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UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, D.C.
    20549
      Form 10-K
  (Mark One)þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended
    December 31, 2006oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the transition period
    from          to   Commission File Number
    001-33054
 Trubion Pharmaceuticals,
    Inc.
 (Exact name of registrant as
    specified in its charter)
  DELAWARE

52-2385898(State or other jurisdiction
    of
    incorporation or organization)

(IRS Employer
    Identification No.)2401 FOURTH AVENUE,
    SUITE 1050
    SEATTLE, WASHINGTON(Address of
    registrants principal executive offices)

98121(Zip
    Code)   (206) 838-0500
 (Telephone number, including area code)
      Securities registered pursuant to Section 12(b) of the
    Act:
  Title of Each Class

Name of Each Exchange on Which RegisteredCOMMON STOCK, $0.001 PAR
    VALUE

NASDAQ GLOBAL
    MARKET   Securities registered pursuant to Section 12(g) of the
    Act:
 None
  o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. o
  Rule 12b-2
 o o þ
  Rule 12b-2 o þ
    DOCUMENTS
    INCORPORATED BY REFERENCE




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##### 



TRUBION
    PHARMACEUTICALS, INC.
  2006
    Form 10-K
    Annual Report
  
  Table of
    Contents
  Page No.PART IItem 1


Business


2Item 1A


Risk
    Factors


21Item 1B


Unresolved Staff
    Comments


37Item 2


Properties


37Item 3


Legal
    Proceedings


37Item 4


Submission of
    Matters to a Vote of Security Holders


37PART IIItem 5


Market for
    Registrants Common Equity, Related Stockholder Matters and
    Issuer Purchases of Equity Securities


38Item 6


Selected Financial
    Data


41Item 7


Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations


42Item 7A


Quantitative and
    Qualitative Disclosures About Market Risk


50Item 8


Financial
    Statements and Supplementary Data


51Item 9


Changes in and
    Disagreements with Accountants on Accounting and Financial
    Disclosure


51Item 9A


Controls and
    Procedures


51Item 9B


Other
    Information


51PART IIIItem 10


Directors and
    Executive Officers of the Registrant


52Item 11


Executive
    Compensation


52Item 12


Security Ownership
    of Certain Beneficial Owners and Management and Related
    Stockholder Matters


52Item 13


Certain
    Relationships and Related Transactions


52Item 14


Principal
    Accounting Fees and Services


52PART IVItem 15


Exhibits and
    Financial Statement Schedules


53Signatures





55EXHIBIT 10.12EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32




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PART I  Form 10-K Form 10-Q Form 8-K.
  6.271-to-1
  ITEM 1.
    BUSINESS  Overview
  tm
    
    TRU-015 for the Treatment of Rheumatoid
    Arthritis.  According to Datamonitor, rheumatoid
    arthritis, or RA, is estimated to affect approximately
    4.3 million people in the United States, Japan and Europe.
    In 2006, total reported worldwide sales of protein therapeutics
    used for the treatment of RA were greater than $9.5 billion.
    In February 2006, we completed enrollment in a Phase IIa
    study in RA patients designed to demonstrate proof of concept
    that TRU-015 improves disease activity. Clinical disease
    activity parameters such as tender and swollen joint counts,
    patient and physician global assessments, patient 2




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assessment of pain and disability, and laboratory measures of
    inflammation may be combined to form composite measures of
    clinical response derived from the American College of
    Rheumatology that are known as ACR20, ACR50, and ACR70. In these
    measures of clinical response, ACR70 indicates a greater
    response from a baseline measure than ACR20, which is defined as
    an improvement of at least 20% from baseline in counts of both
    tender and swollen joints, as well as in at least three of five
    other disease activity parameters. In the first 24 weeks
    after receiving intravenous infusions of TRU-015, 72% of the
    subjects experienced a clinical response that is equal to or
    greater than that required to achieve an ACR20 response, 28%
    achieved an ACR50 response and 14% achieved an ACR70 response.
    In September 2006, we initiated a Phase IIb clinical trial
    to evaluate the safety and efficacy of a single infusion of
    TRU-015 and we completed enrollment in January 2007.  
    TRU-015 for the Treatment of Systemic Lupus
    Erythematosus.  According to Datamonitor, systemic
    lupus erythematosus, or SLE, is estimated to affect
    236,000 people in the United States. Worldwide, the
    prevalence of SLE varies significantly on a
    country-by-country
    basis. We and Wyeth have not yet begun testing of TRU-015 for
    the treatment of SLE in the clinic, but clinical planning is
    underway. Currently, no protein therapeutics have been approved
    specifically for the treatment of SLE.
    TRU-015 for the Treatment of B-cell
    Malignancies.  In addition to RA and SLE, we and
    Wyeth are also evaluating TRU-015 and other
    SMIPtm
    CD20 product candidates for the treatment of certain B-cell
    malignancies. Clinical planning is ongoing for these product
    candidates.
    TRU-016 for the Treatment of B-cell
    Malignancies.  Our TRU-016 product candidate
    targets CD37 for the treatment of B-cell malignancies such as
    non-Hodgkins lymphoma, or NHL, and chronic lymphocytic
    leukemia, or CLL. According to the American Cancer Society, NHL
    is the fifth most common cancer in the United States and is
    estimated to affect 350,000 people, with approximately
    56,000 new cases diagnosed each year. Also, according to
    Datamonitor, CLL is estimated to affect 70,000 people in
    the United States, with approximately 10,000 new cases diagnosed
    each year. Total reported worldwide sales of
    Rituxan®/Mabthera®,
    the leading biologic for NHL, were approximately
    $3.7 billion in 2006. Subject to satisfactory completion of
    preclinical testing of TRU-016, we expect to file an IND for
    TRU-016 in the second half of 2007. If the results of these
    preclinical tests are unsatisfactory, we will not be able to
    file an IND.  tm tm tm product-by-licensed country-by-country
   3




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SMIP
    Custom Drug Assembly
  tm tm tm tm tm tm
  
    Customizable Biological
    Activity.  SMIPtm
    product candidates can be specifically engineered to provide a
    precise balance of complement dependent cytotoxicity, or CDC,
    and/or
    antibody-dependent cellular cytotoxicity, or ADCC, mediated
    activity. We believe our ability to customize this balance of
    biological activities will result in safer and more effective
    immunopharmaceuticals.
    Customizable
    Half-Life.  SMIPtm
    product candidates can be specifically engineered to have an
    optimal half-life, or the ability to maintain effective
    concentrations in vivo, for a given indication. This should
    permit them to be used in treating both acute and chronic
    disease indications.
    Improved
    Biodistribution.  SMIPtm
    product candidates have a particle size that is approximately
    one-half the size of mAbs. Smaller molecules have been
    demonstrated to penetrate tissues more readily, which we believe
    will provide increased therapeutic benefits.
    Reliable Manufacturing.  We believe that
    SMIPtm
    product candidates can be produced at large scale in mammalian
    cell expression systems from readily available starting
    materials. 4




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##### Table of Contents



SMIP
    Product Candidates: Design and Assembly
  tm tm tm
  
  
    Biological Activity.  Our
    SMIPtm
    product candidates are assembled by first selecting from our
    polypeptide libraries a Hinge Domainand Effector
    Domaindesigned to elicit specific biological activity. For
    example, one desired biological activity may be for the immune
    system to kill the cell on which the target antigen is present.
    We select a unique Hinge Domainand Effector
    Domain combination based on the targeted disease to trigger
    the death of the cell to which the
    SMIPtm
    product candidate is bound. This can be through the initiation
    of the complement cascade causing CDC, by recruiting other
    immune cells to kill the cell through ADCC, or by using an
    engineered balance of both activities. In addition, the
    combination of Hinge Domainand Effector Domainmay be engineered to generate cellular signals through the
    antigen target leading to, for example, the death of the cell
    through apoptosis or programmed cell death.
    Binding Activity.  The next step is to pair a
    selected Hinge Domainand Effector Domainwith an
    appropriate Binding Domainfrom our polypeptide
    libraries. The Binding Domainrecognizes and attaches to
    a specific antigen target, which results in initiation of the
    desired biological activity. Examples of target antigens include
    cell surface receptors on target cells such as B cells. The
    Binding Domain may be composed of any polypeptide that
    specifically recognizes and binds to the target antigen.
    Examples of binding domains include polypeptide ligands such as
    hormones, cytokines, chemokines or cell surface or soluble
    receptors for such polypeptide ligands as well as binding
    domains derived from immunogloulin molecules such as single
    chain Fv polypeptides.  Limitations
    of Other Immunopharmaceuticals
   5




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Our
    Product Candidates
      Product Candidate

Disease Indication

Development Stage

PartnerTRU-015

Rheumatoid Arthritis

 Phase IIb
    enrollment completed

WyethTRU-015

Systemic Lupus Erythematosus

 Preclinical
    development

WyethTRU-015

B-Cell Malignancies

 Preclinical
    development

WyethTRU-016

B-Cell Malignancies

 Preclinical
    development; IND expected to be filed in the 2nd half of
    2007

None   TRU-015
    Rheumatoid
    Arthritis
  Background.
  Potential Market.
 6




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Current Treatments. ® ® ® ® ® ®
  TRU-015 Clinical Trial Results.
      
