Intercell Usa (IOMI) 10-Q 2007 Q1 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2007

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: 000-51709

Iomai Corporation

(exact name of registrant as specified in its charter)

Delaware	52-2049149
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

20 Firstfield Road, Suite 250, Gaithersburg, Maryland	20878
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code:
(301) 556-4500

     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. Yesþ Noo

     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.

Large accelerated filero       Accelerated Filero       Non-accelerated filerþ

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

     There were 25,510,610 shares of the registrant’s Common Stock outstanding as of May 4, 2007.

TABLE OF CONTENTS

		Page
	PART I — FINANCIAL INFORMATION
ITEM 1.	Unaudited Financial Statements		4
	Balance Sheets as of March 31, 2007 and December 31, 2006		4
	Statements of Operations for the three months ended March 31, 2007 and 2006		5
	Statements of Cash Flows for the three months ended March 31, 2007 and 2006		6
	Notes to Unaudited Financial Statements		7
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		10
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk		33
ITEM 4.	Controls and Procedures		33
	PART II — OTHER INFORMATION
ITEM 1A.	Risk Factors		34
ITEM 4.	Submission of Matters to a Vote of Security Holders		34
ITEM 6.	Exhibits		34
Signatures			36

2

Cautionary Note Regarding Forward-Looking Statements

     This report contains forward-looking statements. All statements contained in this report other than statements of historical fact are forward-looking statements. Forward-looking statements include statements regarding our future financial position, business strategy, budgets, projected costs, plans and objectives of management for future operations. The words “may,” “continue,” “estimate,” “intend,” “plan,” “will,” “believe,” “project,” “expect,” “seek,” “anticipate” and similar expressions may identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward-looking. These forward-looking statements include, among other things, statements about the implementation of our corporate strategy; our future financial performance and projected expenditures; our ability to enter into future collaborations with pharmaceutical, biopharmaceutical and biotechnology companies and academic institutions or to obtain funding from government agencies; our product research and development activities, including the timing and progress of our clinical trials, and projected expenditures; our technology’s potential efficacy, advantages over current approaches to vaccination and broad applicability to infectious diseases; our ability to receive regulatory approvals to develop and commercialize our product candidates; our ability to increase our manufacturing capabilities for our product candidates; our ability to develop or obtain funding for our immunostimulant patch for pandemic flu applications; our projected markets and growth in markets; our product formulations and patient needs and potential funding sources; our staffing needs; and our plans for sales and marketing.

     The forward-looking statements in this report are subject to risks and uncertainties that may cause actual results to differ materially. These risks and uncertainties include those set forth under the heading “Factors That May Impact Future Results” in Management’s Discussion and Analysis of Financial Condition and Results of Operations. In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this report may not occur as contemplated, and actual results could differ materially from those anticipated or implied by the forward-looking statements. You should not unduly rely on these forward-looking statements, which speak only as of the date of this report. Unless required by law, we undertake no obligation to publicly update or revise any forward-looking statements to reflect new information or future events or otherwise.

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PART I — FINANCIAL INFORMATION

ITEM 1. Unaudited Financial Statements

IOMAI CORPORATION
BALANCE SHEETS
(in thousands, except share and per share data)

	March 31,			December 31,
	2007			2006
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	34,587		$	13,847
Marketable securities		—			1,489
Accounts receivable		1,650			62
Prepaid expenses and other current assets		1,151			500
Total current assets		37,388			15,898
Property and equipment, net		6,988			6,736
Restricted marketable securities		261			268
Other noncurrent assets		288			183
Total assets	$	44,925		$	23,085
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		2,095			1,598
Accrued expenses		2,565			2,353
Notes payable, current portion		1,195			1,369
Notes payable to related party, current portion		180			176
Capital lease obligation, current portion		—			1
Total current liabilities		6,035			5,497
Notes payable, long-term portion		1,590			1,866
Notes payable to related party, long-term portion		1,300			1,347
Deferred rent		351			340
Total liabilities		9,276			9,050
Stockholders’ equity:
Common stock, $0.01 par value; 200,000,000 shares authorized and 25,509,399 shares issued and outstanding as of March 31, 2007; 200,000,000 shares authorized; and 19,197,387 shares issued and outstanding as of December 31, 2006		255			192
Additional paid-in capital		145,404			114,631
Accumulated deficit		(110,010	)		(100,788	)
Total stockholders’ equity		35,649			14,035
Total liabilities and stockholders’ equity		44,925			23,085

See accompanying notes.

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IOMAI CORPORATION
STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)

	Three Months Ended
	March 31,
	2007			2006
	(Unaudited)
Revenues	$	1,588		$	997
Cost and expenses:
Research and development		8,860			4,929
General and administrative		2,122			1,219
Total costs and expenses		10,982			6,148
Loss from operations		(9,394	)		(5,151	)
Other income (expense)
Interest income		263			139
Interest expense		(86	)		(97	)
Other (expense) income, net		(5	)		72
Total other income, net		172			114
Net loss before cumulative effect of a change in accounting principle		(9,222	)		(5,037	)
Cumulative effect of change in accounting principle		—			17
Net loss		(9,222	)		(5,020	)
Dividends on and accretion of convertible redeemable preferred stock		—			(434	)
Net loss available to common stockholders	$	(9,222	)	$	(5,454	)
Net loss available to common stockholders per share of common stock—basic and diluted	$	(0.44	)	$	(0.49	)
Weighted-average number of shares of common stock—basic and diluted		20,958,806			11,179,355

See accompanying notes.

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IOMAI CORPORATION
STATEMENTS OF CASH FLOWS
(in thousands)

	Three Months Ended
	March 31,
	2007			2006
	(Unaudited)
Cash flows from operating activities
Net loss	$	(9,222	)	$	(5,020	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		382			270
Stock-based compensation expense		540			170
Non-cash interest expense and amortization of discount of marketable securities		(13	)		(16	)
Deferred rent		11			110
Loss on disposal of property and equipment		3			5
Changes in operating assets and liabilities:
Accounts receivable		(1,589	)		(996	)
Prepaid expenses and other current assets		(651	)		(739	)
Other noncurrent assets		(105	)		(29	)
Accounts payable		381			(158	)
Accrued expenses		137			(418	)
Net cash used in operating activities		(10,126	)		(6,821	)
Cash flows from investing activities
Purchases of property and equipment		(555	)		(619	)
Sales of property and equipment		—			3
Restricted cash and marketable securities		9			—
Sales/maturities of marketable securities		1,500			—
Purchases of marketable securities		—			(6,906	)
Net cash provided by (used in) investing activities		954			(7,522	)
Cash flows from financing activities
Proceeds from the exercise of stock options		18			7
Proceeds from initial public offering, net of underwriting commissions		—			32,854
Proceeds from private placement of stock and warrants		31,884			—
Stock issuance costs		(1,497	)		(1,020	)
Principal payments on notes payable		(450	)		(322	)
Proceeds from notes payable to related party		—			279
Principal payments on notes payable to related party		(42	)		(90	)
Payments under capital lease obligations		(1	)		(1	)
Net cash provided by financing activities		29,912			31,707
Net increase in cash and cash equivalents		20,740			17,364
Cash and cash equivalents at beginning of period		13,847			5,190
Cash and cash equivalents at end of period	$	34,587		$	22,554
Supplemental schedule of noncash investing and financing activities
Cash paid for interest	$	119		$	107

See accompanying notes.

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IOMAI CORPORATION
NOTES TO FINANCIAL STATEMENTS

1. Basis of Presentation

The financial statements of Iomai Corporation (the “Company” or “Iomai”) for the three-month periods ended March 31, 2007 and 2006 are unaudited and include all adjustments which, in the opinion of management, are necessary to present fairly the financial position and results of operations for the periods then ended. These financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2006 filed with the Securities and Exchange Commission.

The results of operations for any interim period are not necessarily indicative of the results of operations for any other interim period or for a full fiscal year.

2. Significant Accounting Policies

Use of estimates

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Restricted marketable securities

Restricted marketable securities at March 31, 2007 and December 31, 2006 include marketable securities with a face value of $265,000, pledged as collateral to secure payment of notes payable issued to finance, in part, the build-out of the Company’s facilities.

Accounts receivable

Accounts receivable that management has the intent and ability to hold until payment are reported in the balance sheets at outstanding amounts, less the allowance for doubtful accounts. The Company writes off uncollectible receivables when the likelihood of collection is remote. The Company maintains an allowance for doubtful accounts, which is determined based on historical experience and management’s expectations of future losses. There was no allowance for doubtful accounts for the three months ended March 31, 2007 or 2006. Unbilled accounts receivable at March 31, 2007 and December 31, 2006 are approximately $1.2 million and $25,000, respectively.

Unbilled accounts receivable consist principally of expenses incurred on reimbursable research grants and contracts prior to the end of the period that have not yet been billed to the contracting agent.

Revenue recognition

The Company recognizes revenue when all terms and conditions of the agreements have been met, including persuasive evidence of an arrangement, services have been rendered, price is fixed or determinable, and collectability is reasonably assured. For reimbursable cost research grants and contracts, the Company recognizes revenue as costs are incurred. Funding of government grants and contracts beyond the U.S. government’s current fiscal year is subject to annual congressional appropriations, and the Company cannot recognize revenue for subsequent years until the period in which such funding is duly authorized. Provisions for estimated losses on research grant projects and any other contracts are made in the period such losses are determined.

Research and development costs

The Company expenses its research and development costs as incurred; however, equipment and facilities that are acquired or constructed for research and development activities that have alternative future uses (in research and development projects or otherwise) are capitalized and depreciated as tangible assets.

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Stock-based compensation

Effective January 1, 2006, the Company adopted the fair value recognition provisions of FASB Statement No. 123(R),Share-Based Payment(Statement 123(R)), using the modified-prospective-transition method. The Company uses the Black-Scholes-Merton formula to estimate the value of stock options granted to employees.

Equity instruments issued to nonemployees are accounted for under the provisions of SFAS No. 123 and Emerging Issues Task Force Issue No. 96-18,Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in conjunction with, Selling, Goods and Services. Accordingly, the estimated fair value of the equity instrument is recorded on the earlier of the performance commitment date or the date the services required are completed.

Recent Accounting Pronouncements: Uncertain Tax Positions

In July 2006, the FASB issued FIN 48,Accounting for Uncertainty in Income Taxes, an interpretation of Statement of Financial Accounting Standards No. 109,Accounting for Income Taxes. FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The interpretation applies to all tax positions related to income taxes subject to SFAS 109. FIN 48 is effective for fiscal years beginning after December 15, 2006. The adoption of FIN 48 did not have an impact on the Company’s financial condition, results of operations or cash flows.

