Edgar Filing: SIGA TECHNOLOGIES INC

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-Q

(Mark One)

|X| Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934

For the Quarter Ended June 30, 2006

|_| Transition Report Pursuant To Section 13 Or 15(d) Of
the Securities Exchange Act of 1934

For the Transition Period from _____________ to _____________

Commission File No. 0-23047

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SIGA Technologies, Inc.
(Exact name of registrant as specified in its charter)

A Delaware Corporation IRS Employer No. 13-3864870

420 Lexington Avenue, Suite 408, New York, NY 10170
Telephone Number (212) 672-9100

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|.

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

Large Accelerated Filer |_| Accelerated Filer |_| Non-Accelerated Filer |X|.

Indicate by check mark whether the registrant is a shell company (as defined in
rule 12b-2 of the Exchange Act). Yes |_| No |X|.

As of August 8, 2006 the registrant had 27,500,648 shares of common stock
outstanding.

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SIGA Technologies, Inc.

Form 10-Q

Table of Contents

Page No.

PART I FINANCIAL INFORMATION

Item 1. Financial Statements.........................................................................2

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......14

Item 3. Quantitative and Qualitative Disclosure About Market Risk...................................23

Item 4. Controls and Procedures.....................................................................23

PART II OTHER INFORMATION

Item 1. Legal Proceedings...........................................................................24

Item 1A. Risk Factors................................................................................24

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities............24

Item 3. Defaults Upon Senior Securities.............................................................24

Item 4. Submission of Matters to a Vote of Security Holders.........................................24

Item 5. Other Information...........................................................................24

Item 6. Exhibits....................................................................................24

SIGNATURES.............................................................................................25

PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements

SIGA TECHNOLOGIES, INC.

BALANCE SHEETS

Unaudited
June 30, December 31,
2006 2005
------------ ------------

ASSETS
Current assets
Cash and cash equivalents ..................................................... $ 3,083,463 $ 1,772,489
Accounts receivable ........................................................... 210,244 883,054
Prepaid expenses .............................................................. 136,759 160,144
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Total current assets ......................................................... 3,430,466 2,815,687

Property, plant and equipment, net ............................................ 1,603,726 1,224,147
Goodwill ...................................................................... 898,334 898,334
Intangible assets, net ........................................................ 384,037 932,735
Other assets .................................................................. 246,201 234,126
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Total assets ................................................................. $ 6,562,764 $ 6,105,029
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable .............................................................. $ 704,943 $ 1,251,854
Accrued expenses and other .................................................... 674,684 452,082
Deferred revenue .............................................................. 1,341,872 347,319
Common stock rights ........................................................... 476,095 73,400
Notes payable ................................................................. 3,080,641 107,520
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Total current liabilities .................................................... 6,278,235 2,232,175

Non-current portion of notes payable ............................................. 91,636 106,705
Common stock warrants ............................................................ 950,064 535,119
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Total liabilities ............................................................ 7,319,935 2,873,999

Commitments and contingencies .................................................... -- --

Stockholders' equity
Series A convertible preferred stock ($.0001 par value, 10,000,000 shares
authorized, 68,038 issued and outstanding at June 30, 2006
and December 31, 2005) ...................................................... 58,672 58,672
Common stock ($.0001 par value, 50,000,000 shares authorized,
27,000,648 and 26,500,648 issued and outstanding at June 30, 2006
and December 31, 2005, respectively) ........................................ 2,700 2,650
Additional paid-in capital .................................................... 50,640,979 49,638,619
Accumulated deficit ........................................................... (51,459,522) (46,468,911)
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Total stockholders' equity ................................................... (757,171) 3,231,030
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Total liabilities and stockholders' equity ................................... $ 6,562,764 $ 6,105,029
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The accompanying notes are an integral part of these financial statements.

SIGA TECHNOLOGIES, INC.

STATEMENTS OF OPERATIONS (UNAUDITED)

Three Months Ended Six Months Ended
June 30, June 30,
2006 2005 2006 2005
------------ ------------ ------------ ------------

Revenues
Research and development ............................................. $ 1,458,865 $ 1,863,995 $ 2,853,319 $ 3,322,560
------------ ------------ ------------ ------------

Operating expenses
Selling, general and administrative (include $91,376 and $183,848
of non-cash share based compensation for the three
and six months ended June 30, 2006, respectively) ............... 1,493,070 811,238 2,434,611 1,655,948
Research and development (include $23,897 and $53,150
of non-cash share based compensation for the three
and six months ended June 30, 2006, respectively) ............... 2,431,497 2,582,752 4,089,167 4,134,391
Patent preparation fees .............................................. 112,911 90,852 222,447 265,890

------------ ------------ ------------ ------------
Total operating expenses ............................................ 4,037,478 3,484,842 6,746,225 6,056,229
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Operating loss ...................................................... (2,578,613) (1,620,847) (3,892,906) (2,733,669)

Decrease (increase) in fair market value of common stock rights
and common stock warrants ............................................ 453,783 -- (1,071,852)
Other income (expense), net ............................................ (32,121) (9,600) (25,853) (4,203)

------------ ------------ ------------ ------------
Net loss ............................................................ $ (2,156,951) $ (1,630,447) $ (4,990,611) $ (2,737,872)
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Weighted average shares outstanding: basic and diluted ................. 26,758,890 24,500,648 26,629,769 24,500,648
============ ============ ============ ============
Net loss per share: basic and diluted .................................. $ (0.08) $ (0.07) $ (0.19) $ (0.11)
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The accompanying notes are an integral part of these financial statements.

SIGA TECHNOLOGIES, INC.

STATEMENT OF CASH FLOWS (UNAUDITED)

Six Months Ended
June 30,
2006 2005
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Cash flows from operating activities:
Net loss ................................................................. $ (4,990,611) $ (2,737,872)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation ........................................................... 277,197 78,793
Amortization of intangible assets ...................................... 548,698 632,864
Increase in fair market value of common stock rights and warrants ...... 1,071,852 --
Stock based compensation ............................................... 236,698 11,700
Non-cash consulting expense ............................................ 216,840 --
Loss on impairment of investments ...................................... -- 15,000
Loss on write-off of prepaid investments ............................... -- 91,083
Changes in assets and liabilities:
Accounts receivable ................................................. 672,810 46,174
Prepaid expenses .................................................... 23,385 83,046
Other assets ........................................................ (12,075) (67,401)
Accrued interest payable ............................................ 37,822 --
Deferred revenue .................................................... 994,553 --
Accounts payable and accrued expenses ............................... (567,159) 860,313
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Net cash used in operating activities ............................... (1,489,990) (986,300)
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Cash flows from investing activities:
Capital expenditures ................................................... (656,776) (613,578)
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Net cash used in investing activities ............................... (656,776) (613,578)
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Cash flows from financing activities:
Proceeds from note payable ............................................. 3,000,000 267,986
Net proceeds from from exercise of common stock rights ................. 511,500 --
Repayment of note payable .............................................. (53,760) --

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Net cash provided by financing activities ........................... 3,457,740 267,986
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Net increase (decrease) in cash and cash equivalents ..................... 1,310,974 (1,331,892)
Cash and cash equivalents at beginning of period ......................... 1,772,489 2,020,938
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Cash and cash equivalents at end of period ............................... $ 3,083,463 $ 689,046
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The accompanying notes are an integral part of these financial statements.

SIGA TECHNOLOGIES, INC.
Notes to the June 30, 2006 Financial Statements (Unaudited)

1. Basis of Presentation

SIGA Technologies, Inc. ("SIGA" or the "Company") is a bio-defense company
engaged in the discovery, development and commercialization of products for use
in defense against biological warfare agents such as Smallpox and Arenaviruses.
The Company is also engaged in the discovery and development of other novel
anti-infectives, vaccines, and antibiotics for the prevention and treatment of
serious infectious diseases. The Company's anti-viral programs are designed to
prevent or limit the replication of viral pathogens. SIGA's anti-infectives
programs are aimed at the increasingly serious problem of drug resistant
bacteria and emerging pathogens.

The financial statements of the Company have been prepared in accordance with
accounting principles generally accepted in the United States of America for
interim financial information and the rules and regulations of the Securities
and Exchange Commission (the "SEC") for quarterly reports on Forms 10-Q and
should be read in conjunction with the Company's audited financial statements
and notes thereto for the year ended December 31, 2005, included in the 2005
Form 10-K. All terms used but not defined elsewhere herein have the meaning
ascribed to them in the Company's 2005 annual report and Form 10-K. In the
opinion of management, all adjustments (consisting of normal and recurring
adjustments) considered necessary for a fair presentation of the results of the
interim periods presented have been included. The results of operations for the
six months ended June 30, 2006 are not necessarily indicative of the results
expected for the full year.

