**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**Washington, D.C. 20549

**FORM 10-K**

**x**                              ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934.

**Forthe fiscal year ended December 31, 2006.**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934.

**Forthe transition period from             to             .**

**CommissionFile Number 00029815**

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**AllosTherapeutics, Inc.**(Exactname of Registrant as specified in its charter)

| **Delaware**                                                     |   | **54-1655029**                             |
|------------------------------------------------------------------|--------|--------------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification No.) |

 

**11080CirclePoint Road, Suite 200Westminster, Colorado 80020(303) 426-6262**(Address,including zip code, and telephone number, including area code, of principalexecutive offices)

Securities registeredpursuant to Section 12(b) of the Act: **None**

Securities registeredpursuant to Section 12(g) of the Act:

**CommonStock $.001 Par Value**(Titleof Class)

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Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act.  Yes o    No x

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act.  Yes o    No x

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days.  Yes x    No o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to thebest of registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.  x

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

| Large accelerated filer o |   | Accelerated  filer x |   | Non-accelerated  filer o |
|--------------------------------|--------|---------------------------|--------|-------------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).  Yes o    No x

The aggregate market valueof common stock held by nonaffiliates of the registrant (based upon the closingsale price of such shares on the NASDAQ Global Market on June 30, 2006)was $113,081,490. Shares of the registrant’s common stock held by each currentexecutive officer and director and by each stockholder who is known by theregistrant to own 10% or more of the outstanding common stock have beenexcluded from this computation in that such persons may be deemed to beaffiliates of the registrant. Share ownership information of certain personsknown by the registrant to own greater than 10% of the outstanding common stockfor purposes of the preceding calculation is based solely on information onSchedules 13D and 13G, if any, filed with the Commission. Thisdetermination of affiliate status is not necessarily a conclusive determinationfor other purposes.

As of March 6, 2007,there were 65,817,148 shares of the registrant’s common stock outstanding.

**DOCUMENTSINCORPORATED BY REFERENCE**

Portions of the registrant’sdefinitive Proxy Statement for the 2007 Annual Meeting of Stockholders to befiled within 120 days after the end of the Registrant’s fiscal year ended December 31,2006 are incorporated by reference into Part III of this Annual Report on Form 10-Kto the extent stated therein.

 

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**TABLE OF CONTENTS**

|                   | ** ** | ** **                                                                                                         | ** ** | **Page** |
|-------------------|------------|--------------------------------------------------------------------------------------------------------------------|------------|----------|
| **PART I**   |       |                                                                                                               |       |     |
| ITEM 1.      |       | BUSINESS                                                                                                           |       |     | 3 |   |
| ITEM 1A.     |       | RISK FACTORS                                                                                                       |       |     | 23 |   |
| ITEM 1B.     |       | UNRESOLVED STAFF COMMENTS                                                                                          |       |     | 39 |   |
| ITEM 2.      |       | PROPERTIES                                                                                                         |       |     | 39 |   |
| ITEM 3.      |       | LEGAL PROCEEDINGS                                                                                                  |       |     | 40 |   |
| ITEM 4.      |       | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                                |       |     | 40 |   |
| **PART II**  |       |                                                                                                               |       |     |   |   |
| ITEM 5.      |       | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED  STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |       |     | 41 |   |
| ITEM 6.      |       | SELECTED  FINANCIAL DATA                                                                                           |       |     | 44 |   |
| ITEM 7.      |       | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF OPERATIONS                        |       |     | 45 |   |
| ITEM 7A.     |       | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET  RISK                                                        |       |     | 56 |   |
| ITEM 8.      |       | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                                        |       |     | 57 |   |
| ITEM 9.      |       | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON  ACCOUNTING AND FINANCIAL DISCLOSURE                              |       |     | 57 |   |
| ITEM 9A.     |       | CONTROLS AND PROCEDURES                                                                                            |       |     | 57 |   |
| ITEM 9B.     |       | OTHER  INFORMATION                                                                                                 |       |     | 58 |   |
| **PART III** |       |                                                                                                               |       |     |   |   |
| ITEM 10.     |       | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE                                                             |       |     | 59 |   |
| ITEM 11.     |       | EXECUTIVE COMPENSATION                                                                                             |       |     | 59 |   |
| ITEM 12.     |       | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND  MANAGEMENT AND RELATED STOCKHOLDER MATTERS                    |       |     | 59 |   |
| ITEM 13.     |       | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND  DIRECTOR INDEPENDENCE                                         |       |     | 59 |   |
| ITEM 14.     |       | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                                             |       |     | 59 |   |
| **PART IV**  |       |                                                                                                               |       |     |   |   |
| ITEM 15.     |       | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES                                                                         |       |     | 60 |   |
|              |       | SIGNATURES                                                                                                         |       |     | 66 |   |

 

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**PART I**

*Allos Therapeutics, Inc.,the Allos Therapeutics, Inc. logo, EFAPROXYNTM (efaproxiral), and all otherAllos names are trademarks of Allos Therapeutics, Inc. in the UnitedStates and in other selected countries. All other brand names or trademarks appearingin this report are the property of their respective holders. Unless the contextrequires otherwise, references in this report to “Allos,” the “Company,” “we,” “us,”and “our” refer to Allos Therapeutics, Inc.*

*This report contains forward-looking statementswithin the meaning of Section 27A of the Securities Act of 1933, asamended, and Section 21E of the Securities Exchange Act of 1934, asamended. These forward-looking statements include, but are not limitedto, statements concerning our projected timelines for the completion ofenrollment, performance of interim and final analyses and announcement ofresults from our ongoing clinical trials, including our Phase 3 ENRICHtrial and our Phase 2 PROPEL trial; the potential for the results of ourPhase 3 ENRICH trial or Phase 2 PROPEL trial to support marketing approvalof EFAPROXYN or PDX, respectively; other statements regarding our futureproduct development and regulatory strategies, including our intent to developor seek regulatory approval for our product candidates in specific indications;the ability of our third-party manufacturing parties to support ourrequirements for drug supply; any statements regarding our future financialperformance, results of operations or sufficiency of capital resources to fundour operating requirements; and any other statements which are other thanstatements of historical fact. In some cases, these statements may beidentified by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,”“believes,” “estimates,” “predicts,” “potential” or “continue,” or the negativeof such terms and other comparable terminology. Although we believe that theexpectations reflected in the forward-looking statements contained herein arereasonable, we cannot guarantee future results, levels of activity, performanceor achievements. These statements involve known and unknown risks anduncertainties that may cause our, or our industry’s results, levels ofactivity, performance or achievements to be materially different from thoseexpressed or implied by the forward-looking statements. Factors that may causeor contribute to such differences include, among other things, those discussedunder the captions “Business,” “Risk Factors” and “Management’s Discussion andAnalysis of Financial Condition and Results of Operations.” All forward-lookingstatements included in this report are based on information available to us asof the date hereof and we undertake no obligation to revise any forward-lookingstatements in order to reflect any subsequent events or circumstances. Forward-lookingstatements not specifically described above also may be found in these andother sections of this report.*

**ITEM 1.**                BUSINESS

**Overview**

We are a biopharmaceutical company focused ondeveloping and commercializing innovative small molecule drugs for thetreatment of cancer. We strive to develop proprietary products that have thepotential to improve the standard of care in cancer therapy. Our goal is tobuild a profitable company by generating income from products we develop andcommercialize, either alone or with one or more potential strategic partners. Ourfocus is on product opportunities that leverage our internal clinicaldevelopment and regulatory expertise and address important markets with unmetmedical need. We may also seek to grow our existing portfolio of productcandidates through product acquisition and in-licensing efforts.

We have threeproduct candidates that are currently under development, EFAPROXYN(efaproxiral), PDX (pralatrexate) and RH1.

·       **EFAPROXYN** (efaproxiral) is the firstsynthetic small molecule designed to sensitize hypoxic, or oxygen-deprived,areas of tumors during radiation therapy by facilitating the release of oxygenfrom hemoglobin, the oxygen-carrying protein contained within red bloodcells, thereby increasing the level of oxygen in tumors. The presence of oxygenin tumors is an essential element for the 

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effectiveness of radiationtherapy. By increasing tumor oxygenation, we believe EFAPROXYN has thepotential to enhance the efficacy of standard radiation therapy.

·       **PDX** (pralatrexate) is a novel, smallmolecule chemotherapeutic agent that inhibits dihydrofolate reductase, or DHFR,a folic acid (folate)-dependent enzyme involved in the building ofnucleic acid, or DNA, and other processes. PDX was rationally designed forefficient transport into tumor cells via the reduced folate carrier, or RFC-1,and effective intracellular drug retention. We believe these biochemicalfeatures, together with preclinical and clinical data in a variety of tumors,suggest that PDX may have a favorable potency and toxicity profile relative tomethotrexate and other related DHFR inhibitors. We believe PDX has thepotential to be delivered as a single agent or in combination therapy regimens.

·       **RH1** is a small molecule chemotherapeuticagent that we believe is bioactivated by the enzyme DT-diaphorase, or DTD,otherwise known as NAD(P)H quinone oxidoreductase, or NQ01, which isover-expressed in many tumors relative to normal tissue, including lung, colon,breast and liver tumors. We believe that because RH1 is bioactivated in thepresence of DTD, it has the potential to provide targeted drug delivery tothese tumor types while limiting the amount of toxicity to normal tissue.

In September 2006, we completed patientenrollment in ENRICH, a pivotal Phase 3 clinical trial of EFAPROXYN plus wholebrain radiation therapy, or WBRT, in women with brain metastases originatingfrom breast cancer. A total of 368 women were enrolled at 78 cancer centers acrossNorth America, Europe and South America. The primary endpoint of the trial willmeasure the difference in survival between patients receiving WBRT plussupplemental oxygen, with or without EFAPROXYN. In accordance with the ENRICHtrial protocol, we will conduct the final analysis of the primary endpointfollowing the occurrence of 282 patient deaths, which we currently expect tooccur in mid-2007, although the actual timing of the final analysis mayvary based on a number of factors, including patient survival rates. If thetrial is deemed to be positive at the final analysis, we intend to submit anamendment to our previously filed new drug application, or NDA, to the UnitedStates Food and Drug Administration, or FDA, to seek marketing approval for EFAPRPOXYNfor use as an adjunct to WBRT for the treatment of women with brain metastasesoriginating from breast cancer.

In August 2006, we initiated PROPEL, a Phase 2clinical trial of PDX in patients with relapsed or refractory peripheral T-celllymphoma, or PTCL, that we believe, if positive, will be sufficient to supportthe filing of an NDA to seek marketing approval for PDX in this indication. Thetrial will seek to enroll a minimum of 100 evaluable patients at approximately35 cancer centers across the United States, Canada and Europe. The primaryendpoint of the study is objective response rate (complete and partialresponse). Secondary endpoints include duration of response, progression-freesurvival and overall survival. We currently expect to complete patientenrollment in this trial by the third quarter of 2008, although the actualtiming of completion of enrollment may vary based on a number of factors,including site initiation and patient enrollment rates. In July 2006, wereached agreement with the FDA under the special protocol assessment, or SPAprocess, on the design of this Phase 2 trial. The SPA process allows for FDAevaluation of a clinical trial protocol intended to form the primary basis ofan efficacy claim in support of a new drug application, and provides anagreement that the study design, including trial size, clinical endpointsand/or data analyses are acceptable to the FDA.

Our decision to begin PROPEL was based upon interimdata from an ongoing Phase 1/2 clinical trial of PDX in patients with relapsedor refractory non-Hodgkin’s lymphoma, or NHL, and Hodgkin’s disease. Theinterim data, which was presented at the 2006 American Society of HematologyAnnual Meeting, demonstrated a high overall response rate in patients withvarious subtypes of T-cell lymphoma. Notably, responses were observed in 10 of22 (45%) evaluable patients with T-cell lymphoma, of which nine were completeresponses. As of the date of the presentation, six of the patients remained ontreatment and in 

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remission three to21 months following initial treatment. In total, 54 patients were treatedwith PDX in the study, of which 42 were evaluable as of the date of thepresentation. The overall response rate for the evaluable patient populationwas 12 of 42 (28%). Twenty of 42 (47%) evaluable patients had B-cell lymphoma,of which 2 of 20 (10%) patients achieved a partial response with PDX. Theaddition of vitamins to the treatment regimen appeared to mitigate theoccurrence of stomatitis, or mouth ulcers, a toxicity commonly associated withPDX.

In July 2006, the FDA awarded orphan drug statusto PDX for the treatment of patients with T-cell lymphoma. Under the OrphanDrug Act, if we are the first company to receive FDA approval for PDX for thisorphan drug indication, we will obtain seven years of marketing exclusivityduring which the FDA may not approve another company’s application for the samedrug for the same orphan indication.

In October 2006, the FDA granted fast trackdesignation to PDX for the treatment of patients with T-cell lymphoma. The fasttrack program is designed to facilitate the development and expedite the reviewof new drugs that are intended to treat serious or life-threatening conditionsand that demonstrate the potential to address unmet medical needs.

Since our inception in 1992, we have not generated anyrevenue from product sales and have experienced significant net losses andnegative cash flows from operations. We have incurred these losses principallyfrom costs incurred in our research and development programs and from ourgeneral and administrative expenses. For the years ended December 31,2004, 2005 and 2006, we had net losses attributable to common stockholders of$21.8 million, $20.8 million, and $30.2 million, respectively. Research anddevelopment expenses for the years ended December 31, 2004, 2005 and 2006were $10.2 million, $11.2 million and $14.3 million, respectively. As of December 31,2006, we had accumulated a deficit during our development stage of $208.6million.

Our ability to generate revenue and achieveprofitability is dependent on our ability, alone or with partners, tosuccessfully complete the development of our product candidates, conductclinical trials, obtain the necessary regulatory approvals, and manufacture andmarket our product candidates. The timing and costs to complete the successfuldevelopment of any of our product candidates are highly uncertain, andtherefore difficult to estimate. The lengthy process of seeking regulatoryapprovals for our product candidates, and the subsequent compliance withapplicable regulations, require the expenditure of substantial resources. For amore complete discussion of the regulatory approval process, please refer tothe “Government Regulation” section in Item 1 below. Clinical developmenttimelines, likelihood of success and total costs vary widely and are impactedby a variety of factors discussed in the “Risk Factors” section of Item IAbelow. Because of these risks and uncertainties, we cannot predict when orwhether we will successfully complete the development of any of our productcandidates or the ultimate costs of such efforts. Due to these same factors, wecannot be certain when, or if, we will generate any revenue or net cash inflowfrom any of our current product candidates.

Even if our clinical trials demonstrate the safety andeffectiveness of our product candidates in their target conditions, we do notexpect to be able to record commercial sales of any our product candidatesuntil mid-2008 at the earliest. We expect to incur significant andgrowing net losses for the foreseeable future as a result of our research anddevelopment programs and the costs of preparing for the potential commerciallaunch of EFAPROXYN. Although the size and timing of our future net losses aresubject to significant uncertainty, we expect them to increase over the nextseveral years as we continue to fund our development programs and prepare forthe potential commercial launch of our product candidates.

We will be required to raise additional capital tosupport our future operations, including the potential commercialization ofEFAPROXYN and/or PDX in the event we obtain regulatory approval to market suchproduct candidates. We may seek to obtain this additional capital througharrangements with corporate partners, equity or debt financings, or from othersources. Such arrangements, if successfully consummated, may be dilutive to ourexisting stockholders. However, there is no assurance that we will be 

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successful in consummatingany such arrangements. In addition, in the event that additional funds areobtained through arrangements with collaborative partners or other sources,such arrangements may require us to relinquish rights to some of ourtechnologies, product candidates or products under development that we wouldotherwise seek to develop or commercialize ourselves. If we are unable to generatemeaningful amounts of revenue from future product sales, if any, or cannototherwise raise sufficient additional funds to support our operations, we maybe required to delay, reduce the scope of or eliminate one or more of ourdevelopment programs and our business and future prospects for revenue andprofitability may be harmed.

We incorporated in theCommonwealth of Virginia on September 1, 1992 as HemoTech Sciences, Inc.and filed amended Articles of Incorporation to change our name to Allos Therapeutics, Inc.on October 19, 1994. We reincorporated in Delaware on October 28,1996. We operate as a single business segment.

**Current CancerTherapies**

According to an independent healthcare researchcompany, the worldwide oncology drug market is expected to reach approximately$44 billion in 2007. Despite the enormous effort undertaken by thepharmaceutical industry to develop oncology products, cancer is the secondleading cause of death of Americans and remains a largely unmet medical need.In the United States, approximately 1.4 million new cases of cancer arediagnosed each year, and approximately 560,000 patients die each year ofcancer.

The appropriate cancer therapy for each patientdepends on the cancer type and careful assessment of the size and location ofthe tumor and extent to which the tumor has spread, or metastasized, to otherparts of the body. Effective therapy must eliminate or control the growth ofthe cancer both at its site of origin and at sites of metastases. Treatmentoptions may include a combination of surgery, radiation therapy, chemotherapy,biologic drug therapy, hormone therapy and immunotherapy.

Radiation therapy is one of the principal non-surgicalmeans of treating malignant tumors in patients with cancer. Radiation therapy(sometimes called radiotherapy) is the treatment of disease using penetratingbeams of high-energy waves or streams of particles called radiation. Currentlymore than half of all cancer patients receive radiation therapy at some pointduring their cancer treatment. Radiation therapy is used to cure certaincancers, to control local tumor invasion and thus prolong life, and to treatsymptomatic problems in patients who are expected to die of their cancer.

Chemotherapy involves thesystemic use of chemical agents to help kill tumor cells, control or preventthe growth of cancerous tumors, while attempting to limit the damage to normalcells. Chemotherapy is useful in fighting cancer that has spread to other partsof the body and cannot be easily detected or treated with surgery or radiationtherapy. In this way, chemotherapy is different from local treatments such assurgery or radiation therapy, which target only specific areas of the body. Chemotherapycan be used in combination with surgery and/or radiation therapy. An estimated700,000 cancer patients in the United States receive chemotherapy each year.

**Our BusinessStrategy**

Our goal is tobuild a profitable company by generating income from products we develop andcommercialize, either alone or with one or more potential strategic partners.The key elements of our business strategy are to:

·       *Focus on the oncology market.*We intend to continue to focusour drug development efforts on the oncology market. We believe the oncologymarket is attractive due to its size, demand for safer and more effectivecancer treatments, relatively small physician population that can be addressedwith a targeted sales force, and potential for expedited regulatory review.

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·       *Obtain regulatory approval to market EFAPROXYN.*We arecurrently focused on completing our pivotal Phase 3 ENRICH trial and, if theresults are positive, obtaining regulatory approval in the United States andEurope to market EFAPROXYN as an adjunct to WBRT for the treatment of patientswith brain metastases originating from breast cancer. We may pursue regulatoryapprovals in other countries if deemed strategically and economically advisable.In addition, in the event the ENRICH trial is positive, we intend to expand ourclinical development activities involving EFAPROXYN to pursue additionalindications for which there is evidence of potential clinical benefit.

·       *Advance PDX product development program.*We are alsocommitted to evaluating PDX for oncology use as a single agent and incombination with other therapies in target indications that we believe offerthe most expedient pathway to marketing approval. In the near term, we plan toadvance our pivotal Phase 2 PROPEL trial of PDX in patients with relapsed orrefractory peripheral T-cell lymphoma, and initiate several new trials tofurther evaluate PDX’s potential clinical utility in other hematologic andoncologic indications.

·       *Develop sales and marketing capabilities to maximize the commercialsuccess of our product candidates.*We currently retain exclusiveworldwide commercial rights to EFAPROXYN, PDX and RH1 for all targetindications. We intend to commercialize our product candidates by building afocused United States sales and marketing organization which may becomplemented by co-promotion arrangements with pharmaceutical or biotechnologypartners, where appropriate. We intend to enter into co-promotion orout-licensing arrangements with other pharmaceutical or biotechnology firms,where necessary, to reach foreign market segments that are not reachable by aUnited States-based sales force or when deemed strategically and economicallyadvisable.

·       *Expand ourproduct candidate portfolio.*We may pursue opportunities from timeto time to expand our product candidate portfolio by identifying and evaluatingnew compounds that have demonstrated potential in preclinical or clinicalstudies and are strategically aligned with our existing oncology portfolio. Ourintent is to build a portfolio of proprietary small molecule product candidatesthat have the potential to improve the standard of care in cancer therapy andprovide commercial, regulatory and/or geographic exclusivity.

**Our ProductCandidates**

Thefollowing table summarizes the target indications and clinical developmentstatus of our product candidates:

| Product Candidate    | ** ** | ** **                                              | ** ** | **Target Indications**  | ** ** | **Clinical Program Status** |
|----------------------|------------|---------------------------------------------------------|------------|-------------------------|------------|-----------------------------|
| **EFAPROXYN:**       |       |                                                    |       |                    |
| Radiation Sensitizer |       | Brain metastases from  breast cancer                    |       | Phase 3 ongoing    |
|                 |       | Stage IIIA/IIIB non  small cell lung cancer             |       | Phase 1 ongoing    |
|                 |       | Cervical cancer                                         |       | Phase 1b/2 ongoing |
| **PDX:**             |       |                                                    |       |                    |
| Chemotherapy         |       | Peripheral T-cell  lymphoma                             |       | Phase 2 ongoing    |
|                 |       | Non-Hodgkin’s  lymphoma and Hodgkin’s disease |       | Phase 1/2 ongoing  |
|                 |       | Stage IIIB/IV non small  cell lung cancer               |       | Phase 1 ongoing    |
| **RH1:**             |       |                                                    |       |                    |
| Chemotherapy         |       | Solid Tumors                                            |       | Phase 1 ongoing    |

 

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**EFAPROXYN(efaproxiral)**

***EFAPROXYN as a Radiation Sensitizer***

EFAPROXYN is a syntheticsmall molecule being developed for use as an adjunct to radiation therapy inthe treatment of cancer. Approximately 600 patients have been treated withEFAPROXYN in conjunction with radiation therapy in 11 clinical trials, notincluding ENRICH. The results have shown that EFAPROXYN is generally welltolerated and has an acceptable safety profile for use in cancer patients.

*ScientificRationale*

Oxygen is indispensable to all human tissues. It istransported through the body by hemoglobin, a protein contained within redblood cells, and is consumed in the production of energy for sustaining life.When hemoglobin returns to the lungs, it replenishes its store of oxygen forits next circulation through the body.

Although oxygen is ordinarily vital for life, in someinstances, energized forms of oxygen, called oxygen radicals, can be toxic tocells. For example, during radiation therapy for cancer, radiation-inducedoxygen radicals contribute to the death of cells in the tumor. Therapies thatincrease oxygen levels in tumors at the time of radiation therapy thereforehave the potential to enhance the effectiveness of radiation therapy in killingtumor cells.

Malignant tumors often have a poorly regulated bloodsupply, caused by the disorganized and disorderly growth of new blood vesselsinto the tumor. This results in a large number of tumor cells being furtheraway from a blood vessel, resulting in an increased diffusion distance from thevessel to the cells. In addition, because malignant tumors often grow rapidly,they consume high levels of oxygen. This high level of oxygen consumption,combined with the poorly regulated blood supply and increased oxygen diffusiondistances from the vessels to the cells, generally results in tumor hypoxia, oroxygen-deprived regions of the tumor. While hypoxia is deadly to mostcells, cancer cells undergo genetic and adaptive changes that allow them tosurvive and even proliferate in a hypoxic environment. Because oxygen is anecessary component for the effectiveness of radiation therapy, tumor hypoxiamay limit the effectiveness of radiation therapy in controlling tumor growthand killing cancer cells.