3. Government Contract for Pandemic Flu

On January 17, 2007, the Company was awarded a five-year, cost-plus reimbursement contract by the U.S. Department of Health and Human Services (DHHS) to fund the development of a dose-sparing patch for use with a pandemic flu vaccine. The immunostimulant (IS) patch is intended to stimulate an immune response to influenza when used in conjunction with small doses of influenza vaccine. If the product is developed through licensure, the total cost reimbursed by DHHS, plus a fixed fee, is estimated to be $128 million. During the first 15 months of the contract, DHHS has allotted approximately $14.5 million for the Company to assess the safety and immunogenicity of the patch in initial clinical trials, and to develop plans on how the Company would produce 150 million IS patches in a six-month period, as required under the contract.

4. Lease Amendment

On January 26, 2007, the Company amended its lease to lease an additional 7,015 square feet in the facility, comprised of (a) 1,365 square feet currently under lease by a third party until July 1, 2007 (“Expansion Space A”), and (b) 5,650 square feet currently under lease to another third party until September 1, 2007 (“Expansion Space B”). Upon leasing this additional space, the Company will be leasing the entire facility.

Under the amendment, the Company is expected to begin leasing and paying a monthly rent of $3,242 for Expansion Space A beginning on July 1, 2007, and to begin leasing and paying a monthly rate of $13,419 for Expansion Space B beginning on September 1, 2007. The amendment does not change the May 2013 expiration date of the lease. The Company will continue to pay its proportionate share of the operating expenses of the facility.

5. Private Placement

On March 2, 2007, the Company entered into a securities purchase agreement with accredited investors pursuant to which the Company agreed to sell, in a private placement, an aggregate of 6,291,828 units, each unit consisting of one share of common stock, and two warrants to purchase, in total, 0.7 additional shares of common stock, at a purchase price of $5.0675 per unit. The Company received approximately $30.3 million in net proceeds, after expenses. The purchase price for the share component of each unit is $4.98 per share, the closing bid price for the common stock on March 1, 2007. Each warrant provides the right to acquire 0.35 shares of common stock at an

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exercise price of $5.25 per full share. One warrant type is exercisable at any time until March 2, 2012, and the other type of warrant is exercisable at any time until September 1, 2007.

6. Stockholders’ Equity

Stock-Based Compensation

A summary of all stock option plan activity during the three months ended March 31, 2007 is as follows:

						Weighted-
						Average
				Weighted-		Remaining		Aggregate
				Average		Contractual		Intrinsic Value(1)
	Shares			Exercise Price		Term		($000s)
Outstanding at December 31, 2006		2,918,805		$	2.93
Granted		809,000		$	4.96
Exercised		(20,184	)	$	0.91
Forfeited or expired		1,230		$	2.43
Outstanding at March 31, 2007		3,706,391		$	3.38		7.9	$	5,514
Exercisable at March 31, 2007		1,685,990		$	2.11		6.3	$	4,648

⁽¹⁾ Calculated using the per-share closing price of the Company’s common stock on March 30, 2007, which was $4.87.

The total fair value of stock options which vested during the three-month period ended March 31, 2007, less estimated forfeitures, was approximately $540,000. The total intrinsic value of stock options exercised during the three-month period ended March 31, 2007 was approximately $80,000. Cash received from option exercises under all stock compensation plans was $18,367 for the first quarter of 2007.

As of March 31, 2007, there was approximately $6.4 million of total unrecognized compensation expense, less estimated forfeitures, related to unvested options under the Company’s stock compensation plans. The expenses are expected to be recognized over a weighted-average period of 3.2 years.

During the first quarter of 2007, the Company issued 809,000 options, which vest in equal installments over a four-year period. The weighted-average fair value of the options granted during the three-months ended March 31, 2007 was $4.39 per share applying the Black-Scholes option-pricing model utilizing the following weighted-average assumptions used in the valuation model follows:

	Three months ended
	March 31, 2007
Expected dividend yield	0%
Expected volatility	136.2%
Risk-free interest rate	4.49%
Expected average life of options	5 years
Expected forfeiture rate	3.0% – 7.0%

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

     We are a biopharmaceutical company focused on the discovery, development and commercialization of vaccines and immune system stimulants delivered to the skin via a novel, needle-free technology called transcutaneous immunization (TCI). TCI exploits the unique benefits of a major group of antigen-presenting cells found in the outer layers of the skin (Langerhans cells) to generate an enhanced immune response. TCI has the potential to enhance the efficacy of existing vaccines, enable new vaccines that are viable only through transcutaneous administration and expand the global vaccine market. We are developing two distinct product applications: (1) an immunostimulant, or IS, patch and (2) a needle-free vaccine patch. We currently have five product candidates in development: four targeting influenza and pandemic flu and one to preventE. coli-related travelers’ diarrhea.

     Our five product candidates are (1) an IS patch intended to stimulate an immune response to even small doses of a pandemic flu vaccine, thereby extending vaccine supply in the event of an influenza pandemic, (2) an IS patch intended to boost the immune response of the elderly to the standard flu vaccine, (3) a needle-free vaccine patch for seasonal flu, (4) a needle-free pandemic flu vaccine patch, and (5) a needle-free travelers’ diarrhea vaccine patch. None of our product candidates has been approved for commercial sale by the FDA or any comparable foreign agencies.

     As of March 31, 2007, we had an accumulated deficit of $110.0 million. We expect to incur substantial expenses over the next several years as we continue the clinical development of our IS patch to extend the supply of pandemic flu vaccines, our needle-free flu vaccine patch, and our IS patch for elderly receiving flu vaccines; expand the clinical trial program for our needle-free travelers’ diarrhea vaccine patch; continue our existing preclinical development programs, including our needle-free pandemic flu vaccine program, and commence new programs; increase our manufacturing capabilities for product candidates; and expand our research and development activities.

     We anticipate that a substantial portion of our efforts throughout 2007 will be focused on conducting additional development for our product candidates in clinical development, as well as continue to build up our infrastructure to support our operations as a public company.

Management Review of First Quarter of 2007

     The following is a summary of key events that occurred during the first quarter of 2007:

• In mid-January 2007, the Department of Health and Human Services, or DHHS, awarded us a five-year, cost-plus reimbursement contract to fund our development of a dose-sparing patch for use with a pandemic flu vaccine. If the product is developed through licensure, the total cost reimbursed by DHHS, plus a fixed fee, is estimated to be $128 million. During the first 15 months of the contract, DHHS has allotted approximately $14.5 million for us to assess the safety and immunogenicity of the patch in initial clinical trials and to develop plans on how we would produce 150 million IS patches in a six-month period, as required under the contract. Once we demonstrate the safety and dose-sparing capability of our IS patch, we hope to sell up to 150 million IS patches to the United States government for its stockpile of pandemic flu products. In April 2007, we timely submitted our first milestone under this contract in the form of a product development plan.

• We completed vaccinations for both a Phase 2 dose-ranging study for our travelers’ diarrhea vaccine patch, and a Phase 2 field study designed to evaluate the logistics around how to best conduct a larger pivotal field study for our travelers’ diarrhea program. In the dose-ranging trials, four different doses, as well as a placebo patch, were tested, and antibody levels were checked at 21 and 42 days. The interim results from that trial showed that nearly all subjects in the four different dosing groups responded to the vaccine, with even the lowest dose of the vaccine patch applied to the arm evoking a response in more than 95% of subjects. We expect data from the logistics trial to be available during the third quarter of 2007.

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• We also completed vaccinations in a large, multi-center Phase 1 trial for our needle-free flu vaccine patch. This study is designed to test the safety and immunogenicity of our needle-free flu vaccine in comparison with the traditional injected vaccine. We expect interim data from this trial to be available before the end of the second quarter of 2007. We will use the data from this trial to guide our discussions with partners who are producers of flu antigens.

• In January 2007, we amended our lease to acquire access to approximately 7,000 additional square feet in our building during the third quarter of 2007. Upon leasing all of the additional space, we will occupy the entire building, which houses our principal laboratories, pilot manufacturing facility and corporate offices in approximately 53,500 square feet, through May 2013.

• In early March 2007, we raised $30.3 million in net proceeds when we sold 6,291,828 units, each unit consisting of one share of our common stock and two warrants to purchase, in total, 0.7 additional shares of Common Stock, at a purchase price of $5.0675 per unit. The purchase price for the share component of each unit was $4.98 per share. Each warrant provides the right to acquire 0.35 shares of common stock at an exercise price of $5.25 per full share. One warrant is exercisable at any time until March 2, 2012, and the other warrant is exercisable at any time until September 1, 2007.

Historical Results of Operations / Liquidity & Capital Resources

Revenues

     Prior to 2007, our revenues generally have been limited to amounts we have received under U.S. federal grant programs, and we had only one small grant active during the first quarter of 2007. With the award of the DHHS contract in mid-January 2007, we expect our principal source of revenue to come from reimbursement of expenses incurred under that contract up to $14.5 million during the fifteen-month period following contract award. Accordingly, for the first quarter of 2007, we recognized government contract revenues of approximately $1.6 million under our DHHS contract. These amounts include reimbursement for our employees’ time and benefits and other expenses related to performance under the DHHS contract.

Research and development expenses

     Our research and development expenses consist primarily of:

• salaries and related expenses for personnel;

• fees paid to consultants and clinical research organizations in conjunction with their monitoring, acquiring and evaluating data in conjunction with our clinical trials;

• consulting fees paid to third parties in connection with other aspects of our product development efforts;

• fees paid to research organizations in conjunction with preclinical animal studies;

• costs of materials used in research and development;

• depreciation of facilities and equipment used to develop our product candidates; and

• milestone payments, license fees, and royalty payments for technology licenses.

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     We expense both internal and external research and development costs as incurred, other than those capital expenditures that have alternative future uses, such as the build-out of our pilot plant. Due to the risks inherent in the clinical trial process and the early stage of development of our product candidates, we do not currently track our internal research and development costs by program and cannot state precisely the costs incurred for each of our research and development programs. However, the following table shows, for the periods presented, our estimate of the total costs that have been incurred for our lead product candidates: from January 1, 2003 to March 31, 2007:

Product Candidate	Three months ended March 31,				Cumulative Since
(in thousands)	2007		2006		January 1, 2003
Needle-free flu vaccine patch	$	1,874	$	1,213	$	14,968
IS patch for pandemic flu		1,599		556		6,604
IS patch for elderly receiving flu vaccines		568		156		16,385
Needle-free travelers’ diarrhea vaccine patch		4,148		2,626		31,075
Other programs		671		378		12,077
TOTAL	$	8,860	$	4,929	$	81,109

     We expect our research and development costs will continue to be substantial and that they will increase as we advance our current portfolio of product candidates through clinical trials and move other product candidates into preclinical and clinical trials.