The accompanying financial statements have been prepared on a basis which
assumes that the Company will continue as a going concern and which contemplates
the realization of assets and the satisfaction of liabilities and commitments in
the normal course of business. The Company has incurred cumulative net losses
and expects to incur additional losses to perform further research and
development activities. The Company does not have commercial products and has
limited capital resources. Management's plans with regard to these matters
include continued development of its products as well as seeking additional
research support funds and financial arrangements. Although management continues
to pursue these plans, there is no assurance that the Company will be successful
in obtaining sufficient financing on commercially reasonable terms or that the
Company will be able to secure funding from anticipated government contracts and
grants. Management believes that existing cash combined with anticipated cash
flows will be sufficient to support its operations beyond June 30, 2007, and
that sufficient cash flows will be available to meet the Company's business
objectives during that period. Management has developed a plan to further reduce
the Company's operating expenses in the event that sufficient funds are not
available, or if the Company is not able to obtain the anticipated government
contracts and grants, which would be sufficient to enable the Company to operate
beyond June 30, 2007. If the Company is unable to raise adequate capital or
achieve profitability, future operations will need to be scaled back or
discontinued. Continuance of the Company as a going concern is dependent upon,
among other things, the success of the Company's research and development
programs and the Company's ability to obtain adequate financing. The financial
statements do not include any adjustments relating to the recoverability of the
carrying amount of recorded assets and liabilities that might result from the
outcome of these uncertainties.

2. Significant Accounting Policies

Share-based Compensation

On January 1, 2006, the Company adopted Statement of Financial Accounting
Standards No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123(R)"), which
requires the measurement and recognition of compensation expense for all
share-based payment awards made to employees and directors including employee
stock options and employee stock purchases related to the Employee Stock
Purchase Plan ("employee stock purchases") based on estimated fair values. SFAS
123(R) supersedes the Company's previous accounting under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") for
periods beginning on January 1, 2006. In March 2005, the SEC issued Staff
Accounting Bulletin No. 107 ("SAB 107") relating to SFAS 123(R). The Company has
applied the provisions of SAB 107 in its adoption of SFAS 123(R).

The Company adopted SFAS 123(R) using the modified prospective transition
method, which requires the application of the accounting standard as of January
1, 2006, the first day of the Company's fiscal year 2006. The Company's
Financial Statements as of and for the three and six months ended June 30, 2006
reflect the impact of SFAS 123(R). In accordance with the modified prospective
transition method, the Company's Financial Statements for prior periods have not
been restated to reflect, and do not include, the impact of SFAS 123(R).
Share-based compensation related to stock options expense recognized under SFAS
123(R) for the three and six months ended June 30, 2006 was $115,273 and
$236,698,

respectively. No share-based compensation expense related to employee stock
options was recognized during the three and six months ended June 30, 2005.

SFAS 123(R) requires companies to estimate the fair value of share-based payment
awards on the grant-date using an option-pricing model. The value of the portion
of the award that is ultimately expected to vest is recognized as expense over
the requisite service periods in the Company's Statements of Operations. Prior
to the adoption of SFAS 123(R), the Company accounted for share-based awards to
employees and directors using the intrinsic value method in accordance with APB
25 as allowed under Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). Under the intrinsic
value method, no share-based compensation expense related to stock options had
been recognized in the Company's Statements of Operations when the exercise
price of the Company's stock options granted to employees and directors equaled
the fair market value of the underlying stock at the grant-date.

Share-based compensation expense recognized during the current period is based
on the value of the portion of share-based payment awards that is ultimately
expected to vest. SFAS 123(R) requires forfeitures to be estimated at the time
of grant in order to estimate the amount of share-based awards that will
ultimately vest. The forfeiture rate is based on historical rates. Share-based
compensation expense recognized in the Company's Statements of Operations for
the first quarter of 2006 includes (i) compensation expense for share-based
payment awards granted prior to, but not yet vested as of December 31, 2005,
based on the grant-date fair value estimated in accordance with the pro forma
provisions of SFAS 123 and (ii) compensation expense for the share-based payment
awards granted subsequent to December 31, 2005, based on the grant-date fair
value estimated in accordance with the provisions of SFAS 123(R). The Company
utilizes the Black-Scholes option pricing model for the valuation of share-based
awards.

Share-based compensation expense reduced the Company's results of operations for
the three and six months ended June 30, 2006 by $115,273 and $236,698,
respectively, or $0.00 and 0.01 per share, respectively, and had no impact on
the Company's cash flow.

The following table illustrates the effect on net loss and net loss per share as
if the Company had applied the fair value recognition provisions of SFAS No.
123, as amended by SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosures" ("SFAS 148").

Three months
ended June 30, Six months ended
2005 June 30, 2005
-------------- ----------------

Net loss available to common stockholders, as reported $ (1,630,447) $ (2,737,872)
Add: Stock-based employee compensation expense included
in reported net income -- --
Deduct: Total stock based compensation expense determined
under the fair value based method (240,907) (452,043)
------------ ------------
Net loss available to common stockholders, pro forma $ (1,871,354) $ (3,189,915)
============ ============

Loss per common share - basic and diluted:
As reported $ (0.07) $ (0.11)
Pro forma $ (0.08) $ (0.13)

Use of Estimates

The financial statements and related disclosures are prepared in conformity with
accounting principles generally accepted in the United States of America.
Management is required 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 revenue and expenses
during the period reported. These estimates include the realization of deferred
tax assets, useful lives and impairment of tangible and intangible assets, and
the value of options and warrants granted by the Company. Estimates and
assumptions are reviewed periodically and the effects of revisions are reflected
in the financial statements in the period they are determined to be necessary.
Actual results could differ from these estimates.

Cash and cash equivalents

Cash and cash equivalents consist of short term, highly liquid investments, with
original maturities of less than three months when purchased and are stated at
cost. Interest income is accrued as earned.

Property, Plant and Equipment

Property, plant and equipment are stated at cost less accumulated depreciation.
Depreciation is provided on the straight-line method over the estimated useful
lives of the various asset classes. Estimated lives are 5 years for laboratory
equipment; 3 years for computer equipment; 7 years for furniture and fixtures;
and the shorter of the estimated lives or the life of the lease for leasehold
improvements. Maintenance, repairs and minor replacements are charged to expense
as incurred. Upon retirement or disposal of assets, the cost and related
accumulated depreciation are removed from the Balance Sheet and any gain or loss
is reflected in the Statement of Operations.

Revenue Recognition

The Company recognizes revenue from contract research and development and
research payments in accordance with SEC Staff Accounting Bulletin No. 104,
Revenue Recognition, ("SAB 104"). In accordance with SAB 104, revenue is
recognized when persuasive evidence of an arrangement exists, delivery has
occurred, the fee is fixed or determinable, collectibility is reasonably
assured, contractual obligations have been satisfied and title and risk of loss
have been transferred to the customer. The Company recognizes revenue from
non-refundable up-front payments, not tied to achieving a specific performance
milestone, over the period which the Company is obligated to perform services or
based on the percentage of costs incurred to date, estimated costs to complete
and total expected contract revenue. Payments for development activities are
recognized as revenue as earned, over the period of effort. Substantive at-risk
milestone payments, which are based on achieving a specific performance
milestone, are recognized as revenue when the milestone is achieved and the
related payment is due, providing there is no future service obligation
associated with that milestone. In situations where the Company receives payment
in advance of the performance of services, such amounts are deferred and
recognized as revenue as the related services are performed.

For the three month periods ended June 30, 2006 and 2005, revenues from National
Institutes of Health ("NIH") Small Business Innovation Research ("SBIR") grants
approximated 48% and 95%, respectively, of total revenues recognized by the
Company. For the six month periods ended June 30, 2006 and 2005, revenues from
NIH SBIR grants approximated 50% and 94%, respectively, of total revenues
recognized by the Company.

Accounts Receivable

Accounts receivable are recorded net of provisions for doubtful accounts. An
allowance for doubtful accounts is based on specific analysis of the
receivables. At June 30, 2006 and December 31, 2005 the Company had no allowance
for doubtful accounts.