Small molecule drugs, like EFAPROXYN, can be used tomodify a protein’s function by altering the protein’s 3-dimensionalstructure. Known as allosteric modification, a small molecule drug alters aprotein’s 3-dimensional structure by binding to the protein at a sitedifferent from the protein’s active site. This change in conformationalstructure affects the binding affinity of the protein for the molecules thatnormally bind to its active site. The ability of a drug to increase or decreasethis affinity can have important clinical implications.

EFAPROXYN binds in the central water cavity of thehemoglobin tetramer and decreases hemoglobin-oxygen binding affinity,which is reflected as an increase in p50 (i.e., the partial pressure of oxygenthat results in 50 percent hemoglobin saturation). By this action,EFAPROXYN facilitates the release of oxygen from hemoglobin and increases thelevel of oxygen in malignant and non-malignant tissue. In addition, byfacilitating the release of oxygen from hemoglobin, we believe EFAPROXYN hasthe potential to treat a variety of other diseases and clinical conditionscaused by tissue hypoxia.

Unlike existing drugs and other attempts to enhancethe effectiveness of radiation therapy, the radiation-enhancing effect ofEFAPROXYN is not dependent on the direct diffusion of the drug into thecancerous tumor. Instead, EFAPROXYN works by increasing the release of oxygenfrom hemoglobin circulating within and around the tumor. It is the oxygen, andnot EFAPROXYN, which diffuses across the cancer cell membranes to oxygenate thetumor. This is particularly important in the case of primary or metastaticbrain tumors, where the blood brain barrier acts to exclude or impede the entryof most chemical agents into the brain tissue.

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**EFAPROXYNis administered in an outpatient setting and has several distinguishingcharacteristics that make it well suited as a radiation sensitizer:**

·       EFAPROXYNis not cytotoxic;

·       EFAPROXYNdoes not need to cross the blood-brain barrier to be effective; and

·       EFAPROXYN has a rapid onsetof action and a short half-life.

*EFAPROXYN and WBRTin the treatment of Brain Metastases Originating from Breast Cancer*

Brain metastases occur in approximately 175,000patients per year in the United States. WBRT for the treatment of brainmetastases is administered to approximately 125,000 patients per year in theUnited States and is intended to prevent or reduce complications and extendsurvival. Cancers that metastasize to the brain most often originate in thebreast, lungs, kidneys or melanoma in the skin. Breast cancer is the secondmost common cause of brain metastases, accounting for approximately 20% of thetotal incidence of brain metastases. Approximately 178,000 women are expectedto be diagnosed with breast cancer in the United States in 2007. The mediansurvival of patients with brain metastases originating from breast cancer whoreceive WBRT is approximately 4.6 months. A patient’s survival time canvary depending on various clinical factors such as age, general health, whetherthe primary cancer is controlled and the extent of cancer metastases to otherregions in the body. Although WBRT is the primary therapy for these patients,the effectiveness of WBRT may be limited by tumor hypoxia, which has been shownto decrease the radiation sensitivity of solid tumors. As a result, we believethe addition of EFAPROXYN to WBRT may decrease tumor hypoxia, improve thesensitivity of solid tumors to radiation therapy, and increase theeffectiveness of WBRT, thereby leading to improved patient outcomes.

In September 2006, we completed patientenrollment in ENRICH, an international, multi-center, open-label, randomizedpivotal Phase 3 clinical trial of EFAPROXYN plus WBRT in women with brainmetastases originating from breast cancer. A total of 368 women were enrolledat 78 cancer centers across North America, Europe and South America. Theprimary endpoint of the trial will measure the difference in survival betweenpatients receiving WBRT plus supplemental oxygen, with or without EFAPROXYN. Underthe trial protocol, the primary endpoint will be achieved if the EFAPROXYN armdemonstrates a statistically significant increase in overall survival versusthe control arm. The study design has an 80% power to detect a 40% increase inoverall survival. Secondary efficacy endpoints of the trial include theresponse rate in the brain at 3 months, Karnofsky Performance Status, or KPS,and neurologic signs and symptoms assessment.

In March 2006, an independent Data MonitoringCommittee, or DMC, completed the first planned interim analysis of the primaryendpoint, and recommended that the trial continue per the protocol. This firstinterim review was triggered by the occurrence of 94 patient deaths and wasbased upon an evaluation of patients randomized through February 14, 2006.In October 2006, the DMC completed the second planned interim analysis ofthe primary endpoint, and recommended that the trial continue per the protocol.The second interim analysis was triggered by the occurrence of 188 patientdeaths and was based upon an evaluation of patients randomized through July 31,2006. In order to protect the integrity of the trial, the results of theefficacy data at the first and second interim analyses were not made availableto the Company; however, no major patient safety concerns were identified bythe DMC.

In accordance with the ENRICH trial protocol, we willconduct the final analysis of the primary endpoint following the occurrence of282 patient deaths, which we currently expect to occur in mid-2007,although the actual timing of the final analysis may vary based on a number offactors, including patient survival rates. If the trial is deemed to bepositive at the final analysis, we intend to submit an amendment to ourpreviously filed NDA to the FDA to seek marketing approval for EFAPROXYN foruse as an adjunct to WBRT for the treatment of women with brain metastasesoriginating from breast cancer. The 

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protocol for the ENRICHtrial was reviewed by the FDA under its special protocol assessment, or SPA,process, which allows for FDA evaluation of a clinical trial protocol intendedto form the primary basis of an efficacy claim in support of an NDA, andprovides an agreement that the study design, including trial size, clinicalendpoints and/or data analyses are acceptable to the FDA.

Our decision to begin ENRICH was based upon theresults of our prior Phase 3 clinical trial of EFAPROXYN in patients with brainmetastases, which we called REACH. This randomized, open-label, multi-center trialenrolled 538 patients and compared theefficacy and safety of WBRT and supplemental oxygen with or without EFAPROXYNin patients with brain metastases. We announced the results from the REACHtrial in April 2003. Although the survival benefit observed did notachieve statistical significance in either of the pre-specified intent-to-treatgroups, the results demonstrated a statistically significant survival benefitin patients with brain metastases originating from breast cancer. Patients withbrain metastases originating from breast cancer represented a subset ofpatients that was not prospectively defined as an intent-to-treat subgroup inthe Phase 3 REACH trial. For those patients, the addition of EFAPROXYN toWBRT nearly doubled median survival from 4.57 months for the control armto 8.67 months for the EFAPROXYN arm, and improved response rate, or thepercentage of patients experiencing at least a 50% decrease in the amount ofcancer following treatment, from 49.1% in the control arm to 71.7% in the EFAPROYXNarm. Overall, patients with brain metastases from breast cancer who receivedEFAPROXYN experienced approximately a 49% reduction in risk of death. Risk ofdeath is the relative effect on death at any time point between the control armand the EFAPROXYN arm. In addition, a statistically significant quality of lifebenefit (as determined by KPS and Spitzer Questionnaire) at three and sixmonths was observed in patients treated with EFAPROXYN. In general, EFAPROXYN wasvery well tolerated, with the majority of EFAPROXYN-related adverseevents being categorized as mild or moderate according to National CancerInstitute, or NCI, guidelines for the reporting of adverse events. All adverseevents were resolved within a one month follow-up period and were easilymanaged with supportive care.

Based on the findings from the REACH trial, in December 2003,we submitted an NDA to the FDA for approval to market EFAPROXYN in the UnitedStates as an adjunct to WBRT for the treatment of patients with brainmetastases originating from breast cancer. In May 2004, the FDA’sOncologic Drug Advisory Committee, or ODAC, reviewed the NDA and voted not torecommend approval of EFAPROXYN for this indication based on the data from theREACH trial. However, in June 2004, the FDA issued an “approvable letter”in which it indicated that the NDA may be approved if we successfully completeour ongoing Phase 3 ENRICH trial and submit the results as an NDA amendment forthe FDA’s review. In the letter, the FDA stated, “if the study showseffectiveness in this population (increased survival) using the pre specifiedanalysis, and the study is otherwise satisfactory, we believe it would,together with the subset result in the [REACH trial], support approval.”

In June 2004, we filed a Marketing AuthorizationApplication, or MAA, with the European Medicines Agency, or EMEA, for approvalto market EFAPROXYN in Europe as an adjunct to WBRT for the treatment ofpatients with brain metastases originating from breast cancer. As with our NDA,the MAA was based on the findings from the REACH trial. In October 2005,we withdrew the MAA as a result of the Rapporteurs’ Day 180 Joint AssessmentReport, which concluded that the existing data package was not sufficient tosupport approval. Although we can provide no assurances, we believe that ourongoing ENRICH trial, if positive, together with other supporting data, shouldallow us to address the EMEA’s concerns regarding EFAPROXYN and provide theadditional data necessary to support the filing of a new MAA and the futureapproval of EFAPROXYN in Europe for use as an adjunct to WBRT for the treatmentof patients with brain metastases originating from breast cancer.

In August 2004, theFDA awarded orphan drug status to EFAPROXYN for use as an adjunct to WBRT forthe treatment of patients with brain metastases originating from breast cancer.The FDA may award orphan drug designation to drugs that target conditionsaffecting 200,000 or fewer patients per year in the United States and provide asignificant therapeutic advantage over existing treatments. Under the 

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OrphanDrug Act, if we are the first company to receive FDA approval for EFAPROXYN forthis orphan drug indication, we will obtain seven years of marketing exclusivityduring which the FDA may not approve another company’s application for the samedrug for the same orphan indication.

*EFAPROXYN andThoracic Radiation Therapy in the treatment of Non Small Cell Lung Cancer*

Non small cell lung cancer, or NSCLC, is the mostcommon type of lung cancer and occurs in approximately 160,000 patients peryear in the United States, or nearly 85% of all lung cancer cases. We arecurrently evaluating EFAPROXYN as a radiation sensitizer for the treatment ofpatients with locally advanced, unresectable NSCLC without distant metastases,also referred to as Stage IIIA or Stage IIIB NSCLC. Stage III NSCLC encompassesapproximately 32% of all newly diagnosed NSCLC cases.

Initially, thoracic radiation therapy, or TRT, was thepreferred treatment for patients with Stage III NSCLC. However, this approachprovided 5-year survival rates of only 5% to 7%, with a median survivaltime of 6 to 11 months. In an effort to improve upon the results obtainedwith TRT alone, studies were conducted in which full-dose inductionchemotherapy was administered before TRT. The main objective of this strategy,known as sequential chemoradiotherapy, or S-CRT, was to improve patientoutcome by reducing the risk of distant disease through the early administrationof systemic therapy. Although S-CRT was found in studies to reduce theincidence of distant failure, there was no significant improvement in the rateof local control. To improve local control, studies were then conducted inwhich lower-dose chemotherapy was administered concurrently with TRT. Thisapproach, known as concurrent chemoradiotherapy, or C-CRT, was designedto improve local control, while maintaining systemic control of distant disease.It was believed that the concurrent administration of a chemotherapeutic agentwould function as a radiation sensitizer. Although C-CRT was found to reducethe rate of local recurrence relative to S-CRT or TRT alone, there was nosignificant improvement in systemic control. A prior Phase 3 studyconducted by the NCI-sponsored Radiation Therapy Oncology Group(RTOG 94-10) demonstrated a median survival of 15.1 months forpatients with locally advanced unresectable NSCLC (Stage II, IIIA andIIIB) receiving S-CRT, and 17.9 months for patients receiving C-CRT.However, for the reasons described above, we believe the optimal sequencing ofchemotherapy and radiation therapy in this patient setting remains to bedetermined.

In November 2000, we completed a 52-patient,open-label, multi-center, Phase 2 clinical trial of S-CRT incombination with EFAPROXYN for the treatment of patients with Stage IIIA/IIIBNSCLC. EFAPROXYN was added to the S-CRT regimen in an attempt to improve localcontrol, while maintaining the lower toxicity rates associated with S-CRT. Thetwo-year follow-up results showed a median survival rate of 20.6 months, aone-year survival rate of 67% and a two-year survival rate of 37%. The analysisof response data from the 44 patients who had a follow-up scan at the two-monthvisit and who received EFAPROXYN plus radiation therapy demonstrated an overallresponse rate of 89%, with 80% partial responses and 9% complete responses. Basedon this data, in January 2003, we initiated a Phase 3 clinical trialof S-CRT with or without EFAPROXYN in patients with Stage IIIA/IIIB NSCLC, butterminated this trial prior to the first patient being dosed as a result ofcertain expense reduction measures implemented in June 2003 following theannouncement of results from our Phase 3 REACH trial.

Because of the changingtreatment paradigm, in January 2004, we initiated a Phase 1 clinicaltrial of C-CRT in combination with EFAPROXYN in patients with Stage IIIA/IIIBNSCLC. Upon completion of this trial, we will assess our future developmentstrategy for the use of EFAPROXYN in the treatment of NSCLC.

*EFAPROXYN andStandard Radiation Therapy in the treatment of Cervical Cancer*

Cervical cancer is the second most common form ofcancer in women worldwide, and the leading cause of cancer-related deathfor women in developing countries. An estimated 233,000 women die from 

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cervical cancer each year.Cancer of the cervix can often be cured if detected and treated at an earlystage, and five-year survival rates for all stages of cervical cancer areapproximately 72%. Surgery, radiation therapy and chemotherapy are the primarytreatments for patients with advanced cervical cancer.

In August 2002, weinitiated a Phase 1b/2 clinical trial of EFAPROXYN for patients withlocally advanced cancer of the cervix receiving C-CRT. This clinical trial isan open-label, multi-center study of EFAPROXYN administered to patientsreceiving a course of weekly cisplatin with a combination of external beam andintracavitary radiation therapy for locally advanced carcinoma of the cervix. Theintent of this study is to provide preliminary evidence of safety and efficacyof EFAPROXYN in combination with cisplatin and radiation therapy in thispatient population. With positive results, we may seek to continue thedevelopment of EFAPROXYN for the treatment of cervical cancer with the supportof one or more cooperative groups.

***EFAPROXYN in Non-Oncology Indications***

We believe EFAPROXYN could potentially be useful intreating many other diseases and clinical conditions where tissue hypoxia is afactor. For example, for patients undergoing non-cardiac surgery who havechronic medical conditions, such as coronary artery disease, diabetes andhypertension, complications resulting from tissue hypoxia can be as high as 20%.By inducing hemoglobin to release a greater amount of oxygen during surgery, webelieve EFAPROXYN could potentially help mitigate tissue hypoxia resulting fromdecreased oxygen carrying capacity, decreased blood flow, and, in the case ofcardiopulmonary bypass surgery, or CPB, decreased body temperature. Based onpreclinical studies of EFAPROXYN in CPB and a successful Phase 1b study inelective surgery patients, we conducted a randomized 30-patientPhase 2 clinical trial of EFAPROXYN in patients undergoing CPB for firsttime coronary artery bypass grafting. This study demonstrated that EFAPROXYNcan be safely given during CPB and provided preliminary evidence of aprotective effect on heart function.

We also believe that EFAPROXYN could play a beneficialrole in the treatment of patients with acute coronary syndrome and stroke. Preclinicalstudies led to an initial Phase 1b safety study in patients with chronicangina, which demonstrated that EFAPROXYN was safe and well tolerated.

We currently anticipatethat development of EFAPROXYN for these, or any other, non-oncology indicationswould be conducted in cooperation with a strategic partner.

**PDX (pralatrexate)**

PDX is a novel, smallmolecule chemotherapeutic agent that inhibits dihydrofolate reductase, or DHFR,a folic acid (folate)-dependent enzyme involved in the building ofnucleic acid, or DNA, and other processes. PDX was rationally designed forefficient transport into tumor cells via the reduced folate carrier, or RFC-1,and effective intracellular drug retention. These biochemical features,together with preclinical and clinical data in a variety of tumors, suggestthat PDX may have a favorable potency and toxicity profile relative tomethotrexate and other related DHFR inhibitors. We believe PDX has thepotential to be delivered as a single agent or in combination therapy regimens.

***Scientific Rationale***

The antimetabolites are a group of low-molecularweight compounds that exert their effect by virtue of their structural orfunctional similarity to naturally occurring molecules involved in DNAsynthesis. Because the cell mistakes them for a normal metabolite, they eitherinhibit critical enzymes involved in DNA synthesis or become incorporated intothe nucleic acid, producing incorrect codes. Both mechanisms result ininhibition of DNA synthesis and ultimately, cell death. Because of theirprimary effect on DNA synthesis, the antimetabolites are most effective againstactively dividing cells and are largely cell-cycle 

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phase specific. There arethree classes of antimetabolites; purine analogs, pyrimidine analogs and folicacid analogs, also termed antifolates. PDX is a folic acid analog.

The selectivity of antifolates for tumor cellsinvolves their conversion to a polyglutamated form by the enzymefolypolyglutamyl synthetase, or FPGS. Polyglutamation is a time andconcentration dependent process that occurs in tumor cells, and to a lesserextent, normal tissues. The selective activity of the folic acid analogs inmalignant cells versus normal cells likely is due to the relative difference inpolyglutamate formation. Polyglutamated metabolites have prolongedintracellular half-life, increased duration of drug action and are potentinhibitors of several folate-dependent enzymes, including DHFR.

It is thought that the resistanceof malignant cells to the effects of the folic acid analogs may, in part, bedue to impaired polyglutamation. The improved antitumor effects of PDX incomparison to methotrexate, as observed in preclinical studies, is likely dueto the more effective uptake and transport of PDX into the cell followed by thegreater accumulation of PDX and its metabolites within the tumor cell throughthe formation of the polyglutamated derivatives.

***PDX in the treatment of PTCL***

Peripheral T-cell lymphomas, or PTCLs, are abiologically diverse and uncommon group of blood cancers which account forapproximately 10% of all cases of NHL. The majority of PTCL patients aretreated with multi-agent chemotherapy regimens, for which response ratesrange from 50% to 70%. However, a majority of these patients relapse or refractafter treatment with first-line therapy. The average five-year survival ratefor PTCL patients is approximately 25%. There are currently no pharmaceuticalagents approved for use in the treatment of either first-line or relapsed orrefractory PTCL.

In August 2006, we initiated PROPEL, aninternational, multi-center, open-label, single-arm Phase 2 clinical trial ofPDX in patients with relapsed or refractory PTCL that we believe, if positive,will be sufficient to support the filing of an NDA to seek marketing approvalfor PDX in this indication. The trial will seek to enroll a minimum of 100evaluable patients at approximately 35 cancer centers across the United States,Canada and Europe. The primary endpoint of the study is objective response rate(complete and partial response). Secondary endpoints include duration ofresponse, progression-free survival and overall survival. We currently expectto complete patient enrollment in this trial by the third quarter of 2008,although the actual timing of completion of enrollment may vary based on anumber of factors, including site initiation and patient enrollment rates. In July 2006,we reached agreement with the FDA under the special protocol assessment, or SPAprocess, on the design of this pivotal Phase 2 trial. The SPA process allowsfor FDA evaluation of a clinical trial protocol intended to form the primarybasis of an efficacy claim in support of an NDA, and provides an agreement thatthe study design, including trial size, clinical endpoints and/or data analysesare acceptable to the FDA.

In January 2007, an independent Data MonitoringCommittee, or DMC, completed a planned interim analysis of safety data from thePROPEL trial and recommended that the trial continue per the protocol. Thisinterim assessment was based upon an evaluation of the first 10 patientsenrolled to the study who completed at least one cycle of treatment with PDX. Nomajor patient safety concerns were identified by the DMC. According to thePROPEL trial protocol, we will conduct an interim analysis of efficacy datafrom the PROPEL trial after 35 patients have completed at least one cycle oftreatment with PDX, and must observe at least four responses (complete orpartial) out of the first 35 patients in order to continue the trial. Wecurrently expect to conduct the 35 patient efficacy analysis in the second halfof 2007, although the actual timing of the interim analysis may vary based on anumber of factors, including patient enrollment rates.

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In July 2006, the FDA awarded orphan drug statusto PDX for the treatment of patients with T-cell lymphoma. The FDA may awardorphan drug designation to drugs that target conditions affecting 200,000 orfewer patients per year in the United States and provide a significanttherapeutic advantage over existing treatments. Under the Orphan Drug Act, ifwe are the first company to receive FDA approval for PDX for this orphan drugindication, we will obtain seven years of marketing exclusivity during whichthe FDA may not approve another company’s application for the same drug for thesame orphan indication.

InOctober 2006, the FDA granted fast track designation to PDX for thetreatment of patients with T-cell lymphoma. The fast track program isdesigned to facilitate the development and expedite the review of new drugsthat are intended to treat serious or life-threatening conditions and thatdemonstrate the potential to address unmet medical needs.

***PDX in the treatment of non-Hodgkin’s Lymphoma andHodgkin’s disease***

Approximately 63,000 patients are expected to bediagnosed with non-Hodgkin’s lymphoma, or NHL, in the United States in 2007.The incidence of NHL has increased significantly over the last 25 yearsand is currently growing at nearly 2% per year. Patients with indolent orlow-grade NHL may have survival rates as long as 10 years, yet the diseaseis considered incurable. Intermediate and high-grade lymphomas are much moreaggressive and result in shorter median survival times; however, patients withthese malignancies can be cured in 30% to 60% of cases. Standard chemotherapyfor NHL involves an initial combination of cyclophosphamide, doxorubicin,vincristine and prednisone, also known as CHOP. The addition of rituximab tothis regimen has increased response rates to nearly 100%. Even so, about 55% ofpatients eventually relapse and may be candidates for salvage chemotherapy, orchemotherapy given after recurrence of a tumor.

Our decision to beginPROPEL was based upon interim data from an ongoing single-center, open-label,single-arm Phase 1/2 clinical trial of PDX in patients with relapsed orrefractory non-Hodgkin’s lymphoma and Hodgkin’s disease. The interim data,which was presented at the 2006 American Society of Hematology Annual Meeting,demonstrated a high overall response rate in patients with various subtypes ofT-cell lymphoma. Notably, responses were observed in 10 of 22 (45%) evaluablepatients with T-cell lymphoma, of which nine were complete responses. As of thedate of the presentation, six of the patients remained on treatment and inremission three to 21 months following initial treatment. In total, 54patients were treated with PDX in the study, of which 42 were evaluable as ofthe date of the presentation. The overall response rate for the evaluablepatient population was 12 of 42 (28%). Twenty of 42 (47%) evaluable patientshad B-cell lymphoma, of which 2 of 20 (10%) patients achieved a partialresponse with PDX. The addition of vitamins to the treatment regimen appearedto mitigate the occurrence of stomatitis, or mouth ulcers, a toxicity commonlyassociated with PDX. Other dose limiting toxicities observed were primarilyhematologic. Going forward, we plan to use this study to explore alternatedosing and administration schedules in patients with B-cell lymphoma to furtherevaluate PDX’s potential clinical utility in this setting.