General and administrative expense

     General and administrative expense consists primarily of compensation for employees in executive and operational functions, including finance and accounting, business development, and corporate development. Other significant costs include facilities costs and professional fees for accounting and legal services. With the completion of our initial public offering in February 2006, our general and administrative expenses have increased due to increased costs for insurance, professional fees, public company reporting requirements, and investor relations costs associated with operating as a publicly-traded company. In addition, there will likely be further increases going forward related to the hiring of additional personnel.

RESULTS OF OPERATIONS

Comparison of the three months ended March 31, 2007 and 2006

	Three months ended March 31,
(in thousands, except percentages)	2007			2006			$ Change			% Change
Revenues	$	1,588		$	997		$	591			59.3	%
Costs & Expenses:
Research & development		8,860			4,929			3,931			79.8	%
General & administrative		2,122			1,219			903			74.1	%
Total costs & expenses		10,982			6,148			4,834			78.6	%
Other income, net		172			114			58			50.9	%
Cumulative effect of a change in accounting principle		—			17			(17	)		—
Net loss	$	(9,222	)	$	(5,020	)	$	(4,202	)		83.7	%

          Revenues.We recognized revenues of approximately $1.6 million under our DHHS contract for the three months ended March 31, 2007 and approximately $1.0 million under government grants for the three months ended March 31, 2006. Grant revenue in the first quarter of 2006 was principally from reimbursable expenses incurred under our two-year NIH grant awarded for further development of our IS patch technology for pandemic flu applications that was originally awarded in January 2005.

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          Research and Development Expenses.The $3.9 million increase in research expenditures was driven by four major factors associated with supporting our clinical and product development programs: (1) increased clinical trial activity in the ETEC program, (2) higher payroll costs associated with a 46% increase in research and development headcount and expensing of stock options, (3) increased animal study costs associated with the DHHS contract, and (4) increased facility costs resulting from leases of additional space. These increased costs were partially offset by lower outside service costs associated with our skin prep system (SPS) development.

          General and Administrative ExpensesThe $903,000 increase in general and administrative expenses was principally due to higher payroll costs associated with a 60% increase in general and administrative headcount and expensing of stock options; and higher consulting costs associated with the DHHS contract and new financial system implementation.

          Interest Income (Expense) and Other — Net.The net interest and other income reflects the interest received on our cash and marketable securities, offset by interest expense on financing to purchase equipment and leasehold improvements. The $58,000 increase in net interest and other income was a result of increased cash and investment balances due to our receipt of the net proceeds from our private placement in March 2007 and higher interest rates.

          Net Loss.The increase in our net loss was principally a result of increased research and development expenses in the three months ended March 31, 2007.

Liquidity and capital resources

          We have incurred annual operating losses since inception, and, as of March 31, 2007, we had an accumulated deficit of $110.0 million. We expect to incur increasing and significant losses over the next several years as we continue our clinical trials, apply for regulatory approvals, continue development of our technologies, and expand our operations. Since our inception, we have financed our operations primarily through the sale of equity securities, interest income earned on cash, cash equivalents, and short-term investment balances, and debt. We have also generated funds from collaborative partners and research grants and contracts.

          As of March 31, 2007, we had approximately $34.6 million in unrestricted cash, cash equivalents, and marketable securities. We have used cash primarily to finance our research operations, including clinical trials. These costs will be offset by reimbursements from DHHS under our pandemic flu contract, which was awarded in January 2007. DHHS has allotted approximately $14.5 million in the first 15 months of that contract and we expect to be reimbursed for research, development and capital costs associated with the preclinical and clinical testing of the IS patch under the contract on a monthly basis. We invest in cash equivalents and US government and agency obligations. Our investment objectives are, primarily, to assure liquidity and preservation of capital and, secondarily, to obtain investment income. All of our marketable securities are classified as available-for-sale. These securities are carried at fair value, plus any accrued interest.

          We expect that we will be able to fund our capital expenditures and growing operations with our current working capital and reimbursements under our DHHS contract through the second quarter of 2008. In order to fund our needs subsequently, we will need to raise additional money and may seek to do so by: (1) out-licensing technologies or product candidates to one or more corporate partners, (2) completing an outright sale of assets, (3) securing debt financing, and/or (4) selling additional equity securities. Our ability to successfully enter into any such arrangements is uncertain, and, if funds are not available, or not available on terms acceptable to us, we may be required to revise our planned clinical trials, other development activities, capital expenditure requirements, and the scale of our operations. We expect to attempt to raise additional funds in advance of depleting our existing cash balances; however, we may not be able to raise funds or raise amounts sufficient to meet the long-term needs of the business. Satisfying long-term needs will require the successful commercialization of our product candidates and, at this time, we cannot reliably estimate if or when that will occur.

          Our future cash requirements include, but are not limited to, supporting our clinical trial efforts and continuing our other research and development programs. We have entered into various agreements with institutions and clinical research organizations to conduct and monitor our current clinical studies. Under these agreements, subject to the enrollment of patients and performance by the applicable institution of certain services, we have estimated our potential payments to be $14.2 million over the term of currently ongoing studies. Through March 31,

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2007, approximately $9.7 million of this amount has been expensed as research and development expenses and $8.5 million has been paid related to these clinical studies. The timing of our expense recognition and future payments related to these agreements are subject to the enrollment of patients and performance by the applicable institutions of certain services. The actual amounts we pay out will depend on a range of factors outside of our control, including the success of our pre-clinical and clinical development efforts with respect to any products being developed, the content and timing of decisions made by the FDA and other regulatory authorities, and other factors affecting future operating results. As we expand our clinical studies, we plan to enter into additional agreements.

          The following table summarizes sources and uses of cash and cash equivalents for the three months ended March 31, 2007 and 2006.

	Three months ended March 31,
(in thousands)	2007			2006			$ Change
Net cash used in operating activities	$	(10,126	)	$	(6,821	)	$	(3,305	)
Net cash provided by (used in) investing activities		954			(7,522	)		8,476
Net cash provided by financing activities		29,912			31,707			(1,795	)
Net increase in cash and cash equivalents		20,740			17,364			3,376
Cash and cash equivalents at end of period	$	34,587		$	22,554		$	12,033

     The $3.3 million increase in net cash used in operations was primarily attributable to the increase in net loss from the prior period. As we develop our technologies and further our clinical trial programs, we expect to increase our spending. Our future ability to generate cash from operations will depend on achieving regulatory approval of our products, market acceptance of such products, and our ability to enter into collaborations.

          The $8.5 million increase in net cash provided by investing activities was principally the result of investing the proceeds from the our initial public offering in February 2006. During the three months ended March 31, 2007, we did not invest any of our available cash in marketable securities and we received $1.5 million from the maturity of prior such investments, as compared to $6.9 million of our available cash invested in marketable securities for the three months ended March 31, 2006. Additionally, for the three months ended March 31, 2007, we invested approximately $555,000 in the purchase of equipment, furniture, and fixtures for our pilot manufacturing facility and in the build-out of additional office and laboratory space, as compared to approximately $619,000 for such investments in 2006.

          The $1.8 million decrease in net cash provided by financing activities is principally the result of the difference in net proceeds between the March 2007 private placement and our initial public offering in February 2006. The March 2007 private placement resulted in approximately $30.3 million in net proceeds, while the company’s initial public offering in February 2006 resulted in approximately $31.8 million in net proceeds. Net proceeds from the exercise of stock options totaled approximately $18,000 and $7,000, for the three months ended March 31, 2007 and 2006, respectively. During the three months ended March 31, 2007, and 2006, net proceeds from debt borrowings totaled $0 and $279,000, respectively, as we financed the build-out of additional office space during the first quarter of 2006. In the first quarter of 2007, we repaid $492,000 of our debt, as compared to $412,000 during the comparable period in 2006.

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          The following summarizes our long-term contractual obligations as of March 31, 2007:

	Payments Due by Period
			Less Than						More Than
Contractual Obligations	Total		1 Year		1-3 Years		3-5 Years		5 Years
	(In thousands)
Long-Term Debt(1) (2)	$	5,164	$	1,762	$	2,219	$	801	$	382
Operating Lease Obligations(2)		7,646		1,092		2,452		2,544		1,558
Total	$	12,810	$	2,854	$	4,671	$	3,345	$	1,940

(1)	Includes interest payable in the period.
(2)	These amounts include payments for additional facility space leased under a lease amendment signed in January 2007. See discussion of amended lease terms below.

     In January 2007, we amended our lease to acquire access to approximately 7,000 additional square feet in our building over the course of the first nine months of 2007. Upon leasing the additional space, we will occupy the entire building.

     Under our existing license agreements, we could be required to pay up to a total of $800,000 for each product candidate in milestone payments through product approval, in addition to sales milestones, and royalties on commercial sales, if any occur.

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

• the progress and costs of preclinical development and laboratory testing and clinical trials;

• the time and costs involved in obtaining regulatory approvals;

• delays that may be caused by evolving requirements of regulatory agencies;

• our ability to establish, enforce, and maintain collaborations required for product commercialization;

• the number of product candidates we pursue;

• the costs involved in filing and prosecuting patent applications and enforcing or defending patent claims;

• our plans to establish sales, marketing, and/or manufacturing capabilities;

• the acquisition of technologies, products, and other business opportunities that require financial commitments; and

• our revenues, if any, from successful development and commercialization of our products.

           As of March 31, 2007, we did 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. Therefore, we are not materially exposed to any financing, liquidity, market, or credit risk that could arise if we had engaged in these relationships.

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Critical Accounting Policies and Estimates

          Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and expenses and related disclosure of contingent assets and liabilities. We review our estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in more detail in the notes to our financial statements included 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.

Revenue Recognition.

          We recognize revenue when all terms and conditions of the agreements have been met, including persuasive evidence of an arrangement, services have been rendered, price is fixed or determinable, and collectability is reasonably assured. For reimbursable cost research contracts and grants, we recognize revenue as costs are incurred once the funding is authorized. Funding of government contract and grants beyond the U.S. government’s current fiscal year is subject to annual congressional appropriations, and the Company cannot recognize revenue for subsequent years until the period in which such funding is duly authorized. Provisions for estimated losses on research grant projects and any other contracts are made in the period such losses are determined.

Research and Development Costs.

          We expense our research and development costs as incurred.

Stock-Based Compensation.

          We have four stock-based employee compensation plans, and we record compensation expense based upon the fair value of stock-based awards. Effective January 1, 2003, we adopted the fair value recognition provisions of SFAS No. 123,Accounting for Stock-Based Compensation(SFAS 123). The recognition provisions have been applied to all employee awards granted, modified, or settled after January 1, 2003.