 7




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FDA Approved CD20-Directed Therapies in
    RA. ® ® ® ® ®
  TRU-015 Planned Clinical Development. 24-week
  Systemic
    Lupus Erythematosus
  Background.
   8




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Potential Market.
  Current Treatment. and/or
  B-Cell
    Malignancies: Non-Hodgkins Lymphoma and Chronic
    Lymphocytic Leukemia
  Background.
  Potential Market. ® ® ® ®
  Current Treatments. ® ® ® ® ® ® ®
  Commercialization
    Rights
    TRU-016
   9




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B-Cell
    Malignancies: Non-Hodgkins Lymphoma and Chronic
    Lymphocytic Leukemia
  tm tm tm ®
  
  Background.
  Planned Clinical Development.
  Other
    Product Candidates
    Our
    Strategic Collaboration with Wyeth
  tm
 10




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tm product-by-licensed country-by-country
           11




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Our
    Business Strategy
  tm
  
    Customize our
    SMIPtm
    Product Candidates to Improve upon Currently Marketed and
    Development Stage Therapeutics in Large Market
    Indications.  We currently develop product
    candidates that act against biologic targets that have been
    clinically validated either by existing products or by potential
    products in late-stage clinical trials. Because we are able to
    customize our
    SMIPtm
    product candidates for specific binding, biological activity,
    and in vivo half-life, and as a result of their smaller size, we
    believe we can improve upon currently marketed and development
    stage therapeutics.
    Selectively Partner our
    SMIPtm
    Product Candidates.  We intend to selectively
    partner the development and commercialization of
    SMIPtm
    product candidates that require a significant capital investment
    or specialized expertise. For example, we believe that our
    collaboration with Wyeth will accelerate the clinical
    development of TRU-015 across multiple autoimmune diseases and
    cancer types, as well as the development of other product
    candidates directed to targets included within our collaboration.
    Further Develop our own Pipeline of
    SMIPtm
    Product Candidates.  We intend to internally
    develop product candidates from our pipeline that fit within our
    therapeutic areas of expertise and which we believe we can
    develop and commercialize successfully on our own.
    Maintain and Expand our Proprietary Technology and
    Intellectual Property Position.  In the United
    States, we have one issued patent and 24 pending patent
    applications. In addition, we have one issued 12




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foreign patent and 79 pending foreign patent applications. Our
    pending patent applications surround certain composition of
    matter and selected methods of use for this novel class of
    compounds.  Competition
    
    design and develop products that are superior to other products
    in the market;
    attract and retain qualified scientific, product development and
    commercial personnel;
    obtain patent
    and/or other
    proprietary protection for our product candidates and
    technologies;
    obtain required regulatory approvals; and
    successfully collaborate with pharmaceutical companies in the
    design, development and commercialization of new products.    tm and/or
    TRU-015 Product Candidate. ® ® ® ® ® tm ® tm
 13




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TRU-016 Product Candidate. ® ® ® ® ® tm
  Intellectual
    Property
    tm
    tm
 14




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and/or
   15




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No. EP-B-1176981,
    Manufacturing
   16




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Government
    Regulation
    United
    States Government Regulation
    NDA
    and BLA Approval Process
      
    completion of preclinical laboratory tests, animal studies and
    formulation studies under the FDAs good laboratory
    practices regulations;
    submission to the FDA of an IND for human clinical testing,
    which must become effective before human clinical trials may
    begin;
    performance of adequate and well-controlled clinical trials to
    establish the safety and efficacy of the product for each
    indication; 17




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
    submission to the FDA of an NDA or BLA;
    satisfactory completion of an FDA inspection of the
    manufacturing facility or facilities at which the product is
    produced to assess compliance with cGMP; and
    FDA review and approval of the NDA or BLA.          
    evaluate dosage tolerance and appropriate dosage;
    identify possible adverse effects and safety risks; and
    evaluate preliminarily the efficacy of the drug for specific
    indications.       18




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Priority
    Review
      Post-Approval
    Requirements
        Foreign
    Regulation
   19




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Reimbursement
          Employees
    Available
    Information
  www.trubion.com.
 20




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ITEM 1A.
    RISK
    FACTORS  Form 10-K.
  Risks
    Related to our Business
  Our
    success is dependent on the success of our lead product
    candidate, TRU-015, and we cannot be certain that it will
    receive regulatory approval or be successfully
    commercialized.
    We are
    a biopharmaceutical company with a limited operating history,
    have not generated revenue from product sales and face many
    risks inherent in our business. If we do not overcome these
    risks, our business will not succeed.
  tm
  
    obtain sufficient capital to support our efforts to develop our
    technology and create a pipeline of product candidates; and
    complete and continue to enhance the characteristics and
    development of our product candidates. 21




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We
    have incurred operating losses in each year since our inception
    and expect to continue to incur substantial and increasing
    losses for the foreseeable future.
    There
    is no assurance that we will be granted regulatory approval for
    any of our product candidates.
    We are
    dependent upon our collaborative relationship with Wyeth to
    develop, manufacture and commercialize our lead product
    candidate, TRU-015, and other selected product
    candidates.
  tm tm
 22




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target-by-target
    Our
    relationship with Wyeth may have a negative effect on our
    ability to enter into relationships with third
    parties.
  tm
  Any
    failure or delay in commencing or completing clinical trials for
    product candidates could severely harm our
    business.
    
    our or our collaborators ability to obtain regulatory
    approval to commence a clinical trial;
    our or our collaborators ability to manufacture or obtain
    from third parties materials sufficient for use in preclinical
    studies and clinical trials;
    delays in patient enrollment and variability in the number and
    types of patients available for clinical trials;
    poor effectiveness of product candidates during clinical trials;
    unforeseen safety issues or side effects; 23




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
    governmental or regulatory delays and changes in regulatory
    requirements, policy and guidelines; and
    varying interpretation of data by the FDA and similar foreign
    regulatory agencies.    We
    rely on third parties to conduct our clinical trials. If these
    third parties do not perform as contractually required or
    otherwise expected, we may not be able to obtain regulatory
    approval for or commercialize our product
    candidates.
    Even
    if our product candidates receive regulatory approval, they
    could be subject to restrictions or withdrawal from the market
    and we may be subject to penalties if we fail to comply with
    regulatory requirements or if we experience unanticipated
    problems with our products.
    
    restrictions on the products or manufacturing processes;
    withdrawal of the products from the market;
    voluntary or mandatory recalls;
    fines;
    suspension of regulatory approvals;
    product seizures; or
    injunctions or the imposition of civil or criminal penalties.   24




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Failure
    to obtain regulatory approval in foreign jurisdictions would
    prevent us from marketing our products
    internationally.
  non-U.S. jurisdictions,
  Our
    product candidates may never achieve market acceptance even if
    we obtain regulatory approvals.
    
    our ability to provide acceptable evidence of safety and
    efficacy;
    the prevalence and severity of adverse side effects;
    availability, relative cost and relative efficacy of alternative
    and competing treatments;
    the effectiveness of our marketing and distribution strategy;
    publicity concerning our products or competing products and
    treatments; and
    our ability to obtain sufficient third-party insurance coverage
    or reimbursement.    If we
    are unable to obtain, maintain and enforce our proprietary
    rights, we may not be able to compete effectively or operate
    profitably.
    