***PDX in the treatment of NSCLC***

NSCLC is the most common type of lung cancer andoccurs in approximately 160,000 patients per year in the United States, ornearly 85% of all lung cancer cases. Over the last decade, oncologists havebegun treating advanced NSCLC patients more aggressively, typicallyadministering a potent combination of paclitaxel and carboplatin. Other drugsused in this setting include gemcitabine, vinorelbine, docetaxel and cisplatin.Despite aggressive therapy, the one-year survival rate for patients with StageIIIB or IV NSCLC is only approximately 40%.

In 2001, Memorial Sloan Kettering Cancer Center, orMSKCC, one of the institutions from which we licensed PDX, completed aPhase 2 open-label, single-agent study of PDX in patients withrelapsed or 

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refractory Stage IIIB orIV NSCLC. This study demonstrated a median survival time of 13.5 monthsand predicted one and two-year survival rates of 56% and 36%, respectively.However, 21% of the patients suffered grade 3 or 4 stomatitis. As a result ofsubsequent research that suggested supplementation of PDX with folic acid andvitamin B12 may reduce the incidence of clinically significant stomatitis,in January 2005, we initiated a Phase 1 dose escalation study of PDXwith vitamin B12 and folic acid supplementation in patients withpreviously treated (Stage IIIB-IV) advanced NSCLC. The determination of the maximumtolerated dose, or MTD, of PDX in combination with vitamin supplementation willbe essential for further development in this indication. Upon completion ofthis study, we will assess our future development strategy for the use of PDXin the treatment of NSCLC.

Separately, in 2005 wecompleted enrollment in a Phase 1 trial of PDX in combination withdocetaxel in patients with advanced cancer, including NSCLC, who failed priorchemotherapy, and achieved our objective of identifying the MTD of thecombination. Docetaxel is approved for the second-line treatment of advancedNSCLC, and this study will be factored into our future development strategy forPDX in NSCLC.

**RH1**

RH1 is a small molecule chemotherapeutic agent that webelieve is bioactivated by the enzyme DT-diaphorase, or DTD, otherwise known asNAD(P)H quinone oxidoreductase, or NQ01, which is over-expressed in many tumorsrelative to normal tissue, including lung, colon, breast and liver tumors. Webelieve that because RH1 is bioactivated in the presence of DTD, it has thepotential to provide targeted drug delivery to these tumor types while limitingthe amount of toxicity to normal tissue. RH1 has undergone in vivo efficacytesting by the NCI’s Developmental Therapeutics Program and has demonstratedactivity in both NSCLC and ovarian tumor models. RH1 was a nominated compoundfor advancement in the NCI’s Developmental Therapeutics Program, which providescancer drug discovery and development resources to the intramural, academic andindustrial research communities.

**RH1 is currently being evaluated inpatients with advanced solid tumors refractory to other chemotherapy regimensin an open label, Phase 1 dose escalation study to determine the MTD bytesting the safety, tolerability and pharmacokinetics of escalating doses ofRH1. The study is being conducted by Cancer Research UK, the parent institutionof one of our licensors. In the second quarter of 2006, we completed patientenrollment in this study. The last patient has now completed treatment and thefinal study report is pending. We have the right to obtain an exclusive licenseto the results of the study, for use in subsequent development and regulatoryactivities, upon payment of a one-time data option fee of $360,000. Uponcompletion of the Phase 1 study, we will assume responsibility for allfuture development costs and activities. Once we receive the final studyreport, we will evaluate the results from this study to determine our futuredevelopment plans for RH1.**

**The interim findings of thisongoing Phase 1 study were presented at the 17th Annual AACR-NCI-EORTCInternational Conference on Molecular Targets and Cancer Therapeutics inNovember 2005. At this interim analysis, 15 patients had received RH1daily for five days every three weeks at a range of doses and frequency. RH1was generally well tolerated up to certain doses. Clinically significanttoxicities observed to date include neutropenia, or reduction in circulatingwhite blood cells, thrombocytopenia, or reduction in platelets, and mild tomoderate phlebitis, or vein inflammation. No objective tumor responses had beenobserved as of November 2005, although significant, accumulativedose-dependent DNA cross-linking had been seen in peripheral bloodlymphocytes at certain doses. DNA cross linking studies are presently beingextended to tumor samples.**

**Manufacturing**

The production ofEFAPROXYN, PDX and RH1 employ small molecule organic chemistry proceduresstandard for the industry. We plan to continue to outsource manufacturingresponsibilities for 

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theseand any additional future products, and we intend to select and rely, at leastinitially, on single source suppliers to manufacture each of our productcandidates. This manufacturing strategy allows us to direct our financial andmanagerial resources to the development and commercialization of productsrather than to the establishment of a manufacturing infrastructure. It also enables us to minimize fixed costs and capitalexpenditures, while gaining access to advanced manufacturing processcapabilities and expertise. However, if our third party suppliers become unableor unwilling to provide sufficient future drug supply or meet regulatoryrequirements relating to the manufacture of pharmaceutical agents, we would beforced to incur additional expenses to secure alternative third partymanufacturing arrangements.

*EFAPROXYN*

In June 2005, we entered into a long-termmanufacturing agreement with Hovione FarmaCiencia SA, or Hovione, for thesupply of EFAPROXYN bulk drug substance, efaproxiral sodium. In December 2003,we entered into a long-term development and supply agreement with BaxterHealthcare Corporation, or Baxter, for the supply of EFAPROXYN formulated drugproduct, efaproxiral injection.

Hovione is an established contract manufacturer withexperience in manufacturing bulk drug substances for use in injectableformulations. Hovione successfully validated the process for efaproxiral sodiumin 2001. Under the terms of our agreement, Hovione is committed to manufactureand supply us with sufficient quantities of efaproxiral sodium to support ouranticipated requirements for both the clinical development andcommercialization phases of production.

After manufacture,efaproxiral sodium is formulated into the finished drug product, efaproxiralinjection, by Baxter. Baxter has significant experience in the manufacture oflarge volume injectables of this type. Under the terms of our agreement, Baxterhas agreed to manufacture sufficient quantities of efaproxiral injection tosupport our clinical and anticipated commercial requirements.

*PDX*

We have entered intoarrangements with two third party manufacturers to produce PDX bulk drugsubstance and formulated drug product for use in our clinical developmentprograms. We believe these third party manufacturers have the capability tomeet our requirements for all future clinical trial requirements. As wecontinue to advance our PDX development program, we will seek to establishappropriate commercial supply arrangements for the production of PDX bulk drugsubstance and formulated drug product.

*RH1*

We have entered into anagreement with a third party manufacturer for the production of RH1 bulk drugsubstance, and are in the process of selecting a third party manufacturer forthe production of RH1 formulated drug product for use in our clinicaldevelopment programs.

**Sales and Marketing**

We currently retainexclusive worldwide commercial rights to all of our product candidates for alltarget indications. If and when we obtain FDA approval, we intend tocommercialize our product candidates by building a focused United States salesand marketing organization which may be complemented by co-promotionarrangements with pharmaceutical or biotechnology partners, where appropriate. Oursales and marketing strategy is to:

·       *Build a direct United States sales force.*We believe that amoderate sized sales force could effectively reach targeted physicians andmedical institutions that treat the majority of patients with brain metastasesoriginating from breast cancer and/or PTCL in the United States. We intend tobuild and manage this sales force internally.

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·       *Build amarketing organization.*We also plan to build an internal marketingand sales operations organization to develop and implement product plans, andsupport our sales force and marketing partners.

·       *Establishco-promotion alliances.*We intend to enter into co-promotion orout-licensing arrangements with other pharmaceutical or biotechnology firms,where necessary, to reach foreign market segments that are not reachable by aUnited States-based sales force or when deemed strategically and economicallyadvisable.

**IntellectualProperty**

We believe that patent protection and trade secretprotection are important to our business and that our future success willdepend, in part, on our ability to maintain our technology licenses, maintaintrade secret protection, obtain and maintain patents and operate withoutinfringing the proprietary rights of others both in the United States andabroad. We believe that obtaining identical patents and protection periods fora given technology throughout all markets of the world will be difficultbecause of differences in patent laws. In addition, the protection provided bynon-United States patents, if any, may be weaker than that provided by UnitedStates patents.

In order to protect the confidentiality of ourtechnology, including trade secrets and know-how and other proprietarytechnical and business information, we require all of our employees,consultants, advisors and collaborators to enter into confidentialityagreements that prohibit the use or disclosure of confidential information. Theagreements also oblige our employees, consultants, advisors and collaboratorsto assign to us ideas, developments, discoveries and inventions made by suchpersons in connection with their work with us. We cannot be sure that theseagreements will maintain confidentiality, will prevent disclosure, or willprotect our proprietary information or intellectual property, or that otherswill not independently develop substantially equivalent proprietary informationor intellectual property.

The pharmaceuticalindustry is highly competitive and patents have been applied for by, and issuedto, other parties relating to products or new technologies that may becompetitive with those being developed by us. Therefore, our product candidatesmay give rise to claims that they infringe the patents or proprietary rights ofother parties now or in the future. Furthermore, to the extent that we, ourconsultants, or manufacturing and research collaborators, use intellectualproperty owned by others in work performed for us, disputes may also arise asto the rights to such intellectual property or in related or resulting know-howand inventions. An adverse claim could subject us to significant liabilities tosuch other parties and/or require disputed rights to be licensed from suchother parties. A license required under any such patents or proprietary rightsmay not be available to us, or may not be available on acceptable terms. If wedo not obtain such licenses, we may encounter delays in product marketintroductions, or may find that we are prevented from the development,manufacture or sale of products requiring such licenses. In addition, we couldincur substantial costs in defending ourselves in legal proceedings institutedbefore patent and trademark offices in the United States, the European Union,or other ex-United States territories, or in a suit brought against us by aprivate party based on such patents or proprietary rights, or in a suit by usasserting our patent or proprietary rights against another party, even if theoutcome is not adverse to us.

*EFAPROXYN*

Under a 1994 agreement with the Center for InnovativeTechnology, or CIT, we obtained exclusive worldwide rights to a portfolio ofpatents related to allosteric hemoglobin modifier compounds, includingEFAPROXYN, and their uses. This patent portfolio includes numerous issuedpatents in the United States, Europe, and Japan and pending patent applicationsin Canada related to the current EFAPROXYN applications. In exchange for thelicense agreement, we paid CIT $50,000 in cash and 

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issued 248,000 shares ofour common stock valued at $0.16 per share. We will be required to pay a quarterlyroyalty to CIT based on percentages, as defined in the agreement, of either netrevenues arising from sales of products produced in Virginia or net revenuesfrom sales of products produced outside Virginia. This agreement was assignedby CIT to the Virginia Commonwealth University Intellectual PropertyFoundation, or VCUIPF, on July 28, 1997. Under the agreement, we have theright to grant sublicenses, for which we must also pay royalties to VCUIPF forproducts produced by the sublicensees. Also, pursuant to the agreement, we willpay VCUIPF a running royalty of 1% to 1.25% of our worldwide net revenuearising from the sale, lease or other commercialization of the allosterichemoglobin modifier compounds. This agreement terminates on the date the last UnitedStates patent licensed to us under the agreement expires, which is currently October 2016,but could be later depending on possible patent term extensions. Quarterlyroyalty payments are due within 60 days from the end of each calendarquarter. As of December 31, 2006, no royalty payments have been incurred.

The licensedpatents, which expire at various times between February 2010 and October 2016,contain claims covering methods of allosterically modifying hemoglobin withEFAPROXYN and other compounds, the site within hemoglobin where EFAPROXYNbinds, and certain clinical applications of EFAPROXYN and other allosterichemoglobin modifier compounds, including, among others:

·       storingblood;

·       restoringthe oxygen affinity of red blood cells;

·       treatingcarbon monoxide exposure;

·       treatingcancerous tumors;

·       treatingischemia or oxygen deprivation;

·       treatingstroke or cerebral ischemia;

·       treatingsurgical blood loss;

·       performingcardiopulmonary bypass surgery; and

·       treatinghypoxia.

We are co-owners, along with VCUIPF, of a patentfamily directed to chiral allosteric hemoglobin modifier compounds.

We exclusively own severalpatent families with pending applications directed to formulations, methods ofmanufacture, and various additional uses of EFAPROXYN. Issuance of these patentapplications may extend the term of patent protection for EFAPROXYN in theUnited States, Europe and certain other countries.

*PDX*

In December 2002, weentered into a license agreement with Memorial Sloan-Kettering Cancer Center,SRI International and Southern Research Institute, under which we obtainedexclusive worldwide rights to several issued United States patents andequivalent foreign patent applications to develop and market any productderived from any formulation of PDX in connection with all diagnostic andtherapeutic uses, including human and veterinary diseases. Under the terms ofthe agreement, we paid an up-front license fee of $2.0 million upon executionof the agreement and are also required to make certain additional cash paymentsbased upon the achievement of certain clinical development or regulatorymilestones or the passage of certain time periods. To date, we have madeaggregate milestone payments of $1.5 million based on the passage of time. Inthe future, we could make aggregate milestone payments of $1.5 million upon theearlier of achievement of a clinical development milestone or the passage ofcertain 

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timeperiods (the “Clinical Milestone”), and up to $10 million upon achievement ofcertain regulatory milestones, including regulatory approval to market PDX inthe United States or Europe. The next scheduled payments toward the ClinicalMilestone of $500,000 each are currently due on December 23, 2007, 2008and 2009. The up-front license fee and allmilestone payments under the agreement, have been or will be recorded toresearch and development expense when incurred. Under the terms of theagreement, we are required to fund all development programs and will have soleresponsibility for all commercialization activities. In addition, we will paythe licensors a royalty based on a percentage of net revenues arising fromsales of the product or sublicense revenues arising from sublicensing theproduct, if and when such sales or sublicenses occur. As of December 31,2006, no royalty payments have been made or accrued.

*RH1*

In December 2004, weentered into an agreement with the University of Colorado Health SciencesCenter, the University of Salford and Cancer Research Technology, or CRT, underwhich we obtained exclusive worldwide rights to certain intellectual propertysurrounding a proprietary molecule known as RH1. Under the terms of theagreement, we paid an up-front license fee of $190,500 upon execution of theagreement and are also required to make certain additional cash payments basedupon the achievement of certain clinical development, regulatory andcommercialization milestones. To date, we have not made any milestone paymentsunder the agreement. In the future, we could make aggregate milestone paymentsof up to $9.2 million upon the achievement of the clinical development,regulatory and commercialization milestones set forth in the agreement. Theup-front license fee and all milestone payments under the agreement, as well asthe one-time data option fee discussed below, have been or will be recorded toresearch and development expense when incurred. Under the terms of theagreement and related data option agreement, Cancer Research UK, CRT’s parentinstitution, will continue to support an ongoing Phase 1 dose escalation study,and we will have the right to obtain an exclusive license to the results of thestudy, for use in subsequent development and regulatory activities, uponpayment of a one-time data option fee of $360,000. Upon completion of the Phase1 study, we will assume responsibility for all future development costs andactivities and will have sole responsibility for all commercializationactivities. In addition, we will pay the licensors a royalty based on apercentage of net revenues arising from sales of the product or sublicenserevenues arising from sublicensing the product, if and when such sales orsublicenses occur. As of December 31, 2006, no royalty payments have beenmade or accrued.

**Competition**

The pharmaceuticalindustry is characterized by rapidly evolving technology and intensecompetition. Many companies of all sizes, including a number of largepharmaceutical companies as well as several specialized biotechnologycompanies, are developing cancer therapies similar to ours. There are productsand technologies currently on the market that will compete directly with theproducts that we are developing. In addition, colleges, universities,governmental agencies and other public and private research institutions willcontinue to conduct research and are becoming more active in seeking patentprotection and licensing arrangements to collect license fees, milestonepayments and royalties in exchange for license rights to technologies that theyhave developed, some of which may directly compete with our technologies. Thesecompanies and institutions also compete with us in recruiting qualifiedscientific personnel. Many of our competitors have substantially greaterfinancial, research and development, human and other resources than do we. Furthermore,large pharmaceutical companies may have significantly more experience than wedo in preclinical testing, human clinical trials, manufacturing, regulatoryapproval and commercialization procedures. Our competitors may:

·       developor acquire safer and more effective products;

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·       obtainpatent protection or intellectual property rights that limit our ability tocommercialize products; and/or

·       commercializeproducts earlier or more effectively than us.

We expect technologydevelopments in our industry to continue to occur at a rapid pace. Commercialdevelopments by our competitors may render some or all of our potentialproducts obsolete or non-competitive, which would have a material adverseeffect on our business and financial condition.

**GovernmentRegulation**

*FDA Regulation andProduct Approval*

The FDA and comparable regulatory agencies in stateand local jurisdictions and in foreign countries impose substantialrequirements upon the clinical development, manufacture and marketing ofpharmaceutical products. These agencies and other federal, state and localentities regulate research and development activities and the testing,manufacture, quality control, safety, effectiveness, labeling, storage, recordkeeping, approval, advertising and promotion of our product candidates.

The processrequired by the FDA before our product candidates may be marketed in the UnitedStates generally involves the following:

·       preclinicallaboratory and animal tests;

·       submissionto the FDA of an Investigational New Drug, or IND, application, which mustbecome effective before clinical trials may begin;

·       adequateand well-controlled human clinical trials to establish the safety and efficacyof the proposed pharmaceutical in our intended use;

·       pre-approvalinspection of manufacturing facilities and selected clinical investigators; and

·       submissionto the FDA of a New Drug Application, or NDA, that must be approved.

The testing and approval process requires substantialtime, effort and financial resources, and we cannot be certain that anyapprovals for our product candidates will be granted on a timely basis, if atall.

Preclinical tests include laboratory evaluation of theproduct candidate, its chemistry, formulation and stability, as well as animalstudies to assess its potential safety and efficacy. We then submit the resultsof the preclinical tests, together with manufacturing information andanalytical data, to the FDA as part of an IND application, which must becomeeffective before we may begin human clinical trials. The IND automaticallybecomes effective 30 days after the FDA acknowledges that the filing iscomplete, unless the FDA, within the 30-day time period, raises concernsor questions about the conduct of the trials as outlined in the IND. In such acase, the IND sponsor and the FDA must resolve any outstanding concerns beforeclinical trials can begin. Further, an independent Institutional Review Boardat each medical center proposing to conduct the clinical trials must review andapprove any clinical study.

Human clinicaltrials are typically conducted in three sequential phases, which may overlap:

·       Phase 1:The drug is initially administered into healthy human subjects or patients andtested for safety, dosage tolerance, absorption, metabolism, distribution andexcretion.

·       Phase 2:The drug is administered to a limited patient population to identify possibleadverse effects and safety risks, to determine the efficacy of the product forspecific targeted diseases and to determine dosage tolerance and optimaldosage.

·       Phase 3:When Phase 2 evaluations demonstrate that a dosage range of the drug iseffective and has an acceptable safety profile, Phase 3 trials areundertaken to further evaluate dosage, clinical 

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efficacy and to furthertest for safety in an expanded patient population at geographically dispersedclinical study sites.

In the case of product candidates for severe orlife-threatening diseases such as cancer, the initial human testing is oftenconducted in patients rather than in healthy volunteers. Since these patientsalready have the target disease, these studies may provide initial evidence ofefficacy traditionally obtained in Phase 2 trials and thus these trialsare frequently referred to as Phase 1b trials. Additionally, when productcandidates can do damage to normal cells, it is not ethical to administer suchdrugs to healthy patients in a Phase 1 trial.

We cannot be certain that we will successfullycomplete Phase 1, Phase 2 or Phase 3 testing of our productcandidates within any specific time period, if at all. Furthermore, the FDA,the Institutional Review Boards or the sponsor may suspend clinical trials atany time on various grounds, including a finding that the subjects or patientsare being exposed to an unacceptable health risk.

The results of product development, preclinicalstudies and clinical studies are submitted to the FDA as part of an NDA forapproval of the marketing and commercial shipment of the product candidate. TheFDA may deny an NDA if the applicable regulatory criteria are not satisfied ormay require additional clinical data. Even if such data is submitted, the FDAmay ultimately decide that the NDA does not satisfy the criteria for approval.Once issued, the FDA may withdraw product approval if compliance with regulatorystandards is not maintained or if problems occur after the product reaches themarket. In addition, the FDA may require testing and surveillance programs tomonitor the effect of approved products which have been commercialized, and theagency has the power to prevent or limit further marketing of a product basedon the results of these post-marketing programs.

Satisfaction of the above FDA requirements or similarrequirements of state, local and foreign regulatory agencies typically takesseveral years and the actual time required may vary substantially, based uponthe type, complexity and novelty of the pharmaceutical product candidate.Government regulation may delay or prevent marketing of potential products fora considerable period of time and impose costly procedures upon our activities.

We cannot be certain that the FDA or any otherregulatory agency will grant approval for any of our product candidates on atimely basis, if at all. Success in preclinical or early stage clinical trialsdoes not assure success in later stage clinical trials. Data obtained frompreclinical and clinical activities is not always conclusive and may besusceptible to varying interpretations, which could delay, limit or preventregulatory approval. Even if a product candidate receives regulatory approval,the approval may be significantly limited to specific indications. Further,even after regulatory approval is obtained, later discovery of previouslyunknown problems with a product may result in restrictions on the product oreven complete withdrawal of the product from the market. Delays in obtaining,or failures to obtain regulatory approvals would have a material adverse effecton our business. Marketing our product candidates abroad will require similarregulatory approvals and is subject to similar risks. In addition, we cannotpredict what adverse governmental regulations may arise from future UnitedStates or foreign governmental action.

Any products manufactured or distributed by uspursuant to FDA clearances or approvals are subject to pervasive and continuingregulation by the FDA, including record-keeping requirements andreporting of adverse experiences with the drug. Drug manufacturers and theirsubcontractors are required to register their establishments with the FDA andcertain state agencies, and are subject to periodic unannounced inspections bythe FDA and certain state agencies for compliance with current GoodManufacturing Practices, which impose certain procedural and documentationrequirements upon us and our third-party manufacturers. We cannot becertain that we or our present or future suppliers will be able to comply withthe current Good Manufacturing Practices and other FDA regulatory requirements.

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The FDA regulates drug labeling and promotionactivities. The FDA has actively enforced regulations prohibiting the marketingof products for unapproved uses. Under the Modernization Act of 1997, the FDAwill permit the promotion of a drug for an unapproved use in certaincircumstances, but subject to very stringent requirements.

Our product candidates are also subject to a varietyof state laws and regulations in those states or localities where such productcandidates may be marketed. Any applicable state or local regulations mayhinder our ability to market our product candidates in those states orlocalities.

The FDA’s policies maychange and additional government regulations may be enacted which could preventor delay regulatory approval of our potential products. Moreover, increasedattention to the containment of health care costs in the United States and inforeign markets could result in new government regulations, which could have amaterial adverse effect on our business. We cannot predict the likelihood,nature or extent of adverse governmental regulation, which might arise fromfuture legislative or administrative action, either in the United States orabroad.

*Foreign Regulationand Product Approval*

Outside the United States,our ability to market a product candidate is contingent upon receivingmarketing authorization from the appropriate regulatory authorities. Therequirements governing the conduct of clinical trials, marketing authorization,pricing and reimbursement vary widely from country to country. At present,foreign marketing authorizations are applied for at a national level, althoughwithin the European Union, or EU, centralized registration procedures areavailable to companies wishing to market a product in more than one EU member state.If the regulatory authority is satisfied that adequate evidence of safety,quality and efficacy has been presented, a marketing authorization will begranted. In some countries in the EU, pricing of prescription drugs is subjectto government control and agreements must be reached on a national level beforemarketing may begin in that territory. If we are unable to reach agreement onan acceptable price for our products, we may choose not to pursue marketing ofour drugs in that territory. The foreign regulatory approval process involvesall of the risks associated with FDA clearance discussed above.