          Effective January 1, 2006, we adopted the fair value recognition provisions of FASB Statement No. 123(R), “Share-Based Payment” (Statement 123(R)), using the modified-prospective-transition method. As we have expensed options since 2003, the adoption of Statement 123(R) did not have a material impact on our stock- based compensation expenses for the periods after its adoption, and management believes that the adoption of Statement 123(R) will not have a material impact on its financial statements going forward. We have continued to use the Black-Scholes formula to estimate the fair value of stock-based awards with the adoption of Statement 123(R).

          With the adoption of Statement 123(R), we recognized in our statement of operations for the three months ended March 31, 2006 a one-time charge recorded as the cumulative effect of a change in accounting principle, which reflects an estimate of forfeitures for unvested awards outstanding as of the adoption of Statement 123(R). This charge represents a reduction in the compensation cost for prior periods for any unvested options remaining that would not have been recognized in those prior periods had forfeitures for such unvested options been estimated during those prior periods. The cumulative effect for this change in accounting principle totaled $16,726 and is recorded on the statement of operations for the three months ended March 31, 2006.

          As of March 31, 2007, we anticipate recognizing approximately $6.4 million of total unrecognized compensation expense, less estimated forfeitures, related to unvested options under the stock compensation plans in future periods. These expenses are expected to be recognized over a weighted-average period of 3.2 years.

          Based on the closing price of our stock on March 30, 2007, the intrinsic value of options outstanding as of that date was $5.5 million, of which approximately $4.6 million related to vested options and $900,000 related to unvested options.

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          We account for equity instruments issued to nonemployees under the provisions of SFAS 123 and Emerging Issues Task Force Issue No. 96-18,Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in conjunction with, Selling, Goods and Services. Accordingly, the estimated fair value of the equity instrument is recorded on the earlier of the performance commitment date or the date the services required are completed.

Factors That May Impact Future Results

          Our future operating results may differ materially from the results described in this report due to the risks and uncertainties related to our business and our industry, including those discussed below. In addition, these factors represent risks and uncertainties that could cause actual results to differ materially from those implied by forward-looking statements in this report. The risks described below are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business, financial condition or results of operations.

Risks Relating to Our Business

     We are a biopharmaceutical company with a limited operating history and have generated no revenue from product sales. As a development stage company, we face many risks inherent in our business. If we do not overcome these risks, our business will not succeed.

     Biopharmaceutical product development is a highly speculative undertaking and involves a substantial degree of risk. We commenced operations in May 1997, and since that time we have been engaged in research and development activities in connection with our product candidates. We have never generated any revenue from product sales. All of our current product candidates are at an early stage of development, and we do not expect to realize revenue from product sales for several more years, if at all. In addition, we are not currently receiving any significant funding for our research and development programs from third parties through collaborations or grants, except for our DHHS contract to develop a “dose-sparing” IS patch for use in the event of a pandemic flu outbreak. We are seeking to create a business based upon new technology that is intended to change existing practices of vaccine delivery. As such, we are subject to all the risks incident to the creation of new products and may encounter unforeseen expenses, difficulties, complications and delays and other unknown factors. You also should consider that we will need to:

• obtain sufficient capital to support our efforts to develop our technology and commercialize our product candidates;

• complete and continue to enhance the product characteristics and development of our product candidates; and

• attempt to transition from a development stage company to a company capable of supporting commercial activities.

     We have a history of operating losses and may never be profitable.

     We have incurred substantial losses since our inception, and we expect to continue to incur substantial losses for the foreseeable future. Our net loss for the three months ended March 31, 2007 was $9.2 million. As of March 31, 2007, we had an accumulated deficit of approximately $110.0 million. These losses have resulted principally from costs incurred in our research and development programs and from our general and administrative costs. We expect to incur additional operating losses in the future, and we expect these losses to increase significantly, whether or not we generate revenue, as we expand our product development and clinical trial efforts. These losses have had, and are expected to continue to have, an adverse impact on our working capital, total assets and stockholders’ equity.

     To date, we have generated no revenue from product sales or royalties. We do not expect to achieve any revenue from product sales or royalties unless and until we receive regulatory approval and begin commercialization of our product candidates. We are not certain of when, if ever, that will occur.

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     Even if the regulatory authorities approve any of our product candidates and we commercialize these candidates, we may never be profitable. Even if we achieve profitability for a particular period, we may not be able to sustain or increase profitability.

     We will need additional funding, and we cannot guarantee that we will find adequate sources of capital in the future.

     As of March 31, 2007, we had approximately $34.6 million in unrestricted cash, cash equivalents and marketable securities. We have incurred negative cash flows from operations since inception and have expended, and expect to continue to expend, substantial funds to conduct our research and development programs. On January 17, 2007, we were awarded a five-year, $128 million contract by DHHS to fund our development of a dose-sparing patch for use with a pandemic flu vaccine. During the first 15 months of the contract, DHHS has allotted approximately $14.5 million to reimburse us for our activities under that contract. Also, on March 2, 2007, we closed a private placement in which we raised approximately $30.3 million in net proceeds after expenses. We believe that our current working capital and reimbursement of expenses under our existing government grants and contracts will be sufficient to fund our operating expenses and capital requirements through the second quarter of 2008, although we cannot assure you that we will not require additional funds before then. We have based this estimate on assumptions that may prove to be wrong. Our future capital requirements will depend on many factors, including:

• the number, size and complexity of our clinical trials;

• our progress in developing our product candidates;

• the timing of and costs involved in obtaining regulatory approvals;

• costs of manufacturing our product candidates;

• costs to maintain, expand and protect our intellectual property portfolio; and

• costs to develop our sales and marketing capability.

     We expect to seek to raise additional funds in advance of when we exhaust our cash resources, which, if we raise additional funds by issuing equity securities, will result in further dilution to our stockholders. Any equity securities issued also may provide for rights, preferences or privileges senior to those of holders of our common stock. If we raise additional funds by issuing debt securities, these debt securities would have rights, preferences and privileges senior to those of holders of our common stock, and the terms of the debt securities issued could impose significant restrictions on our operations. If we raise additional funds through collaborations and licensing arrangements, we might be required to relinquish significant rights to our technology, product candidates or products that we would otherwise seek to develop or commercialize ourselves, or to grant licenses on terms that are not favorable to us.

     We do not know whether additional financing will be available on commercially acceptable terms when needed. If adequate funds are not available or are not available on commercially acceptable terms, we may need to downsize or halt our operations and may be unable to continue developing our products.

     The success of some programs, such as our needle-free flu vaccine patch, may depend on licensing biologics from, and entering into collaboration arrangements with, third parties. We cannot be certain that our licensing or collaboration efforts will succeed or that we will realize any revenue from them.

     The success of our business strategy is, in part, dependent on our ability to enter into multiple licensing and collaboration arrangements and to manage effectively the numerous relationships that will result. For example, we currently do not intend to manufacture any product components other than heat labile toxin (LT) adjuvant and formulated patches. Therefore, we will need to negotiate agreements to acquire biologics, such as the flu antigens

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contained in our needle-free flu vaccine patch, and other product components from third parties in order to develop some of our vaccine candidates (other than our needle-free travelers’ diarrhea vaccine patch and IS patch). We are seeking a collaboration with respect to our needle-free flu patch. A failure to enter into a collaboration could delay development of this product candidate. Also, we may not establish a direct sales force for our products and, therefore, may need to establish marketing arrangements with third parties or major pharmaceutical companies.

     Our ability to enter into agreements with commercial partners depends in part on convincing them that our TCI technology can help achieve and accelerate their goals or efforts. This may require substantial time and effort on our part. While we anticipate expending substantial funds and management effort, we cannot assure you that a strategic relationship will result or that we will be able to negotiate additional strategic agreements in the future on acceptable terms, if at all. Furthermore, we may incur significant financial commitments to collaborators in connection with potential licenses and sponsored research agreements. Generally, we will not be able to directly control the areas of responsibility undertaken by our strategic partners and will be adversely affected should these partners prove unable to carry the product candidates forward to full commercialization or should they lose interest in dedicating the necessary resources toward developing such products quickly.

     Third parties may terminate our licensing and other strategic arrangements if we do not perform as required under these arrangements. Generally, we expect that agreements for rights to develop technologies will require us to exercise diligence in bringing product candidates to market and will require us to make milestone and royalty payments that, in some instances, are substantial. Our failure to exercise the required diligence or make any required milestone or royalty payment could result in the termination of the relevant license agreement, which could have a material adverse effect on us and our operations. In addition, these third parties may also breach or terminate their agreements with us or otherwise fail to conduct their activities in connection with our relationships in a timely manner. If we or our partners terminate or breach any of our licenses or relationships, we:

• may lose our rights to develop and market our product candidates;

• may lose patent and/or trade secret protection for our product candidates;

• may experience significant delays in the development or commercialization of our product candidates;

• may not be able to obtain any other licenses on acceptable terms, if at all; and

• may incur liability for damages.

     Licensing arrangements and strategic relationships in our industry can be very complex, particularly with respect to intellectual property rights. Disputes may arise in the future regarding ownership rights to technology developed by or with other parties. These and other possible disagreements between us and third parties with respect to our licenses or our strategic relationships could lead to delays in the research, development, manufacture and commercialization of our product candidates. These disputes could also result in litigation or arbitration, both of which are time-consuming and expensive. These third parties also may pursue alternative technologies or product candidates either on their own or in strategic relationships with others in direct competition with us.

     Our IS patch for pandemic flu program relies on government health organizations for funding clinical development and for ultimately procuring the product, if approved.

     We are currently relying upon the United States government to fund our IS patch for pandemic flu. In January 2007, we entered into a five-year, $128 million cost-reimbursement contract with the DHHS to develop a “dose-sparing” patch for use in the event of an influenza pandemic where the DHHS will fund our costs for research, development and capital and will pay a fixed fee. Currently, DHHS has allocated $14.5 million through the first 15 months of the contract for us to assess the safety and immunogenicity of the patch in initial clinical trials and to develop plans on how we would produce 150 million IS patches in a six-month period, as required under the contract. If the results for either of these clinical trials are not deemed adequate by DHHS or we fail to satisfy, from DHHS’s perspective, the requirements regarding our product development and manufacturing plans, DHHS may not extend the contract through its full term, in which event we may not be able to proceed with the balance of the contract.

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     In our performance under the DHHS contract, we are highly dependent on timely and adequate performance of our subcontractors, including Solvay Pharmaceuticals, which is supplying us with injectable pandemic flu vaccine for our clinical trials, and our architectural design and engineering firm. If the performance of our subcontractors is not adequate or timely, our performance under our DHHS contract may be delayed, and we therefore may not be able to satisfy the contract’s requirements, which could cause us to be in breach under those contracts and cause those contracts to be terminated. We cannot assure you that one or more of these subcontractors will not be delayed in performing, or fail to perform their obligations under these contracts in compliance with applicable legal requirements.