    obtain patent and other proprietary protection for our
    technology, processes and product candidates;
    defend patents once issued;
    preserve trade secrets; and
    operate without infringing the patents and proprietary rights of
    third parties. 25




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
    we might not have been the first to make the inventions covered
    by any of our patents, if issued, or our pending patent
    applications;
    we might not have been the first to file patent applications for
    these inventions;
    others may independently develop similar or alternative
    technologies or duplicate any of our technologies;
    it is possible that none of our pending patent applications will
    result in issued patents or, if issued, these patents may not be
    sufficient to protect our technology or provide us with a basis
    for commercially-viable products and may not provide us with any
    competitive advantages;
    if our pending applications issue as patents, they may be
    challenged by third parties as not infringed, invalid or
    unenforceable under U.S. or foreign laws;
    if issued, the patents under which we hold rights may not be
    valid or enforceable; or
    we may develop additional proprietary technologies that are not
    patentable and which may not be adequately protected through
    trade secrets, if for example a competitor were to independently
    develop duplicative, similar or alternative technologies.       26




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If our
    SMIPtm technology or our product candidates, including TRU-015,
    conflict with the rights of others, we may not be able to
    manufacture or market our product candidates, which could have a
    material and adverse effect on us and on our collaboration
    agreement with Wyeth.
  No. EP-B-1176981,
      tm
 27




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We may
    incur substantial costs as a result of litigation or other
    proceedings relating to patent and other intellectual property
    rights.
    If any
    products we develop become subject to unfavorable pricing
    regulations, third-party reimbursement practices or healthcare
    reform initiatives, our business could be harmed.
    We
    face potential product liability exposure, and if successful
    claims are brought against us, we may incur substantial
    liability for a product candidate and may have to limit its
    commercialization.
   28




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
    decreased demand for our product candidates;
    impairment of our business reputation;
    withdrawal of clinical trial participants;
    costs of related litigation;
    substantial monetary awards to patients or other claimants;
    loss of revenues; and
    the inability to commercialize our product candidates.    We
    currently rely on third-party manufacturers to supply our
    product candidates, which could delay or prevent the clinical
    development and commercialization of our product
    candidates.
    scale-up
   29




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We
    face substantial competition, which may result in others
    discovering, developing or commercializing products before, or
    more successfully, than we do.
    TRU-015 Product Candidate. ® ® ® ® ® tm ® tm
  TRU-016 Product Candidate. ® ® ® ® ® tm
    
    design and develop products that are superior to other products
    in the market;
    attract qualified scientific, medical, sales and marketing and
    commercial personnel;
    obtain patent
    and/or other
    proprietary protection for our processes and product candidates;
    obtain required regulatory approvals; and
    successfully collaborate with others in the design, development
    and commercialization of new products.   30




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If we
    are unable to establish a sales and marketing infrastructure or
    enter into collaborations with partners to perform these
    functions, we will not be able to commercialize our product
    candidates.
    
    our inability to recruit and retain adequate numbers of
    effective sales and marketing personnel;
    the inability of sales personnel to obtain access to or persuade
    adequate numbers of physicians to prescribe our products;
    the lack of complementary products to be offered by sales
    personnel, which may put us at a competitive disadvantage
    relative to companies with more extensive product lines; and
    unforeseen costs and expenses associated with creating a sales
    and marketing organization.    The
    loss of members of our management team could substantially
    disrupt our business operations.
    We
    rely on highly skilled personnel, and if we are unable to retain
    or motivate key personnel or hire qualified personnel, we may
    not be able to maintain our operations or grow
    effectively.
   31




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If we
    use biological and hazardous materials in a manner that causes
    contamination or injury or violates laws, we may be liable for
    damages.
    Our
    management and auditors have identified a material weakness in
    our internal controls that, if not properly remediated, could
    result in material misstatements in our financial statements and
    the inability of our management to provide its report on the
    effectiveness of our internal controls as required by the
    Sarbanes-Oxley Act of 2002 for the year ending December 31,
    2007, either of which could cause investors to lose confidence
    in our reported financial information and have a negative effect
    on the trading price of our stock.
        
    strengthened our internal staffing and technical expertise in
    financial and SEC accounting and reporting;
    improved the segregation of duties within our accounting and
    finance department;
    upgraded our accounting software systems; and
    engaged an outside compliance consulting firm to advise us on
    improving our internal controls to take advantage of best
    practices.   32




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If we
    fail to obtain the capital necessary to fund our operations, we
    may be unable to develop our product candidates and we could be
    forced to share our rights to these product candidates with
    third parties on terms that may not be favorable to
    us.
      Risks
    Related to Our Common Stock
  The
    trading price of our common stock may be volatile.
    
    quarterly variations in our results of operations or those of
    our collaborators or competitors; 33




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
    our ability to develop and market new and enhanced product
    candidates on a timely basis;
    announcements by us or our collaborators or competitors of new
    commercial products, clinical progress or the lack thereof,
    significant contracts, commercial relationships or capital
    commitments;
    commencement of, or our involvement in, litigation;
    changes in governmental regulations or in the status of our
    regulatory approvals;
    changes in earnings estimates or recommendations by securities
    analysts;
    any major change in our board or management;
    general economic conditions and slow or negative growth of our
    markets; and
    political instability, natural disasters, war
    and/or
    events of terrorism.    If
    securities analysts do not publish research or reports about our
    business, or if they downgrade our stock, the price of our stock
    could decline.
    Future
    sales of shares by existing stockholders could cause our stock
    price to decline.
  180-day lock-up 180-day lock-up lock-up
  lock-up lock-up
 34




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The
    concentration of our capital stock ownership with insiders will
    likely limit your ability to influence corporate
    matters.
    Anti-takeover
    provisions in our charter documents and under Delaware law could
    make an acquisition of us, which may be beneficial to our
    stockholders, more difficult and may prevent attempts by our
    stockholders to replace or remove our current
    management.
    Special
    Note Regarding Forward-Looking Statements
    
    the therapeutic and commercial potential of TRU-015 and other
    SMIPtm
    drug candidates;
    the effectiveness of our custom drug assembly technology;
    the ability of
    SMIPtm
    product candidates to be produced at large scale in mammalian
    cell expression systems from readily available starting
    materials;
    the benefits from our collaboration with Wyeth on our clinical
    development of TRU-015;
    future clinical development programs and the timing thereof;
    future clinical development plans;
    the details of the clinical trials and the timing thereof;
    the anticipated future size of the RA and SLE markets;
    the timing of regulatory applications and action;
    payments and reimbursements we expect to receive;
    intellectual property rights and defenses to patent infringement
    claims;
    the impact of SFAS 123R on our statement of operations;
    the adequacy of our current facilities to meet our near-term
    needs;
    future capital needs and expenditures; and
    the future impact of a sudden change in market interest rates on
    our operating results and cash flows. 35




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Executive
    Officers and Key Employees
    Name

Age

Position(s)Executive Officers:Peter A. Thompson, M.D., FACP


47


President, Chief Executive Officer
    and Chairman of the Board of DirectorsMichelle G. Burris


41


Senior Vice President and Chief
    Financial OfficerKey Employees:Daniel J. Burge, M.D.


45


Senior Vice President and Chief
    Medical OfficerLeander F.
    Lauffer, Ph.D.


53


Senior Vice President of Business
    Development & Corporate StrategyJeffrey A.
    Ledbetter, Ph.D.


56


Chief Scientific OfficerKendall M. Mohler, Ph.D.


51


Senior Vice President of
    Research & DevelopmentJudith A. Woods, Ph.D.


54


Senior Vice President of Legal
    Affairs and Chief Patent Counsel   Peter A. Thompson, M.D.
  Michelle G. Burris
  Daniel J. Burge, M.D.
  Leander F. Lauffer, Ph.D.
  Jeffrey A. Ledbetter, Ph.D.
  Kendall M. Mohler, Ph.D.
 36




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Judith A. Woods, Ph.D.
  ITEM 1B.
    UNRESOLVED
    STAFF COMMENTS    ITEM 2.
    PROPERTIES    ITEM 3.
    LEGAL
    PROCEEDINGS    ITEM 4.
    SUBMISSION
    OF MATTERS TO A VOTE OF SECURITY HOLDERS    1-for-6.271
         37




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##### Table of Contents



PART II  ITEM 5.
    MARKET
    FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
    AND ISSUER PURCHASES OF EQUITY SECURITIES  Market
    Information for Common Stock
      High


LowYear ended December 31,
    2006October 18, 2006 
    December 31, 2006

$
20.50


$
13.09   Stockholders
    Dividend
    Policy
   38




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##### Table of Contents



Stock
    Performance Graph
      
  10/18/2006


10/31/2006


11/30/2006


12/29/2006Trubion Pharmaceuticals, Inc.