*Other Regulations*

We are also subject tonumerous federal, state and local laws relating to such matters as safe workingconditions, manufacturing practices, environmental protection, fire hazardcontrol, and disposal of hazardous or potentially hazardous substances. We mayincur significant costs to comply with such laws and regulations now or in thefuture.

**Employees**

As of March 6, 2007,we had a total of 59 full-time employees. Of those, 37 are engaged in clinicaldevelopment, regulatory affairs, biostatistics, manufacturing and preclinicaldevelopment. The remaining 22 are involved in marketing, corporate development,finance, administration and operations. We believe that we have goodrelationships with our employees. We have never had a work stoppage, and noneof our employees is represented under a collective bargaining agreement.

**AvailableInformation**

We are located inWestminster, Colorado, a suburb of Denver. Our mailing address is 11080CirclePoint Road, Suite 200, Westminster, Colorado 80020. Our websiteaddress is *www.allos.com*;however, information found on our website is not incorporated by reference intothis report. Our web site address is included in this report as an inactivetextual reference only. Our annual reports on Form 10-K, quarterlyreports on Form 10-Q and current reports on Form 8-K, aswell as any amendments to those 

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reports,are available free of charge through our website as soon as reasonablypracticable after we file them with, or furnish them to, the SEC. Once at *www.allos.com*, go to Investors/Media andthen to SEC Filings. You may also read and copy materials that we file with SECat the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC20549. You may obtain information on the operation of the Public ReferenceRoom by calling the SEC at 1-800-SEC-0330. The SEC alsomaintains a website that contains reports, proxy and information statements andother information regarding us and other issuers that file electronically withthe SEC at *www.sec.gov*.

**ITEM 1A. RISKFACTORS**

*Our business faces significant risks. These risksinclude those described below and may include additional risks of which we arenot currently aware or which we currently do not believe are material. If anyof the events or circumstances described in the following risk factors actuallyoccurs, they may materially harm our business, financial condition, operatingresults and cash flow. As a result, the market price of our common stock coulddecline. Additional risks and uncertainties that are not yet identified or thatwe think are immaterial may also materially harm our business, operatingresults and financial condition. The following risks should be read inconjunction with the other information set forth in this report.*

**We have a historyof net losses and an accumulated deficit, and we may never generate revenue orachieve or maintain profitability in the future.**

Since our inception in1992, we have not generated any revenue from product sales and have experiencedsignificant net losses and negative cash flows from operations. To date, wehave financed our operations primarily through the private and public sale ofsecurities. For the years ended December 31, 2004, 2005 and 2006, we hadnet losses attributable to common stockholders of $21.8 million,$20.8 million, and $30.2 million, respectively. As of December 31,2006, we had accumulated a deficit during our development stage of$208.6 million. We have incurred these losses principally from costsincurred in our research and development programs and from our general andadministrative expenses. We expect to continue incurring net losses for theforeseeable future. Our ability to generate revenue and achieve profitabilityis dependent on our ability, alone or with partners, to successfully completethe development of our product candidates, conduct clinical trials, obtain thenecessary regulatory approvals, and manufacture and market our product candidates.We may never generate revenue from product sales or become profitable. Weexpect to continue to spend substantial amounts on research and development,including amounts spent on conducting clinical trials for our productcandidates, and in preparing for the potential commercial launch of our productcandidates. We may not be able to continue as a going concern if we are unableto generate meaningful amounts of revenue to support our operations or cannototherwise raise the necessary funds to support our operations.

**Our productcandidates are in various stages of development and may never be fullydeveloped in a manner suitable for commercialization. If we do not developcommercially successful products, our ability to generate revenue will belimited.**

We currently have noproducts that are approved for commercial sale. All of our product candidatesare in various stages of development, and significant research and development,financial resources and personnel will be required to develop commerciallyviable products and obtain regulatory approvals. We do not expect to be able tomarket any of our product candidates, including EFAPROXYN and PDX, until atleast 2008. Further, certain of the indications that we are pursuing haverelatively low incidence rates, which may make it difficult for us to enroll asufficient number of patients in our clinical trials on a timely basis, or atall, and may limit the revenue potential of our product candidates. If we areunable to develop, receive approval for, or successfully commercialize any ofour product candidates, we may be unable to generate meaningful revenue fromproduct sales and will incur continued net losses and negative cash flows.

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**We cannot predictwhen or if we will obtain regulatory approval to commercialize our productcandidates.**

A pharmaceutical productcannot be marketed in the United States or most other countries until it hascompleted a rigorous and extensive regulatory approval process. If we fail toobtain regulatory approval to market our product candidates, we will be unableto sell our products and generate revenue, which would jeopardize our abilityto continue operating our business. Satisfaction of regulatory requirementstypically takes many years, is dependent upon the type, complexity and noveltyof the product and requires the expenditure of substantial resources. Ofparticular significance are the requirements covering research and development,testing, manufacturing, quality control, labeling and promotion of drugs forhuman use. We may not obtain regulatory approval for any product candidates wedevelop, including EFAPROXYN and PDX, or we may not obtain regulatory review ofsuch product candidates in a timely manner. For a more complete description ofthe regulatory approval process and related risks, please refer to the “GovernmentRegulation” section of Item 1 above.

**If our productcandidates, including EFAPROXYN and PDX, fail to meet safety and efficacyendpoints in clinical trials, they will not receive regulatory approval, and wewill be unable to market them.**

Our product candidates may not prove to be safe andefficacious in clinical trials and may not meet all of the applicableregulatory requirements needed to receive regulatory approval. The clinicaldevelopment and regulatory approval process is extremely expensive and takesmany years. Failure can occur at any stage of development, and the timing ofany regulatory approval cannot be accurately predicted.

We currently expect to conduct the final analysis of theprimary endpoint from our Phase 3 ENRICH trial in mid-2007, although theactual timing of the final analysis may vary based on a number of factors,including patient survival rates. We cannot assure you that the design of, ordata collected from, the ENRICH trial will be adequate to demonstrate thesafety and efficacy of EFAPROXYN for the treatment of patients with brainmetastases originating from breast cancer, or otherwise be sufficient tosupport FDA or any foreign regulatory approval. Similarly, according to thePROPEL trial protocol, we will conduct an interim analysis of  efficacy data from the PROPEL trial after 35patients have completed at least one cycle of treatment with PDX, and mustobserve at least four responses (complete or partial) out of the first 35patients in order to continue the trial. Wecurrently expect to conduct the 35 patient efficacy analysis in the second halfof 2007, although the actual timing of the interim analysis may vary based on anumber of factors, including patientenrollment rates. We cannot assure you that the design of, or datacollected from, the PROPEL trial will be adequate to continue the trial beyondthe first 35 patients or demonstrate the safety and efficacy of PDX for thetreatment of patients with relapsed or refractory peripheral T-cell lymphoma,or otherwise be sufficient to support FDA or any foreign regulatory approval. Ifthe ENRICH or PROPEL trials fail to achieve their safety and efficacyendpoints, we may be unable to obtain regulatory approval to commercializeEFAPROXYN or PDX, and our business and stock price may be harmed. If we fail toobtain regulatory approval for EFAPROXYN, PDX or any of our other current orfuture product candidates, we will be unable to market and sell them andtherefore may never generate meaningful amounts of revenue or becomeprofitable.

As part of the regulatoryprocess, we must conduct clinical trials for each product candidate todemonstrate safety and efficacy to the satisfaction of the FDA and otherregulatory authorities abroad. The number and design of clinical trials thatwill be required varies depending on the product candidate, the condition beingevaluated, the trial results and regulations applicable to any particularproduct candidate. The design of our clinical trials is based on manyassumptions about the expected effect of our product candidates, and if thoseassumptions prove incorrect, the clinical trials may not produce statisticallysignificant results. Preliminary results may not be confirmed upon full analysisof the detailed results of a trial, and prior clinical trial program designsand results may not be predictive of future clinical trial designs or results.Product candidates in later stage clinical trials may fail to show the desiredsafety 

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andefficacy despite having progressed through initial clinical trials withacceptable endpoints. If our product candidates fail to show clinicallysignificant benefits, they will not be approved for marketing.

**We may experiencedelays in our clinical trials that could adversely affect our financialposition and our commercial prospects.**

We do not know when our current clinical trials,including our ENRICH and PROPEL trials, will be completed, if at all. We alsocannot accurately predict when other planned clinical trials will begin or becompleted. Many factors affect patient enrollment, including the size of thepatient population, the proximity of patients to clinical sites, theeligibility criteria for the trial, competing clinical trials and new drugsapproved for the conditions we are investigating. Other companies areconducting clinical trials and have announced plans for future trials that areseeking or likely to seek patients with the same diseases as those we arestudying. Competition for patients in some cancer trials is particularlyintense because of the limited number of leading specialist physicians and thegeographic concentration of major clinical centers.

As a result of thenumerous factors which can affect the pace of progress of clinical trials, ourtrials may take longer to enroll patients than we anticipate, if they can becompleted at all. Delays in patient enrollment in the trials may increase ourcosts and slow our product development and approval process. Our productdevelopment costs will also increase if we need to perform more or largerclinical trials than planned. If other companies’ product candidates showfavorable results, we may be required to conduct additional clinical trials toaddress changes in treatment regimens or for our products to be commerciallycompetitive. Any delays in completing our clinical trials will delay ourability to generate revenue from product sales, and we may have insufficientcapital resources to support our operations.

**While we havenegotiated special protocol assessments with the FDA relating to our ENRICH andPROPEL trials, these agreements do not guarantee any particular outcome fromregulatory review of the trials or the products, including any regulatoryapproval.**

The protocols for theENRICH and PROPEL trials were reviewed by the FDA under the special protocolassessment, or SPA, process, which allows for FDA evaluation of a clinicaltrial protocol intended to form the primary basis of an efficacy claim insupport of a new drug application, and provides an agreement that the studydesign, including trial size, clinical endpoints and/or data analyses areacceptable to the FDA. However, a SPA agreement is not a guarantee of approval,and we cannot assure you that the design of, or data collected from, the ENRICHor PROPEL trials will be adequate to demonstrate the safety and efficacy ofEFAPROXYN or PDX in their target indications, or otherwise be sufficient to supportFDA or any foreign regulatory approval. Further, the SPA agreement is notbinding on the FDA if public health concerns unrecognized at the time the SPAagreement is entered into become evident, other new scientific concernsregarding product safety or efficacy arise, or if we fail to comply with theagreed upon trial protocols. In addition, the SPA agreement may be changed byus or the FDA on written agreement of both parties, and the FDA retainssignificant latitude and discretion in interpreting the terms of the SPAagreement and the data and results from the ENRICH and PROPEL trials. As aresult, we do not know how the FDA will interpret the parties’ respectivecommitments under the SPA agreement, how it will interpret the data and resultsfrom the ENRICH or PROPEL trials, or whether EFAPROXYN or PDX will receive anyregulatory approvals as a result of the SPA agreement or the clinical trial.Therefore, despite the potential benefits of the SPA agreement, significantuncertainty remains regarding the clinical development and regulatory approvalprocess for EFAPROXYN for the treatment of brain metastases originating frombreast cancer, and PDX for the treatment of PTCL.

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**We may be requiredto suspend, repeat or terminate our clinical trials if they are not conductedin accordance with regulatory requirements, the results are negative orinconclusive or the trials are not well designed.**

Clinical trials must be conducted in accordance withthe FDA’s Good Clinical Practices and are subject to oversight by the FDA andInstitutional Review Boards at the medical institutions where the clinicaltrials are conducted. In addition, clinical trials must be conducted withproduct candidates produced under the FDA’s Good Manufacturing Practices, andmay require large numbers of test subjects. Clinical trials may be suspended bythe FDA or us at any time if it is believed that the subjects participating inthese trials are being exposed to unacceptable health risks or if the FDA findsdeficiencies in the conduct of these trials.

Even if we achievepositive interim results in clinical trials, these results do not necessarilypredict final results, and acceptable results in early trials may not berepeated in later trials. Data obtained from preclinical and clinical activitiesare susceptible to varying interpretations that could delay, limit or preventregulatory clearances, and the FDA can request that we conduct additionalclinical trials. A number of companies in the pharmaceutical industry havesuffered significant setbacks in advanced clinical trials, even after promisingresults in earlier trials. As a result, there can be no assurance that ourENRICH or PROPEL trials will achieve their primary endpoints. In addition,negative or inconclusive results or adverse medical events during a clinicaltrial could cause a clinical trial to be repeated or terminated. Also, failureto construct clinical trial protocols to screen patients for risk profilefactors relevant to the trial for purposes of segregating patients into thepatient populations treated with the drug being tested and the control groupcould result in either group experiencing a disproportionate number of adverseevents and could cause a clinical trial to be repeated or terminated. If wehave to conduct additional clinical trials, whether for EFAPROXYN, PDX or anyother product candidate, it would significantly increase our expenses and delaymarketing of our products.

**Reports of adverseevents or safety concerns involving our product candidates or in related technologyfields or other companies’ clinical trials could delay or prevent us fromobtaining regulatory approval or negatively impact public perception of ourproduct candidates.**

Our product candidates may produce serious adverseevents. These adverse events could interrupt, delay or halt clinical trials ofour product candidates and could result in the FDA or other regulatoryauthorities denying approval of our product candidates for any or all targetedindications. An independent data safety monitoring board, the FDA, otherregulatory authorities or we may suspend or terminate clinical trials at anytime. We cannot assure you that any of our product candidates will be safe forhuman use.

At present, there are anumber of clinical trials being conducted by other pharmaceutical companiesinvolving small molecule chemotherapeutic agents. If other pharmaceuticalcompanies announce that they observed frequent adverse events or unknown safetyissues in their trials involving compounds similar to, or competitive with, ourproduct candidates, we could encounter delays in the timing of our clinicaltrials or difficulties in obtaining the approval of our product candidates. Aswell, the public perception of our product candidates might be adverselyaffected, which could harm our business and results of operations and cause themarket price of our common stock to decline, even if the concern relates toanother company’s product or product candidate. We cannot assure you that anyof our product candidates will be safe for human use.

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**Due to our relianceon contract research organizations and other third parties to conduct clinicaltrials, we are unable to directly control the timing, conduct and expense ofour clinical trials.**

We rely primarily on thirdparties to conduct our clinical trials, including the ENRICH and PROPEL trials.As a result, we have had and will continue to have less control over theconduct of our clinical trials, the timing and completion of the trials, therequired reporting of adverse events and the management of data developedthrough the trial than would be the case if we were relying entirely upon ourown staff. Communicating with outside parties can also be challenging,potentially leading to mistakes as well as difficulties in coordinating activities.Outside parties may have staffing difficulties, may undergo changes inpriorities or may become financially distressed, adversely affecting theirwillingness or ability to conduct our trials. We may experience unexpected costincreases that are beyond our control. Problems with the timeliness or qualityof the work of a contract research organization may lead us to seek toterminate the relationship and use an alternative service provider. However,making this change may be costly and may delay our trials, and contractualrestrictions may make such a change difficult or impossible. Additionally, itmay be impossible to find a replacement organization that can conduct ourtrials in an acceptable manner and at an acceptable cost.

**Even if our productcandidates meet safety and efficacy endpoints in clinical trials, regulatoryauthorities may not approve them, or we may face post-approval problems thatrequire withdrawal of our products from the market.**

We will not be able to commercialize any of our productcandidates until we have obtained regulatory approval. We have limitedexperience in filing and pursuing applications necessary to gain regulatoryapprovals, which may place us at risk of delays, overspending and humanresources inefficiencies.

Our product candidates may not be approved even ifthey achieve their endpoints in clinical trials. Regulatory agencies, includingthe FDA or their advisors, may disagree with our interpretations of data frompreclinical studies and clinical trials. Regulatory agencies also may approve aproduct candidate for fewer conditions than requested or may grant approvalsubject to the performance of post-marketing studies for a product candidate.In addition, regulatory agencies may not approve the labeling claims that arenecessary or desirable for the successful commercialization of our productcandidates.

Even if we receiveregulatory approvals, our product candidates may later exhibit adverse effectsthat limit or prevent their widespread use or that force us to withdraw thoseproduct candidates from the market. In addition, a marketed product continuesto be subject to strict regulation after approval and may be required toundergo post-approval studies. Any unforeseen problems with an approved productor any violation of regulations could result in restrictions on the product,including its withdrawal from the market. Any delay in, or failure to receiveor maintain regulatory approval for, any of our products could harm ourbusiness and prevent us from ever generating meaningful revenues or achievingprofitability.

**Even if we receiveregulatory approval for our product candidates, we will be subject to ongoingregulatory obligations and review.**

Following any regulatoryapproval of our product candidates, we will be subject to continuing regulatoryobligations such as safety reporting requirements and additional post-marketingobligations, including regulatory oversight of the promotion and marketing ofour products. In addition, we or our third-party manufacturers will be requiredto adhere to regulations setting forth current Good Manufacturing Practices.These regulations cover all aspects of the manufacturing, storage, testing,quality control and record keeping relating to our product candidates.Furthermore, we or our third-party manufacturers must pass a pre-approvalinspection of manufacturing facilities by the FDA and foreign authoritiesbefore obtaining marketing approval and will be subject to periodic inspectionby these regulatory authorities. Such inspections may result in complianceissues that could prevent or delay 

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marketingapproval, or require the expenditure of financial or other resources toaddress. If we or our third-party manufacturers fail to comply with applicableregulatory requirements, we may be subject to fines, suspension or withdrawalof regulatory approvals, product recalls, seizure of products, operatingrestrictions and criminal prosecution.

**Budget constraintsmay force us to delay our efforts to develop certain product candidates infavor of developing others, which may prevent us from commercializing allproduct candidates as quickly as possible.**

Because we have limitedresources, and because research and development is an expensive process, wemust regularly assess the most efficient allocation of our research anddevelopment budget. As a result, we may have to prioritize developmentcandidates and may not be able to fully realize the value of some of ourproduct candidates in a timely manner, if at all.

**If we fail toobtain the capital necessary to fund our operations, we will be unable tosuccessfully develop or commercialize our product candidates.**

We expect thatsignificant additional capital will be required in the future to continue ourresearch and development efforts and to commercialize our product candidates,if approved for marketing. Our actual capital requirements will depend on manyfactors, including, among other factors:

·       thetiming and outcome of our ongoing ENRICH and PROPEL trials;

·       costsassociated with the commercialization of our product candidates, if approvedfor marketing;

·       ourevaluation of, and decisions with respect to, our strategic alternatives; and

·       costsassociated with securing in-license opportunities, purchasing productcandidates and conducting preclinical research and clinical development for ourcurrent and future product candidates.

We intend to raiseadditional capital in the future through arrangements with corporate partners,equity or debt financings, or from other sources. We do not know whetheradditional financing will be available when needed, or that, if available, wewill obtain financing on terms favorable to our stockholders or us. If adequatefunds are not available to us, we will be required to delay, reduce the scopeof or eliminate one or more of our development programs and our business andfuture prospects for revenue and profitability may be harmed. To the extent weraise additional capital by issuing equity securities, our stockholders mayexperience substantial dilution. To the extent that we raise additional fundsthrough collaboration and licensing arrangements, we may be required torelinquish some rights to our technologies or product candidates, or grantlicenses on terms that are not favorable to us.

**If we are unable toeffectively protect our intellectual property, we will be unable to preventthird parties from using our technology, which would impair our competitivenessand ability to commercialize our product candidates. In addition, enforcing ourproprietary rights may be expensive and result in increased losses.**

Our success will depend in part on our ability toobtain and maintain meaningful patent protection for our products, both in theUnited States and in other countries. We rely on patents to protect a largepart of our intellectual property and our competitive position. Any patentsissued to or licensed by us could be challenged, invalidated, infringed,circumvented or held unenforceable. In addition, it is possible that no patentswill issue on any of our licensed patent applications. It is possible that theclaims in patents that have been issued or licensed to us or that may be issuedor licensed to us in the future will not be sufficiently broad to protect ourintellectual property or that the patents will not provide protection against 

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competitive products orotherwise be commercially valuable. Failure to obtain and maintain adequatepatent protection for our intellectual property would impair our ability to becommercially competitive.

Our commercial success will also depend in part on ourability to commercialize our product candidates without infringing patents orother proprietary rights of others or breaching the licenses granted to us. Wemay not be able to obtain a license to third-party technology that we mayrequire to conduct our business or, if obtainable, we may not be able tolicense such technology at a reasonable cost. If we fail to obtain a license toany technology that we may require to commercialize our technologies or productcandidates, or fail to obtain a license at a reasonable cost, we will be unableto commercialize the affected product or to commercialize it at a price thatwill allow us to become profitable.

In addition to patent protection, we also rely upontrade secrets, proprietary know-how and technological advances which we seek toprotect through confidentiality agreements with our collaborators, employeesand consultants. Our employees and consultants are required to enter intoconfidentiality agreements with us. We also have entered into non-disclosureagreements, which are intended to protect our confidential informationdelivered to third parties for research and other purposes. However, theseagreements could be breached and we may not have adequate remedies for anybreach, or our trade secrets and proprietary know-how could otherwise becomeknown or be independently discovered by others.

Furthermore, as with anypharmaceutical company, our patent and other proprietary rights are subject touncertainty. Our patent rights related to our product candidates might conflictwith current or future patents and other proprietary rights of others. For thesame reasons, the products of others could infringe our patents or otherproprietary rights. Litigation or patent interference proceedings, either ofwhich could result in substantial costs to us, may be necessary to enforce anyof our patents or other proprietary rights, or to determine the scope andvalidity or enforceability of other parties’ proprietary rights. The defenseand prosecution of patent and intellectual property infringement claims areboth costly and time consuming, even if the outcome is favorable to us. Anyadverse outcome could subject us to significant liabilities to third parties,require disputed rights to be licensed from third parties, or require us tocease selling our future products. We are not currently a party to any patentor other intellectual property infringement claims.

**We do not havemanufacturing facilities or capabilities and are dependent on third parties tofulfill our manufacturing needs, which could result in the delay of clinicaltrials, regulatory approvals, product introductions and commercial sales.**

We are dependent on third parties for the manufactureand storage of our product candidates for clinical trials and, if approved, forcommercial sale. If we are unable to contract for a sufficient supply of ourproduct candidates on acceptable terms, or if we encounter delays ordifficulties in the manufacturing process or our relationships with ourmanufacturers, we may not have sufficient product to conduct or complete ourclinical trials or support commercial requirements for our product candidates,if approved.

We have a contract with Hovione Inter Limited for thesupply of EFAPROXYN bulk drug substance, and a contract with Baxter Healthcarefor the supply of EFAPROXYN formulated drug product. These manufacturers arecurrently our only contracted sources for the production and formulation ofEFAPROXYN. Both PDX and RH1 are cytotoxic which requires manufacturers of thesesubstances to have specialized equipment and safety systems to handle suchsubstances. In addition, the starting materials for PDX require custompreparations, which will require us to manage an additional set of suppliers toobtain the needed supplies of PDX.