     Although we have been awarded the DHHS contract, government funding is subject to annual appropriations and other political risks. As a result, the receipt by us of funds from the United States government to fund our research and development of our IS patch for pandemic flu beyond the $14.5 million already allotted cannot be assured. In addition, we expect that United States and foreign governments would be the entities procuring any pandemic flu products, if approved, and not individual consumers. While there has recently been increased public awareness of the risks of pandemic flu, government health organizations may not devote significant resources to the prevention of an outbreak and may not seek to procure pandemic flu products from us. The acceptance of our product candidate for pandemic flu may depend on whether government health organizations adopt a dose-sparing strategy to prevent pandemic flu and whether a competing technology for dose sparing is adopted. If a dose-sparing strategy is not endorsed or a competing technology for dose sparing is adopted, our product candidate will not yield any revenues.

     The development and clinical testing of our IS patch for pandemic flu product candidate will likely take several years. Even if our IS patch for pandemic flu obtains regulatory approval, by that time the threat of a pandemic flu outbreak may be reduced or government health organizations may have adequate stockpiles of flu vaccine or have adopted other technologies or strategies to prevent or limit outbreaks.

     Even if our IS patch for pandemic flu gains regulatory approval and governmental health organizations choose to stockpile the product, we may be not be able to produce enough of the product to fulfill public health and safety needs.

     U.S. government agencies have special contracting requirements, which create additional risks.

     We have entered into a contract with DHHS, which is a U.S. government agency. Currently, DHHS has allocated $14.5 million through the first 15 months of the contract for us to assess the safety and immunogenicity of the patch in initial clinical trials and to develop plans on how we would produce 150 million IS patches in a six-month period, as required under the contract. In contracting with government agencies, we are subject to various U.S. government agency contract requirements. Future revenues from DHHS and other U.S. government agencies will depend, in part, on our ability to meet U.S. government agency contract requirements, certain of which we may not be able to satisfy.

     U.S. government contracts typically contain unfavorable termination provisions allowing the U.S. government to terminate the contract at any time and are subject to audit and modification by the government at its sole discretion, which subjects us to additional risks. These risks include the ability of the U.S. government to unilaterally:

• suspend or prevent us for a set period of time from receiving new contracts or extending existing contracts based on violations or suspected violations of laws or regulations;

• terminate our existing contracts;

• reduce the scope and value of our existing contracts;

• audit and object to our contract-related costs and fees, including allocated indirect costs;

• control and potentially prohibit the export of our products; and

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• change certain terms and conditions in our contracts.

          The U.S. government may terminate any of its contracts with us either for its convenience or if we default by failing to perform in accordance with the contract schedule and terms. Termination for convenience provisions generally enable us to recover only our costs incurred or committed and profit on the work completed prior to termination, and settlement expenses incurred in the termination for convenience process. Termination for default provisions do not permit these recoveries and may make us liable for excess costs incurred by the U.S. government in procuring undelivered items from another source.

          As a U.S. government contractor, we are required to comply with applicable laws, regulations and standards relating to our accounting practices and are subject to periodic audits and reviews. As part of any such audit or review, the U.S. government may review the adequacy of, and our compliance with, our internal control systems and policies, including those relating to our purchasing, property, estimating, compensation and management information systems. Based on the results of its audits, the U.S. government may adjust our contract-related costs and fees, including allocated indirect costs. If our costs are challenged, reimbursement may fail to cover the expenses we incur discharging our role under the contract. In addition, if an audit or review uncovers any improper or illegal activity, we may be subject to civil and criminal penalties and administrative sanctions, including termination of our contracts, forfeiture of profits, suspension of payments, fines and suspension or prohibition from doing business with the U.S. government. We could also suffer serious harm to our reputation if allegations of impropriety were made against us. Although adjustments arising from government audits and reviews have not seriously harmed our business in the past, future audits and reviews could cause adverse effects. In addition, under U.S. government purchasing regulations, some of our costs, including most financing costs, amortization of intangible assets, portions of our research and development costs, and some marketing expenses, may not be reimbursable or allowed under our contracts. Further, as a U.S. government contractor, we are subject to an increased risk of investigations, criminal prosecution, civil fraud, whistleblower lawsuits and other legal actions and liabilities to which purely private sector companies are not.

     Our technology is unproven and presents challenges for our product development efforts.

     Our TCI technology represents a novel approach to stimulating the body’s immune system. There is no precedent for the successful commercialization of product candidates based on our technology. Developing biopharmaceuticals based on new technologies presents inherent risks of failure, including:

• research could demonstrate that the scientific basis of our technology is incorrect or less sound than we had believed;

• unexpected research results could reveal side effects or other unsatisfactory conditions that either will add cost to development of our product candidates or jeopardize our ability to complete the necessary clinical trials; and

• time and effort required to solve technical problems could sufficiently delay the development of product candidates such that any competitive advantage that we may enjoy is lost.

     All of our product candidates currently in development rely on LT, a naturally occurring bacterial toxin, as an adjuvant. LT has been shown to cause undesirable side effects when delivered through conventional mechanisms such as injection, intranasal and oral delivery methods. LT cannot be administered orally as an adjuvant and was linked to an increase in the risk of Bell’s palsy, a temporary paralysis of the facial muscles, when used in a nasal flu vaccine that was on the market in Europe during the 2000/2001 flu season. If we find that LT is not safe when administered to patients through the skin using our TCI technology, we will not be able to use LT as an adjuvant in our products. This would have a material adverse effect on our product development efforts.

     Successful commercialization of our TCI technology will require integration of multiple dynamic and evolving components, such as antigens, adjuvants and a delivery mechanism, into finished product candidates. This complexity will likely increase the number of technical problems that we can expect to confront in the clinical and

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product development processes and, therefore, add to the cost and time required to commercialize each product candidate.

     As part of our product development efforts, we may make significant changes to our product candidates. These changes may not yield the benefits that we expect.

     We have made changes in the design or application of our product candidates in response to preclinical and clinical trial results and technological changes, and we may make additional changes in the future before we are able to commercialize our products. These and other changes to our product candidates may not yield the benefits that we expect and may result in complications and additional expenses that delay the development of our product candidates. In addition, changes to our product candidates may not be covered by our existing patents and patent applications, and may not qualify for patent protection, which could have a material adverse effect on our ability to commercialize our product candidates. See the risk factor entitled “If we are unable to protect our intellectual property, we may not be able to operate our business profitably.”

     We may not be able to manufacture our product candidates in commercial quantities, which would prevent us from initiating Phase 3 trials and commercializing our product candidates.

     To date, our product candidates have been manufactured in small quantities by us and third party manufacturers for preclinical and clinical trials. As we prepare our facility for Phase 3 and commercial manufacturing, this will require scale up of our fermentation, downstream processing and patch manufacturing as compared to our currrent levels. For example, we have recently installed manufacturing equipment capable of producing initial commercial quantities of our vaccine patches. These projects may result in unanticipated delays and cost more than expected due to a number of factors, including complying with cGMP regulations, such as qualification and validation of these equipment, and this could result in the delay of initiation of our planned Phase 3 trials and commercial launch of products.

     If any of our product candidates is approved by the FDA or other regulatory agencies for commercial sale, we will need to manufacture it in larger quantities. We or our third party manufacturers may not be able to successfully increase the manufacturing capacity for any of our product candidates in a timely or economic manner, or at all. If we are unable to successfully increase the manufacturing capacity for a product candidate, the regulatory approval or commercial launch of that product candidate may be delayed or there may be a shortage in the supply of the product candidate. Our product candidates require precise, high quality manufacturing that is subject to current Good Manufacturing Practices, or cGMP. Our failure or the failure of our third party manufacturers to achieve and maintain these high manufacturing standards and comply with the cGMP, including the incidence of manufacturing errors, could result in patient injury or death, product recalls or withdrawals, delays or failures in product testing or delivery, cost overruns or other problems that could seriously harm our business. In addition, our manufacturing facilities will be subject to unannounced inspections by the FDA, and significant scale-up of manufacturing may require additional validation studies, which the FDA must review and approve.

     We rely on third parties to conduct our clinical trials, and those third-parties may not perform satisfactorily, including failing to meet established deadlines for the completion of such trials.

     We do not have the ability to independently conduct clinical trials for our vaccine candidates, and we rely on third parties such as contract research organizations, medical institutions and clinical investigators to enroll qualified patients and conduct our clinical trials. Our reliance on these third parties for clinical development activities reduces our control over these activities. Furthermore, these third parties may also have relationships with other entities, some of which may be our competitors. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, our efforts to obtain regulatory approvals for and commercialize our vaccine candidates may be delayed or prevented.

     We may be required to conduct clinical trials of our IS patch with flu vaccines developed by different manufacturers, which may lead to added cost and delay in approval and commercialization of our IS patch.

     In order for our IS patch to gain approval from the FDA and to be used with commercially available injectable flu vaccines, we may need to conduct multiple clinical trials of our IS patch with multiple flu vaccines developed by

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different manufacturers. This may substantially expand the cost and time required for the clinical trials of our IS patch, which could delay its potential approval by the FDA and its commercialization.

     The skin preparation systems used in connection with our product candidates may make our products less attractive to consumers.

     We have observed in our product development efforts that the delivery of antigens and adjuvants to Langerhans cells through the skin is significantly improved by prepping the skin to disrupt the outer dead layer of skin, known as the stratum corneum. Based on animal studies, we believe that the method and level of skin preparation may differ from one product candidate to another because of the different physical properties of the active ingredients. Therefore, more than one skin preparation system (SPS) may be required for our different products to be effective. In recent clinical studies for our needle-free travelers’ diarrhea and flu vaccine patches, we have tested simple abrasive materials to disrupt the stratum corneum and are now working to design and test improved embodiments of these materials for use in our future clinical trials of our product candidates. We believe our SPS will be simple to perform and will not involve discomfort to the patient. However, to the degree that our SPS is not perceived to be simple to perform or involve patient discomfort, it could reduce the attractiveness of our products since alternative vaccines or treatments are available for many of the indications that our product candidates under development seek to address.

     None of our product candidates has been approved for commercial sale, and we may never receive such approval.

     All of our product candidates are in early pre-commercial stages, and we do not expect our product candidates to be commercially available for several years, if at all. We expect that each of our product candidates, consisting of a patch and one or more active ingredients, will be treated together as a separate investigational product by the FDA, even if any active ingredient is part of an existing approved product. None of the active ingredients in our product candidates have been approved by the FDA for commercial sale in any product. Our product candidates are subject to stringent regulation by regulatory authorities in the United States and in other countries. We cannot market any product candidate until we have completed our clinical trials and have obtained the necessary regulatory approvals for that product candidate. We do not know whether regulatory authorities will grant approval for any of our product candidates.