$
100.00



$
106.95



$
146.83



$
137.59Nasdaq Stock Market Index


$
100.00



$
102.09



$
114.71



$
87.97Nasdaq Biotechnology Index


$
100.00



$
101.52



$
102.45



$
99.47   Recent
    Sales of Unregistered Securities
    and/or
 39




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##### Table of Contents



Use of
    Proceeds
  Form S-1, No. 333-134709),
  Form 10-K.
 40




---



##### Table of Contents



ITEM 6.
    SELECTED
    FINANCIAL DATA    Year Ended December 31,2006


2005


2004


2003


2002(In thousands, except share and per share data)Statements of Operations
    Data:Revenue:Collaboration revenue

$
36,530


$
222


$



$



$
Grant revenue






127



294







Total revenue


36,530



349



294







Operating expenses:Research and development


33,309



15,212



11,640



3,403



278General and administrative


9,473



4,146



2,851



2,294



563Total operating expenses


42,782



19,358



14,491



5,697



841Loss from operations


(6,252
)


(19,009
)


(14,197
)


(5,697
)


(841
)Net interest income (expense)


2,222



278



(16
)


116



(1
)Other income (expense)


101



(134
)










Loss before cumulative effect of
    change in accounting principle


(3,929
)


(18,865
)


(14,213
)


(5,581
)


(842
)Cumulative effect of change in
    accounting principle






(62
)










Net loss

$
(3,929
)

$
(18,927
)

$
(14,213
)

$
(5,581
)

$
(842
)Basic and diluted net loss per
    share

$
(0.83
)

$
(23.30
)

$
(22.47
)

$
(11.39
)

$
(1.15
)Shares used in computation of
    basic and diluted net loss per share


4,744



812



633



490



729   At December 31,2006


2005


2004


2003


2002(In thousands)Balance Sheet Data:Cash, cash equivalents and
    investments

$
105,801


$
9,792


$
13,944


$
7,105


$
13,420Receivable from collaboration


4,354



40,000











Deferred revenue


31,778



39,778











Working capital


93,188



37,881



11,503



6,188



12,713Total assets


121,394



54,009



17,738



11,369



13,435Non-current portion of notes
    payable


6,708



1,276



1,198



1,210



Preferred stock warrant liability






282











Convertible preferred stock






45,753



33,809



13,740



13,705Total stockholders equity
    (deficit)


72,654



(37,902
)


(20,962
)


(6,538
)


(992
)  41




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##### Table of Contents



ITEM 7.
    MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
    OPERATIONS  The following discussion and analysis should be read in
    conjunction with our audited financial statements and notes
    thereto that appear elsewhere in this annual report. This
    discussion contains forward-looking statements reflecting our
    current expectations that involve risks and uncertainties.
    Actual results may differ materially from those discussed in
    these forward-looking statements due to a number of factors,
    including those set forth in the section entitled Risk
    Factors and elsewhere in this annual report.
  Overview
  tm TRU-015.
    tm tm product-by-licensed country-by-country
   42




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##### Table of Contents



B-cell
      Critical
    Accounting Policies and Significant Judgments and
    Estimates
    10-K.
 43




---



##### Table of Contents



Revenue
    Recognition
      Up-Front Fees and License
    Fees:
  Collaborative Research Funding:
  Milestones:
  Royalties:
  Preclinical
    Study and Clinical Trial Accruals
    
    fees paid to contract research organizations in connection with
    preclinical studies; 44




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##### Table of Contents




    fees paid to contract research organizations and other clinical
    sites in connection with clinical trials; and
    fees paid to contract manufacturers in connection with the
    production of components and drug materials for preclinical
    studies and clinical trials.    Stock-Based
    Compensation
  Share-Based
    Payment Accounting for Certain Transactions Involving
    Stock Compensation, an interpretation of APB 25 Accounting for Stock-Based
    Compensation, Accounting for
    Stock-Based Compensation  Transition and
    Disclosure.
    Accounting for Stock-Based
    Compensation  Transition and Disclosure, and Emerging
    Issues Task Force
    No. 96-18,
    Accounting for Equity Instruments That Are Issued to Other Than
    Employees for Acquiring, or in Conjunction with Selling, Goods
    or Services
 45




---



##### Table of Contents



Accounting for Stock Appreciation
    Rights and Other Variable Stock Option or Award Plans.
  Results
    of Operations for the Years Ended December 31, 2006, 2005
    and 2004
  Revenue.
    Research
    and Development Expenses.
  TRU-015,
   46




---



##### Table of Contents



(in thousands)
  Year Ended December 31,2006


2005


2004Research and preclinical programs

$
14,856


$
7,787


$
8,757Clinical development programs


18,453



7,425



2,883Total research and development

$
33,309


$
15,212


$
11,640       tm tm
  General
    and Administrative Expenses.
   47




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##### Table of Contents



Net
    Interest Income (Expense).
    Income
    Taxes
      Liquidity
    and Capital Resources
      Operating Activities:
 48




---



##### Table of Contents



Investing Activities:
  Financing Activities:
        
    expenditures related to continued preclinical and clinical
    development of our product candidates during this period will be
    within budgeted levels;
    unexpected costs related to the development of our manufacturing
    capability will not be material; and
    the hiring of a number of new employees at salary levels
    consistent with our estimates to support our continued growth
    during this period.    
    milestone payments projected to be received under the Wyeth
    collaboration agreement;
    the hiring of a number of new employees at salary levels
    consistent with our estimates to support our continued growth
    during this period; 49




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##### Table of Contents




    the scope, rate of progress, results and costs of our
    preclinical testing, clinical trials and other research and
    development activities;
    the terms and timing of any additional collaborative or
    licensing agreements that we may establish;
    the cost, timing and outcomes of regulatory approvals;
    the number and characteristics of product candidates that we
    pursue;
    the cost of establishing clinical and commercial supplies of our
    product candidates;
    the cost of preparing, filing, prosecuting, defending and
    enforcing any patent claims and other intellectual property
    rights; and
    the extent to which we acquire or invest in businesses, products
    or technologies, although we currently have no commitments or
    agreements relating to any of these types of transactions.      Payments Due by PeriodContractual Obligations

Total


1 Year


2-3 Years


4-5 Years


ThereafterNotes payable (including interest)

$
9,349


$
1,255


$
3,730


$
3,174


$
1,190Operating lease obligations


8,898



1,405



2,810



2,810



1,873Manufacturing obligations


1,100



1,100











Total

$
19,347


$
3,760


$
6,540


$
5,984


$
3,063   Off-Balance
    Sheet Arrangements
    ITEM 7A.
    QUANTITATIVE
    AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK     50




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##### Table of Contents



ITEM 8.
    FINANCIAL
    STATEMENTS AND SUPPLEMENTARY DATA    ITEM 9.
    CHANGES
    IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
    FINANCIAL DISCLOSURE    ITEM 9A.
    CONTROLS
    AND PROCEDURES              ITEM 9B.
    OTHER
    INFORMATION   51




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##### Table of Contents



PART III  ITEM 10.
    DIRECTORS,
    EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE      ITEM 11.
    EXECUTIVE
    COMPENSATION    ITEM 12.
    SECURITY
    OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
    RELATED STOCKHOLDER MATTERS    ITEM 13.
    CERTAIN
    RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
    INDEPENDENCE    ITEM 14.
    PRINCIPAL
    ACCOUNTING FEES AND SERVICES   52




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##### Table of Contents



PART IV  ITEM 15.
    EXHIBITS
    AND FINANCIAL STATEMENT SCHEDULES  (a) 1. Financial
    Statements and Report of Independent Auditor
    Page No.Report of
    Independent Registered Public Accounting Firm