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Even if we obtain approval to market EFAPROXYN, PDX orRH1 in one or more indications, our current or future manufacturers may beunable to accurately and reliably manufacture commercial quantities ofEFAPROXYN, PDX or RH1 at reasonable costs, on a timely basis and in compliancewith the FDA’s current Good Manufacturing Practices. If our current or futurecontract manufacturers fail in any of these respects, our ability to timelycomplete our clinical trials, obtain required regulatory approvals and successfullycommercialize EFAPROXYN, PDX or RH1 will be materially and adversely affected.This risk may be heightened with respect to PDX and RH1 as there are a limitednumber of fill/finish manufacturers with the ability to handle cytotoxicproducts such as PDX and RH1.

Our reliance oncontract manufacturers exposes us to additional risks, including:

·       delays or failure tomanufacture sufficient quantities needed for clinical trials in accordance withour specifications or to deliver such quantities on the dates we require;

·       our current and futuremanufacturers are subject to ongoing, periodic, unannounced inspections by theFDA and corresponding state and international regulatory authorities forcompliance with strictly enforced current Good Manufacturing Practiceregulations and similar state and foreign standards, and we do not have controlover our contract manufacturers’ compliance with these regulations andstandards;

·       our current and futuremanufacturers may not be able to comply with applicable regulatoryrequirements, which would prohibit them from manufacturing products for us;

·       if we need to change toother commercial manufacturing contractors, the FDA and comparable foreignregulators must approve these contractors prior to our use, which would requirenew testing and compliance inspections, and the new manufacturers would have tobe educated in, or themselves develop substantially equivalent processesnecessary for, the production of our products;

·       our manufacturers might notbe able to fulfill our commercial needs, which would require us to seek newmanufacturing arrangements and may result in substantial delays in meetingmarket demands; and

·       we may not haveintellectual property rights, or may have to share intellectual propertyrights, to any improvements in the manufacturing processes or new manufacturingprocesses for our products.

Any of these factors couldresult in the delay of clinical trials, regulatory submissions, requiredapprovals or commercialization of our products under development, entail highercosts and result in our being unable to effectively commercialize our products.

**We may explore newalliances that may never materialize or may fail.**

We may, in the future,periodically explore a variety of possible partnerships or alliances in aneffort to gain access to additional complimentary resources. At the currenttime, we cannot predict what form such a partnership or alliance might take.Such strategic business alliances could result in: the issuance of equitysecurities that would dilute stockholders’ percentage ownership; theexpenditure of substantial operational, financial, and management resources inintegrating new businesses, technologies, and products; the assumption ofsubstantial actual or contingent liabilities; or a business combinationtransaction featuring terms that stockholders might not deem desirable.

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**Acceptance of ourproducts in the marketplace is uncertain, and failure to achieve marketacceptance will limit our ability to generate revenue and become profitable.**

Even if approvedfor marketing, our products may not achieve market acceptance. The degree ofmarket acceptance will depend upon a number of factors, including:

·       the receipt of timelyregulatory approval for the uses that we are studying;

·       the establishment anddemonstration in the medical community of the safety and efficacy of ourproducts and their potential advantages over existing and newly developedtherapeutic products;

·       ease of use of ourproducts;

·       reimbursement and coveragepolicies of government and private payors such as Medicare, Medicaid, insurancecompanies, health maintenance organizations and other plan administrators; and

·       the scope and effectivenessof our sales and marketing efforts.

Physicians, patients,payors or the medical community in general may be unwilling to accept, utilizeor recommend the use of any of our products.

**The status ofreimbursement from third-party payors for newly approved health care drugs isuncertain and failure to obtain adequate coverage and reimbursement could limitour ability to generate revenue.**

Our ability tosuccessfully commercialize our products will depend, in part, on the extent towhich coverage and reimbursement for the products will be available from:

·       government and healthadministration authorities;

·       private health insurers;

·       managed care programs; and

·       other third-party payors.

Significant uncertaintyexists as to the reimbursement status of newly approved health care products.Third-party payors, including Medicare, are challenging the prices charged formedical products and services. Government and other third-party payorsincreasingly are attempting to contain health care costs by limiting bothcoverage and the level of reimbursement for new drugs and by refusing, in somecases, to provide coverage for uses of approved products for disease conditionsfor which the FDA has not granted labeling approval. Third-party insurancecoverage may not be available to patients for our products. If government andother third-party payors do not provide adequate coverage and reimbursementlevels for our product candidates, their market acceptance may be reduced.

**Health care reformmeasures could adversely affect our business.**

The business and financial condition of pharmaceuticaland biotechnology companies are affected by the efforts of governmental andthird-party payors to contain or reduce the costs of health care. In the UnitedStates and in foreign jurisdictions there have been, and we expect that therewill continue to be, a number of legislative and regulatory proposals aimed atchanging the health care system. For example, in some countries other than theUnited States, pricing of prescription drugs is subject to government control,and we expect proposals to implement similar controls in the United States tocontinue. We are unable to predict what additional legislation or regulation,if any, relating to the health care industry or third-party coverage andreimbursement may be enacted in the future or what effect such legislation orregulation would have on our business. The pendency or approval of suchproposals or reforms could result in a decrease in our stock price or limit ourability to raise capital or to obtain strategic partnerships or licenses.

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The FDA has designatedEFAPROXYN for the treatment of brain metastases from breast cancer and PDX forthe treatment of T-cell lymphoma as orphan drugs under the Orphan Drug Act. TheOrphan Drug Act provides incentives to pharmaceutical companies to develop andmarket drugs for rare diseases, generally by entitling the first developer thatreceives FDA marketing approval for an orphan drug to a seven-year exclusivemarketing period in the United States for that product. In recent years,Congress has considered legislation to change the Orphan Drug Act to shortenthe period of automatic market exclusivity and to grant marketing rights tosimultaneous developers of a drug. If the Orphan Drug Act is amended in thismanner, any approved drugs for which we have been granted exclusive marketingrights under the Orphan Drug Act will face increased competition, which maydecrease the amount of revenue we may receive from these products.

**We may not obtainorphan drug exclusivity or we may not receive the full benefit of orphan drugexclusivity even if we obtain it.**

The FDA has granted orphandrug designation to EFAPROXYN for the treatment of patients with brainmetastases originating from breast cancer and to PDX for the treatment ofpatients with T-cell lymphoma. Under the Orphan Drug Act, if we are the firstcompany to receive FDA approval for these drugs for the designated orphan drugindications, we will obtain seven years of marketing exclusivity during whichFDA may not approve another company’s application for the same drug for thesame orphan indication. Orphan drug exclusivity would not prevent FDA approvalof a different drug for the orphan indication or the same drug for a differentindication. Moreover, if another company obtains orphan drug designation forefaproxiral, the active ingredient of EFAPROXYN, or for pralatrexate, which werefer to as PDX, and obtains FDA approval of an NDA before we do, we could beprevented from obtaining approval of our drugs for seven years. Even if weobtain orphan drug exclusivity, we can lose that exclusivity if FDA determinesthat we are unable to supply the relevant patient population or if anothermanufacturer demonstrates that its efaproxiral or pralatrexate product issuperior to ours.

**If we fail tocomply with healthcare fraud and abuse laws, we could face substantialpenalties and our business, operations and financial condition could beadversely affected*.***

As abiopharmaceutical company, even though we do not and will not control referralsof healthcare services or bill directly to Medicare, Medicaid or otherthird-party payors, certain federal and state healthcare laws and regulationspertaining to fraud and abuse will be applicable to our business. These lawsand regulations, include, among others:

·       thefederal Anti-Kickback Statute, which prohibits, among other things, personsfrom soliciting, receiving or providing remuneration, directly or indirectly,to induce either the referral of an individual, for an item or service or thepurchasing or ordering of a good or service, for which payment may be madeunder federal healthcare programs such as the Medicare and Medicaid programs;

·       federalfalse claims laws which prohibit, among other things, individuals or entitiesfrom knowingly presenting, or causing to be presented, claims for payment fromMedicare, Medicaid, or other third-party payors that are false or fraudulent;

·       thefederal Health Insurance Portability and Accountability Act of 1996, or HIPAA,which prohibits executing a scheme to defraud any healthcare benefit program ormaking false statements relating to healthcare matters; and

·       statelaw equivalents of each of the above federal laws, such as anti-kickback andfalse claims laws which may apply to items or services reimbursed by anythird-party payor, including commercial insurers.

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Although there are a number statutory exemptions andregulatory safe harbors protecting certain common activities from prosecutionunder the federal Anti-Kickback statute, the exemptions and safe harbors aredrawn narrowly, and practices that involve remuneration intended to induceprescribing, purchases, or recommendations may be subject to scrutiny if theydo not qualify for an exemption or safe harbor. Our practices may not in allcases meet all of the criteria for safe harbor protection from anti-kickback liability.

If our operations arefound to be in violation of any of the laws described above or any othergovernmental regulations that apply to us, we may be subject to penalties,including civil and criminal penalties, damages, fines and the curtailment orrestructuring of our operations. Any penalties, damages, fines, curtailment orrestructuring of our operations could adversely affect our ability to operateour business and our financial results. Although compliance programs canmitigate the risk of investigation and prosecution for violations of theselaws, the risks cannot be entirely eliminated. Any action against us forviolation of these laws, even if we successfully defend against it, could causeus to incur significant legal expenses and divert our management’s attentionfrom the operation of our business. Moreover, achieving and sustainingcompliance with all applicable federal and state fraud and abuse laws may provecostly.

**If we are unable todevelop adequate sales, marketing or distribution capabilities or enter intoagreements with third parties to perform some of these functions, we will notbe able to commercialize our products effectively.**

We have limited experiencein sales, marketing and distribution. To directly market and distribute anyproducts, we must build a sales and marketing organization with appropriatetechnical expertise and distribution capabilities. We may attempt to build sucha sales and marketing organization on our own or with the assistance of acontract sales organization. For some market opportunities, we may need toenter into co-promotion or other licensing arrangements with largerpharmaceutical or biotechnology firms in order to increase the likelihood ofcommercial success for our products. We may not be able to establish sales,marketing and distribution capabilities of our own or enter into sucharrangements with third parties in a timely manner or on acceptable terms. Tothe extent that we enter into co-promotion or other licensing arrangements, ourproduct revenues are likely to be lower than if we directly marketed and soldour products, and some or all of the revenues we receive will depend upon theefforts of third parties, and these efforts may not be successful.Additionally, building marketing and distribution capabilities may be moreexpensive than we anticipate, requiring us to divert capital from otherintended purposes or preventing us from building our marketing and distributioncapabilities to the desired levels.

**Ifour competitors develop and market products that are more effective than ours,our commercial opportunity will be reduced or eliminated.**

Even if we obtain thenecessary regulatory approvals to market EFAPROXYN, PDX or any other productcandidates, our commercial opportunity will be reduced or eliminated if ourcompetitors develop and market products that are more effective, have fewerside effects or are less expensive than our product candidates. Our potentialcompetitors include large fully integrated pharmaceutical companies and moreestablished biotechnology companies, both of which have significant resourcesand expertise in research and development, manufacturing, testing, obtainingregulatory approvals and marketing. Academic institutions, government agencies,and other public and private research organizations conduct research, seekpatent protection and establish collaborative arrangements for research,development, manufacturing and marketing. It is possible that competitors willsucceed in developing technologies that are more effective than those beingdeveloped by us or that would render our technology obsolete or noncompetitive.

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**If productliability lawsuits are successfully brought against us, we may incursubstantial liabilities and may be required to limit commercialization of ourproduct candidates.**

The testing and marketingof pharmaceutical products entail an inherent risk of product liability.Product liability claims might be brought against us by consumers, health careproviders or by pharmaceutical companies or others selling our future products.If we cannot successfully defend ourselves against such claims, we may incursubstantial liabilities or be required to limit the commercialization of ourproduct candidates. We have obtained limited product liability insurancecoverage for our human clinical trials. However, product liability insurancecoverage is becoming increasingly expensive, and we may be unable to maintainproduct liability insurance coverage at a reasonable cost or in sufficientamounts to protect us against losses due to product liability. A successfulproduct liability claim in excess of our insurance coverage could have amaterial adverse effect on our business, financial condition and results ofoperations. We may not be able to obtain commercially reasonable productliability insurance for any products approved for marketing.

**We are currentlyinvolved in a securities class action litigation, which could harm our businessif management attention is diverted or the claims are decided against us.**

We have been named as adefendant in an alleged securities class action lawsuit seeking unspecifieddamages relating to the issuance of allegedly false and misleading statementsregarding EFAPROXYN during the period from May 29, 2003 to April 29,2004 and subsequent declines in our stock price. On October 20, 2005, theDistrict Court granted our motion to dismiss the lawsuit with prejudice andentered judgment in our favor. On November 20, 2005, the plaintiffappealed the decision to the United States Court of Appeals for the TenthCircuit. In October 2006, the parties held discussions to settle thematter, although the terms of any such potential settlement remain subject tonegotiation and no binding agreement has been reached. A settlement would besubject to various conditions, including approval of the District Court. Weexpect that any settlement in excess of our deductible would be covered by ourinsurance carrier. As with any litigation proceeding, we cannot predict withcertainty the eventual outcome of our settlement discussions or the legalproceedings. In the event a settlement is not concluded, we intend tovigorously defend against the plaintiff’s appeal. If the Court of Appealsreverses the District Court’s decision and we are not successful in our defenseof such claims, we could be forced to make significant payments to theplaintiffs, and such payments could have a material adverse effect on ourbusiness, financial condition, results of operations and cash flows to theextent such payments are not covered by our insurance carriers. Even if ourdefense against such claims is successful, the litigation could result insubstantial costs and divert management’s attention and resources, which couldadversely affect our business. As of December 31, 2006, we have recorded$2,000,000 in accrued litigation settlement costs, which represents our bestestimate of the potential gross amount of the settlement costs to be paid tothe plaintiffs, and $1,749,000 in prepaid expenses and other assets, whichrepresents the amount we expect to be reimbursed from our insurance carrier. Thenet difference of $251,000 between these amounts represents the remainingunpaid deductible under our insurance policy, and this amount has been recordedto marketing, general and administrative expenses for the year ended December 31,2006.

**Failure to attract,retain and motivate skilled personnel and cultivate key academic collaborationswill delay our product development programs and our research and developmentefforts.**

We are a small companywith 59 full-time employees, and our success depends on our continued abilityto attract, retain and motivate highly qualified management and scientificpersonnel and on our ability to develop and maintain important relationshipswith leading academic institutions and scientists. Competition for personneland academic collaborations is intense. In particular, our product developmentprograms depend on our ability to attract and retain highly skilled clinicaldevelopment personnel. In addition, we will need to hire additional personneland develop additional academic collaborations as we 

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continueto expand our research and development activities. We do not know if we will beable to attract, retain or motivate personnel or maintain our relationshipswith academic institutions and scientists. If we fail to negotiate additionalacceptable collaborations with academic institutions and scientists, or if ourexisting academic collaborations were to be unsuccessful, our productdevelopment programs may be delayed.

**We cannot guaranteethat we will be in compliance with all potentially applicable regulations.**

The development, manufacturing, and, if approved,pricing, marketing, sales and reimbursement of our products, together with ourgeneral obligations, are subject to extensive regulation by federal, state andother authorities within the United States and numerous entities outside of theUnited States. We also have significantly fewer employees than many othercompanies that have the same or fewer product candidates in late stage clinicaldevelopment and we rely heavily on third parties to conduct many importantfunctions.

As a publicly-tradedcompany, we are subject to significant regulations, some of which have eitheronly recently been adopted, including the Sarbanes Oxley Act of 2002, or arecurrently proposals subject to change. We cannot assure that we are or will bein compliance with all potentially applicable regulations. If we fail to complywith the Sarbanes Oxley Act of 2002 or any other regulations we could besubject to a range of consequences, including restrictions on our ability tosell equity or otherwise raise capital funds, the de-listing of our commonstock from the Nasdaq Global Market, suspension or termination of our clinicaltrials, failure to obtain approval to market our product candidates,restrictions on future products or our manufacturing processes, significantfines, or other sanctions or litigation.

**If our internalcontrols over financial reporting are not considered effective, our businessand stock price could be adversely affected.**

Section 404 of the Sarbanes-Oxley Act of 2002requires us to evaluate the effectiveness of our internal controls overfinancial reporting as of the end of each fiscal year, and to include amanagement report assessing the effectiveness of our internal controls overfinancial reporting in our annual report on Form 10-K for thatfiscal year. Section 404 also requires our independent registered publicaccounting firm to attest to, and report on, management’s assessment of ourinternal controls over financial reporting.

Our management, includingour chief executive officer and principal financial officer, does not expectthat our internal controls over financial reporting will prevent all error andall fraud. A control system, no matter how well designed and operated, can provideonly reasonable, not absolute, assurance that the control system’s objectiveswill be met. Further, the design of a control system must reflect the fact thatthere are resource constraints, and the benefits of controls must be consideredrelative to their costs. Because of the inherent limitations in all controlsystems, no evaluation of controls can provide absolute assurance that allcontrol issues and instances of fraud involving a company have been, or willbe, detected. The design of any system of controls is based in part on certainassumptions about the likelihood of future events, and we cannot assure youthat any design will succeed in achieving its stated goals under all potentialfuture conditions. Over time, controls may become ineffective because ofchanges in conditions or deterioration in the degree of compliance withpolicies or procedures. Because of the inherent limitations in a cost-effectivecontrol system, misstatements due to error or fraud may occur and not bedetected. We cannot assure you that we or our independent registered publicaccounting firm will not identify a material weakness in our internal controlsin the future. A material weakness in our internal controls over financialreporting would require management and our independent registered publicaccounting firm to consider our internal controls as ineffective. If ourinternal controls over financial reporting are not considered effective, we mayexperience a loss of public confidence, which could have an adverse effect on ourbusiness and on the market price of our common stock.

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**If we do notprogress in our programs as anticipated, our stock price could decrease.**

For planning purposes, weestimate the timing of a variety of clinical, regulatory and other milestones,such as when a certain product candidate will enter clinical development, whena clinical trial will be completed or when an application for regulatoryapproval will be filed. Some of our estimates are included in this report. Ourestimates are based on information available to us as of the date of thisreport and a variety of assumptions. Many of the underlying assumptions areoutside of our control. If milestones are not achieved when we estimated thatthey would be, investors could be disappointed, and our stock price maydecrease.

**Warburg PincusPrivate Equity VIII, L.P. (“Warburg”) and Baker Brothers Life Sciences, L.P.(“Baker”) each control a substantial percentage of the voting power of ouroutstanding common stock.**

On March 2, 2005, we entered into a SecuritiesPurchase Agreement with Warburg Pincus Private Equity VIII, L.P. (“Warburg”)and certain other investors pursuant to which we issued and sold an aggregateof 2,352,443 shares of our Series A Exchangeable Preferred Stock (the“Exchangeable Preferred”) at a price per share of $22.10, for aggregate grossproceeds of approximately $52.0 million. On May 18, 2005, at ourAnnual Meeting of Stockholders, our stockholders voted to approve the issuanceof shares of our common stock upon exchange of shares of the ExchangeablePreferred. As a result of such approval, we issued a total of 23,524,430 sharesof common stock upon exchange of 2,352,443 shares of Exchangeable Preferred. Inconnection with its purchase of the Exchangeable Preferred, Warburg enteredinto a standstill agreement agreeing not to pursue certain activities thepurpose or effect of which may be to change or influence the control of Allos.

On February 2, 2007, we closed an underwrittenoffering of 9,000,000 shares of common stock, of which Baker Brothers LifeSciences, L.P. and certain other affiliated funds (collectively “Baker”)purchased 3,300,000 shares, at a price per share of $6.00, for aggregate grossproceeds of approximately $54.0 million. In connection with its purchase of sharesin the February 2007 offering, Baker entered into a standstill agreementagreeing not to pursue certain activities the purpose or effect of which mightbe to change or influence the control of Allos.

As of March 6, 2007, we had approximately65.8 million shares of common stock outstanding, of which Warburg owned22,624,430 shares, or approximately 34% of the voting power of our outstandingcommon stock, and Baker owned 9,929,493 shares, or approximately 15% of thevoting power of our outstanding common stock. Although each of Warburg andBaker have entered into a standstill agreement with us, they are, and willcontinue to be, able to exercise substantial influence over any actionsrequiring stockholder approval.

**Anti-takeover provisions in our charter documents andunder Delaware law could discourage, delay or prevent an acquisition of us,even if an acquisition would be beneficial to our stockholders, and may preventattempts by our stockholders to replace or remove our current management.**

Provisionsof our amended and restated certificate of incorporation and bylaws, as well asprovisions of Delaware law, could make it more difficult for a third party toacquire us, even if doing so would benefit our stockholders. In addition, theseprovisions may frustrate or prevent any attempts by our stockholders to replaceor remove our current management by making it more difficult for stockholdersto replace members of our board of directors. Because our board of directors isresponsible for appointing the members of our management team, these provisionscould in turn affect any attempt by our stockholders to replace current membersof our management team. These provisions include:

·       authorizingthe issuance of “blank check” preferred stock that could be issued by our boardof directors to increase the number of outstanding shares or change the balanceof voting control and thwart a takeover attempt;

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·       prohibitingcumulative voting in the election of directors, which would otherwise allow forless than a majority of stockholders to elect director candidates;

·       prohibitingstockholder action by written consent, thereby requiring all stockholderactions to be taken at a meeting of our stockholders;

·       eliminatingthe ability of stockholders to call a special meeting of stockholders; and

·       establishingadvance notice requirements for nominations for election to the board ofdirectors or for proposing matters that can be acted upon at stockholdermeetings.

In addition, we aresubject to Section 203 of the Delaware General Corporation Law, whichgenerally prohibits a Delaware corporation from engaging in any of a broadrange of business combinations with an interested stockholder for a period ofthree years following the date on which the stockholder became an interestedstockholder. This provision could have the effect of delaying or preventing achange of control, whether or not it is desired by or beneficial to ourstockholders. Notwithstanding the foregoing, the three year moratorium imposedon business combinations by Section 203 will not apply to either Warburgor Baker because, prior to the dates on which they became interestedstockholders, our board of directors approved the transactions which resultedin Warburg and Baker becoming interested stockholders. However, in connectionwith its purchase of Exchangeable Preferred in March 2005, Warburg enteredinto a standstill agreement agreeing not to pursue, for four years, certainactivities the purpose or effect of which may be to change or influence thecontrol of Allos. Similarly, in connection with the February 2007Financing, Baker entered into a standstill agreement agreeing not to pursue,for four years, certain activities the purpose or effect of which may be tochange or influence the control of Allos.

**We have adopted a stockholder rights plan that maydiscourage, delay or prevent a merger or acquisition that is beneficial to ourstockholders.**

In May 2003, ourboard of directors adopted a stockholder rights plan that may have the effectof discouraging, delaying or preventing a merger or acquisition of us that isbeneficial to our stockholders by diluting the ability of a potential acquirerto acquire us. Pursuant to the terms of our plan, when a person or group,except under certain circumstances, acquires 15% or more of our outstandingcommon stock or 10 business days after announcement of a tender or exchangeoffer for 15% or more of our outstanding common stock, the rights (except thoserights held by the person or group who has acquired or announced an offer toacquire 15% or more of our outstanding common stock) would generally becomeexercisable for shares of our common stock at a discount. Because the potentialacquirer’s rights would not become exercisable for our shares of common stockat a discount, the potential acquirer would suffer substantial dilution and maylose its ability to acquire us. In addition, the existence of the plan itselfmay deter a potential acquirer from acquiring us. As a result, either byoperation of the plan or by its potential deterrent effect, mergers andacquisitions of us that our stockholders may consider in their best interestsmay not occur.