     Conducting clinical trials and obtaining regulatory approvals are uncertain, time consuming and expensive processes. Our product candidates must complete rigorous preclinical testing and clinical trials. It will take us many years to complete our testing, and failure could occur at any stage of testing. Results of early trials frequently do not predict results of later trials, and acceptable results in early trials may not be repeated.

     Even if we complete preclinical and clinical trials successfully, we may not be able to obtain regulatory approvals. Data obtained from preclinical and clinical studies are subject to varying interpretations that could delay, limit or prevent regulatory approval, and failure to observe regulatory requirements or inadequate manufacturing processes are examples of other problems that could prevent approval. In addition, we may encounter delays or rejections due to additional government regulation from future legislation, administrative action or changes in FDA policy. Even if the FDA approves a product, the approval will be limited to those indications encompassed in the approval; marketing the product for a different indication would require a supplementary application.

     Outside the United States, our ability to market any of our potential products is contingent upon receiving marketing authorizations from the appropriate regulatory authorities. These foreign regulatory approval processes include all of the risks associated with the FDA approval process described above.

     If our research and testing is not successful, or if we cannot show that our product candidates are safe and effective, we will be unable to commercialize our product candidates, and our business may fail.

     If physicians and patients do not accept our products, we may be unable to generate significant revenue.

     Even if any of our vaccine candidates obtain regulatory approval, they still may not gain market acceptance among physicians, patients and the medical community, which would limit our ability to generate revenue and

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would adversely affect our results of operations. Physicians will not recommend products developed by us or our collaborators until clinical data or other factors demonstrate the safety and efficacy of our products as compared to other available treatments. Even if the clinical safety and efficacy of our products is established, physicians may elect not to recommend these products for a variety of factors, including the reimbursement policies of government and third-party payors. There are other established treatment options for the diseases that many of our product candidates target, such as travelers’ diarrhea and the flu. In order to successfully launch a product based on our TCI technology, we must educate physicians and patients about the relative benefits of our products. If our products are not perceived as easy and convenient to use, for example as compared to an injectable vaccine or antibiotics, or are perceived to present a greater risk of side effects or are not perceived to be as effective as other available treatments, physicians and patients might not adopt our products. A failure of our technology to gain commercial acceptance would have a material adverse effect on our business. We expect that, if approved for commercialization, our needle-free travelers’ diarrhea vaccine patch will be paid for by patients out of pocket. Our needle-free travelers’ diarrhea vaccine patch is not designed to protect against all forms of travelers’ diarrhea, rather it is designed to protect against only those cases of travelers’ diarrhea caused by enterotoxigenicE. colibacteria, or ETEC, and in which the LT toxin is present. We estimate this to be approximately one-third of all cases of travelers’ diarrhea. This could limit commercial acceptance of this product. Because our needle-free flu vaccine patch and IS patch candidates are targeted at preventing or ameliorating the effects of flu infection, if the launch of these products for a particular flu season fails, we may not receive significant revenues from that product until the next season, if at all. See the risk factors set forth below entitled “Our competitors in the biopharmaceutical industry may have superior products, manufacturing capability or marketing expertise,” “Our ability to generate revenues will be diminished if we fail to obtain acceptable prices or an adequate level of reimbursement for our products,” and “We have no experience in sales, marketing and distribution and will depend on the sales and marketing efforts of third parties.”

     Our license to use TCI technology from The Walter Reed Army Institute of Research, or WRAIR, is critical to our success. Under some circumstances, WRAIR may modify or terminate our license or sublicense the TCI technology to third parties which could adversely affect our business.

     We license substantially all of our patented and patentable TCI technology through an exclusive license from WRAIR, a federal government entity. This license will terminate automatically on the expiration date of the last to expire patent subject to the license, which, based on currently issued patents and our assumption that such patents will not be invalidated, would be February 2019. WRAIR may unilaterally modify or terminate the license if we, among other things:

• do not expend reasonable efforts and resources to carry out the development and marketing of the licensed TCI technology and do not manufacture, use, or operate products that use the TCI technology by April 2008 (subject to extension based upon a showing of reasonable diligence in developing the technology);

• do not continue to make our TCI-based products available to the public on commercially reasonable terms after we have developed such products;

• misuse the licensed TCI technology or permit any of our affiliates or sub-licensees to do so;

• fail to pay royalties or meet our other payment or reporting obligations under the license;

• become bankrupt; or

• otherwise materially breach our obligations under the license.

     As we do not expect to have regulatory approval for any of our TCI-based product candidates by April 2008, we may need to seek an extension of the April 2008 milestone. If we violate the terms of the WRAIR license, or otherwise lose our licensed rights to the TCI technology, we would likely be unable to continue to develop our products. WRAIR and third parties may dispute the scope of our rights to the TCI technology under the license. Additionally, WRAIR may breach the terms of its obligations under the license or fail to prevent infringement or fail to assist us to prevent infringement by third parties of the patents underlying the licensed TCI technology. Loss or

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impairment of the WRAIR license for any reason could materially harm our financial condition and operating results.

     In addition to WRAIR’s termination and modification rights described above, our license is subject to a non-exclusive, non-transferable, royalty-free right of the United States government to practice the licensed TCI technology for research and other governmental purposes on behalf of the United States and on behalf of any foreign government or international organization pursuant to any existing or future treaty or agreement with the United States. WRAIR also reserves the right to require us to grant sublicenses to third parties if WRAIR determines that:

• such sublicenses are necessary to fulfill public health and safety needs that we are not reasonably addressing;

• such sublicenses are necessary to meet requirements for public use specified by applicable United States government regulations with which we are not reasonably in compliance; or

• we are not manufacturing our products substantially in the United States.

     Although we are currently the only parties licensed to actively develop the TCI technology, we cannot assure you that WRAIR will not in the future require us to sublicense the TCI technology. Any action by WRAIR to force us to issue such sublicenses or development activities instituted by the United States government pursuant to its reserved rights in the TCI technology would erode our ability to exclusively develop products based on the TCI technology and could materially harm our financial condition and operating results.

     Licenses of technology owned by agencies of the United States government, including the WRAIR license, require that licensees—in this case, us—and our affiliates and sub-licensees agree that products covered by the license will be manufactured substantially in the United States. This may restrict our ability to contract for manufacturing facilities, if we attempt to do so, outside the United States and we may risk losing our rights under the WRAIR license, which could materially harm our financial condition and operating results.

     If we are unable to protect our intellectual property, we may not be able to operate our business profitably.

     We base our TCI technology in large part on innovations for which WRAIR has sought protection under the United States and certain foreign patent laws. We consider patent protection of our TCI technology to be critical to our business prospects. As of May 10, 2007, there are four issued United States patents, 32 issued foreign patents and 41 United States and foreign patent applications relating to TCI and improvements on the technology. The four issued United States patents will expire between November 2016 and February 2019. The issued foreign patents will expire between November 2016 and February 2019. Under our license agreement with WRAIR, we bear financial responsibility for the preparation, filing, prosecution and maintenance of any and all patents and patent applications licensed. With respect to enforcement, we have the right to bring actions to enforce patents licensed under the WRAIR license agreement, subject to WRAIR’s continuing right to intervene, and WRAIR maintains the right to bring enforcement actions if we fail to do so.

     Our contract with DHHS includes certain patent and data rights provisions governing our rights and those of the U.S. government in respect of patentable processes and inventions and works subject to copyright, including software, that we may develop under the contract and that are paid for by DHHS. While we do not believe that our performance under the DHHS contract will result in patentable processes or inventions, or works subject to copyright, including software, that we would need to market our IS patch technology in the future, our performance under the DHHS contract subjects us to the risk that the U.S. government may claim rights or interests in such patentable processes or inventions or works subject to copyright.

     Patent protection in the field of biopharmaceuticals is highly uncertain and involves complex legal and scientific questions and has recently been the subject of much litigation. We cannot control when or if any patent applications will result in issued patents. Even if issued, our patents may not afford us protection against competitors marketing similar products. Neither the US Patent and Trademark Office nor the courts have a consistent policy regarding the breadth of claims allowed or the degree of protection afforded under many biopharmaceutical patents.

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The claims of our existing US patents and those that may issue in the future, or those licensed to us, may not offer significant protection of our TCI technology and other technologies. Our patents on transcutaneous immunization, in particular, are broad in that they cover the delivery of antigens and adjuvants to the skin to induce an immune response. While our TCI technology is covered by issued patents and we are not aware of any challenges, patents with broad claims tend to be more vulnerable to challenge by other parties than patents with more narrowly written claims. Patent applications in the United States and many foreign jurisdictions are typically not published until 18 months following their priority filing date, and in some cases not at all. In addition, publication of discoveries in scientific literature often lags significantly behind actual discoveries. Therefore, neither we nor our licensors can be certain that we or they were the first to make the inventions claimed in our issued patents or pending patent applications, or that we or they were the first to file for protection of the inventions set forth in these patent applications. In addition, changes in either patent laws or in interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property or narrow the scope of our patent protection. Furthermore, our competitors may independently develop similar technologies or duplicate technology developed by us in a manner that does not infringe our patents or other intellectual property.

     If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology and products could be adversely affected.

     In addition to patented technology, we rely upon unpatented proprietary technology, processes and know-how. We and our licensors seek to protect this information in part by confidentiality agreements with employees, consultants and third parties. These agreements may be breached, and there may not be adequate remedies for any such breach. In addition, our trade secrets may otherwise become known or be independently developed by competitors. If we are unable to protect the confidentiality of our proprietary information and know-how, competitors may be able to use this information to develop products that compete with our products, which could adversely impact our business.

     If the use of our technology conflicts with the intellectual property rights of third parties, we may incur substantial liabilities, and we may be unable to commercialize products based on this technology in a profitable manner, if at all.

     Our competitors or others may have or acquire patent rights that they could enforce against us. In addition, we may be subject to claims from others that we are misappropriating their trade secrets or confidential proprietary information. If our technology conflicts with the intellectual property rights of others, they could bring legal action against us or our licensors, licensees, suppliers, customers or collaborators. If a third party claims that we infringe upon its proprietary rights, any of the following may occur:

• we may become involved in time-consuming and expensive litigation, even if the claim is without merit;

• we may become liable for substantial damages for past infringement if a court decides that our technology infringes upon a competitor’s patent;

• a court may prohibit us from selling or licensing our product without a license from the patent holder, which may not be available on commercially acceptable terms, if at all, or which may require us to pay substantial royalties or grant cross licenses to our patents; and

• we may have to redesign our product so that it does not infringe upon others’ patent rights, which may not be possible or could be very expensive and time-consuming.