F-1Balance
    Sheets


F-2Statements of
    Operations


F-3Statement of
    Convertible Preferred Stock and Stockholders
    Equity


F-4Statement of Cash
    Flows


F-7Notes to Financial
    Statements


F-8   (a) 2. Financial
    Statement Schedules
    (a) 3. Exhibits
  ExhibitNumber

Description3
.1(1)

Amended and Restated Certificate
    of Incorporation.3
.2(1)

Amended and Restated Bylaws of the
    registrant.4
.1(2)

Form of registrants common
    stock certificate.4
.2(1)

Amended and Restated Investor
    Rights Agreement, dated July 13, 2004.4
.3(1)

Amendment No. 1 to Amended
    and Restated Investor Rights Agreement, dated December 19,
    2005.10
.1(1)+

Form of Indemnification Agreement
    to be entered into between the registrant and its directors and
    officers.10
.2(1)+

2002 Stock Plan.10
.3(1)+

Form of Stock Option Agreement
    under the 2002 Stock Plan.10
.4(1)+

2002 Equity Incentive Plan.10
.5(1)+

Form of Stock Option Agreement
    under the 2002 Equity Incentive Plan.10
.6(2)+

2006 Equity Incentive Plan.10
.7(2)+

Form of Stock Option Agreement
    under the 2006 Equity Incentive Plan.10
.8(1)

Lease Agreement between the
    registrant and Selig Real Estate Holdings Eight, dated
    April 28, 2003.10
.9(1)

Amendment to Lease Agreement
    between the registrant and Selig Real Estate Holdings Eight,
    dated December 8, 2004.10
.10(1)

Amendment to Lease Agreement
    between the registrant and Selig Real Estate Holdings Eight,
    dated February 1, 2006.10
.11(3)

Collaboration and License
    Agreement between the registrant and Wyeth, acting through Wyeth
    Pharmaceuticals Division, dated December 19, 2005.10
.12*

Amendment No. 1 to the
    Collaboration and License Agreement between the registrant and
    Wyeth, acting through Wyeth Pharmaceuticals Division, dated
    November 30, 2006.10
.13(1)

Common Stock Purchase Agreement
    between the registrant and Wyeth, dated December 19, 2005.10
.14(1)+

Amended and Restated Employment
    Agreement between the registrant and
    Peter A. Thompson, M.D., dated March 29,
    2006. 53




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##### Table of Contents



ExhibitNumber

Description10
.15(1)+

Offer Letter with Michelle Burris,
    dated January 20, 2006.10
.16(1)

Consulting Agreement with Lee R.
    Brettman, M.D., dated January 1, 2003.10
.17(1)

Restricted Stock Purchase
    Agreement with Lee R. Brettman, M.D., dated
    January 28, 2004.10
.18(1)

Letter from Oxford Finance
    Corporation, dated April 2, 2003.10
.19(1)

Letter from Oxford Finance
    Corporation, dated November 3, 2004.10
.20(1)

Master Security Agreement with
    Oxford Finance Corporation, dated June 18, 2003.10
.21(1)

Form of Oxford Finance Corporation
    Promissory Note.10
.22(1)

Technology and Investment
    Agreement by and among the registrant, Jeffrey A. Ledbetter,
    Martha Hayden-Ledbetter and the Pacific Northwest Research
    Institute, dated December 31, 2001.10
.23(4)

Independent Contractor Agreement
    between the registrant and Martha Hayden-Ledbetter dated
    May 1, 2004.10
.24(5)

Loan and Security Agreement
    between the registrant and Comerica Bank, dated
    September 12, 2006.23
.1*

Consent of Independent Registered
    Public Accounting Firm.24
.1*

Power of Attorney (included on
    signature page).31
.1*

Certification of Chief Executive
    Officer of Trubion Pharmaceuticals, Inc., Pursuant to Exchange
    Act
    Rules 13a-14(a)
    and
    15d-14(a),
    as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
    Act of 2002.31
.2*

Certification of Chief Financial
    Officer of Trubion Pharmaceuticals, Inc., Pursuant to Exchange
    Act
    Rules 13a-14(a)
    and
    15d-14(a),
    as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
    Act of 2002.32

*

Certification of Chief Executive
    Officer and Chief Financial Officer of Trubion Pharmaceuticals,
    Inc., Pursuant to 18 U.S.C. Section 1350, as Adopted
    Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.99
.1(5)

Opposition Brief filed
    August 8, 2006.     *
    
    Filed herewith(1)
    
    Incorporated by reference from Trubions Registration
    Statement on Form
    S-1 filed
    with the Securities and Exchange Commission on June 2, 2006.(2)
    
    Incorporated by reference from Trubions Registration
    Statement on Form
    S-1 filed
    with the Securities and Exchange Commission on October 2,
    2006.(3)
    
    Incorporated by reference from Trubions Registration
    Statement on Form
    S-1 filed
    with the Securities and Exchange Commission on October 5,
    2006.(4)
    
    Incorporated by reference from Trubions Registration
    Statement on Form
    S-1 filed
    with the Securities and Exchange Commission on July 18,
    2006.(5)
    
    Incorporated by reference from Trubions Registration
    Statement on Form
    S-1 filed
    with the Securities and Exchange Commission on
    September 22, 2006.
    
    Portions of the agreement are subject to confidential treatment+
    
    Executive Compensation Plan or Agreement 54




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##### Table of Contents



SIGNATURES    TRUBION PHARMACEUTICALS, INC.
  By:
    /s/  Peter
    Thompson   President, Chief Executive Officer and
 Chairman of the Board of Directors
  attorney-in-fact attorneys-in-fact attorneys-in-fact
    Signature

Title

Date/s/  Peter
    ThompsonPeter
    A. Thompson, M.D., FACP

President, Chief Executive
    Officer, Chairman of the Board and Director (Principal Executive
    Officer)

March 26, 2007/s/  Michelle
    G. BurrisMichelle G.
    Burris

Senior Vice President and Chief
    Financial Officer (Principal Financial Officer)

March 26, 2007/s/  Lee
    BrettmanLee
    R. Brettman

Director

March 26, 2007/s/  Patrick
    HeronPatrick J.
    Heron

Director

March 26, 2007/s/  Anders
    HoveAnders
    D. Hove, M.D.

Director

March 26, 2007/s/  Steven
    GillisSteven
    Gillis, Ph.D.

Director

March 26, 2007/s/  David
    MannDavid
    A. Mann

Director

March 26, 2007 55




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##### Table of Contents



Signature

Title

Date/s/  Samuel
    SaksSamuel
    R. Saks

Director

March 26, 2007/s/  David
    SchnellDavid
    Schnell, M.D.

Director

March 26, 2007  56




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##### Table of Contents



Report of
    Independent Registered Public Accounting Firm             
    F-1




---



##### Table of Contents



TRUBION
    PHARMACEUTICALS, INC.



BALANCE
    SHEETS  December 31,2006


2005(In thousands, except share and par value)ASSETSCurrent assets:Cash and cash equivalents

$
56,414


$
4,681Investments


49,387



5,111Receivable from collaboration


4,354



40,000Prepaid expenses


792



236Total current assets


110,947



50,028Property and equipment, net


10,334



3,898Other assets


113



83Total assets

$
121,394


$
54,009LIABILITIES AND
    STOCKHOLDERS EQUITY (DEFICIT)Current liabilities:Accounts payable

$
1,537


$
833Accrued liabilities


5,666



1,663Accrued compensation


1,351



291Current portion of notes payable


1,025



1,187Current portion of deferred rent


180



173Current portion of deferred revenue


8,000



8,000Total current liabilities


17,759



12,147Non-current portion of notes
    payable


6,708



1,276Non-current portion of deferred
    rent


495



675Non-current portion of deferred
    revenue


23,778



31,778Preferred stock warrant liability






282Commitments and contingenciesConvertible preferred stock and
    stock warrants; $0.001 par value per share; shares
    authorized  none at December 31, 2006 and
    10,874,478 at December 31, 2005; issued and
    outstanding  none at December 31, 2006 and
    10,652,057 at December 31, 2005






45,753Stockholders equity
    (deficit):Preferred stock, $0.001 par
    value per share; shares authorized  5,000,000 at
    December 31, 2006 and none at December 31, 2005;
    issued and outstanding  none at December 31,
    2006 and 2005






Common stock, $0.001 par
    value per share; shares authorized  150,000,000 at
    December 31, 2006 and 13,554,458 at December 31, 2005;
    outstanding  17,554,318 at December 31, 2006 and
    1,395,201 at December 31, 2005


18



1Additional paid-in capital


117,061



3,357Deferred stock-based compensation


(850
)


(1,591
)Accumulated other comprehensive
    loss


21



(2
)Accumulated deficit


(43,596
)


(39,667
)Total stockholders equity
    (deficit)


72,654



(37,902
)Total liabilities, convertible
    preferred stock and stockholders equity (deficit)

$
121,394


$
54,009    F-2




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##### Table of Contents



TRUBION
    PHARMACEUTICALS, INC.