Research and development

Research and development expenses include costs directly attributable to the
conduct of research and development programs, including employee related costs,
materials, supplies, depreciation on and maintenance of research equipment, the
cost of services provided by outside contractors, and facility costs, such as
rent, utilities, and general support services. All costs associated with
research and development are expensed as incurred. Costs related to the
acquisition of technology rights, for which development work is still in
process, and that have no alternative future uses, are expensed as incurred.

Goodwill

Goodwill is recorded when the purchase price paid for an acquisition exceeds the
estimated fair value of the net identified tangible and intangible assets
acquired.

The Company performs an annual review in the fourth quarter of each year, or
more frequently if indicators of potential impairment exist, to determine if the
carrying value of the recorded goodwill is impaired. Goodwill impairment is
determined using a two-step approach in accordance with Statement of Financial
Accounting Standards No. 142 "Goodwill and Other Intangible Assets" ("SFAS
142"). The impairment review process compares the fair value of the reporting
unit in which goodwill resides to its carrying value.

Intangible Assets

Acquisition-related intangible assets include acquired technology, customer
contracts, grants and covenants not to compete, and are amortized on a straight
line basis over periods ranging from 2 to 4 years.

related asset or group of assets over their remaining lives against their
respective carrying amounts. Impairment, if any, is based on the excess of the
carrying amount over the fair value of those assets. Changes in events or
circumstances that may affect long-lived assets include, but are not limited to,
cancellations or terminations of research contracts or pending government
grants.

Income taxes

Income taxes are accounted for under the asset and liability method prescribed
by Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Deferred income taxes are recorded for temporary differences between
financial statement carrying amounts and the tax basis of assets and
liabilities. Deferred tax assets and liabilities reflect the tax rates expected
to be in effect for the years in which the differences are expected to reverse.
A valuation allowance is provided if it is more likely than not that some or all
of the deferred tax asset will not be realized.

Net income (loss) per common share

The Company computes, presents and discloses earnings per share in accordance
with SFAS 128 "Earnings Per Share" ("EPS") which specifies the computation,
presentation and disclosure requirements for earnings per share of entities with
publicly held common stock or potential common stock. The statement defines two
earnings per share calculations, basic and diluted. The objective of basic EPS
is to measure the performance of an entity over the reporting period by dividing
income (loss) by the weighted average shares outstanding. The objective of
diluted EPS is consistent with that of basic EPS, that is to measure the
performance of an entity over the reporting period, while giving effect to all
dilutive potential common shares that were outstanding during the period. The
calculation of diluted EPS is similar to basic EPS except the denominator is
increased for the conversion of potential common shares.

The Company incurred losses for the three and six months ended June 30, 2006 and
2005, and as a result, certain equity instruments are excluded from the
calculation of diluted loss per share. At June 30, 2006 and 2005, 68,038 shares
of the Company's Series A convertible preferred stock have been excluded from
the computation of diluted loss per share as they are anti-dilutive. At June 30,
2006 and 2005, outstanding options to purchase 8,488,727 and 9,902,061 shares,
respectively, of the Company's common stock with exercise prices ranging from
$0.94 to $5.50 have been excluded from the computation of diluted loss per share
as they are anti-dilutive. At June 30, 2006 and 2005, outstanding warrants to
purchase 9,655,396 and 8,469,594 shares, respectively, of the Company's common
stock, with exercise prices ranging from $1.18 to $3.60 have been excluded from
the computation of diluted loss per share as they are anti-dilutive.

Fair value of financial instruments

The carrying value of cash and cash equivalents, accounts payable and accrued
expenses approximates fair value due to the relatively short maturity of these
instruments.

Concentration of credit risk

The Company has cash in bank accounts that exceed the Federal Deposit Insurance
Corporation insured limits. The Company has not experienced any losses on its
cash accounts. No allowance has been provided for potential credit losses
because management believes that any such losses would be minimal.

Segment information

The Company is managed and operated as one business. The entire business is
managed by a single management team that reports to the Chief Executive Officer.
The Company does not operate separate lines of business or separate business
entities with respect to any of its product candidates. Accordingly, the Company
does not prepare discrete financial information with respect to separate product
areas or by location and only has one reportable segment as defined by SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information".

Recent accounting pronouncements

In July 2006, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes--an
interpretation of FASB Statement No. 109" ("FIN 48"), which clarifies the
accounting for uncertainty in tax positions. This Interpretation requires an
entity to recognize the impact of a tax position in its financial statements if
that position is more likely than not to be sustained on audit based on the
technical merits of the position. The provisions of FIN 48 are effective as of
the beginning of fiscal year 2007, with the cumulative effect of the change in
accounting principle recorded as an adjustment to opening retained earnings.
Early application of FIN 48 is encouraged. The Company is evaluating the timing
of its adoption of FIN 48 and the potential effects of implementing this
Interpretation on its financial condition and results of operations.

3. Intangible Assets

Amortization expense recorded for the six months ended June 30, 2006 and 2005
was as follows:

Six Months Ended June 30,
2006 2005
---------- ----------

Amortization of acquired grants $ 490,674 $ 490,673
Amortization of customer contract and grants 16,714 16,714
Amortization of covenants not to compete -- 84,167
Amortization of acquired technology 41,310 41,310
---------- ----------
$ 548,698 $ 632,864
---------- ----------

4. Stockholders' Equity

At June 30, 2006, the Company's authorized share capital consisted of 60,000,000
shares, of which 50,000,000 are designated common shares and 10,000,000 are
designated preferred shares. The Company's Board of Directors is authorized to
issue preferred shares in series with rights, privileges and qualifications of
each series determined by the Board.

Holders of the Series A Convertible Preferred Stock are entitled to (i)
cumulative dividends at an annual rate of 6% payable when and if declared by the
Company's board of directors; (ii) in the event of liquidation of the Company,
each holder is entitled to receive $1.4375 per share (subject to certain
adjustments) plus all accrued but unpaid dividends; (iii) convert each share of
Series A to a number of fully paid and non-assessable shares of common stock as
calculated by dividing $1.4375 by the Series A Conversion Price (shall initially
be $1.4375); and (iv) vote with the holders of other classes of shares on an
as-converted basis.

In November 2005, the Company sold 2,000,000 shares of the Company's common
stock at $1.00 per share, warrants to purchase 1,000,000 shares of the Company's
common stock with an initial exercise price of $1.18 per share, and rights to
purchase 2,000,000 additional shares of the Company's common stock for an
initial price of $1.10 per share. The warrants are exercisable at any time and
from time to time through and including the seventh anniversary of the sale
closing date and the rights are exercisable for a period of 90 trading days
following the effectiveness of a registration statement. An initial registration
statement relating to the common stock sold and the stock underlying the
warrants became effective on December 2, 2005. A registration statement relating
to the common stock underlying the rights became effective on April 17, 2006. On
May 15, a holder of rights to acquire 500,000 shares of the Company's common
stock exercised its rights and purchased from the Company 500,000 shares of
common stock in exchange for $550,000. On July 10, 2006, another holder of
rights to acquire 500,000 shares of the Company's common stock exercised its
rights in full in exchange for $550,000.

The Company accounted for the transaction under the provisions of EITF 00-19
which requires that free standing derivative financial instruments that require
net cash settlement be classified as assets or liabilities at the time of the
transaction, and recorded at their fair value. EITF 00-19 also requires that any
changes in the fair value of the derivative instruments be reported in earnings
as long as the derivative contracts are classified as assets or liabilities. At
June 30, 2006, the fair value of the outstanding warrants to acquire common
stock and option to acquire additional shares of common stock was $950,065 and
$476,096, respectively. The Company applied the Black-Scholes model to calculate
the fair values of the respective derivative instruments using the contracted
term of the instruments. Management estimates the expected volatility using a
combination of the Company's historical volatility and the volatility of a group
of comparable companies. For the 3 and 6 months ended June 30, 2006, SIGA
recorded a gain of $453,783 and a loss of $1,071,852, respectively, representing
changes in the instruments' fair value.

5. Related Parties

During the three months ended June 30, 2006, the Company incurred no costs and
recorded no revenue in connection with related parties. On June 30, 2006, the
Company's outstanding payables included $38,900 payable to a related party.
Accounts receivable at June 30, 2006 included $46,883 due from a related party.