     If any of these events occurs, our business will suffer and the market price of our common stock will likely decline.

     We may be involved in lawsuits to protect or enforce our patents or the patents of our collaborators or licensors, which could be expensive and time consuming.

     Competitors may infringe our patents or the patents of our collaborators or licensors. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time-consuming.

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In addition, in an infringement proceeding, a court may decide that a patent of ours is not valid or is unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology in question. An adverse result in any litigation or defense proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly and could put our patent applications at risk of not issuing.

     Interference proceedings brought by the US Patent and Trademark Office may be necessary to determine the priority of inventions with respect to our patent applications or those of our collaborators or licensors. Litigation or interference proceedings may fail and, even if successful, may result in substantial costs and be a distraction to our management. We may not be able, alone or with our collaborators and licensors, to prevent misappropriation of our proprietary rights, particularly in countries where the laws may not protect such rights as fully as in the United States.

     Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock.

     We depend on our key personnel, the loss of whom would adversely affect our operations. If we fail to attract and retain the talent required for our business, our business will be materially harmed.

     We are a small company with 106 employees as of March 31, 2007, and we depend to a great extent on principal members of our management and scientific staff. If we lose the services of any key personnel, in particular, Stanley Erck, our President and Chief Executive Officer, or Gregory Glenn, our Chief Scientific Officer, it could significantly impede the achievement of our research and development objectives and could delay our product development programs and approval and commercialization of our product candidates. We do not currently have any key man life insurance policies. While we have entered into agreements with certain of our executive officers relating to severance after a change of control and these officers have agreed to restrictive covenants relating to non-competition and non solicitation, we have not entered into employment agreements with members of our senior management team other than Stanley Erck. Our agreement with Stanley Erck does not ensure that we will retain his services for any period of time in the future. Our success depends on our ability to attract and retain highly qualified scientific, technical and managerial personnel and research partners. Competition among biopharmaceutical and biotechnology companies for qualified employees is intense, and we may not be able to retain existing personnel or attract and retain qualified staff in the future. If we fail to hire and retain personnel in key positions, we will be unable to develop or commercialize our product candidates in a timely manner.

     Our competitors may have superior products, manufacturing capability or marketing expertise.

     Our business may fail because it faces intense competition from major pharmaceutical companies, specialized biopharmaceutical and biotechnology companies and drug development companies engaged in the development and production of vaccines, vaccine delivery technologies and other biopharmaceutical products. Several companies are pursuing programs that target the same markets we are targeting. In addition to pharmaceutical, biopharmaceutical and biotechnology companies, our competitors include academic and scientific institutions, government agencies and other public and private research organizations. Many of our competitors have greater financial and human resources and more experience. Our competitors may:

• develop products or product candidates earlier than we do;

• form collaborations before we do, or preclude us from forming collaborations with others;

• obtain approvals from the FDA or other regulatory agencies for such products more rapidly than we do;

• develop and validate manufacturing processes more rapidly than we do;

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• obtain patent protection or other intellectual property rights that would limit our ability to use our technologies or develop our product candidates;

• develop products that are safer or more effective than those we develop or propose to develop; or

• implement more effective approaches to sales and marketing.

     Alternative competitive technologies and products could render our TCI technology and our product candidates based on this technology obsolete and non-competitive. Presently, there are a number of companies developing alternative methods to the syringe for delivering vaccines. These alternative methods include microneedles, electroporations, microporations, jet injectors, nasal sprays and oral delivery, and several of these delivery mechanisms are in clinical trials.

     While there are no vaccines against infection by ETEC that have been approved for sale in the United States, we are aware of several companies with ETEC vaccine product candidates that are in development, which, if approved, would compete against our needle-free travelers’ diarrhea vaccine patch. Those companies with potential ETEC vaccine candidates include Avant Immunotherapeutics, Inc., Crucell N.V., Cambridge Biostability Limited and Emergent BioSolutions, Inc. One of our competitors, Crucell, has announced the results from a study of an ETEC vaccine indicating the vaccine may be effective in preventing diarrhea caused by ETEC. In the absence of vaccines, travelers’ diarrhea is generally treated, either prophylactically or following onset, with antibiotics or over-the-counter, or OTC, products that alleviate symptoms. Some of these OTC products and antibiotics, such as Cipro, are marketed by pharmaceutical companies with substantial resources and enjoy widespread acceptance among physicians and patients. In addition, Salix Pharmaceuticals, Inc. has announced that it has completed a Phase 3 study and initiated another to evaluate the efficacy and safety of an antibiotic specifically designed to be taken prophylactically for the prevention of travelers’ diarrhea, and is targeting filing a license application in the first half of 2008.

     There are multiple influenza vaccines approved for sale in both the United States and Europe. In many cases, these products are manufactured and distributed by pharmaceutical companies with substantial resources, such as Novartis AG, GlaxoSmithKline plc, sanofi-aventis SA, Solvay SA and MedImmune, Inc. FluMist, a nasal flu vaccine, has received marketing approval from the FDA and would compete against our needle-free flu vaccine. We are also aware of other flu vaccine candidates to be delivered by alternative methods, such as nasal spray and skin delivery, which, if approved, would compete against our needle-free flu vaccine. In addition, we know of multiple flu vaccine candidates that incorporate adjuvants to enhance immune responses, particularly in the elderly. Some of these adjuvanted flu vaccines are being developed by pharmaceutical companies with substantial resources, such as sanofi-aventis, GlaxoSmithKline and Novartis. These adjuvanted vaccines would compete against our IS patch for the elderly and for pandemic flu applications. For example, both GlaxoSmithKline and Novartis were awarded “dose-sparing” contracts by DHHS totaling $63.3 million and $54.8 million, respectively, in January 2007 to develop pandemic flu vaccines with their proprietary adjuvant systems. Both GlaxoSmithKline and Novartis have reported separately initial data indicating that low doses (3.8 ug and 7.5 ug, respectively) of their respective adjuvanted pandemic flu vaccines have elicited immune responses at levels considered protective by health authorities, as well as strong immune responses against “drifted” strains of pandemic flu that have changed over time. In addition, sanofi-aventis has a micro-injection flu vaccine in Phase 3 clinical trials aimed at providing a superior immune response in the elderly.

     Our ability to generate revenues will be diminished if we fail to obtain acceptable prices or an adequate level of reimbursement for our products.

     We expect that most patients will rely on private health insurers, Medicare and Medicaid and other third party payors to pay for any products that we or our collaborators may market, other than our needle-free travelers’ diarrhea vaccine patch for which we expect patients will pay out-of-pocket. The continuing efforts of government and third party payors to contain or reduce the costs of health care through various means may limit our commercial opportunity. For example, in some foreign markets, pricing and profitability of prescription biopharmaceuticals are subject to government control. In the United States, we expect that there will continue to be a number of federal and state proposals to implement similar government controls. In addition, increasing emphasis on managed care in the

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United States will continue to put pressure on the pricing of biopharmaceutical products. Cost control initiatives could decrease the price that we would receive for any products in the future.

     Our ability to commercialize biopharmaceutical product candidates, alone or with third parties, could be adversely affected by cost control initiatives and also may depend in part on the extent to which reimbursement for the product candidates will be available from:

• government and health administration authorities;

• private health insurers; and

• other third party payors.

     Significant uncertainty exists as to the reimbursement status of newly approved health care products. Third party payors, including Medicare, are challenging the prices charged for medical products and services. Government and other third party payors increasingly attempt to contain health care costs by limiting both coverage and the level of reimbursement for new biopharmaceutical products and by refusing, in some cases, to provide coverage for uses of approved products for disease indications for which the FDA has not granted labeling approval. In the United States, there have been a number of legislative and regulatory proposals to change the healthcare system in ways that could affect our ability to market and sell our product candidates profitably. In particular, in December 2003, President Bush signed into law new Medicare prescription drug coverage legislation which went into effect on January 1, 2006. Under this legislation, the Centers for Medicare and Medicaid Services, or CMS, the agency within the Department of Health and Human Services that administers Medicare and is responsible for reimbursement of the cost of drugs, has asserted the authority of Medicare to elect not to cover particular drugs if CMS determines that the drugs are not “reasonable and necessary” for Medicare beneficiaries or to elect to cover a drug at a lower rate similar to that of drugs that CMS considers to be “therapeutically comparable.” Changes in reimbursement policies or health care cost containment initiatives that limit or restrict reimbursement for our products may cause our potential revenues to decline. Third party insurance coverage may not be available to patients for any product candidates we discover and develop, alone or through our strategic relationships. If government and other third party payors do not provide adequate coverage and reimbursement levels for our product candidates, the market acceptance of these product candidates may be reduced.

     We have no experience in sales, marketing and distribution and will depend on the sales and marketing efforts of third parties.

     We plan to establish marketing arrangements with third parties or major pharmaceutical companies and do not expect to establish direct sales capability for several years. However, these types of marketing arrangements might not be available on acceptable terms, or at all. In the future, to market any of our product candidates directly, we will need to develop a marketing and sales force with technical expertise and distribution capability. To the extent that we enter into marketing or distribution arrangements, any revenues we receive will depend upon the efforts of third parties. We cannot assure you that we will be successful in gaining market acceptance for any products we may develop.

     Our business exposes us to potential product liability claims.

     Our proposed products could be the subject of product liability claims. A failure of our product candidates to function as anticipated, whether as a result of the design of these products, unanticipated health consequences or side effects, or misuse or mishandling by third parties of such products, could result in injury. Claims also could be based on failure to immunize as anticipated. Tort claims could be substantial in size and could include punitive damages. We cannot assure you that any warranty disclaimers provided with our proposed products would be successful in protecting us from product liability exposure. Damages from any such claims could be substantial and could affect our financial condition.

     Our business exposes us to potential product liability risks that are inherent in the testing, manufacturing and marketing of biopharmaceutical products. We have obtained clinical trial liability insurance for our clinical trials in the aggregate amount of $10 million. We cannot be certain that we will be able to maintain adequate insurance for

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our clinical trials. We also intend to seek product liability insurance in the future for products approved for marketing, if any. However, we may not be able to acquire or maintain adequate insurance at a reasonable cost. Any insurance coverage may not be sufficient to satisfy any liability resulting from product liability claims. A successful product liability claim or series of claims could have a material adverse impact on our operations.

     We deal with hazardous materials that may cause injury to others and are regulated by environmental laws that may impose significant costs and restrictions on our business.