STATEMENTS
    OF OPERATIONS  Year Ended December 31,2006


2005


2004(In thousands, except per share data)RevenueCollaboration revenue

$
36,530


$
222


$
Grant revenue






127



294Total revenue


36,530



349



294Operating expenses:Research and development*


33,309



15,212



11,640General and administrative*


9,473



4,146



2,851Total operating expenses


42,782



19,358



14,491Loss from operations


(6,252
)


(19,009
)


(14,197
)Interest income


2,494



478



164Interest expense


(272
)


(200
)


(180
)Other income (expense)


101



(134
)


Loss before cumulative effect of
    change in accounting principle


(3,929
)


(18,865
)


(14,213
)Cumulative effect of change in
    accounting principle






(62
)


Net loss

$
(3,929
)

$
(18,927
)

$
(14,213
)Basic and diluted net loss per
    share

$
(0.83
)

$
(23.30
)

$
(22.47
)Shares used in computation of
    basic and diluted net loss per share


4,744



812



633* Includes non-cash stock-based
    compensation as follows:Research and development

$
2,693


$
1,079


$
23General and administrative


2,553



748



17Total non-cash stock-based
    compensation

$
5,246


$
1,827


$
40    F-3




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##### Table of Contents



TRUBION
    PHARMACEUTICALS, INC.



STATEMENT
    OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS EQUITY
    (DEFECIT)  AccumulatedOther





TotalConvertible









Additional


Deferred


Comprehensive





StockholdersPreferred Stock



Common Stock


Paid-in


Stock-Based


Income


Accumulated


EquityShares


Amount



Shares


Amount


Capital


Compensation


(Loss)


Deficit


(Deficit)(In thousands, except share and per share data)Balance at January 1, 2004


3,362,254


$
13,740




908,342


$
1


$
3


$
(14
)

$
(1
)

$
(6,527
)

$
(6,538
)Issuance of common stock upon
    exercise of stock options











744























Issuance of Series A
    convertible preferred stock warrants issued in connection with
    issuance of notes payable






21




























Repurchase of Series A
    convertible preferred stock for $4.39 per share


(153,769
)


(627
)











(48
)














(48
)Issuance of Series B
    convertible preferred stock for $4.39 per share, $199 in
    financing costs


4,709,893



20,675












(199
)














(199
)Stock-based compensation to
    non-employees at fair value



















26















26Vesting of non-employee restricted
    stock



















2















2Issuance and vesting of employee
    restricted stock











15,947







5















5Amortization of deferred
    stock-based compensation























14











14Unrealized holding loss on
    available-for-sale
    securities for the year ended December 31, 2004



























(11
)






(11
)Net loss for the year ended
    December 31, 2004































(14,213
)


(14,213
)Comprehensive loss



































(14,224
)Balance at December 31, 2004
    (carried forward)


7,918,378


$
33,809




925,033


$
1


$
(211
)

$



$
(12
)

$
(20,740
)

$
(20,962
)    F-4




---



##### Table of Contents



TRUBION
    PHARMACEUTICALS, INC.
  STATEMENT
    OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS EQUITY
    (DEFECIT)
  AccumulatedOther





TotalConvertible









Additional


Deferred


Comprehensive





StockholdersPreferred Stock



Common Stock


Paid-in


Stock-Based


Income


Accumulated


EquityShares


Amount



Shares


Amount


Capital


Compensation


(Loss)


Deficit


(Deficit)(In thousands, except share and per share data)Balance at December 31, 2004
    (brought forward)


7,918,378


$
33,809




925,033


$
1


$
(211
)

$



$
(12
)

$
(20,740
)

$
(20,962
)Issuance of common stock upon
    exercise of stock options











462,194







145















145Issuance of Series B
    convertible preferred stock for $4.39 per share, $3 in
    financing costs


2,733,679



12,000












(3
)














(3
)Issuance of Series B
    convertible preferred stock warrants issued in connection with
    issuance of notes payable






5




























Reclassification of convertible
    preferred stock warrants to liabilities (Note 2)






(61
)



























Stock-based compensation to
    non-employees at fair value



















836















836Issuance and vesting of
    non-employee restricted stock











7,974







4















4Vesting of employee restricted stock



















4















4Issuance of stock options to
    employees



















2,582



(2,582
)










Amortization of deferred
    stock-based compensation























991











991Unrealized holding gain on
    available-for-sale
    securities for the year ended December 31, 2005



























10







10Net loss for the year ended
    December 31, 2005































(18,927
)


(18,927
)Comprehensive loss



































(18,917
)Balance at December 31, 2005
    (carried forward)


10,652,057


$
45,753




1,395,201


$
1


$
3,357


$
(1,591
)

$
(2
)

$
(39,667
)

$
(37,902
)    F-5




---



##### Table of Contents



TRUBION
    PHARMACEUTICALS, INC.
  STATEMENT
    OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS EQUITY
    (DEFECIT)
  AccumulatedOther





TotalConvertible









Additional


Deferred


Comprehensive





StockholdersPreferred Stock



Common Stock


Paid-in


Stock-Based


Income


Accumulated


EquityShares


Amount



Shares


Amount


Capital


Compensation


(Loss)


Deficit


(Deficit)(In thousands, except share and per share data)Balance at December 31, 2005
    (brought forward)


10,652,057


$
45,753




1,395,201


$
1


$
3,357


$
(1,591
)

$
(2
)

$
(39,667
)

$
(37,902
)Issuance of common stock upon
    exercise of stock options











93,167







94















94Stock-based compensation to
    non-employees at fair value



















834















834Vesting of non-employee restricted
    stock



















8















8Stock-based compensation expense



















3,573















3,573Amortization of deferred
    stock-based compensation























530











530Reversal of deferred stock-based
    compensation due to employee terminations



















(132
)


132











Stock option modification



















230



79











309Conversion of preferred stock to
    common stock


(10,652,057
)


(45,753
)



10,652,057



11



45,742















45,753Net exercise of preferred stock
    warrants into common stock











13,893







181















181Issuance of common stock for cash
    in initial public offering, net of offering expenses of $7,020











4,600,000



5



52,775















52,780Issuance of common stock for cash
    in private placement offering











800,000



1



10,399















10,400Unrealized holding gain on
    available-for-sale
    securities for the year ended December 31, 2006



























23







23Net loss for the year ended
    December 31, 2006































(3,929
)


(3,929
)Comprehensive loss



































(3,906
)Balance at December 31, 2006





$





17,554,318


$
18


$
117,061


$
(850
)

$
21


$
(43,596
)

$
72,654     F-6




---



##### Table of Contents



TRUBION
    PHARMACEUTICALS, INC.