6. Notes Payable

On March 20, 2006, SIGA entered into a Bridge Note Purchase Agreement ("Note
Purchase Agreement") with PharmAthene, Inc. ("PHTN") for the sale of three 8%
Notes by SIGA, for $1,000,000 each. The first, second and third Notes were
issued on March 20, 2006, April 19, 2006, and June 19, 2006, respectively. The
proceeds of the Notes are used by the Company for (i) expenses directly related
to the development of SIGA's lead product, SIGA-246, (ii) expenses related to
the Company's planned merger with PHTN and (iii) corporate overhead. Pursuant to
a Security Agreement between the Company and PHTN, also entered into on March
20, 2006, the Notes are secured by a first priority security interest in the
Company's assets (other than assets subject to the security interest granted to
General Electric Capital Corporation).

The first, second and third Notes for a principal amount of $1,000,000 each,
will be payable on the earliest of (x) March 20, 2008, April 19, 2008, and June
19, 2008, respectively, (the "Maturity Dates"), (y) the closing of a Qualified
Financing (as defined in the Purchase Agreement) or (z) a Sale Event (as defined
in the Purchase Agreement). In the event of default under the Notes, payment of
the Notes will be accelerated such that the entire unpaid principal amount of
the Notes and all accrued and unpaid interest shall become immediately due and
payable in full.

7. Stock Compensation Plans

In January 1996, the Company implemented its 1996 Incentive and Non-Qualified
Stock Option Plan (the "Plan"). The Plan as amended provides for the granting of
up to 11,000,000 shares of the Company's common stock to employees, consultants
and outside directors of the Company. The exercise period for options granted
under the Plan, except those granted to outside directors, is determined by a
committee of the Board of Directors. Stock options granted to outside directors
pursuant to the Plan must have an exercise price equal to or in excess of the
fair market value of the Company's common stock at the date of grant.

For the three and six months ended June 30, 2006, the Company recorded
compensation expense of approximately $115,273 and $236,698, respectively,
related to stock options. The total fair value of options vested during the
three and six months ended June 30, 2006 was $96,800 and $318,700. The total
compensation cost not yet recognized related to non-vested awards at June 30,
2006 is $279,600. The weighted average period over which total compensation cost
is expected to be recognized is 1.2 years.

The Company did not grant any option awards during the 3 months ended June 30,
2006. SIGA calculated the fair value of options awarded during the first 3
months of 2006 using the Black-Scholes model with the following weighted average
assumptions:

Six months ended
Weighted Average Assumptions June 30, 2006
----------------
Expected volatility 54.35%
Dividend Yield 0.00%
Risk-free interest rate 4.29%
Forfeitures rate 2.50%
Expected holding period 3.00

The Company calculates the expected volatility using a combination of SIGA's
historical volatility and the volatility of a group of comparable companies. The
risk-free interest rate assumption is based upon observed interest rate
appropriate for the term of the Company's employee stock options. The dividend
yield assumption is based on the Company's intent not to issue a dividend in the
foreseeable future. The expected holding period assumption was estimated based
on historical experience.

Stock option activity of the Company during the six months ended June 30, 2006,
is summarized as follows:

Weighted
Average
Number of Exercise
Shares Price ($)

Options outstanding at December 31, 2005 9,399,561 2.00
Granted 122,500 0.94
Forfeited (1,250,000) 1.30
Expired (33,334) 1.50
Exercised -- --
---------- ----------
Options outstanding at June 30, 2006 8,238,727 2.09

Weighted
Average
Number of Intrinsic Value
Shares ($)

Nonvested options at December 31, 2005 1,987,500 --
Nonvested options at June 30, 2006 637,615 0.10
Options vested during 2006 305,766 0.08

Options available for future grant at June 30, 2006 2,546,232
Weighted average fair value of options granted during 2006 $ 0.38
Weighted average fair value of options forfeited during 2006 $ 1.02

The following table summarizes information about options outstanding at June 30,
2006:

Weighted
Number of Average Number Fully
Range of Options Remaining Weighted Vested & Weighted Aggregate
Exercise Outstanding at Contractual Life Average Exercise Exercisable at Average Exercise Intrinsic Value at
Price($) June 30, 2006 (Years) Price ($) June 30, 2006 Price ($) June 30, 2006

1.00 - 1.85 3,063,250 7.45 1.38 2,425,635 1.40 $ 206,700
2.00 - 2.75 4,837,250 4.69 2.38 4,837,250 2.38 --
3.94 - 5.50 338,227 2.66 4.36 338,227 4.36 --
----------- ----------- -----------
8,238,727 7,601,112 $ 206,700
=========== =========== ===========

In February 2003, the Company entered into an agreement with an outside
consultant for its support in obtaining certain government contracts. Under the
terms of the agreement, upon meeting certain criteria, the Company is obligated
to issue 400,000 fully vested warrants with an exercise price of $1.32 and a 3
year term. On June 30, 2006, management recorded a non-cash consulting charge of
$216,840 in connection with its assessment that as of June 30, 2006, it is
probable that the criteria for earning the 400,000 warrants under the agreement
will be met during the third quarter of fiscal 2006.

8. Commitments and Contingencies

As of June 30, 2006, our purchase obligations are not material. The Company
leases certain facilities and office space under operating leases. Minimum
future rental commitments under operating leases having non-cancelable lease
terms in excess of one year and future minimum payments under notes payable are
as follows:

Loans and related
Year ended December 31, Lease obligations interest payable Total commitments

Remainder of 2006 $ 127,700 $ 53,760 $ 181,460
2007 261,800 107,521 369,321
2008 133,200 3,533,760 3,666,960
2009 135,900 -- 135,900
2010 22,700 -- 22,700
------------ ------------ ------------
Total $ 681,300 $ 3,695,041 $ 4,376,341
============ ============ ============

From time to time, the Company is involved in disputes or legal proceedings
arising in the ordinary course of business. The Company believes that there is
no dispute or litigation pending that could have, individually or in the
aggregate, a material adverse effect on its financial position, results of
operations or cash flows.

9. Other Transactions

On June 8, 2006, SIGA and PHTN entered into an Agreement and Plan of Merger (the
"Merger Agreement") pursuant to which SIGA and PHTN have agreed to combine their
businesses through a merger. Subject to the terms of the Merger Agreement,
stockholders of PHTN will receive an aggregate of approximately 68% of the
capital stock of SIGA on a fully diluted basis. In addition, the Chief Executive
Officer of PHTN will serve as President and Chief Executive Officer of the
combined company and the Board of Directors for the new company will reflect the
new proportionate ownership. The Merger Agreement contains representations,
warranties, and covenants of PHTN and SIGA, including, among others, covenants
(i) to conduct their business in the usual and ordinary course between the
signing of and closing under the Merger Agreement, subject to usual and
customary restrictions, and (ii) not to engage in certain kinds of transactions
during such period. In addition, SIGA must seek the approval of its stockholders
for the transactions contemplated by the Merger Agreement, and any and all other
necessary approvals, consents and waivers must be obtained. The Merger Agreement
also provides that SIGA shall, prior to the consummation of the Merger, enter
into one or more agreements related to the sale, immediately following the
Merger, of at least $25 million worth of SIGA equity securities to investors,
including the conversion by PHTN investors of not more than $12.4 million of
bridge loans. Consummation of the Merger is subject to various conditions,
including, among others, conditions relating to (i) requisite approvals of the
PHTN and SIGA stockholders, (ii) receipt of all necessary third party consents;
(iii) the absence of any law or order prohibiting the closing; (iv) the accuracy
of the representations and warranties of the other party, (v) compliance of the
other party with its covenants in all material respects, (vi) the increase in
the number of authorized shares of SIGA common stock to 300,000,000, (vii)
certain stockholders of both SIGA and PHTN entering into "lock-up" agreements
with respect to the shares of SIGA common stock held or to be held by such
stockholders, and (viii) certain stockholders of both SIGA and PHTN entering
into a stockholders agreement with respect to the shares of SIGA common stock
held or to be held by such stockholders.