     Our research and development programs and manufacturing operations involve the controlled use of potentially harmful biological materials such as toxins fromE. coliand other hazardous materials. We cannot completely eliminate the risk of accidental contamination or injury to others from the use, manufacture, 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 or any applicable insurance coverage we may have. We are also subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling or disposal of hazardous materials and waste products. If we fail to comply with these laws and regulations or with the conditions attached to our operating licenses, then our operating licenses could be revoked, we could be subjected to criminal sanctions and substantial liability and we could be required to suspend, modify or terminate our operations. We may also have to incur significant costs to comply with future environmental laws and regulations. We do not currently have a pollution and remediation insurance policy.

     Until recently, we have operated as a private company and as a result, we have limited experience attempting to comply with public company obligations. Attempting to comply with these requirements will increase our costs and require additional management resources, and we still may fail to comply.

     In February 2006, we closed our initial public offering. Previously, as a private company, we maintained a small finance and accounting staff. While we expect to continue to expand our staff, we may encounter substantial difficulty attracting qualified staff with requisite experience due to the high level of competition for experienced financial professionals.

     We face increased legal, accounting, administrative and other costs and expenses as a public company that we did not incur as a private company. Compliance with the Sarbanes Oxley Act of 2002, as well as other rules of the SEC, the Public Company Accounting Oversight Board and The Nasdaq Stock Market will result in a significant initial cost to us as well as an ongoing increase in our legal, audit and financial compliance costs. As a public company, we expect to become subject to Section 404 of the Sarbanes Oxley Act relating to internal control over financial reporting for the year ended December 31, 2007. We have only recently begun a formal process to evaluate our internal controls for purposes of Section 404, and we cannot assure that our internal control over financial reporting will prove to be effective.

     If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud. As a result, stockholders could lose confidence in our financial and other public reporting, which would harm our business and the trading price of our common stock.

     Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and, together with adequate disclosure controls and procedures, are designed to prevent fraud. If we cannot continue to provide reliable financial reports or prevent fraud, our operating results could be harmed. Also, to account for our continued growth, as well the additional reporting obligations under the DHHS contract, we have installed a new financial system, which went live on January 1, 2007. Our experience with this new system is limited and could impact our ability in the future to provide timely financial reports. We have only recently begun a formal process to evaluate our internal control over financial reporting. Given the status of our efforts, coupled with the fact that guidance from regulatory authorities in the area of internal controls continues to evolve, substantial uncertainty exists regarding our ability to comply by applicable deadlines. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock.

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     Investment Risks

     We expect that our stock price will fluctuate significantly, which may adversely affect holders of our stock and our ability to raise capital.

     The stock market, particularly in recent years, has experienced significant volatility particularly with respect to pharmaceutical, biopharmaceutical and biotechnology stocks. The volatility of pharmaceutical, biopharmaceutical and biotechnology stocks often does not relate to the operating performance of the companies represented by the shares. Factors that could cause volatility in the market price of our common stock include:

• the timing and the results from our clinical trial programs;

• FDA or international regulatory actions;

• failure of any of our product candidates, if approved, to achieve commercial success;

• announcements of clinical trial results or new product introductions by our competitors;

• market conditions in the pharmaceutical, biopharmaceutical and biotechnology sectors;

• developments concerning intellectual property rights;

• litigation or public concern about the safety of our potential products;

• actual and anticipated fluctuations in our quarterly operating results;

• deviations in our operating results from the estimates of securities analysts;

• additions or departures of key personnel;

• third party reimbursement policies; and

• developments concerning current or future strategic alliances.

     These and other factors may cause the market price and demand for our common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity of our common stock and our ability to raise capital.

     If the price and volume of our common stock experience extreme fluctuations, then we could face costly litigation.

     In the past, companies that experience volatility in the market price of their securities have often faced securities class action litigation. Whether or not meritorious, if any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management and harm our ability to grow our business.

     Our directors and management exercise significant control over our company.

     Our directors and executive officers and their affiliates collectively control approximately 41.8% of our outstanding common stock. These stockholders, if they act together, may be able to influence our management and affairs and all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. The concentration of ownership may have the effect of delaying or preventing a change in control of our company and might affect the market price of our common stock.

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     We may not achieve our projected development goals in the time frames we announce and expect.

     We set goals for and make public statements regarding timing of the accomplishment of objectives material to our success, such as the commencement and completion of clinical trials. The actual timing of these events can vary dramatically due to factors such as delays or failures in our clinical trials, the uncertainties inherent in the regulatory approval process and delays in achieving manufacturing or marketing arrangements sufficient to commercialize our products. There can be no assurance that our clinical trials will be completed, that we will make regulatory submissions or receive regulatory approvals as planned or that we will be able to adhere to our current schedule for the launch of any of our products. If we fail to achieve one or more of these milestones as planned, the market price of our shares could decline.

     Provisions of Delaware law or our charter documents could delay or prevent an acquisition of our company, even if the acquisition would be beneficial to our stockholders, and could make it more difficult for you to change management.

     Provisions of our certificate of incorporation and bylaws may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. This is because these provisions may prevent or frustrate attempts by stockholders to replace or remove our current management or members of our board of directors.

     These provisions include:

• a staggered board of directors;

• a prohibition on stockholder action through written consent;

• a requirement that special meetings of stockholders be called only by the chairman of the board of directors, the chief executive officer, or the board of directors pursuant to a resolution adopted by a majority of the total number of authorized directors;

• advance notice requirements for stockholder proposals and nominations; and

• the authority of the board of directors to issue preferred stock with such terms as it may determine.

     As a result, these provisions and others available under Delaware law could limit the price that investors are willing to pay in the future for shares of our common stock.

     Because we do not expect to pay dividends in the foreseeable future, you must rely on stock appreciation for any return on your investment.

     We have paid no cash dividends on any of our capital stock to date, and we currently intend to retain our future earnings, if any, to fund the development and growth of our business. As a result, we do not expect to pay any cash dividends in the foreseeable future, and payment of cash dividends, if any, will also depend on our financial condition, results of operations, capital requirements and other factors and will be at the discretion of our board of directors. Furthermore, we may in the future become subject to contractual restrictions on, or prohibitions against, the payment of dividends. Accordingly, the success of your investment in our common stock will likely depend entirely upon any future appreciation. There is no guarantee that our common stock will appreciate in value after you purchase them or even maintain the price at which you purchased your shares, and you may not realize a return on your investment in our common stock.

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ITEM 3. Qualitative and Quantitative Disclosures About Market Risk

     Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because the majority of our investments are in short-term US government and agency debt securities. The market value of these investments fluctuates with changes in current market interest rates. In general, as rates increase, the market value of a debt investment would be expected to decrease. Likewise, as rates decrease, the market value of a debt investment would be expected to increase. To minimize such market risk, we generally hold these instruments to maturity at which time they are redeemed at their stated or face value. Due to the nature of our short-term investments, we believe that we are not subject to any material market risk exposure.

     The interest rates on our debt obligations are fixed so repayment of these obligations is not subject to any material market risk exposure.

     We do not have any foreign currency or other derivative financial instruments.

ITEM 4. Controls and Procedures

     Disclosure Controls and Procedures

     We currently have in place systems relating to disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). In connection with the preparation of this report, our principal executive officer and our principal financial officer evaluated the effectiveness of these disclosure controls and procedures as of the end of our quarterly period ended March 31, 2007 and concluded that the controls and procedures were effective at that time.

     Changes in Internal Controls Over Financial Reporting

     During the first quarter of 2007, we went live with a new accounting software system that management believes has improved our capabilities for internal control over financial reporting. The implementation has not otherwise materially affected, and at this time is not reasonably likely to materially affect, our internal control over financial reporting. There have been no other significant changes in our internal control over financial reporting during the quarterly period ended March 31, 2007, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

ITEM 1A. Risk Factors

     We incorporate by reference the information included under “Factors That May Impact Future Results” under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2 of Part I of this report.

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

At a special meeting of stockholders held on March 6, 2007, Iomai stockholders voted to approve an amendment to our 2005 Stock Incentive Plan to increase the number of shares of common stock available for issuance under the plan by 850,000 shares, making a total of 1,890,000 shares of common stock reserved and available for issuance.

The shares voted for the amendment to the 2005 Stock Incentive Plan were as follows:

	For		Against		Abstain
To approve amendment to 2005 Stock Incentive Plan		11,489,902		452,224		31,533

Abstentions and broker non-votes were counted for determining a quorum. Broker non-voters were not treated as votes cast. Absentions were not voted in favor of the proposal and had the same effect as a vote against the proposal.

ITEM 6. Exhibits

Exhibit 3.1.3 (1)	Third Amended and Restated Certificate of Incorporation.
Exhibit 3.2.3 (2)	Third Amended and Restated Bylaws.
Exhibit 4.13 (3)	Form of common stock warrant dated March 2, 2007.
Exhibit 4.14 (3)	Form of common stock warrant dated March 2, 2007.
Exhibit 10.4 (4)	2005 Incentive Plan, as amended March 6, 2007.**
Exhibit 10.11.9 (5)	Sixth Amendment to Lease dated January 26, 2007 by and between Iomai Corporation and ARE 20/22/1300 Firstfield Quince Orchard, LLC.
Exhibit 10.14 (3)	Securities Purchase Agreement dated March 2, 2007 by and among Iomai Corporation and Investors thereto.
Exhibit 10.15	Contract dated January 17, 2007 by and between Iomai Corporation and Department of Health and Human Services (HHS/OS/OPHEP/OPHEMC). +
Exhibit 31.1	Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended.
Exhibit 31.2	Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended.

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Exhibit 32.1(6) Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

**	Indicates a management contract or compensatory plan.
+	Confidential Treatment Requested Under 17 C.F.R. §§ 200.80(b)(4) and 230.406. The confidential portions of this exhibit have been omitted and are marked by an asterisk.
(1)	Previously filed as an exhibit to the Company’s Form S-1/A (File No. 333-128765) and incorporated herein by reference thereto.
(2)	Previously filed as an exhibit to the Company’s Form 8-K filed March 24, 2006 and incorporated herein by reference thereto.
(3)	Previously filed as an exhibit to the Company’s Form 8-K filed March 2, 2007 and incorporated herein by reference thereto.
(4)	Previously filed as an exhibit to the Company’s Form 8-K filed March 7, 2007 and incorporated herein by reference thereto.
(5)	Previously filed as an exhibit to the Company’s Form 8-K filed January 30, 2007 and incorporated herein by reference thereto.
(6)	This certification is deemed to be furnished but not filed.

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SIGNATURES

     Pursuant to the requirements 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.

IOMAI CORPORATION

/s/Russell P. WilsonRussell P. Wilson
Chief Financial Officer

Dated: May 14, 2007

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