STATEMENT
    OF CASH FLOWS  Year Ended December 31,2006


2005


2004(In thousands)Operating activitiesNet loss

$
(3,929
)

$
(18,927
)

$
(14,213
)Adjustments to reconcile net loss
    to net cash used in operating activities:Non-cash stock-based compensation
    expense


4,412



991



14Non-cash stock-based consulting
    expense


834



836



26Depreciation and amortization


1,534



928



692Amortization of debt discount


25



17



14Revaluation of warrants to fair
    value


(101
)


196



Changes in operating assets and
    liabilities:Receivable from collaboration


35,646



(40,000
)


Grant receivable






294



(294
)Prepaid expenses and other assets


(586
)


(13
)


(116
)Accounts payable


704



234



86Accrued liabilities and
    compensation


5,071



651



559Deferred revenue


(8,000
)


39,778



Deferred rent


(173
)


(172
)


822Net cash provided by (used in)
    operating activities


35,437



(15,187
)


(12,410
)Investing activitiesPurchase of property and equipment


(7,970
)


(1,515
)


(812
)Purchase of investments


(169,498
)


(26,012
)


(22,905
)Maturities of investments


125,245



30,718



15,804Net cash provided by (used in)
    investing activities


(52,223
)


3,191



(7,913
)Financing ActivitiesProceeds from issuance of notes
    payable


6,458



1,401



869Payments on notes payable


(1,213
)


(889
)


(603
)Net proceeds from the initial
    public offering


52,780







Proceeds from the private
    placement of common stock to Wyeth


10,400







Proceeds from issuance of
    convertible preferred stock, net of issuance costs






11,997



20,476Repurchase of Series A
    convertible preferred stock










(675
)Proceeds from issuance of common
    stock and exercise of stock options


94



148



5Net cash provided by financing
    activities


68,519



12,657



20,072Net increase (decrease) in cash
    and cash equivalents


51,733



661



(251
)Cash and cash equivalents at
    beginning of year


4,681



4,020



4,271Cash and cash equivalents at end
    of year

$
56,414


$
4,681


$
4,020Supplemental disclosure
    information:Cash paid for interest

$
217


$
181


$
166Non-cash investing and
    financing activities:Issuance of warrants in connection
    with the issuance of notes payable

$



$
30


$
21Conversion of preferred stock to
    common stock

$
45,753


$



$
Net exercise of preferred stock
    warrants to common stock

$
181


$



$
    F-7




---



##### Table of Contents



TRUBION
    PHARMACEUTICALS, INC.



NOTES TO FINANCIAL STATEMENTS  1.
    Organization
    and Summary of Significant Accounting Policies  Organization
    tm
  Use of
    Estimates
    Fair
    Value of Financial Instruments
  available-for-sale
  Cash,
    Cash Equivalents and Investments
    available-for-sale.
 F-8




---



##### Table of Contents



TRUBION
    PHARMACEUTICALS, INC.
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
  available-for-sale
  Property
    and Equipment
    Impairment
    of Long-Lived Assets
  Accounting for the Impairment or
    Disposal of Long-Lived Assets
  Deferred
    Rent
    Revenue
    Recognition
      Up-Front Fees and License
    Fees:
 F-9




---



##### Table of Contents



TRUBION
    PHARMACEUTICALS, INC.
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
    Collaborative Research Funding:
  Milestones:
  Royalties:
  Research
    and Development
    Income
    Taxes
  Accounting for Income Taxes
  Comprehensive
    Income (Loss)
    Stock-Based
    Compensation
  Share-Based
    Payment Accounting for Stock Issued to Employees
 F-10




---



##### Table of Contents



TRUBION
    PHARMACEUTICALS, INC.
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
  Accounting for Stock-Based Compensation Accounting for Stock Based
    Compensation  Transition and Disclosure
  Accounting for Stock-Based Compensation No. 96-18, Accounting for Equity Instruments That Are Issued to Other
    Than Employees for Acquiring, or in Conjunction with Selling,
    Goods or Services.
    Year Ended December 31,2005


2004(In thousands, except per share data)Net loss, as reported

$
(18,927
)

$
(14,213
)Add back: stock-based employee
    compensation expense included in net loss


991



14Deduct: stock-based employee
    compensation expense determined under the fair value method


(1,106
)


(15
)Pro forma net loss

$
(19,042
)

$
(14,214
)Basic and diluted net loss per
    share, as reported

$
(23.30
)

$
(22.47
)Pro forma basic and diluted net
    loss per share

$
(23.44
)

$
(22.47
)     Year Ended December 31,2005


2004Risk-free interest rate


4.35
%


4.25
%Weighted-average expected life (in
    years)


4.87



5.16Expected dividend yield


0
%


0
%Expected volatility rate


0
%


0
%Weighted-average estimated fair
    value of employee options

$
7.15


$
0.06   Concentration
    of Credit Risk
   F-11




---



##### Table of Contents



TRUBION
    PHARMACEUTICALS, INC.
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
   Freestanding
    Preferred Stock Warrants
  Accounting for Certain Financial
    Instruments with Characteristics of Both Liabilities and
    Equity.
  Recent
    Accounting Pronouncements
  Accounting for
    Uncertainty in Income Taxes  an Interpretation of
    FASB Statement 109
  Accounting Changes and Error Corrections Reporting Accounting Changes in Interim Financial
  Fair
    Value Measurements
  Considering the Effects of Prior
    Year Misstatements when Quantifying Misstatements in Current
    Year Financial Statements
 F-12




---



##### Table of Contents



TRUBION
    PHARMACEUTICALS, INC.
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
   2.
    Cumulative
    Effect of Change in Accounting Principle  150-5, Issuers Accounting under FASB Statement No. 150
    for Freestanding Warrants and Other Similar Instruments on
    Shares That Are Redeemable. No. 96-18, 150-5
    Year Ended December 31,2006


2005


2004Net loss per common share, basic
    and diluted:Loss before cumulative effect of
    change in accounting principle

$
(0.83
)

$
(23.22
)

$
(22.47
)Cumulative effect of change in
    accounting principle






(0.08
)


Net loss

$
(0.83
)

$
(23.30
)

$
(22.47
)Shares used in computing basic and
    diluted net loss per common share (in thousands)


4,744



812



633    F-13




---



##### Table of Contents



TRUBION
    PHARMACEUTICALS, INC.
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
   3.
    Net Loss
    per Share    As of December 31,2006


2005


2004Stock options


1,587,626



974,151



1,049,873Warrants to purchase convertible
    preferred stock






20,353



17,163Common shares subject to repurchase


1,730



96,108



222,482Convertible preferred stock






10,652,057



7,918,3781,589,356



11,742,669



9,207,896   Non-GAAP Pro
    Forma Basic Net Income (Loss) per Share
    Year Ended December 31,2006


2005


2004Net loss

$
(3,929
)

$
(18,927
)

$
(14,213
)Preferred stock warrant liability
    income (expense)


101



(134
)


Pro forma net loss

$
(3,828
)

$
(19,061
)

$
(14,213
)Shares used to compute basic and
    diluted net loss per share


4,744



812



633Pro forma adjustments to reflect
    weighted-average effect of conversion of preferred stock on
    January 1, 2004


8,434



10,652



7,918Non-GAAP pro forma shares used in
    pro forma basic and diluted net loss per share


13,178



11,464



8,551Non-GAAP pro forma basic and
    diluted net loss per share

$
(0.29
)

$
(1.66
)

$
(1.66
)   4.
    Collaboration
    Agreement  tm
 F-14




---



##### Table of Contents



TRUBION
    PHARMACEUTICALS, INC.
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
  tm product-by-licensed country-by-country
    5.
    Investments  available-for-sale
  Gross Unrealized


Gross Unrealized


Estimated FairDecember 31, 2006

Amortized Cost


Gains


Losses


Market ValueCorporate debt securities

$
60,549


$
26


$
(5
)

$
60,570Money market funds


39,040











39,040Total


99,589



26



(5
)


99,610Less: cash equivalents


(50,223
)










(50,223
)Amounts classified as investments

$
49,366


$
26


$
(5
)

$
49,387   F-15




---



##### Table of Contents



TRUBION
    PHARMACEUTICALS, INC.
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
  Gross Unrealized


Gross Unrealized


Estimated FairDecember 31, 2005

Amortized Cost


Gains


Losses


Market ValueCorporate debt securities

$
4,613


$



$
(2
)

$
4,611Government securities


500











500Money market funds


3,322











3,322Total


8,435







(2
)


8,433Less: cash equivalents


(3,322
)










(3,322
)Amounts classified as investments

$
5,113


$



$
(2
)

$
5,111   available-for-sale
  6.
    Property
    and Equipment    December 31,2006


2005Lab equipment

$
6,053


$
3,056Leasehold improvements


6,385



2,148Furniture and fixtures


359



180Computer equipment and software


711



358Construction in progress


204



13,712



5,742Accumulated depreciation and
    amortization


(3,378
)


(1,844
)$
10,334


$
3,898    F-16




---



##### Table of Contents



TRUBION
    PHARMACEUTICALS, INC.
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
   7.
    Accrued
    Liabilities    December 31,2006