10. Subsequent Event

On July 19, 2006, the Company received notice from the Nasdaq Stock Market
("NASDAQ") that for the last 10 consecutive trading days, SIGA's market value of
listed securities has been below the $35,000,000 minimum required for continued
inclusion on the Nasdaq Capital Market under Marketplace Rule 4310(c)(2)(B)(ii).
In accordance with Marketplace Rule 4310(c)(8)(C), SIGA will be provided with 30
calendar days, until August 18, 2006, to regain compliance. If, at any time
before August 18, 2006, the market value of listed securities of SIGA is
$35,000,000 or more for a minimum of 10 consecutive business days, NASDAQ will
determine if the Company complies with Marketplace Rule 4310(c)(2)(B)(ii). If
compliance with the rule cannot be demonstrated by August 18, 2006, the staff of
the NASDAQ Stock Market will provide written notification to the Company that
its securities will be delisted. At that time, SIGA may appeal such
determination to a listing qualification panel.

stockholders' equity of $2,500,000 or net income from continuing operations of
$500,000 in the most recently completed fiscal year or in two of the last three
most recent completed fiscal years.

The Company intends to monitor the market value of its listed securities between
now and August 18, 2006, and consider available options if its common stock does
not trade at a level likely to result in SIGA regaining compliance with the
minimum market value requirement.

SIGA TECHNOLOGIES, INC.

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations

The following discussion should be read in conjunction with our financial
statements and notes to those statements and other financial information
appearing elsewhere in this Quarterly Report. In addition to historical
information, the following discussion and other parts of this Quarterly Report
contain forward-looking information that involves risks and uncertainties.

Overview

Since our inception in December 1995, we have been principally engaged in
the research and development of novel products for the prevention and treatment
of serious infectious diseases, including products for use in the defense
against biological warfare agents such as Smallpox and Arenaviruses. The effort
to develop a drug for Smallpox has been aided by SBIR grants from the NIH
totaling approximately $5.8 million that were awarded in the third quarter of
2004, an agreement with Saint Louis University, funded by the NIH that was
signed in September 2005, and a $1.6 million contract with the U.S. Army which
began in January 2003. The Arenavirus program is being supported by SBIR grants
from the NIH totaling approximately $6.3 million that were awarded in the third
quarter of 2004.

Our anti-viral programs are designed to prevent or limit the replication
of the viral pathogen. Our anti-infectives programs are aimed at the
increasingly serious problem of drug resistance. These programs are designed to
block the ability of bacteria to attach to human tissue, the first step in the
infection process. We are also developing a technology for the mucosal delivery
of our vaccines which may allow the vaccines to activate the immune system at
the mucus lined surfaces of the body -- the mouth, the nose, the lungs and the
gastrointestinal and urogenital tracts -- the sites of entry for most infectious
agents.

We do not have commercial biomedical products, and we do not expect to
have such products for one to three years, if at all. We believe that we will
need additional funds to complete the development of our biomedical products.
Our plans with regard to these matters include continued development of our
products as well as seeking additional research support funds and financial
arrangements. Although we continue to pursue these plans, there is no assurance
that we will be successful in obtaining sufficient financing on terms acceptable
to us. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty. Management believes it has sufficient
funds and projected cash flows to support operations beyond June 30, 2007.

Our biotechnology operations are based in our research facility in
Corvallis, Oregon. We continue to seek to fund a major portion of our ongoing
antiviral, antibiotic and vaccine programs through a combination of government
grants and strategic alliances. While we have had success in obtaining strategic
alliances and grants, there is no assurance that we will continue to be
successful in obtaining funds from these sources. Until additional relationships
are established, we expect to continue to incur significant research and
development costs and costs associated with the manufacturing of product for use
in clinical trials and pre-clinical testing. It is expected that general and
administrative costs, including patent and regulatory costs, necessary to
support clinical trials and research and development will continue to be
significant in the future.

To date, we have not marketed, or generated revenues from the commercial
sale of any products. Our biopharmaceutical product candidates are not expected
to be commercially available for several years, if at all. Accordingly, we
expect to incur operating losses for the foreseeable future. There can be no
assurance that we will ever achieve profitable operations.

Critical Accounting Estimates

The methods, estimates and judgments we use in applying our accounting
policies have a significant impact on the results we report in our financial
statements, which we discuss under the heading "Results of Operations" following
this section of our MD&A. Some of our accounting policies require us to make
difficult and subjective judgments, often as a result of the need to make
estimates of matters that are inherently uncertain. Our most critical accounting
estimates include share-based compensation, the assessment of recoverability of
goodwill, which could impact goodwill impairments; and the assessment of
recoverability of long-lived assets, which primarily impacts operating income if
impairment exists. Below, we discuss these policies further, as well as the
estimates and judgments involved. Other key accounting policies, including
revenue recognition, are less subjective and involve a far lower degree of
estimates and judgment.

Significant Accounting Policies

The following is a brief discussion of the more significant accounting
policies and methods used by us in the preparation of our financial statements.
Note 2 of the Notes to the Financial Statements includes a summary of all of the
significant accounting policies.

Share-based Compensation

On January 1, 2006, the Company adopted Statement of Financial Accounting
Standards No. 123 (revised 2004), "Share-Based Payment," ("SFAS 123(R)") which
requires the measurement and recognition of compensation expense for all
share-based payment awards made to employees and directors including employee
stock options and employee stock purchases related to the Employee Stock
Purchase Plan ("employee stock purchases") based on estimated fair values. SFAS
123(R) supersedes the Company's previous accounting under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") for
periods beginning on January 1, 2006. In March 2005, the SEC issued Staff
Accounting Bulletin No. 107 ("SAB 107") relating to SFAS 123(R). The Company has
applied the provisions of SAB 107 in its adoption of SFAS 123(R).

SFAS 123(R) requires companies to estimate the fair value of share-based
payment awards on the grant-date using an option-pricing model. The value of the
portion of the award that is ultimately expected to vest is recognized as
expense over the requisite service periods in the Company's Statements of
Operations. Prior to the adoption of SFAS 123(R), the Company accounted for
share-based awards to employees and directors using the intrinsic value method
in accordance with APB 25 as allowed under Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Under
the intrinsic value method, no share-based compensation expense related to stock
options had been recognized in the Company's Statements of Operations when the
exercise price of the Company's stock options granted to employees and directors
equaled the fair market value of the underlying stock at the grant-date.

Share-based compensation expense recognized during the current period is
based on the value of the portion of share-based payment awards that is
ultimately expected to vest. SFAS 123(R) requires forfeitures to be estimated at
the time of grant in order to estimate the amount of share-based awards that
will ultimately vest. The forfeiture rate is based on historical rates.
Share-based compensation expense recognized in the Company's Statements of
Operations for the six months ended June 30, 2006 includes (i) compensation
expense for share-based payment awards granted prior to, but not yet vested as
of December 31, 2005, based on the grant-date fair value estimated in accordance
with the pro forma provisions of SFAS 123 and (ii) compensation expense for the
share-based payment awards granted subsequent to December 31, 2005, based on the
grant-date fair value estimated in accordance with the provisions of SFAS
123(R). The Company utilizes the Black-Scholes options pricing model for the
valuation of share-based awards. Determining the fair value of these awards at
the grant date requires judgment. It is reasonably likely that forfeiture rates
will change in the future and impact future compensation expense. It is also
reasonably likely that the variables used in the Black Scholes option pricing
model will change in the future and impact the fair value of future options at
the grant date and future compensation expense.

Revenue Recognition

The Company recognizes revenue from contract research and development and
research progress payments in accordance with SEC Staff Accounting Bulletin No.
104, Revenue Recognition, ("SAB 104"). In accordance with SAB 104, revenue is
recognized when persuasive evidence of an arrangement exists, delivery has
occurred, the fee is fixed and determinable, collectibility is reasonably
assured, contractual obligations have been satisfied and title and risk of loss
have been transferred to the customer. The Company recognizes revenue from
non-refundable up-front payments, not tied to achieving a specific performance
milestone, over the period which the Company is obligated to perform services or
based on the percentage of costs incurred to date, estimated costs to complete
and total expected contract revenue. Payments for development activities are
recognized as revenue is earned, over the period of effort. Substantive at-risk
milestone payments, which are based on achieving a specific performance
milestone, are recognized as revenue when the milestone is achieved and the
related payment is due, providing there is no future service obligation
associated with that milestone. In situations where the Company receives payment
in advance of the performance of services, such amounts are deferred and
recognized as revenue as the related services are performed.

Goodwill

Goodwill is recorded when the purchase price paid for an acquisition
exceeds the estimated fair value of the net identified tangible and intangible
assets acquired.