Because Warburg owns asubstantial percentage of our outstanding common stock, we amended thestockholder rights plan in connection with Warburg’s purchase of ExchangeablePreferred in March 2005 to provide that Warburg and its affiliates will beexempt from the stockholder rights plan, unless Warburg and its affiliatesbecome, without the prior consent of our board of directors, the beneficialowner of more than 44% of our common stock. Likewise, since Baker owns asubstantial percentage of our outstanding common stock, we amended thestockholder rights plan in connection with the February 2007 Financing toprovide that Baker and its affiliates will be exempt from the stockholderrights plan, unless Baker becomes, without the prior consent of our board ofdirectors, the beneficial owner of more than 20% of our common stock. Under thestockholder rights plan, our board of directors has express authority to amendthe rights plan without stockholder approval.

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**The market price for our common stock has been and maycontinue to be highly volatile, and an active trading market for our commonstock may never exist.**

Wecannot be sure that an active trading market for our common stock will exist atany time. Holders of our common stock may not be able to sell shares quickly orat the market price if trading in our common stock is not active. The tradingprice of our common stock has been and is likely to be highly volatile andcould be subject to wide fluctuations in price in response to various factors,many of which are beyond our control, including:

·       actualor anticipated results of our clinical trials, including ENRICH and PROPEL;

·       actualor anticipated regulatory approvals or non-approvals of our product candidates,including EFAPROXYN and PDX, or of competing product candidates;

·       changesin laws or regulations applicable to our product candidates;

·       changesin the expected or actual timing of our development programs;

·       actualor anticipated variations in quarterly operating results;

·       announcementsof technological innovations by us or our competitors;

·       changesin financial estimates or recommendations by securities analysts;

·       conditionsor trends in the biotechnology and pharmaceutical industries;

·       changesin the market valuations of similar companies;

·       announcementsby us of significant acquisitions, strategic partnerships, joint ventures orcapital commitments;

·       additionsor departures of key personnel;

·       disputesor other developments relating to proprietary rights, including patents,litigation matters and our ability to obtain patent protection for ourtechnologies;

·       developmentsconcerning any research and development, manufacturing, and marketingcollaborations;

·       salesof large blocks of our common stock;

·       salesof our common stock by our executive officers, directors and five percentstockholders; and

·       economicand other external factors, including disasters or crises.

Public companies ingeneral and companies included on the Nasdaq Global Market in particular haveexperienced extreme price and volume fluctuations that have often beenunrelated or disproportionate to the operating performance of those companies.There has been particular volatility in the market prices of securities ofbiotechnology and other life sciences companies, and the market prices of thesecompanies have often fluctuated because of problems or successes in a givenmarket segment or because investor interest has shifted to other segments.These broad market and industry factors may cause the market price of ourcommon stock to decline, regardless of our operating performance. We have nocontrol over this volatility and can only focus our efforts on our ownoperations, and even these may be affected due to the state of the capitalmarkets. In the past, following large price declines in the public market priceof a company’s securities, securities class action litigation has often beeninitiated against that company, including in 2004 against us. Litigation ofthis type could result in substantial costs and diversion of management’sattention and resources, which would hurt our business. Any adversedetermination in litigation could also subject us to significant liabilities.

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**We are required to recognize stock-based compensationexpense relating to employee stock options, restricted stock, and stockpurchases under our Employee Stock Purchase Plan, and the amount of expense werecognize may not accurately reflect the value of our share-based paymentawards. Further, the recognition of stock-based compensation expense will causeour net losses to increase and may cause the trading price of our common stockto fluctuate.**

On January 1, 2006,we adopted SFAS 123R, which requires the measurement and recognition ofcompensation expense for all stock-based compensation based on estimated fairvalues. As a result, our operating results for the year ended December 31,2006 included, and future periods will include, a charge for stock-basedcompensation related to employee stock options, restricted stock and discountedemployee stock purchases. The application of SFAS 123R requires the use ofan option-pricing model to determine the fair value of share-based paymentawards. This determination of fair value is affected by our stock price as wellas assumptions regarding a number of highly complex and subjective variables.These variables include, but are not limited to, our expected stock pricevolatility over the term of the awards, and actual and projected employee stockoption exercise behaviors. Option-pricing models were developed for use inestimating the value of traded options that have no vesting or hedgingrestrictions and are fully transferable. Because our employee stock optionshave certain characteristics that are significantly different from tradedoptions, and because changes in the subjective assumptions can materiallyaffect the estimated value, in management’s opinion the existing valuationmodels may not provide an accurate measure of the fair value of our employeestock options.

Our adoption ofSFAS 123R has had a material impact on our financial statements andresults of operations. We also expect that SFAS 123R will have a materialimpact on our future financial statements and results of operations. We cannotpredict the effect that our stock-based compensation expense will have on thetrading price of our common stock.

**Substantial sales of shares may impact the marketprice of our common stock.**

If our stockholders sellsubstantial amounts of our common stock, the market price of our common stockmay decline. These sales also might make it more difficult for us to sellequity or equity-related securities in the future at a time and price that weconsider appropriate. We are unable to predict the effect that sales may haveon the then prevailing market price of our common stock. Pursuant to aRegistration Rights Agreement entered into between us with Warburg and theother purchasers of our Exchangeable Preferred, beginning on March 4,2007, such investors will be entitled to certain registration rights withrespect to the shares of common stock that were issued upon exchange of theExchangeable Preferred.

In addition, we will needto raise substantial additional capital in the future to fund our operations.If we raise additional funds by issuing equity securities, the market price ofour common stock may decline and our existing stockholders may experiencesignificant dilution.

**ITEM1B.**       UNRESOLVED STAFF COMMENTS

Not Applicable.

**ITEM2.**                PROPERTIES

Our corporate headquartersfacility consists of approximately 43,956 square feet in Westminster, Colorado.We lease our corporate headquarters facility pursuant to a lease agreement thatexpires on October 31, 2008. In January 2005, we entered intoagreements to sublease 9,420 square feet of this space to two other entities.

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We believe that our leasedfacilities are adequate to meet our needs until such time, if any, as wereceive regulatory approval to market one or more of our product candidates. Wealso believe that there is adequate space for lease in our area to support ourfuture growth requirements.

**ITEM3.**                LEGAL PROCEEDINGS

The Company and one of itsformer officers were named as defendants in a purported securities class actionlawsuit filed in May 2004 in the United States District Court for theDistrict of Colorado (the “District Court”). An amended complaint was filed in August 2004.The lawsuit was brought on behalf of a purported class of purchasers of oursecurities during the period from May 29, 2003 to April 29, 2004, andsought unspecified damages relating to the issuance of allegedly false andmisleading statements regarding EFAPROXYN during this period and subsequentdeclines in our stock price. On October 20, 2005, the District Courtgranted the defendants’ motion to dismiss the lawsuit with prejudice. In anopinion dated October 20, 2005, the District Court concluded that theplaintiff’s complaint failed to meet the legal requirements applicable to itsalleged claims.

On November 20, 2005,the plaintiff appealed the District Court’s decision to the U.S. Court ofAppeals for the Tenth Circuit (the “Court of Appeals”).   In October 2006,the parties held discussions to settle the matter, although the terms of anysuch potential settlement remain subject to negotiation and no bindingagreement has been reached. A settlement would be subject to variousconditions, including approval of the District Court. We expect that anysettlement in excess of our deductible would be covered by our insurancecarrier. As with any litigation proceeding, we cannot predict with certaintythe eventual outcome of our settlement discussions or the legal proceedings. Inthe event a settlement is not concluded, we intend to vigorously defend againstthe plaintiff’s appeal. If the Court of Appeals reverses the District Court’sdecision and we are not successful in our defense of such claims, we could beforced to make significant payments to the plaintiffs, and such payments couldhave a material adverse effect on our business, financial condition, results ofoperations and cash flows to the extent such payments are not covered by ourinsurance carriers. Even if our defense against such claims is successful, thelitigation could result in substantial costs and divert management’s attentionand resources, which could adversely affect our business. As of December 31,2006, we have recorded $2,000,000 in accrued litigation settlement costs, whichrepresents our best estimate of the potential gross amount of the settlementcosts to be paid to the plaintiffs, and $1,749,000 in prepaid expenses andother assets, which represents the amount we expect to be reimbursed from ourinsurance carrier. The net difference of $251,000 between these amountsrepresents the remaining unpaid deductible under our insurance policy, and thisamount has been recorded to marketing, general and administrative expenses forthe year ended December 31, 2006.

**ITEM4.**                SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS

None.

40

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**PART II**

**ITEM 5.**                MARKETFOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES

**Market Informationand Holders**

Ourcommon stock is traded on the Nasdaq Global Market® under the symbol “ALTH.”  The following table sets forth, for theperiods indicated, the high and low sales prices for our common stock asreported on the Nasdaq Global Market:

| **Year Ended December 31, 2006** | ** ** | ** ** | ** ** | **HIGH** | ** ** | **LOW** | ** ** |
|------------------------------------------------------|------------|------------|------------|----------|------------|---------|------------|
| First Quarter                                        |       | $          | 3.55       |     | $          | 2.09    |       |
| Second Quarter                                       |       | $          | 3.53       |     | $          | 2.90    |       |
| Third Quarter                                        |       | $          | 4.15       |     | $          | 3.52    |       |
| Fourth Quarter                                       |       | $          | 7.28       |     | $          | 3.74    |       |

 

| **Year Ended December 31, 2005** | ** ** | ** ** | ** ** | **HIGH** | ** ** | **LOW** | ** ** |
|------------------------------------------------------|------------|------------|------------|----------|------------|---------|------------|
| First Quarter                                        |       | $          | 2.71       |     | $          | 2.06    |       |
| Second Quarter                                       |       | $          | 2.43       |     | $          | 2.06    |       |
| Third Quarter                                        |       | $          | 2.56       |     | $          | 2.08    |       |
| Fourth Quarter                                       |       | $          | 2.50       |     | $          | 2.01    |       |

 

On March 6, 2007, wehad approximately 74 holders of record of our common stock.

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**Stock PerformanceMeasurement Comparison(1)**

The following graph showsthe total stockholder return of an investment of $100 in cash on December 31,2001 for (i) the Company’s common stock, (ii) the Nasdaq CompositeIndex and (iii) the Nasdaq Biotechnology Index. All values assumereinvestment of the full amount of all dividends and are calculated as of December 31of each year:

**Comparison of 5year Cumulative Total Return on Investment**

| **Total Return Analysis** | ** ** | ** ** | ** ** | **12//31/2001** | ** ** | **12/31/2002** | ** ** | **12/31/2003** | ** ** | **12/31/2004** | ** ** | **12/31/2005** | ** ** | **12/31/2006** | ** ** |
|-------------------------------------|------------|------------|------------|-----------------|------------|----------------|------------|----------------|------------|----------------|------------|----------------|------------|----------------|------------|
| **Allos Therapeutics, Inc.**   |       |       | $          | 100.00          |       |           |       | $              | 108.36     |           |       |           | $          | 51.73          |       |   |   | $ | 34.58 |   |   |   | $ | 30.98 |   |   |   | $ | 84.29 |   |   |
| **NASDAQ Composite**                |       |       | $          | 100.00          |       |           |       | $              | 69.66      |           |       |           | $          | 99.71          |       |   |   | $ | 113.79 |   |   |   | $ | 114.47 |   |   |   | $ | 124.20 |   |   |
| **NASDAQ Biotechnology**            |       |       | $          | 100.00          |       |           |       | $              | 62.08      |           |       |           | $          | 90.27          |       |   |   | $ | 99.08 |   |   |   | $ | 111.81 |   |   |   | $ | 110.06 |   |   |

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(1)          Theinformation in this section is not “soliciting material,” is not deemed “filed”with the SEC and is not to be incorporated by reference in any filing of theCompany under the 1933 Act or the 1934 Act whether made before or after thedate hereof and irrespective of any general incorporation language in any suchfiling.

**Dividends**

We have never paiddividends to holders of our common stock, and we do not anticipate paying anycash dividends in the foreseeable future as we intend to retain any earningsfor use in our business. Any future determination to pay dividends will be atthe discretion of our board of directors and will depend upon the results ofoperations, financial condition, contractual restrictions, restrictions imposedby applicable law and other factors our board of directors deems relevant.

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**SecuritiesAuthorized for Issuance Under Equity Compensation Plans**

Thefollowing table provides certain information with respect to our equitycompensation plans in effect as of December 31, 2006:

| **Plan Category**                                          | ** ** |   | ** ** | **Number of securities to  be issued upon exercise  of outstanding options  and rights  (a)** | ** ** | **Weighted-average  exercise price  of outstanding  options and rights  (b)** | ** ** | **Number of securities  remaining available  for issuance under  equity compensation  plans (excluding  securities reflected  in column (a))  (c)** | ** ** |
|-----------------------------------------------------------------|------------|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Equity  compensation plans approved by security holders**     |       |   | 4,770,071  |                                                                                                                                       |       |                                                                                              | $          | 3.36                                                                                                                                                                                                  |       |   |   | 4,918,608 | (1)(2) |   |
| **Equity  compensation plans not approved by security holders** |       |   | 1,008,500  |                                                                                                                                       |       |                                                                                              | $          | 4.71                                                                                                                                                                                                  |       |   |   | 1,345,393 |   |   |
| **Total**                                                       |       |   | 5,778,571  |                                                                                                                                       |       |                                                                                              | $          | 3.60                                                                                                                                                                                                  |       |   |   | 6,264,001 | (1)(2) |   |

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(1)          As of December 31, 2006,2,594,855 shares of common stock were authorized and unissued under our2000 Stock Incentive Compensation Plan. On January 1 of each year duringthe term of our 2000 Stock Incentive Compensation Plan, beginning on January 1,2001 through and including January 1, 2010, the share reserve under the2000 Stock Incentive Compensation Plan is increased by the lesser of the following: (i) 2% of the totalnumber of shares of common stock outstanding, (ii) 440,000 shares, or (iii) suchsmaller number of shares as determined by the Board of Directors. On January 1,2007, the share reserve under our 2000 Stock Incentive Compensation Plan wasincreased by 440,000 shares.

(2)          Includes 2,323,753shares of common stock available for future issuance under our 2001 EmployeeStock Purchase Plan.

Please see Note 3 toour Financial Statements included in Part IV, Item 15 of this reportfor a description of the material features of our 2002 Broad Based EquityIncentive Plan and 2006 Inducement Award Plan, each of which was adoptedwithout the approval of our security holders.

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**ITEM 6.**                SELECTEDFINANCIAL DATA

Theselected financial data set forth below should be read in conjunction with ourfinancial statements and the related notes and “Management’s Discussion andAnalysis of Financial Condition and Results of Operations,” included in thisreport. The statement of operations data for the years ended December 31,2004, 2005, 2006, and cumulative period from September 1, 1992 through December 31,2006, and the balance sheet data as of December 31, 2005 and 2006, arederived from, and qualified by reference to, our audited financial statementsincluded elsewhere in this report. The statement of operations data for theyears ended December 31, 2002 and 2003, and the balance sheet data as of December 31,2002, 2003 and 2004, are derived from our audited financial statements that donot appear in this report. The historical results are not necessarilyindicative of the operating results to be expected in the future.

| ** **                                                            | ** ** | **Years Ended December 31,**                                            | ** ** | **Cumulative  period from  September 1,  1992 (date  of inception)  through  December 31** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                            | ** ** | **2002**                                                                               | ** ** | **2003**                                                                                                            | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** | **2006** | ** ** |
| ** **                                                            | ** ** | **(in thousands, except share and per share data)** | ** ** |
| **Statement of Operations Data:**                                     | ** ** | ** **                                                                             | ** ** | ** **                                                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |
| Operating expenses:                                                   |       |                                                                                   |       |                                                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Research and development                                              |       | $                                                                                      | 13,860     |                                                                                                                | $          | 11,957 |   | $ | 10,158 |   | $ | 11,215 |   | $ | 14,322 |   |   | $ | 107,856 |   |   |
| Clinical manufacturing                                                |       | 3,776                                                                                  |       | 7,252                                                                                                               |       | 2,979 |   | 1,266 |   | 2,284 |   |   | 29,065 |   |   |
| Marketing, general and administrative                                 |       | 10,444                                                                                 |       | 9,378                                                                                                               |       | 9,194 |   | 9,044 |   | 14,876 |   |   | 83,158 |   |   |
| Restructuring and separation costs                                    |       | —                                                                                 |       | 638                                                                                                                 |       | — |   | 380 |   | 646 |   |   | 1,664 |   |   |
| Total operating expenses                                              |       | 28,080                                                                                 |       | 29,225                                                                                                              |       | 22,331 |   | 21,905 |   | 32,128 |   |   | 221,743 |   |   |
| Loss from operations                                                  |       | (28,080                                                                                | )          | (29,225                                                                                                             | )          | (22,331 | ) | (21,905 | ) | (32,128 | ) |   | (221,743 | ) |   |
| Gain on settlement claims                                             |       | —                                                                                 |       | 5,110                                                                                                               |       | — |   | — |   | — |   |   | 5,110 |   |   |
| Interest and other income, net                                        |       | 2,311                                                                                  |       | 988                                                                                                                 |       | 494 |   | 1,768 |   | 1,916 |   |   | 18,310 |   |   |
| Net loss                                                              |       | (25,769                                                                                | )          | (23,127                                                                                                             | )          | (21,837 | ) | (20,137 | ) | (30,212 | ) |   | (198,323 | ) |   |
| Dividend related to beneficial conversion feature of  preferred stock |       | —                                                                                 |       | —                                                                                                              |       | — |   | (623 | ) | — |   |   | (10,236 | ) |   |
| Net loss attributable to common stockholders                          |       | $                                                                                      | (25,769    | )                                                                                                                   | $          | (23,127 | ) | $ | (21,837 | ) | $ | (20,760 | ) | $ | (30,212 | ) |   | $ | (208,559 | ) |   |
| Net loss per share: basic and diluted                                 |       | $                                                                                      | (1.03      | )                                                                                                                   | $          | (0.87 | ) | $ | (0.70 | ) | $ | (0.45 | ) | $ | (0.55 | ) |   |   |   |   |
| Weighted-average  shares: basic and diluted                           |       | 24,942,496                                                                             |       | 26,493,861                                                                                                          |       | 31,139,192 |   | 46,070,686 |   | 55,299,614 |   |   |   |   |   |

 

| ** **                                                       | ** ** | **As of December 31,** | ** ** |
|------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                       | ** ** | **2002**                              | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                                       | ** ** | **(in thousands)**               | ** ** |
| **Balance Sheet Data:**                                          |       |                                  |       |   |   |   |   |   |   |   |   |
| Cash, cash equivalents and investments in marketable  securities |       | $                                     | 54,433     |   | $ | 44,897 |   | $ | 23,711 |   | $ | 55,156 |   | $ | 32,796 |   |
| Long-term investments in marketable securities                   |       | 5,816                                 |       | 150 |   | 138 |   | 126 |   | — |   |
| Working capital                                                  |       | 48,679                                |       | 43,806 |   | 22,745 |   | 52,477 |   | 28,897 |   |
| Total assets                                                     |       | 64,401                                |       | 48,174 |   | 26,173 |   | 57,081 |   | 36,382 |   |
| Long-term obligations, less current portion                      |       | —                                |       | — |   | — |   | — |   | — |   |
| Common stock                                                     |       | 171,046                               |       | 181,446 |   | 181,485 |   | 231,637 |   | 238,109 |   |
| Deficit accumulated during the development stage                 |       | (112,623                              | )          | (135,750 | ) | (157,587 | ) | (178,347 | ) | (208,559 | ) |
| Total  stockholders’ equity                                 |       | 57,322                                |       | 45,411 |   | 23,863 |   | 53,290 |   | 29,550 |   |
|                                                                  |            |                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**ITEM 7.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

**Overview**

We are a biopharmaceutical company focused ondeveloping and commercializing innovative small molecule drugs for thetreatment of cancer. We strive to develop proprietary products that have thepotential to improve the standard of care in cancer therapy. Our goal is tobuild a profitable company by generating income from products we develop andcommercialize, either alone or with one or more potential strategic partners. Ourfocus is on product opportunities that leverage our internal clinicaldevelopment and regulatory expertise and address important markets with unmetmedical need. We may also seek to grow our existing portfolio of productcandidates through product acquisition and in-licensing efforts.

We have threeproduct candidates that are currently under development, EFAPROXYN(efaproxiral), PDX (pralatrexate) and RH1.

·       **EFAPROXYN** (efaproxiral) is the firstsynthetic small molecule designed to sensitize hypoxic, or oxygen-deprived,areas of tumors during radiation therapy by facilitating the release of oxygenfrom hemoglobin, the oxygen-carrying protein contained within red bloodcells, thereby increasing the level of oxygen in tumors. The presence of oxygenin tumors is an essential element for the effectiveness of radiation therapy. Byincreasing tumor oxygenation, we believe EFAPROXYN has the potential to enhancethe efficacy of standard radiation therapy.

·       **PDX** (pralatrexate) is a novel, smallmolecule chemotherapeutic agent that inhibits dihydrofolate reductase, or DHFR,a folic acid (folate)-dependent enzyme involved in the building ofnucleic acid, or DNA, and other processes. PDX was rationally designed forefficient transport into tumor cells via the reduced folate carrier, or RFC-1,and effective intracellular drug retention. We believe these biochemicalfeatures, together with preclinical and clinical data in a variety of tumors,suggest that PDX may have a favorable potency and toxicity profile relative tomethotrexate and other related DHFR inhibitors. We believe PDX has thepotential to be delivered as a single agent or in combination therapy regimens.

·       **RH1** is a small molecule chemotherapeuticagent that we believe is bioactivated by the enzyme DT-diaphorase, or DTD,otherwise known as NAD(P)H quinone oxidoreductase, or NQ01, which isover-expressed in many tumors relative to normal tissue, including lung, colon,breast and liver tumors. We believe that because RH1 is bioactivated in thepresence of DTD, it has the potential to provide targeted drug delivery tothese tumor types while limiting the amount of toxicity to normal tissue.

In September 2006, we completed patientenrollment in ENRICH, a pivotal Phase 3 clinical trial of EFAPROXYN plus wholebrain radiation therapy, or WBRT, in women with brain metastases originatingfrom breast cancer. A total of 368 patients were enrolled at 78 cancer centersacross North America, Europe and South America. The primary endpoint of thetrial will measure the difference in survival between patients receiving WBRTplus supplemental oxygen, with or without EFAPROXYN. In accordance with theENRICH trial protocol, we will conduct the final analysis of the primaryendpoint following the occurrence of 282 patient deaths, which we currentlyexpect to occur in mid-2007, although the actual timing of the finalanalysis may vary based on a number of factors, including patient survival rates.If the trial is deemed to be positive at the final analysis, we intend tosubmit an amendment to our previously filed new drug application, or NDA, tothe United States Food and Drug Administration, or FDA, to seek marketingapproval for EFAPRPOXYN for use as an adjunct to WBRT for the treatment ofwomen with brain metastases originating from breast cancer.