2005Accrued professional fees

$
576


$
273Accrued manufacturing


1,583



975Accrued clinical trials


1,994



324Leasehold improvements


442



Other


1,071



91$
5,666


$
1,663   8.
    Notes Payable 
    Equipment Financing Arrangements           F-17




---



##### Table of Contents



TRUBION
    PHARMACEUTICALS, INC.
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
       Notes PayableYear ending December 31, 2007

$
1,2552008


2,0492009


1,6812010


1,5872011


1,587Thereafter


1,190Total payments


9,349Less amount representing interest


(1,562
)Less amount attributable to debt
    issuance costs


(54
)Present value of payments


7,733Less current portion of notes
    payable


(1,025
)Long-term portion of notes payable

$
6,708   9.
    Commitments
    and Contingencies  Operating
    Lease Commitments
    Operating LeasesYear ending December 31, 2007

$
1,4052008


1,4052009


1,4052010


1,4052011


1,405Thereafter


1,873Total minimum lease payments

$
8,898      F-18




---



##### Table of Contents



TRUBION
    PHARMACEUTICALS, INC.
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
      Manufacturing
    Commitments
      Guarantees
    and Indemnifications
  Guarantors
    Accounting and Disclosure Requirements for Guarantees, Including
    Indirect Guarantees of Indebtedness of
    Others.
        10.
    Stockholders
    Equity (Deficit)  Preferred
    Stock
     F-19




---



##### Table of Contents



TRUBION
    PHARMACEUTICALS, INC.
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
    Common
    Stock
          December 31,


December 31,2006


2005Convertible preferred stockShares outstanding






10,652,057Shares authorized, but unissued






222,421WarrantsTo purchase Series A
    preferred stock






17,418To purchase Series B
    preferred stock






4,5562006 Equity Incentive PlanOptions outstanding


1,587,626



974,151Shares available for grant


490,522



60,6222,078,148



11,931,225   Reverse
    Stock Split
   F-20




---



##### Table of Contents



TRUBION
    PHARMACEUTICALS, INC.
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
   Exercise
    of Warrants
    Equity
    Incentive Plans
   F-21




---



##### Table of Contents



TRUBION
    PHARMACEUTICALS, INC.
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
     Weighted-Weighted-


AverageAverage


RemainingShares





Exercise


Contractual


AggregateAvailable





Price per


Life


Intrinsicfor Grant


Options Granted


Share


(in years)


ValueBalance at January 1, 2004


327,515



548,286



0.25Authorized increase in Plan


637,856







Issuance of restricted shares


(15,946
)






Granted


(519,263
)


519,263



0.32Exercised






(744
)


0.32Cancelled


16,909



(16,909
)


0.32Balance at December 31, 2004


447,071



1,049,896



0.32Granted at less than fair value


(386,537
)


386,537



1.13Exercised






(462,194
)


0.32Cancelled


88



(88
)


0.32Balance at December 31, 2005


60,622



974,151



0.63Authorized increase in Plan


1,136,542







Granted at less than fair value


(652,102
)


652,102



6.94Granted at fair value


(73,700
)


73,700



16.45Exercised






(93,167
)


1.00Cancelled


19,160



(19,160
)


2.55Balance at December 31, 2006


490,522



1,587,626


$
3.90



8.34


$
22,449Vested and expected to vest at
    December 31, 2006






1,567,086


$
3.83



8.34


$
22,264Exercisable at December 31,
    2006






675,066


$
1.64



7.67


$
11,048      F-22




---



##### Table of Contents



TRUBION
    PHARMACEUTICALS, INC.
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
     Options OutstandingWeighted-AverageRemainingContractual





Options ExercisableNumber of


Life


Aggregate


Number of


AggregateExercise Price per Share

Shares


(In Years)


Intrinsic Value


Shares


Intrinsic Value$0.07


91,532



5.74


$
1,643



91,532


$
1,643$0.32


661,428



7.61



11,705



386,690



6,843$2.70


123,990



8.92



1,898



78,633



1,204$6.53


526,091



9.16



6,044



118,211



1,358$8.35  $19.22


184,585



9.57



1,159







$0.07  $19.22


1,587,626



8.34


$
22,449



675,066


$
11,048     OutstandingStockAwardsBalance at January 1, 2004


345,393Units granted


15,947Units vested


(138,858
)Balance at December 31, 2004


222,482Units granted


7,974Units vested


(134,348
)Balance at December 31, 2005


96,108Units granted


Units vested


(94,378
)Balance at December 31, 2006


1,730   Employee
    Stock-Based Compensation
    Year Ended December 31, 2006G&A


R&D


TotalEmployee stock options granted
    prior to January 1, 2006

$
265


$
264


$
529Employee stock options granted on
    or subsequent to January 1, 2006


2,218



1,665



3,883Non-employee stock options


70



764



834$
2,553


$
2,693


$
5,246   F-23




---



##### Table of Contents



TRUBION
    PHARMACEUTICALS, INC.
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
  Year Ended December 31, 2005G&A


R&D


TotalEmployee stock options

$
554


$
437


$
991Non-employee stock options


194



642



836$
748


$
1,079


$
1,827       Employee
    Stock Options Granted Prior to January 1,
    2006
    2007

$
5022008


3122009


36$
850   Employee
    Stock Options Granted On or Subsequent to January 1,
    2006
     F-24




---



##### Table of Contents



TRUBION
    PHARMACEUTICALS, INC.
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
         Year EndedDecember 31,2006Risk-free interest rate

4.57%-5.04%Weighted-average expected life (in
    years)

5.5-6.25Expected dividend yield

0%Expected volatility rate

75%Weighted-average estimated fair
    value of employee options

$15.39     Non-employee
    Stock-Based Compensation
  Accounting for Stock-Based
    Compensation Accounting for Stock-Based
    Compensation  Transition and Disclosure, No. 96-18, Accounting for Equity Instruments That Are Issued to Other
    Than Employees for Acquiring, or in Conjunction with Selling,
    Goods or Services.
 F-25




---



##### Table of Contents



TRUBION
    PHARMACEUTICALS, INC.
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
        Accounting for Stock Appreciation Rights and Other Variable
    Stock Option or Award Plans.
    11.
    401(k)
    Plan    12.
    Income
    Taxes   F-26




---



##### Table of Contents



TRUBION
    PHARMACEUTICALS, INC.
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
     December 31,2006


2005Deferred tax assetsNet operating loss carryforwards

$
1,068


$
12,767Deferred revenue


11,122



Stock compensation


607



R&D tax credit carryforwards


643



529Other current assets and
    liabilities (net)


124



107Other non-current assets and
    liabilities (net)


324



303Less: Valuation allowance


(13,888
)


(13,706
)Net deferred tax asset (liability)

$



$
   13.
    Related
    Party Transactions      Dr. Martha Hayden-Ledbetter,
 F-27




---



##### Table of Contents



TRUBION
    PHARMACEUTICALS, INC.
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
   14.
    Quarterly
    Information (Unaudited)    March 31,


June 30,


September 30,


December 31,2006










(1
)Revenue

$
5,818


$
7,818


$
16,539


$
6,355Total operating expenses


8,588



10,362



11,602



12,230Income (loss) from operations


(2,770
)


(2,544
)


4,937



(5,875
)Net income (loss)


(2,387
)


(2,132
)


5,390



(4,800
)Basic net income (loss) per
    share(2)


(1.80
)


(1.55
)


3.79



(0.33
)Diluted net income (loss) per
    share(2)


(1.80
)


(1.55
)


0.40



(0.33
)2005Revenue

$
74


$
53


$



$
222Total operating expenses


4,000



4,462



4,960



5,936Loss from operations


(3,926
)


(4,409
)


(4,960
)


(5,714
)Net loss


(3,862
)


(4,321
)


(5,012
)


(5,732
)Basic and diluted net loss per
    share


(5.38
)


(5.74
)


(6.33
)


(5.81
)   (1)
    Reflects the impact of $8 million of revenue recognized in
    the third quarter of 2006 upon the achievement of a milestone
    under the Wyeth agreement.(2)
    Reflects the impact of the conversion of 10,652,057 shares
    of convertible preferred stock into common stock upon the
    closing of the initial public offering in October 2006. F-28