The Company evaluates goodwill for impairment annually, in the fourth
quarter of each year. In addition, the Company would test goodwill for
recoverability between annual evaluations whenever events or changes in
circumstances indicate that the carrying amounts may not be recoverable.
Examples of such events could include a significant adverse change in legal
matters, liquidity or in the business climate, an adverse action or assessment
by a regulator or government organization, loss of key personnel, or new
circumstances that would cause an expectation that it is more likely than not
that we would sell or otherwise dispose of a reporting unit. Goodwill impairment
is determined using a two-step approach in accordance with Statement of
Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets"
("SFAS 142"). The impairment review process compares the fair value of the
reporting unit in which goodwill resides to its carrying value. In 2005, the
Company operated as one business and one reporting unit. Therefore, the goodwill
impairment analysis was performed on the basis of the Company as a whole using
the market capitalization of the Company as an estimate of its fair value. In
the past, our market capitalization has been significantly in excess of the
Company's carrying value. It is reasonably likely that the future market
capitalization of SIGA may exceed or fall short of our current market
capitalization, in which case a different amount for potential impairment would
result. In addition, the use of the discounted expected future cash flows to
evaluate the fair value of the Company as a whole is reasonably likely to
produce different results than the Company's market capitalization.

Intangible Assets

Acquisition-related intangibles include acquired technology, customer
contracts, grants and covenants not to compete, and are amortized on a straight
line basis over periods ranging from 2-4 years.

In accordance with Statement of Financial Accounting Standards No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"),
the Company performs a review of its identified intangible assets to determine
if facts and circumstances exist which indicate that the useful life is shorter
than originally estimated or that the carrying amount of assets may not be
recoverable. If such facts and circumstances do exist, the Company assesses the
recoverability of identified intangible assets by comparing the projected
undiscounted net cash flows associated with the related asset or group of assets
over their remaining lives against their respective carrying amounts.
Impairment, if any, is based on the excess of the carrying amount over the fair
value of those assets. Our estimates of projected cash flows are dependent on
many factors, including general economic trends, technological developments and
projected future contracts and government grants. It is reasonably likely that
that future cash flows associated with our intangible assets may exceed or fall
short of our current projections, in which case a different amount for an
impairment would result. If our actual cash flows exceed our estimates of future
cash flows, any impairment charge would be greater than needed. If our actual
cash flows are less than our estimated cash flows, we may need to recognize
additional impairment charges in future periods, which would be limited to the
carrying amount of the intangible assets.

Recent accounting pronouncements

Results of Operations

Three months ended June 30, 2006 and 2005

Revenues from grants and research and development contracts for the three
months ended June 30, 2006 and 2005 were approximately $1.5 million and $1.9
million, respectively. For the three months ended June 30, 2006 we recorded
$568,000 from NIH SBIR grants supporting two of our lead programs. Revenues from
NIH SBIR grants supporting these programs during the same period in 2005 were
$1.7 million. The decline of $1.1 million was partially offset by $656,000 of
revenues recognized in connection with a $3.2 million, one year contract with
USAMRMC. The agreement, for the rapid identification and treatment of anti-viral
diseases, was entered into on September 22, 2005 and is funded through the USAF
(the "USAF Agreement"). The decline was also offset by $134,000 recorded in
connection with a $500,000, one year, Phase I SBIR grant from the NIH to support
the development of our Bacterial Commensal Vector technology for the delivery of
smallpox vaccine, ending on February 28, 2007.

Selling, general and administrative expenses ("SG&A") were $1.5 million
and $811,000 for the three months ended June 30, 2006 and 2005, respectively.
The increase of $682,000 or 84% in SG&A is mainly due to professional fees
incurred in connection with our potential merger with PHTN and a non-cash
consulting charge recorded on June 30, 2006. During the three months ended June
30, 2006 we recorded legal, accounting and consulting expenses of $373,000,
$102,000 and $82,000, respectively, for due diligence services, fairness opinion
and legal advice related to the potential merger transaction. On June 30, 2006,
we recorded approximately $217,000 of a non-cash consulting charge reflecting
our assessment that certain criteria for the issuance of 400,000 warrants under
a February 2003 consulting agreement, will be met during the third quarter of
fiscal 2006. For the three months ended June 30, 2006, we also recorded $91,000
non-cash charge for share based compensation following the adoption of FAS
123(R) on January 1, 2006. The increases were partially offset by a decline of
$42,000 in investor relations expense, a decline of $112,000 in payroll expense
and a decline of $34,000 in amortization expense.

Research and development expenses ("R&D") declined approximately $151,000
or 5.9% from $2.6 million for the three months ended June 30, 2005 to $2.4
million for the three months ended June 30, 2006. R&D expenditures related to
two of our lead programs declined $760,000 from the same three months period in
2005. The decline was partially offset by an increase of $155,000 in payroll
expenses related to the expansion of the Company's research and development work
force. In addition, on April 1, 2006, we completed the renovation of a new
laboratory space in Corvallis, Oregon. Depreciation expense and lab supplies
expenditures for the three months ended June 30, 2006, increased by $200,000 and
$105,000, respectively, from the same period in 2005.

During the three months ended June 30, 2006, and 2005 we spent
approximately $716,000 and $1.6 million, respectively, on the development of our
lead drug candidate, SIGA-246, an orally administered anti-viral drug that
targets the smallpox virus. For the three months ended June 30, 2006, we spent
approximately $122,000 on internal human resources and $594,000 mainly on human
clinical testing. For the three months ended June 30, 2005, we spent
approximately $154,000 on internal human resources and $1.5 million on
pre-clinical testing of SIGA-246. From inception of the SIGA-246 development
program to-date, we expended a total of $5.4 million related to the program, of
which $1.2 million and $4.2 million were spent on internal human resources, and
clinical and pre-clinical work, respectively.

$220,000 and $474,000 of our R&D expenses during the three months ended
June 30, 2006 and 2005, respectively, were used to support the development of
ST-294, a drug candidate which has demonstrated significant antiviral activity
in cell culture assays against arenavirus pathogens. For the three months ended
June 30, 2006, we spent approximately $174,000 on internal human resources and
$45,000 mainly on pre-clinical testing. For the three months ended June 30,
2005, we spent approximately $209,000 on internal human resources and $264,000
on pre-clinical testing of ST-294. From inception of the ST-294 development
program to-date, we spent a total of $2.4 million related to the program, of
which $1.4 million and $1.1 million were expended on internal human resources
and pre-clinical work, respectively.

R&D expenses related to our USAF Agreement were approximately $219,000 and
$165,000 for internal human resources and external R&D services, respectively,
during the three months ended June 30, 2006. Costs related to our work on the
USAF Agreement, during the term of the agreement to-date were approximately $1.1
million, of which we spent $544,000 and $543,000 on internal human resources and
external R&D services, respectively.

Patent preparation expenses for the three months ended June 30, 2006 and
2005 were $113,000 and $91,000, respectively.

A gain of $454,000 was recorded during the three months ended June 30,
2006, reflecting the decline in fair market value of common stock rights and
common stock warrants sold in November 2005, from March 31, 2006 to June 30,
2006. The warrants and rights to purchase common stock of SIGA were recorded at
fair market value and classified as liabilities at the time of the transaction.

Other expense, net, increased from $9,600 for the three months ended June
30, 2005, to net interest expense of $32,000 mainly due to interest expense
related to the three $1.0 million notes payable to PHTN, recorded for the three
months ended June 30, 2006. Other loss of $9,600 for the three months ended June
30, 2005 comprised of interest income of approximately $5,400 and loss on
impairment of our investment in Pecos' common stock of $15,000.

Our product programs are in the early stage of development. At this stage
of development, we cannot make reasonable estimates of the potential cost for
most of our programs to be completed or the time it will take to complete the
project. Our lead product, SIGA-246, is an orally administered anti-viral drug
that targets the smallpox virus. In December 2005 the FDA accepted our IND
application for SIGA-246 and granted it Fast-Track status. Fast Track programs
of the FDA are designed to facilitate the development and expedite the review of
new drugs that are intended to treat serious or life-threatening conditions and
that demonstrate the potential to address unmet medical needs.

We expect that costs to complete our SIGA-246 program will approximate $15
million to $20 million, and that the project could be completed in 12 months to
36 months. There is a high risk of non-completion of any program, including
SIGA-246, because of the lead time to program completion and uncertainty of the
costs. Net cash inflows from any products developed from our programs are at
least one to three years away. However, we could receive additional grants,
contracts or technology licenses in the short-term. The potential cash and
timing is not known and we cannot be certain if they will ever occur.