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In addition to the ENRICH trial, we are currentlyenrolling patients in a Phase 1 clinical trial of EFAPROXYN in patients withlocally advanced non-small cell lung cancer, or NSCLC, receiving concurrentchemoradiotherapy (chemotherapy and radiation therapy administered at the sametime), and a Phase 1b/2 clinical trial of EFAPROXYN in patients with locallyadvanced cancer of the cervix receiving concurrent chemoradiotherapy. Inaddition, in the event the ENRICH trial is positive, we intend to expand ourclinical development activities involving EFAPROXYN to pursue additionalindications for which there is evidence of potential clinical benefit.

In August 2006, we initiated PROPEL, a Phase 2clinical trial of PDX in patients with relapsed or refractory peripheral T-celllymphoma, or PTCL, that we believe, if positive, will be sufficient to supportthe filing of an NDA to seek marketing approval for PDX in this indication. Thetrial will seek to enroll a minimum of 100 evaluable patients at approximately35 cancer centers across the United States, Canada and Europe. The primaryendpoint of the study is objective response rate (complete and partial response).Secondary endpoints include duration of response, progression-free survival andoverall survival. We currently expect to complete patient enrollment in thistrial by the third quarter of 2008, although the actual timing of completion ofenrollment may vary based on a number of factors, including site initiation andpatient enrollment rates. In July 2006, we reached agreement with the FDAunder the special protocol assessment, or SPA process, on the design of thisPhase 2 trial. The SPA process allows for FDA evaluation of a clinical trialprotocol intended to form the primary basis of an efficacy claim in support ofa new drug application, and provides an agreement that the study design,including trial size, clinical endpoints and/or data analyses are acceptable tothe FDA.

In addition to the PROPEL study, we are currentlyenrolling patients in a Phase 1/2 study of PDX in patients with non-Hodgkin’slymphoma, or NHL, and Hodgkin’s disease, and a Phase 1 dose escalation of PDXwith vitamin B12 and folic acid supplementation in patients with previouslytreated advanced NSCLC. During 2007, we also plan to initiate several newstudies to further evaluate PDX’s potential clinical utility in otherhematologic and oncologic indications, including a Phase 1 study of PDX plusgemcitabine in patients with relapsed or refractory NHL and Hodgkin’s disease,and a Phase 1/2 study of PDX in patients with relapsed or persistent cutaneousT-cell lymphoma, or CTCL. We also plan to initiate a study of PDX in one ormore solid tumors during the second half of 2007, once we have determined themaximum tolerated dose for PDX in the ongoing Phase 1 dose escalation study ofPDX with vitamin B12 and folic acid supplementation in patients withpreviously-treated advanced NSCLC.

Since our inception in 1992, we have not generated anyrevenue from product sales and have experienced significant net losses andnegative cash flows from operations. We have incurred these losses principallyfrom costs incurred in our research and development programs and from ourgeneral and administrative expenses. For the years ended December 31,2004, 2005 and 2006, we had net losses attributable to common stockholders of$21.8 million, $20.8 million, and $30.2 million, respectively. As of December 31,2006, we had accumulated a deficit during our development stage of $208.6million.

Our ability to generate revenue and achieveprofitability is dependent on our ability, alone or with partners, tosuccessfully complete the development of our product candidates, conductclinical trials, obtain the necessary regulatory approvals, and manufacture andmarket our product candidates. Even if our clinical trials demonstrate thesafety and effectiveness of our product candidates, we do not expect to be ableto record commercial sales of any our product candidates until mid-2008at the earliest. As of result of our research and development expenses and thecosts of preparing for the potential commercial launch of EFAPROXYN and PDX, weexpect to incur significant and growing losses for the foreseeable future. Althoughthe size and timing of our future operating losses are subject to significantuncertainty, we expect them to increase over the next several years as wecontinue to fund our development programs and prepare for the potentialcommercial launch of our product candidates.

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We will be required toraise additional capital to support our future operations, including thepotential commercialization of EFAPROXYN and/or PDX in the event we obtainregulatory approval to market such product candidates. We may seek to obtainthis additional capital through arrangements with corporate partners, equity ordebt financings, or from other sources. Such arrangements, if successfullyconsummated, may be dilutive to our existing stockholders. However, there is noassurance that we will be successful in consummating any such arrangements. Inaddition, in the event that additional funds are obtained through arrangementswith collaborative partners or other sources, such arrangements may require usto relinquish rights to some of our technologies, product candidates orproducts under development that we would otherwise seek to develop orcommercialize ourselves. If we are unable to generate meaningful amounts ofrevenue from future product sales, if any, or cannot otherwise raise sufficientadditional funds to support our operations, we may be required to delay, reducethe scope of or eliminate one or more of our development programs and ourbusiness and future prospects for revenue and profitability may be harmed.

**Results ofOperations**

***Comparison of Years Ended December 31, 2004, 2005and 2006***

*Research and Development.**  *Research and development expensesinclude the costs of certain personnel, basic research, preclinical studies,clinical trials, regulatory affairs, biostatistical data analysis, patents andlicensing fees for our product candidates.

| ** **                         | ** ** | **Years Ended  December 31,** | ** ** |
|------------------------------------|------------|-----------------------------------------|------------|
| ** **                         | ** ** | **2004**                                | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                         | ** ** | **(in millions)**                  | ** ** |
| Research and  development expenses |       | $                                       | 10.2       |   | $ | 11.2 |   | $ | 14.3 |   |
|                                    |            |                                         |            |  |  |  |  |  |  |  |

 

The$1.1 million increase in research and development expenses in 2005 ascompared to 2004 was primarily due to a $3.6 million increase in clinicaltrial costs resulting from increased patient enrollment in our Phase 3ENRICH trial. This increase was partially offset by the following decreases:

·       $1.0 milliondecrease in licensing fees resulting from a milestone payment paid in 2004under our license agreement for PDX;

·       $590,000decrease in preclinical study costs for PDX;

·       $396,000decrease in consulting costs due to the cost of activities relating to ourmeeting with ODAC in May 2004;

·       $277,000decrease in regulatory fees due to the cost of our MAA filing in 2004; and

·       $167,000decrease in non-cash stock-based compensation expense.

The$3.1 million increase in research and development expenses in 2006 ascompared to 2005 was primarily due to the following:

·       $1.1 millionincrease in preclinical study costs related to PDX;

·       $1.0million increase in clinical trial costs for PROPEL;

·       $658,000increase in non-cash stock-based compensation expense due to the adoption ofaccounting rules related to stock-based compensation expense on January 1,2006;

·       $550,000increase in licensing fees resulting primarily from a milestone payment underour license agreement for PDX;

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·       $463,000increase in personnel costs, mainly attributable to additional headcount andincreases in compensation costs year over year;

·       $293,000increase in patent costs for PDX and EFAPROXYN; and

·       $199,000increase in costs for our Phase 1 clinical trial of EFAPROXYN in patients withNSCLC.

These increases were partially offset by a $1.3 milliondecrease in clinical trial costs for ENRICH as (i) we incurred a one-timemilestone payment of $550,000 in 2005 related to third party trial managementservices, (ii) we changed our estimate relating to certain costs forENRICH during the quarter ended December 31, 2006 as a result of newinformation, which resulted in a reduction of research and development expensesof approximately $400,000, and (iii) patients were enrolled in the ENRICHtrial throughout 2005 whereas patient enrollment was completed in September 2006.

We expect researchand development expenses to increase in 2007 due to the following:

·       anincrease in trial costs relating to the PROPEL trial and the planned initiationof several new trials to evaluate PDX’s potential clinical utility in otherhematologic and oncologic indications;

·       anincrease in preclinical study costs relating to the initiation of new preclinicalstudies for PDX starting in 2007; and

·       anincrease in non-cash stock-based compensation expense.

We charge direct internal and external research anddevelopment expenses to the respective development programs. Since ourinception through December 31, 2006, we have incurred direct costs ofapproximately $38.5 million, $8.4 million and $220,000 associatedwith research and development expenses for EFAPROXYN, PDX and RH1 respectively,and approximately $5.5 million associated with our other research anddevelopment programs, including programs that have been discontinued. We alsoincur indirect costs that are not allocated to specific programs because suchcosts benefit multiple development programs. These consist primarily ofsalaries and benefits, facilities costs and other internal-sharedresources related to the development and maintenance of systems and processesapplicable to all of our programs. Unallocated costs since our inceptionthrough December 31, 2006 represent approximately $55.3 million ofresearch and development expenses.

Thefollowing table summarizes our research and development expenses for the yearsended December 31, 2004, 2005 and 2006 and for the cumulative period fromour inception through December 31, 2006:

| ** **                               | ** ** | **Years Ended December 31,** | ** ** | **Cumulative  Period from  September 1, 1992  through  December 31,** | ** ** |
|------------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|
| ** **                               | ** ** | **2004**                                    | ** ** | **2005**                                                                                  | ** ** | **2006** | ** ** | **2006** | ** ** |
| ** **                               | ** ** | **(in millions)**                      | ** ** |
| EFAPROXYN                                |       | $                                           | 1.9        |                                                                                      | $          | 5.3 |   | $ | 4.3 |   |   | $ | 38.5 |   |   |
| PDX                                      |       | 1.9                                         |       | 0.5                                                                                       |       | 3.4 |   |   | 8.4 |   |   |
| RH1                                      |       | 0.2                                         |       | —                                                                                    |       | — |   |   | 0.2 |   |   |
| Other programs                           |       | —                                      |       | —                                                                                    |       | — |   |   | 5.5 |   |   |
| Unallocated                              |       | 6.2                                         |       | 5.4                                                                                       |       | 6.6 |   |   | 55.3 |   |   |
| Total research  and development expenses |       | $                                           | 10.2       |                                                                                      | $          | 11.2 |   | $ | 14.3 |   |   | $ | 107.9 |   |   |

 

The timing and costs to complete the successfuldevelopment of any of our product candidates are highly uncertain, andtherefore difficult to estimate. The lengthy process of seeking regulatoryapprovals for our product candidates, and the subsequent compliance withapplicable regulations, require the 

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expenditure of substantialresources. For a more complete discussion of the regulatory approval process,please refer to the “Government Regulation” section in Item 1 above. Clinicaldevelopment timelines, likelihood of success and total costs vary widely andare impacted by a variety of factors discussed in the “Risk Factors” section ofItem IA above. Because of these risks and uncertainties, we cannot predictwhen or whether we will successfully complete the development of any of ourproduct candidates or the ultimate costs of such efforts. Due to these samefactors, we cannot be certain when, or if, we will generate any revenue or netcash inflow from any of our current product candidates.

*Clinical Manufacturing.**  *Clinical manufacturing expensesinclude the costs of certain personnel, third party manufacturing costs forEFAPROXYN for use in clinical trials, costs associated with pre-commercialscale-up of manufacturing to support anticipated regulatory and commercialrequirements, and development activities for clinical trial and preclinicalstudies material for PDX.

| ** **                       | ** ** | **Years Ended  December 31,** | ** ** |
|----------------------------------|------------|-----------------------------------------|------------|
| ** **                       | ** ** | **2004**                                | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                       | ** ** | **(in millions)**                  | ** ** |
| Clinical  manufacturing expenses |       | $                                       | 3.0        |   | $ | 1.3 |   | $ | 2.3 |   |
|                                  |            |                                         |            |  |  |  |  |  |  |  |

 

The$1.7 million decrease in clinical manufacturing expenses in 2005 ascompared to 2004 was primarily due to the following:

·       $866,000decrease in third-party manufacturing costs for EFAPROXYN bulk drugsubstance and formulated drug product as our supplies during 2005 weresufficient for our clinical trials requirements in 2005;

·       $670,000decrease in third-party manufacturing costs for PDX bulk drug substanceand formulated drug product as our supplies during 2005 were sufficient for ourclinical trials requirements in 2005; and

·       $176,000decrease in personnel costs due to reduced headcount.

The$1.0 million increase in clinical manufacturing expenses in 2006 ascompared to 2005 was primarily due to the following:

·       $715,000increase in third-party manufacturing costs for PDX bulk drug substanceand formulated drug product;

·       $141,000increase in third-party manufacturing costs for RH1 bulk drug substance;and

·       $113,000increase in non-cash stock-based compensation expense due to the adoption ofaccounting rules related to stock-based compensation expense on January 1,2006.

We currently have a sufficient supply of EFAPROXYNbulk drug substance and formulated drug product to support our ongoing clinicaltrials in 2007. However, we expect our manufacturing expenses for PDX and RH1to increase in 2007 as compared to 2006 in order to support our requirementsfor ongoing and planned clinical trials and preclinical studies. As a result,we expect total clinical manufacturing expenses in 2007 will increase ascompared to 2006.

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*Marketing, General andAdministrative.**  *Marketing,general and administrative expenses include costs for pre-marketing activities,corporate development, executive administration, corporate offices and relatedinfrastructure.

| ** **                                      | ** ** | **Years Ended  December 31,** | ** ** |
|-------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                      | ** ** | **2004**                                | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                      | ** ** | **(in millions)**                  | ** ** |
| Marketing,  general and administrative expenses |       | $                                       | 9.2        |   | $ | 9.0 |   | $ | 14.9 |   |
|                                                 |            |                                         |            |  |  |  |  |  |  |  |

 

The $150,000decrease in marketing, general and administrative expenses in 2005 as comparedto 2004 was primarily due to the following:

·       $346,000decrease in third-party legal fees relating to general corporate mattersand the purported securities class action lawsuit filed in May 2004;

·       $326,000decrease in public relations costs resulting from reduced use of third-partyagencies;

·       $288,000decrease in expenses relating to our second year of compliance efforts with theSarbanes Oxley Act of 2002 and related regulations;

·       $137,000decrease in facilities costs primarily resulting from the January 2005sublease of excess space in our corporate offices and the correspondingrestructuring costs recorded for this excess space; and

·       $128,000decrease in depreciation and amortization expense relating to our property andequipment.

These decreaseswere partially offset by the following increases:

·       $571,000increase in non-cash stock-based compensation expense, primarilyresulting from $462,000 of non-cash stock-based compensation expenseresulting from the May 2005 amendment of certain options granted to ourChairman of the Board of Directors in 2000; and

·       $496,000increase in personnel costs primarily resulting from additional headcount.

The$5.8 million increase in marketing, general and administrative expenses in2006 as compared to 2005 was primarily due to the following:

·       $2.3million increase in non-cash stock-based compensation expense due to theadoption of accounting rules related to stock-based compensation expenseon January 1, 2006;

·       $1.6million increase in personnel costs, mainly attributable to additionalheadcount, increases in compensation costs year over year, and recruiting andrelocation costs for our new Chief Executive and Chief Commercial Officers;

·       $816,000increase in market research and consulting expenses related to our productdevelopment and commercialization planning for EFAPROXYN and PDX;

·       $342,000increase in travel expenses relating to expanded investor relations activitiesand the development of relationships with key opinion leaders in oncology;

·       $265,000increase in costs related to the securities class action lawsuit, as furtherdescribed in “Legal Proceedings” included in Part I, Item 3 of thisreport;

·       $244,000increase in consulting and temporary personnel costs for general corporateactivities and administration;

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·       $217,000increase in facilities costs; and

·       $216,000increase in third-party legal fees relating to general corporate matters.

These increases were partially offset by a $311,000decrease in insurance costs.

We expectmarketing, general and administrative expenses to increase in 2007 due to thefollowing:

·       anincrease in non-cash stock-based compensation expense;

·       anincrease in market research costs resulting from pre-commercial planningactivities for EFAPROXYN and PDX; and

·       anincrease in personnel costs, primarily resulting from additional headcount.

*Restructuringand Separation Costs.**  *Werecorded $380,000 and $646,000 in restructuring and separation costs during theyears ended December 31, 2005 and 2006, respectively.

In January 2005, we executed agreements tosublease approximately three-quarters of the 12,708 square feet of excessspace in our corporate offices located in Westminster, Colorado. The term ofeach sublease agreement is through the term of our office lease, or October 31,2008. The total rental payments to us under the terms of the subleaseagreements approximate $230,000. In the year ended December 31, 2005, werecorded a lease abandonment charge of $380,000 as our obligations under ourprimary lease were in excess of the sum of the actual and expected subleaserental payments for this excess space. As of December 31, 2006, the amountremaining in accrued restructuring and separation costs relating to this leaseabandonment charge was $107,000.

In January 2006, Michael E. Hart notified ourBoard of Directors of his intent to resign from his positions as President,Chief Executive Officer and Chief Financial Officer of the Company once asuccessor Chief Executive Officer was appointed. On March 3, 2006, weentered into a separation agreement with Mr. Hart to provide certainincentives for his continued employment with the Company while we conducted oursearch for his successor. On March 9, 2006, we appointed Paul L. Berns asour President, Chief Executive Officer and a member of the Board of Directorsand Mr. Hart resigned from his positions in accordance with the terms ofthe separation agreement. The separation agreement with Mr. Hart wasamended on March 9, 2006, and on May 10, 2006 (as so amended, the “SeparationAgreement”). Pursuant to the Separation Agreement, Mr. Hart is entitled tocertain payments and benefits from the Company, as further described inNote 5 to our Financial Statements included in Part IV, Item 15of this report. We recorded separation costs of $646,000 during the year ended December 31,2006 relating to our estimate of our total obligations under the SeparationAgreement with Mr. Hart. During the year ended December 31, 2006, wemade payments to Mr. Hart under the Separation Agreement of $325,000. Asof December 31, 2006, the remaining liability of $321,000 relating to theSeparation Agreement with Mr. Hart is recorded in accrued restructuringand separation costs.

*Interest and Other Income,Net.**  *Interest income,net of interest expense, for 2004, 2005 and 2006 was $494,000, $1.8 million,and $1.9 million, respectively. The $1.3 million increase in 2005 ascompared to 2004 primarily resulted from higher average investment balances andhigher yields on United States government securities, high-grade commercialpaper and corporate notes, and money market funds. The $148,000 increase in2006 as compared to 2005 primarily resulted from higher yields on United Statesgovernment securities, high-grade commercial paper and corporate notes, andmoney market funds partially offset by lower average investment balances.

*Income Taxes.**  *As of December 31, 2006, wehave approximately $168.0 million of net operating loss (“NOL”)carryforwards, approximately $7.8 million of research and development (“R&D”)credit carryforwards and a $1.2 million orphan drug credit carryforward. Thesecarryforwards will expire beginning in 2009. As of December 31, 2006,approximately $3.3 million of the NOL carryforwards relate 

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to stock optionexercises, which will result in an increase to additional paid-in-capital and adecrease in income taxes payable when and if the tax loss carryforwards areutilized. The utilization of these carryforwards to reduce future income taxeswill depend on our ability to generate sufficient taxable income prior to theexpiration of these carryforwards. The Internal Revenue Code of 1986, asamended, contains provisions that may limit the NOL, R&D credit, and orphandrug credit carryforwards available for use in any given year upon theoccurrence of certain events, including significant changes in ownershipinterest and are subject to review and possible adjustment by the InternalRevenue Service. A greater than 50% change in ownership of a company within athree-year period results in an annual limitation on our ability to utilize ourNOL, R&D credit and orphan drug credit carryforwards from tax periods priorto the ownership change. Our NOL, R&D credit and orphan drug creditcarryforwards as of December 31, 2006 will likely be subject to annuallimitation due to changes in ownership from the February 2007 financingand previous financings. The amount of these limitations, if any, has not beendetermined, and our NOL, R&D credit and orphan drug credit carryforwardsmay expire unused. Additionally, future ownership changes could further limitthe utilization of our NOL, R&D credit and orphan drug creditcarryforwards.

**Liquidity andCapital Resources**

As of December 31, 2006, we had$32.8 million in cash, cash equivalents, and investments in marketablesecurities. In February 2007, we raised approximately $50.5 million in netproceeds from the sale of 9,000,000 shares of common stock in an underwrittenoffering, after deducting underwriting commissions and other expenses.

Since our inception, we have financed our operationsprimarily through public and private sales of our equity securities, which haveresulted in net proceeds to us of $202.1 million through December 31,2006. We have also generated $18.3 million of net interest income sinceour inception from investing the net proceeds of these financings.

We have used $164.7 million of cash for operatingactivities from our inception through December 31, 2006. Net cash used tofund our operating activities for 2004, 2005 and 2006 was $21.1 million,$17.7 million and $25.1 million, respectively.

Net cash provided by investing activities for 2004 and2006 was $17.4 million and $27.9 million, respectively, and consistedprimarily of proceeds from the maturities of investments in marketablesecurities, partially offset by the purchase of investments in marketablesecurities. Net cash used in investing activities for 2005 was$28.2 million, and consisted primarily of purchases of investments inmarketable securities, partially offset by the proceeds from maturities ofinvestments in marketable securities.

Net cash provided by financing activities during 2004was $158,000 and primarily resulted from proceeds received from the exercise ofcommon stock options and from sales of stock under our employee stock purchaseplan. Net cash provided by financing activities during 2005 was$49.1 million and resulted primarily from the March 2005 sale of2,352,443 shares of Series A Exchangeable Preferred Stock (the “ExchangeablePreferred”), at a price per share of $22.10, to Warburg Pincus Private EquityVIII, L.P. (“Warburg”) and certain other investors for aggregate gross proceedsof approximately $52.0 million. We incurred offering expenses of$3.2 million in connection with the sale of Exchangeable Preferred,resulting in net proceeds to us of $48.8 million. On May 18, 2005, atour Annual Meeting of Stockholders, our stockholders voted to approve theissuance of shares of our common stock upon exchange of shares of theExchangeable Preferred. As a result of such approval, we issued a total of23,524,430 shares of common stock upon exchange of 2,352,443 shares ofExchangeable Preferred. Net cash provided by financing activities during 2006was $3.1 million and primarily resulted from proceeds received from theexercise of common stock options, common stock warrants and sales of stockunder our employee stock purchase 

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plan, and the release of$183,000 of restricted cash during 2006 resulting from a reduction in theletter of credit on our lease for our corporate offices.

Based upon the currentstatus of our product development plans, we believe that our existing cash,cash equivalents, and investments in marketable securities, including the net proceedsof the February 2007 financing, will be adequate to satisfy our capitalneeds through at least the next twelve months. If our ongoing Phase 3 ENRICH trial meets its primary endpoint in mid-2007, we would expect to raiseadditional capital resources to prepare for the potential commercialization ofEFAPROXYN and support the future development of EFAPROXYN in other indications.If the ENRICH trial fails to meet its primary endpoint, we believe thatour existing resources could be adequate to support our operations through theend of 2008, although there can be no assurance that this can, in fact, beaccomplished.

Our forecasts ofthe periods of time through which our financial resources will be adequate tosupport our operations are forward-looking statements that involve risksand uncertainties, and actual results could vary materially. We anticipatecontinuing our current development programs and/or beginning other long-termdevelopment projects involving our product candidates. These projects mayrequire many years and substantial expenditures to complete and may ultimatelybe unsuccessful. Therefore, we may need to obtain additional funds from outsidesources to continue research and development activities, fund operatingexpenses, pursue regulatory approvals and build sales and marketingcapabilities, as necessary. However, our actual capital requirements willdepend on many factors, including:

·       thestatus of our product development programs;

·       thetime and cost involved in conducting clinical trials and obtaining regulatoryapprovals;

·       thetime and cost involved in filing, prosecuting and enforcing patent claims;

·       competingtechnological and market developments; and

·       ourability to market and distribute our future products and establish newcollaborative and licensing arrangements.

