKER AND GUARANTORS HEREBY IRREVOCABLY WAIVE, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS NOTE, THE OTHER DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY.

	Favrille, Inc.
/s/ Michele Owen	By:	/s/ Tamara A. Seymour
(Witness)
Michele Owen	Name:			Tamara A. Seymour
(Print name)
10421 Pacific Center Court San Diego, CA 92121	Title:		CFO
(Address)
	Federal Tax ID #:					33-0892797
	Address: 10421 Pacific Center Court
					San Diego, CA 92121

3

EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the Registration Statement on Form S-8 (No.’s 333-132755 and 333-122825) pertaining to the Amended and Restated 2001 Equity Incentive Plan, 2005 Non-Employee Director’s Stock Option Plan, and the 2005 Employee Stock Purchase Plan of Favrille, Inc. of our report dated March 27, 2006 with respect to the financial statements of Favrille, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 2005.

	/s/ Ernst & Young LLP
San Diego, California
March 27, 2006

EX-31.1

Exhibit 31.1

CERTIFICATION

I, John P. Longenecker, Ph.D., certify that:

1.I have reviewed this annual report on Form 10-K of Favrille, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 29, 2006

By:	/s/ John P. Longenecker
	John P. Longenecker, Ph.D.
	President and Chief Executive Officer
	(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Tamara A. Seymour, certify that:

1.I have reviewed this annual report on Form 10-K of Favrille, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 29, 2006

By:	/s/ Tamara A. Seymour
	Tamara A. Seymour
	Chief Financial Officer and
	Vice President, Finance and Administration
	(Principal Financial Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION

Pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350), John P. Longenecker, Ph.D., Chief Executive Officer of Favrille, Inc. (the “Company”), and Tamara A. Seymour, Chief Financial Officer of the Company, each hereby certifies that, to the best of his or her knowledge:

1.The Company’s Annual Report on Form 10-K for the period ended December 31, 2005, to which this Certification is attached as Exhibit 32.1 (the “Annual Report”) fully complies with the requirements of Section 13(a) or Section 15(d) of the Exchange Act, and

2.The information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

In Witness Whereof, the undersigned have set their hands hereto as of the 29th day of March, 2006.

/s/ John P. Longenecker	/s/ Tamara A. Seymour
John P. Longenecker, Ph.D.	Tamara A. Seymour
Chief Executive Officer	Chief Financial Officer

“This certification accompanies the Form 10-K to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Favrille, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-K), irrespective of any general incorporation language contained in such filing.”