The risk of failure to complete any program is high, as each, other than
our smallpox program that entered phase I clinical trials in 2006, is in the
relatively early stage of development. Products for the biological warfare
defense market, such as the SIGA-246 smallpox anti-viral, could generate
revenues in one to three years. We believe the products directed toward this
market are on schedule. We expect the future research and development cost of
our biological warfare defense programs to increase as the potential products
enter animal studies and safety testing, including human safety trials. Funds
for future development will be partially paid for by NIH SBIR grants, the
contract we have with the U.S. Army, additional government funding and from
future financing. If we are unable to obtain additional federal grants and
contracts or funding in the required amounts, the development timeline for these
products will slow or possibly be suspended. Delay or suspension of any of our
programs could have an adverse impact on our ability to raise funds in the
future, enter into collaborations with corporate partners or obtain additional
federal funding from contracts or grants.

Six months ended June 30, 2006 and 2005

Revenues from grants and research and development contracts for the six
months ended June 30, 2006 and 2005 were $2.9 million and $3.3 million,
respectively. Revenues recorded for the six months ended June 30, 2006 declined
approximately $470,000 or 14% from the same period in the prior year. For the
six months ended June 30, 2006 we recorded $1.3 million from NIH SBIR grants and
an agreement with Saint Louis University, supporting two of our lead programs.
Revenues from NIH SBIR grants supporting these programs during the same period
in 2005 were $3.0 million. The decline of $1.7 million was partially offset by
$1.2 million of revenues recognized in connection with our $3.2 million, one
year contract with USAMRMC. The agreement, for the rapid identification and
treatment of anti-viral diseases, was entered into on September 22, 2005 and is
funded through the USAF. The decline was also offset by $159,000 recorded in
connection with a $500,000, one year, Phase I SBIR grant from the NIH to support
the development of our Bacterial Commensal Vector technology for the delivery of
smallpox vaccine, ending on February 28, 2007.

Selling, general and administrative expenses ("SG&A") for the six months
ended June 30, 2006 and 2005 were $2.4 million and $1.7 million, respectively.
The increase of $780,000 or 47% is mainly attributed to professional fees
incurred in connection with of our potential merger with PHTN and a non-cash
consulting charge recorded on June 30, 2006. During the six months ended June
30, 2006 we recorded legal, accounting and consulting expenses of $451,000,
$102,000 and $82,000, respectively, for due diligence services, fairness opinion
and legal advice related to the potential merger transaction. On June 30, 3006,
we recorded approximately $217,000 of a non-cash consulting charge reflecting
our assessment that certain criteria for the issuance of 400,000 warrants under
a February 2003 consulting agreement, will be met during the third quarter of
fiscal 2006. We also recorded $184,000 non-cash charge for share based
compensation following the adoption of FAS 123(R) on January 1, 2006. The
increases were partially offset by a decline of $88,000 in investor relations
expense, a decline of $67,000 in payroll expense and a decline of $84,000 in
amortization expense.

Research and development expenses were $4.1 million for the six months
ended June 30, 2006 and 2005. R&D expenditures related to two of our lead
programs declined $906,000 from the six months period in 2005. The decline was
partially offset by an increase of $341,000 in payroll expenses related to the
expansion of the Company's research and development work force. In addition, on
April 1, 2006, we completed the renovation of a new laboratory space in
Corvallis, Oregon. Depreciation expense, lab supplies expenditures and rent
expense for the six months ended June 30, 2006, increased by $200,000, $146,000,
and $92,000, respectively, from the same period in 2005.

During the six months ended June 30, 2006, and 2005 we spent approximately
$1.1 million and $2.2 million, respectively, on the development of our lead drug
candidate, SIGA-246, an orally administered anti-viral drug that targets the
smallpox virus. For the six months ended June 30, 2006, we spent approximately
$313,000 on internal human resources and $806,000 mainly on human clinical
testing. For the six months ended June 30, 2005, we spent approximately $317,000
on internal human resources and $1.9 million on pre-clinical testing of
SIGA-246. From inception of the SIGA-246 development program to-date, we
expended a total of $5.4 million related to the program, of which $1.2 million
and $4.2 million were spent on internal human resources, and clinical and
pre-clinical work, respectively.

$442,000 and $892,000 of our R&D expenses during the six months ended June
30, 2006 and 2005, respectively, were used to support the development of ST-294,
a drug candidate which has demonstrated significant antiviral activity in cell
culture assays against arenavirus pathogens. For the six months ended June 30,
2006, we spent approximately $346,000 on internal human resources and $96,000
mainly on pre-clinical testing. For the six months ended June 30, 2005, we spent
approximately $421,000 on internal human resources and $471,000 on pre-clinical
testing of ST-294. From inception of the ST-294 development program to-date, we
spent a total of $2.4 million related to the program, of which $1.4 million and
$1.0 million were expended on internal human resources and pre-clinical work,
respectively.

R&D expenses related to our USAF Agreement were approximately $413,000 and
$294,000 for internal human resources and external R&D services, respectively,
during the six months ended June 30, 2006. Costs related to our work on the USAF
Agreement, during the term of the agreement to-date were approximately $1.1
million, of which we spent $544,000 and $543,000 on internal human resources and
external R&D services, respectively.

Patent preparation expenses for the six months ended June 30, 2006 were
$222,000 compared to $265,000 for the six months ended June 30, 2005. During the
six months period in 2005 we incurred higher patent costs in connection with the
Plexus Vaccine Inc. and ViroPharma Incorporated asset acquisitions.

A loss from the increase in fair market value of common stock rights and
common stock warrants was recorded in connection with the sale of common stock,
warrants and rights in November 2005. The warrants and rights to purchase common
stock of SIGA were recorded at fair market value and classified as liabilities
at the time of the transaction. A loss of $1.1 million was recorded by us,
reflecting the increase in the fair value of the warrants and the rights to
acquire additional shares of our common stock, during the period December 31,
2005 to June 30, 2006.

Other loss of $26,000 for the six months ended June 30, 2006 comprised of
interest expense of $50,000 related to our loans payable and interest income of
$24,000. Other loss of $4,200 for the six months ended June 30, 2005 comprised
of interest income of approximately $10,800 and loss on impairment of our
investment in Pecos' common stock of $15,000.

additional federal grants and contracts or funding in the required amounts, the
development timeline for these products would slow or possibly be suspended.
Delay or suspension of any of our programs could have an adverse impact on our
ability to raise funds in the future, enter into collaborations with corporate
partners or obtain additional federal funding from contracts or grants.

Liquidity and Capital Resources

As of June 30, 2006, we had approximately $3.1 million in cash and cash
equivalents. We believe that these funds and our anticipated cash flows,
including receipt of funding from government contracts and grants, will be
sufficient to support our operations beyond June 30, 2007.

On June 8, 2006, SIGA and PHTN entered into an Agreement and Plan of
Merger (the "Merger Agreement") pursuant to which SIGA and PHTN have agreed to
combine their businesses through a merger. Subject to the terms of the Merger
Agreement, stockholders of PHTN will receive an aggregate of approximately 68%
of the capital stock of SIGA on a fully diluted basis. In addition, the Chief
Executive Officer of PHTN will serve as President and Chief Executive Officer of
the combined company and the Board of Directors for the new company will reflect
the new proportionate ownership. The Merger Agreement contains representations,
warranties, and covenants of PHTN and SIGA, including, among others, covenants
(i) to conduct their business in the usual and ordinary course between the
signing of and closing under the Merger Agreement, subject to usual and
customary restrictions, and (ii) not to engage in certain kinds of transactions
during such period. In addition, SIGA must seek the approval of its stockholders
for the transactions contemplated by the Merger Agreement, and any and all other
necessary approvals, consents and waivers must be obtained. The Merger Agreement
also provides that SIGA shall, prior to the consummation of the Merger, enter
into one or more agreements related to the sale, immediately following the
Merger, of at least $25 million worth of SIGA equity securities to investors,
including the conversion by PHTN investors of not more than $12.4 million of
bridge loans. Consummation of the Merger is subject to various conditions,
including, among others, conditions relating to (i) requisite approvals of the
PHTN and SIGA stockholders, (ii) receipt of all necessary third party consents;
(iii) the absence of any law or order prohibiting the closing; (iv) the accuracy
of the representations and warranties of the other party, (v) compliance of the
other party with its covenants in all material respects, (vi) the increase in
the number of authorized shares of SIGA common stock to 300,000,000, (vii)
certain stockholders of both SIGA and PHTN entering into "lock-up" agreements
with respect to the shares of SIGA common stock held or to be held by such
stockholders, and (viii) certain stockholders of both SIGA and PHTN entering
into a stockholders agreement with respect to the shares of SIGA common stock
held or to be held by such stockholders.

On March 20, 2006, in connection with the transaction, we entered into a
Bridge Note Purchase Agreement ("Notes Purchase Agreement") with PHTN for the
sale of three 8% Notes by SIGA, for $1,000,000 each. The first, second and third
Notes were issued on March 20, 2006, April 19, 2006, and June 19, 2006,
respectively. The proceeds of the Notes are used by the Company for (i) expenses
directly related to the development of SIGA's lead product, SIGA-246, (ii)
expenses related to the Company's planned merger with PHTN and (iii) corporate
overhead. Pursuant to a Security Agreement between SIGA and PHTN, also entered
into on March 20, 2006, the Notes are secured by a first priority security
interest in the Company's assets (other than assets subject to the security
interest granted to General Electric Capital Corporation).

We believe that our existing cash combined with anticipated cash flows,
including receipt of future funding from government contracts and grants will be
sufficient to support our operations beyond June 30, 2007, and that sufficient
cash flows will be available to meet our business objectives. We have developed
a plan to further reduce the Company's operating expenses in the event that
sufficient funds are not available, or if we are not able to obtain funding from
the anticipated government contracts and grants, which would be sufficient to
enable us to operate beyond June 30, 2007. If we are unable to raise adequate
capital or achieve profitability, future operations will need to be scaled back
or discontinued.

Operating activities

Net cash used in operations during the six months ended June 30, 2006 was
$1.5 million compared to $1.0 million used during the six months ended June 30,
2005. The increase in cash used in operations is mainly due to professional fees
incurred in connection with of our potential merger with PHTN. During the six
months ended June 30, 2006, cash generated from the collection of outstanding
accounts receivable and receipt of payments from the USAF was approximately $1.6
million higher than during the same period in 2005. This increase was partially
offset by the use of

$567,000 to reduce our accounts payable balance during the six months ended June
30, 2006, as compared with an increase of $860,000 in the accounts payable
balance during the same period in 2005.

Investing activities

Capital expenditures during the six months ended June 30, 2006 and 2005
were approximately $657,000 and 614,000, respectively, and mainly supported the
renovation of our research facility in Oregon.

Financing activities

Cash provided by financing activities was $3.5 million and $268,000 during
the six months ended June 30, 2006 and 2005, respectively. During the six months
ended June 30, 2006 we received $3.0 million from notes payable issued to PHTN,
and $512,000 net proceeds from the exercised of rights to purchase 500,000
shares of our common stock for $1.10 per share. The notes issued to PHTN, for a
principal amount of $1,000,000 each, will be payable on the earliest of (x)
March 20, 2008, April 19, 2008, and June 19, 2008, respectively, (the "Maturity
Dates"), (y) the closing of a Qualified Financing (as defined in the Purchase
Agreement) or (z) a Sale Event (as defined in the Purchase Agreement). In the
event of default under the Notes, payment of the Notes will be accelerated such
that the entire unpaid principal amount of the Notes and all accrued and unpaid
interest shall become immediately due and payable in full. During the six months
ended June 30, 2005 we received $268,000, net, from the issuance of a promissory
note payable to General Electric Capital Corporation. The note is payable in 36
monthly installments of principal and interest of 10.31% per annum.

Other

As of June 30, 2006, we do not expect receipt of up-front and milestone
payments from any of our current collaborative agreements. Payments from current
NIH SBIR grants are received upon recognition of the related revenue. As of June
30, 2006, we have received the entire amount of $3.2 million from the USAF
agreement, of which, $1.3 million was recorded as deferred revenue on June 30,
2006.

In addition, the NASDAQ notice also stated that, based on the Company's
Form 10-Q for the period ending March 31, 2006, SIGA no longer complies with
Marketplace Rule 4310(c)(2)(B)(i) or (4310)(c)(2)(B)(iii), which require minimum
stockholders' equity of $2,500,000 or net income from continuing operations of
$500,000 in the most recently completed fiscal year or in two of the last three
most recent completed fiscal years.

The Company intends to monitor the market value of its listed securities
between now and August 18, 2006, and consider available options if its common
stock does not trade at a level likely to result in SIGA regaining compliance
with the minimum market value requirement.

Off-Balance Sheet Arrangements

SIGA does not have any off-balance sheet arrangements.

Safe Harbor Statement

This report contains certain "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995, as amended,
including statements regarding the efficacy of potential products, the timelines
for bringing such products to market and the availability of funding sources for
continued development of such products. Forward-looking statements are based on
management's estimates, assumptions and projections, and are subject to
uncertainties, many of which are beyond the control of SIGA. Actual results may
differ materially from those anticipated in any forward-looking statement.
Factors that may cause such differences include the risks that (a) potential
products that appear promising to SIGA or its collaborators cannot be shown to
be efficacious or safe in subsequent pre-clinical or clinical trials, (b) SIGA
or its collaborators will not obtain appropriate or necessary governmental
approvals to market these or other potential products, (c) SIGA may not be able
to obtain anticipated funding for its development projects or other needed
funding, (d) SIGA may not be able to secure funding from anticipated government
contracts and grants, (e) SIGA may not be able to secure or enforce adequate
legal protection, including patent protection, for its products and (f)
unanticipated internal control deficiencies or weaknesses or ineffective
disclosure controls and procedures. More detailed information about SIGA and
risk factors that may affect the realization of forward-looking statements,
including the forward-looking statements in this presentation, is set forth in
SIGA's filings with the Securities and Exchange Commission, including SIGA's
Annual Report on Form 10-K for the fiscal year ended December 31, 2005, and in
other documents that SIGA has filed with the Commission. SIGA urges investors
and security holders to read those documents free of charge at the Commission's
Web site at http://www.sec.gov. Interested parties may also obtain those
documents free of charge from SIGA. Forward-looking statements speak only as of
the date they are made, and except for our ongoing obligations under the U.S.
federal securities laws, we undertake no obligation to publicly update any
forward-looking statements whether as a result of new information, future events
or otherwise.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

None

Item 4. Controls and Procedures

(a) Disclosure Controls and Procedures. The Company's management, with the
participation of the Company's Chief Financial Officer, has evaluated the
effectiveness of the Company's disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the
fiscal period covered by this Quarterly Report on Form 10-Q. Based upon such
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that, as of the end of such period, the Company's disclosure controls
and procedures are effective.

(b) Internal Control Over Financial Reporting. There have not been any
changes in the Company's internal control over financial reporting (as such term
is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
fiscal period covered by this Quarterly Report on Form 10-Q that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.

Part II
Other information

Item 1. Legal Proceedings - On or about February 28, 2006, Four Star Group, a
Division of Executive Intelligence Network, LLC filed suit in the
Supreme Court of the State if New York naming as defendants SIGA
Technologies, Inc., Bernard Kasten and "John Odgen [sic]." In 2004,
SIGA renewed a contract with Four Star under which Four Star was to
assist SIGA in identifying and obtaining contracts and grants.
Plaintiff Four Star alleges that SIGA breached its contract by
allegedly failing to compensate Four Star within the time set by the
contract and that SIGA breached the contract, and tortuously interfered
with Four Star's contractual relationships, by allegedly soliciting
and/or hiring certain affiliates of Four Star. Plaintiff asserts that
it has not fully calculated its damages, but states that they are
"believed to be" in excess of approximately $700,000. Plaintiff also
seeks relief preventing defendants from soliciting agents and employees
of plaintiff. SIGA believes the claims are without merit and intends to
contest them vigorously.

Item 1A. Risk Factors - There were no material changes to Risk Factors disclosed
in SIGA's 2005 Form 10-K

Item 2. Unregistered Sale of Equity Securities and Use of Proceeds - None

Item 3. Defaults upon Senior Securities - None

Item 4. Submission of Matters to a Vote of Security Holders - None

Item 5. Other Information - None

Item 6. Exhibits

* 31 Certification of Chief Financial Officer and Acting Chief Executive
Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

* 32 Certification of Chief Financial Officer and Acting Chief Executive
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Filed herein

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.

SIGA Technologies, Inc.
(Registrant)

Date: August 10, 2006 By: /s/ Thomas N. Konatich
----------------------

Thomas N. Konatich

Chief Financial Officer and
Acting Chief Executive Officer