We will be required to raise additional capital tosupport our future operations, including the potential commercialization ofEFAPROXYN and/or PDX in the event we obtain regulatory approval to market suchproduct candidates. We may seek to obtain this additional capital througharrangements with corporate partners, equity or debt financings, or from othersources. Such arrangements, if successfully consummated, may be dilutive to ourexisting stockholders. However, there is no assurance that we will besuccessful in consummating any such arrangements. In addition, in the eventthat additional funds are obtained through arrangements with collaborativepartners or other sources, such arrangements may require us to relinquishrights to some of our technologies, product candidates or products underdevelopment that we would otherwise seek to develop or commercialize ourselves.If we are unable to generate meaningful amounts of revenue from future productsales, if any, or cannot otherwise raise sufficient additional funds to supportour operations, we may be required to delay, reduce the scope of or eliminateone or more of our development programs and our business and future prospectsfor revenue and profitability may be harmed.

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**Obligations andCommitments**

Belowis a schedule of timing of contractual commitments, by fiscal year, related toour leases and service contracts. We currently have no off-balance sheetarrangements.

| ** **                     | ** ** | **2007**  | ** ** | **2008 to 2009** | ** ** | **2010 to 2011** | ** ** | **After  2011** | ** ** | **Total**  | ** ** |
|--------------------------------|------------|-----------|------------|----------------------------|------------|----------------------------|------------|-----------------|------------|------------|------------|
| Operating lease  obligations   |       | $         | 775,000    |                       | $          | 725,000                    |       | $               | 6,000      |       | $          | — |   | $ | 1,506,000 |   |
| License agreement  obligations |       | 500,000   |       | 1,000,000                  |       | —                     |       | —          |       | 1,500,000  |       |
| Purchase  obligations          |       | 2,000,000 |       | 8,500,000                  |       | 10,000,000                 |       | 20,000,000      |       | 40,500,000 |       |
| Total obligations              |       | $         | 3,275,000  |                       | $          | 10,225,000                 |       | $               | 10,006,000 |       | $          | 20,000,000 |   | $ | 43,506,000 |   |

 

Operating lease obligations represent future minimumrental commitments for non-cancelable operating leases for our facilities andcertain office equipment, net of $133,000 of remaining sublease payments onexcess space in our corporate offices.

License agreement obligations represent futuremilestone payments under our license agreement for PDX, due upon the passage ofcertain time periods after the effective date of the agreement, which could bepaid earlier depending on the timing of achieving a development milestone.

Purchase obligationsrepresent annual minimum purchase requirements of efaproxiral sodium fromHovione under our June 2005 Manufacturing Agreement, equal to $2,000,000in 2007, $3,500,000 in 2008, $5,000,000 in 2009, and $5,000,000 in each yearthereafter through the end of the term of the agreement, which is the 7thanniversary of the date we obtain approval from the FDA to market EFAPROXYN. Inthe event that we do not meet these annual minimum purchase requirements, wehave the option to pay two remaining extension fees to move the annualrequirements out by a total of two years. These remaining extension fees areequal to $150,000 for the first extension, and $200,000 for the second andfinal extension, if necessary. During the year ended December 31, 2006, weelected to incur an extension fee of $100,000 to move the minimum purchaserequirement of $2,000,000 for 2006 to 2007. The Company and Hovione each havecustomary termination rights, including termination for material breach orother events relating to insolvency or bankruptcy. In addition, we mayterminate the agreement at any time, without penalty, if we decide todiscontinue development or, if approved, marketing of EFAPROXYN, and ourobligation to Hovione would equal the amount of any unpaid and outstandingpurchase orders.

**Critical AccountingPolicies**

Our discussion andanalysis of our financial condition and results of operations are based upon ourfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States. The preparation of thesefinancial statements requires us to make estimates and judgments that affectthe reported amounts of assets, liabilities, and expenses. We base ourestimates on historical experience, available information and assumptions thatwe believe to be reasonable under the circumstances. Actual results may differfrom these estimates under different assumptions or conditions. We believe thefollowing policies to be the most critical to an understanding of our financialcondition and results of operations because they require us to make estimates,assumptions and informed management judgments about matters that are inherentlyuncertain:

·       accountingfor research and development expenses;

·       accountingfor clinical manufacturing expenses;

·       accountingfor cash equivalents and investments in marketable securities; and

·       accountingfor stock-based compensation expense.

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*Researchand Development.**  *Researchand development expenditures are charged to expense as incurred. Research anddevelopment expenses include the costs of certain personnel, basic research, preclinicalstudies, clinical trials, regulatory affairs, biostatistical data analysis,patents and licensing fees for our product candidates. Clinical trial costsrepresent internal costs from personnel, external costs incurred at clinicalsites and contracted costs incurred by third party clinical researchorganizations to perform certain clinical trials.

We record upfront fees and milestone payments madeunder our licensing agreements for our product candidates as research anddevelopment expense as incurred.

We accrue research and development expenses foractivity as incurred during the fiscal year and prior to receiving invoicesfrom clinical sites and third party clinical and preclinical researchorganizations. We accrue external costs for clinical and preclinical studiesbased on an evaluation of the following: the progress of the studies, includingpatient enrollment, dosing levels of patients enrolled, estimated costs to dosepatients, invoices received, and contracted costs with clinical sites and thirdparty clinical and preclinical research organizations. Significant judgmentsand estimates must be made and used in determining the accrued balance in anyaccounting period. Actual results could differ from those estimates. During theyears ended December 31, 2004, 2005, and 2006, we did not have any changesin estimates that would have resulted in material adjustments to research anddevelopment expenses accrued in the prior period. However, during the quarterended December 31, 2006, we did change our estimate relating to certaincosts for our Phase 3 ENRICH trial for EFAPROXYN as a result of newinformation, which resulted in a reduction of research and development expensesof approximately $400,000 and a corresponding decrease in accrued research anddevelopment expenses as of December 31, 2006.

In accordance with certain research and developmentagreements, we are obligated to make certain upfront payments upon execution ofthe agreement. We record these upfront payments as prepaid research anddevelopment expenses. Such payments are recorded to research and developmentexpense as services are performed. We evaluate on a quarterly basis whetherevents and circumstances have occurred that may indicate impairment ofremaining prepaid research and development expenses.

*ClinicalManufacturing.**  *Ourfinished drug inventory is expensed to clinical manufacturing expenses since weare still a development stage company and we have not received regulatoryapproval to market our product candidates. If and when we receive regulatoryapproval, we will be required to capitalize any future costs of our marketedproducts at the lower of cost or market and then expense the sold inventory asa component of cost of goods sold.

*CashEquivalents and Investments in Marketable Securities.**  *All highly liquid investments with an originalmaturity of three months or less are considered to be cash equivalents. Thecarrying values of our cash equivalents and investments in marketablesecurities approximate their market values based on quoted market prices. Weaccount for investments in marketable securities in accordance with Statementof Financial Accounting Standards (“SFAS”) No. 115, *Accounting for Certain Investments in Debt and EquitySecurities*. Investments in marketable securities are classified asheld to maturity and are carried at cost plus accrued interest. Substantiallyall of our marketable securities as of December 31, 2006 are held incorporate notes with remaining maturities ranging from one to five months.

*Stock-basedCompensation Expense.**  *We adopted SFAS No. 123 (Revised 2004), *Share-Based Payment* (“SFAS 123R”) effective January 1,2006. Under the provisions of SFAS 123R, stock-based compensation is measuredat the grant date based on the fair value of the award and is recognized asexpense over the required service period of the award. Prior to the adoption ofSFAS 123R, we accounted for grants of stock-based awards according toAccounting Principles Board Opinion No. 25,*Accounting for Stock Issued to Employees* and relatedInterpretations. In March 2005, the Securities and Exchange Commissionissued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS123R. We applied the provisions of SAB 107 in connection with our adoption ofSFAS 123R. We adopted SFAS 123R using the 

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modified prospectivetransition method, which requires the application of the accounting standard asof January 1, 2006, the first day of our fiscal year 2006. Our financialstatements as of and for the year ended December 31, 2006 reflect theimpact of SFAS 123R. In accordance with the modified prospective transitionmethod, our financial statements for prior periods have not been restated toreflect, and do not include, the impact of SFAS 123R.

The adoption ofSFAS 123R on January 1, 2006 had a material impact on our net lossand net loss per share for the year ended December 31, 2006. We expectthat our adoption of SFAS 123R will have a material impact on our futurefinancial statements and results of operations. During the year ended December 31,2006, we recorded stock-based compensation expense of approximately $3.6million related to stock-based awards, including stock options, restrictedstock and our Employee Stock Purchase Plan. As of December 31, 2006, theunrecorded deferred stock-based compensation expense balance related to thesestock-based awards was approximately $3.2 million and will be recognized overthe remaining vesting periods of the awards. Judgments and estimates must bemade and used in determining the factors used in calculating the fair value ofstock-based awards, including the expected forfeiture rate of our stock-basedawards, the expected life of our stock-based awards, and the expectedvolatility of our stock price. For more information on stock-based compensationexpense during the year ended December 31, 2006, refer to Note 4 “Stock-BasedCompensation” of the Notes to our Financial Statements included in Part IV,Item 15 of this report.

**Recent AccountingPronouncements**

In February 2006, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 155, *Accountingfor Certain Hybrid Financial Instruments* (“SFAS 155”), which amendsSFAS No. 133 and SFAS No. 140. SFAS 155 will be effective for theCompany beginning in the first quarter of 2007. SFAS 155 permits interests inhybrid financial instruments that contain an embedded derivative that wouldotherwise require bifurcation, to be accounted for as a single financialinstrument at fair value, with changes in fair value recognized in earnings. Thiselection is permitted on an instrument-by-instrument basis for all hybridfinancial instruments held, obtained, or issued as of the adoption date. We arecurrently assessing the impact of the adoption of SFAS 155 on our financialstatements.

In June 2006, the FASB issued Interpretation No. 48,*Accounting for Uncertainty in Income Taxes*(“FIN 48”), which clarifies the accounting for uncertainty in income taxesrecognized in the financial statements in accordance with SFAS No. 109, *Accounting for Income Taxes*. FIN 48 prescribes a recognitionthreshold and measurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a tax return. FIN48 is effective for fiscal years beginning after December 15, 2006. We arecurrently assessing the impact of the adoption of FIN 48 on our financialstatements.

In September 2006,the FASB issued SFAS No. 157, *Fair Value Measurements*(“SFAS 157”), which is effective for fiscal years beginning after November 15,2007 and for interim periods within those years. SFAS 157 defines fair value,establishes a framework for measuring fair value and expands the relateddisclosure requirements. We are currently assessing the impact of the adoptionof SFAS 157 on our financial statements.

**ITEM 7A.**        QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We do not use derivative financial instruments in ourinvestment portfolio and have no foreign exchange contracts. Our financialinstruments as of December 31, 2006, consist of cash, cash equivalents,short-term investments in marketable securities, and accounts payable. Allhighly liquid investments with original maturities of three months or less areconsidered to be cash equivalents.

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We invest in marketable securities in accordance withour investment policy. The primary objectives of our investment policy are topreserve principal, maintain proper liquidity to meet operating needs andmaximize yields. Our investment policy specifies credit quality standards forour investments and limits the amount of credit exposure to any single issue,issuer or type of investment. The average duration of the issues in ourportfolio as of December 31, 2006 is approximately two months. As of December 31,2006, our investments in marketable securities of $22.7 million are allclassified as held-to-maturity and were held in a variety of interest-bearinginstruments, consisting mainly of high-grade corporate notes.

Investments in fixed-rateinterest-earning instruments carry varying degrees of interest rate risk.The fair market value of our fixed-rate securities may be adversely impacteddue to a rise in interest rates. In general, securities with longer maturitiesare subject to greater interest-rate risk than those with shorter maturities. Duein part to this factor, our interest income may fall short of expectations orwe may suffer losses in principal if securities are sold that have declined inmarket value due to changes in interest rates. Due to the short duration of ourinvestment portfolio, we believe an immediate 10% change in interest rateswould not be material to our financial condition or results of operations.

**ITEM 8.**                FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

The financial statementsrequired by this Item are included in Item 15 of this report and arepresented beginning on page F-1.

**ITEM 9.**                CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

**ITEM 9A.**        CONTROLSAND PROCEDURES

**Disclosure Controlsand Procedures**

As of the end of theperiod covered by this report, an evaluation was carried out under thesupervision and with the participation of our management, including ourprincipal executive officer and principal financial officer (the “EvaluatingOfficers”), of the effectiveness of our disclosure controls and procedures, asdefined in Rule 13(a)-15(e) of the Securities Exchange Act of1934, as amended (“Exchange Act”). Based on that evaluation, our management,including the Evaluating Officers, concluded that our disclosure controls andprocedures were effective as of December 31, 2006 to ensure thatinformation required to be disclosed by us in reports that we file or submitunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in the Securities and Exchange Commission’s rules andforms, and that such information is accumulated and communicated to ourmanagement, including the Evaluating Officers, as appropriate, to allow timelydecisions regarding required disclosure.

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**Management’s Reporton Internal Control Over Financial Reporting**

Our management isresponsible for establishing and maintaining effective internal control overfinancial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) orRule 15d-(f) promulgated under the Exchange Act as a processdesigned by, or under the supervision of, a company’s principal executiveofficer and principal financial officer and effected by the company’s board ofdirectors, management and other personnel, to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that:

·       pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company;

·       providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and

·       providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use or disposition of the company’s assets that could have amaterial effect on the financial statements.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

Our management assessed the effectiveness of ourinternal control over financial reporting as of December 31, 2006. Inmaking its assessment, management used the criteria established in *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission.Based on its assessment, management determined that, as of December 31,2006, we maintained effective internal control over financial reporting basedon those criteria.

Our management’sassessment of the effectiveness of our internal control over financialreporting as of December 31, 2006 has been audited byPricewaterhouseCoopers LLP, an independent registered public accounting firm,as stated in their report on page F-2 of this Annual Report on Form 10-K.

**No Changes inInternal Control over Financial Reporting**

There were no changes inour internal control over financial reporting during the quarter ended December 31,2006 that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

**ITEM 9B.**       OTHERINFORMATION

None.

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**PART III**

**ITEM 10.**         DIRECTORS,EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this Item concerningour directors is incorporated by reference to the information to be set forthin the sections entitled “Proposal 1—Election of Directors” and “Section 16(a) BeneficialOwnership Reporting Compliance” in our definitive Proxy Statement for the 2007Annual Meeting of Stockholders to be filed with the Securities and ExchangeCommission within 120 days after the end of our fiscal year ended December 31,2006 (the “Proxy Statement”). The information required by thisItem concerning our executive officers is incorporated by reference to theinformation to be set forth in the section of the Proxy Statement entitled “ExecutiveOfficers.”

Our Board of Directors has adopted a Code of BusinessConduct and Ethics for all of our directors, officers and employees.Stockholders may locate a copy of our Code of Business Conduct and Ethics onour website at http://www.allos.com or request a free copy from:

Allos Therapeutics, Inc.Attention: Investor Relations11080 CirclePoint Road, Suite 200Westminster, CO 80020Telephone: 303-426-6262

To date, there have beenno waivers under our Code of Business Conduct and Ethics. We will post anywaivers, if and when granted, of our Code of Business Conduct and Ethics on ourwebsite.

**ITEM 11.**         EXECUTIVECOMPENSATION

The information requiredby this Item regarding executive compensation is incorporated by referenceto the information to be set forth in the sections of the Proxy Statemententitled “Executive Compensation,” “Director Compensation,” “CompensationCommittee Interlocks and Insider Participation,” and “Compensation CommitteeReport.”

**ITEM 12.**         SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS

The information requiredby this Item regarding security ownership of certain beneficial owners andmanagement is incorporated by reference to the information to be set forth inthe section of the Proxy Statement entitled “Security Ownership of CertainBeneficial Owners and Management.” The information required by thisItem regarding securities authorized for issuance under our equitycompensations plans is incorporated by reference to the information to be setforth in the section of the Proxy Statement entitled “Securities Authorized forIssuance under Equity Compensation Plans.”

**ITEM 13.**         CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information requiredby this Item regarding certain relationships and related transactions anddirector independence is incorporated by reference to the information to be setforth in the section of the Proxy Statement entitled “Transactions with RelatedPersons” and “Proposal 1—Election of Directors.”

**ITEM 14.**         PRINCIPALACCOUNTANT FEES AND SERVICES

The information required by this Item regardingprincipal accountant fees and services is incorporated by reference to theinformation to be set forth in the section of the Proxy Statement entitled “Proposal2—Ratification of Selection of Independent Auditors.”

59

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**PART IV**

**ITEM 15.**         EXHIBITSAND FINANCIAL STATEMENT SCHEDULES

**(a)****          Thefollowing documents are being filed as part of this report:**

(1)         Financial Statements.

Reference is madeto the Index to Financial Statements of Allos Therapeutics, Inc. appearingon page F-1 of this report.

(2)         Financial StatementSchedules.

All financial statement schedules have been omittedbecause they are not applicable or not required or because the information isincluded elsewhere in the Financial Statements or the Notes thereto.

(3)         Exhibits.

The following is a list of exhibits filed as part ofthis report on Form 10-K. Where so indicated by footnote, exhibitsthat were previously filed are incorporated by reference.

| Exhibit   No. | ** ** | **Note** | ** ** | **Description**                                                                                                                                                                            |
|---------------|------------|----------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.01          |       | (30)     |       | Amended and Restated Certificate of Incorporation.                                                                                                                                         |
| 3.02          |       | (30)     |       | Certificate of  Designation of Series A Junior Participating Preferred Stock.                                                                                                         |
| 3.03          |       | (30)     |       | Certificate of Amendment  to Restated Certificate of Incorporation.                                                                                                                        |
| 3.04          |       |     |       | Bylaws, as amended.                                                                                                                                                                        |
| 4.01          |       | (1)      |       | Form of Common  Stock Certificate.                                                                                                                                                    |
| 4.02          |       |     |       | Reference is made to  Exhibits 3.01, 3.02, 3.03 and 3.04.                                                                                                                                  |
| 4.03          |       | (2)      |       | Rights Agreement dated  May 6, 2003 between Allos and Mellon Investor Services LLC.                                                                                                   |
| 4.04          |       | (3)      |       | Form of Rights  Certificate.                                                                                                                                                          |
| 4.05          |       | (4)      |       | Amendment to Rights  Agreement dated March 4, 2005 between Allos and Mellon Investor Services  LLC.                                                                                   |
| 4.06          |       | (31)     |       | Amendment to Rights  Agreement dated January 29, 2007 between Allos and Mellon Investor  Services LLC.                                                                                |
| 10.01†   |       | (1)      |       | Form of Indemnification  Agreement between Allos and each of its directors and officers.                                                                                              |
| 10.02         |       | (1)      |       | Hemotech and CIT Amended  and Restated Allosteric Modifiers of Hemoglobin Agreement with Center for  Innovative Technology dated January 12, 1994.                                    |
| 10.03         |       | (1)      |       | Amendment to Allos  Therapeutics, Inc. and CIT Amended and Restated Allosteric Modifiers of  Hemoglobin Agreement with Center for Innovative Technology dated  January 17, 1995. |
| 10.04         |       | (1)      |       | Amendment to Allos  Therapeutics, Inc. and CIT Amended and Restated Allosteric Modifiers of  Hemoglobin Agreement with Center for Innovative Technology dated  March 12, 1996.   |

60

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| 10.05         |   | (1)  |   | Assignment and  Assumption Agreement with Amendment with Center for Innovative Technology and  Virginia Commonwealth University Intellectual Property Foundation dated  July 28, 1997. |
|---------------|--------|------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.07†   |   | (5)  |   | 1995 Stock Option Plan,  as amended.                                                                                                                                                        |
| 10.10†   |   | (23) |   | 2000 Stock Incentive  Compensation Plan, as amended.                                                                                                                                        |
| 10.10.1† |   | (6)  |   | Form of Incentive  Stock Option Letter Agreement under 2000 Stock Incentive Compensation Plan.                                                                                         |
| 10.10.2† |   | (7)  |   | Form of  Nonqualified Stock Option Letter Agreement under 2000 Stock Incentive  Compensation Plan.                                                                                     |
| 10.10.3† |   | (24) |   | Form of  Nonqualified Stock Option Letter Agreement for Non-Employee Directors  under 2000 Stock Incentive Compensation Plan.                                                          |
| 10.11†   |   | (8)  |   | Severance Benefit Plan,  effective January 16, 2001, and related benefit schedule thereto.                                                                                             |
| 10.12†   |   | (9)  |   | 2001 Employee Stock  Purchase Plan and form of Offering.                                                                                                                                    |
| 10.13*        |   | (10) |   | Office Lease dated  April 4, 2001 between Allos and Catellus Development Corporation.                                                                                                  |
| 10.13.1*      |   | (11) |   | Amended and Restated  Second Amendment to Lease dated December 9, 2002 between Allos and  Catellus Development Corporation.                                                            |
| 10.13.2*      |   | (12) |   | Third Amendment to Lease  dated November 28, 2003 between Allos and Catellus Development  Corporation.                                                                                 |
| 10.14†   |   | (13) |   | 2002 Broad Based Equity  Incentive Plan.                                                                                                                                                    |
| 10.14.1† |   | (22) |   | Form of Stock  Option Grant Notice under 2002 Broad Based Equity Incentive Plan.                                                                                                       |
| 10.14.2† |   | (22) |   | Form of Stock  Option Agreement under 2002 Broad Based Equity Incentive Plan.                                                                                                          |
| 10.15†   |   | (14) |   | Employment Agreement  dated December 17, 2001 between Allos and Michael E. Hart.                                                                                                       |
| 10.18†   |   | (15) |   | Employment Agreement,  effective August 12, 2002, between Allos and David A. DeLong.                                                                                                   |
| 10.20         |   | (16) |   | Form of Common  Stock Purchase Warrant issued pursuant to Securities Purchase Agreement dated  November 20, 2003.                                                                 |
| 10.21*        |   | (17) |   | Development and Supply  Agreement, effective December 19, 2003, between Allos and Baxter  Healthcare Corporation.                                                                      |
| 10.23†   |   | (18) |   | Employment Agreement  dated October 11, 2004 between Allos and Marc H. Graboyes.                                                                                                       |
| 10.24         |   | (19) |   | Securities Purchase  Agreement dated March 2, 2005 between Allos and the Investors listed on  the signature pages thereto.                                                        |
| 10.25         |   | (20) |   | Registration Rights  Agreement dated March 4, 2005 between Allos and the Investors listed on  Schedule I thereto.                                                                      |

61

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| 10.26         |   | (21)   |   | Letter Agreement dated  March 4, 2005 among Allos, Warburg Pincus Private Equity VIII, L.P.,  Warburg Pincus & Co. and Warburg Pincus LLC.                                                                                                         |
|---------------|--------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.27*        |   | (25)   |   | Manufacturing Agreement,  effective May 30, 2005, between Allos and Hovione Inter Limited.                                                                                                                                                                  |
| 10.28†   |   | (26)   |   | Annual Incentive Plan.                                                                                                                                                                                                                                           |
| 10.29†   |   | (27)   |   | 2006 Base Salaries for  Named Executive Officers.                                                                                                                                                                                                                |
| 10.30†   |   | (28)   |   | Separation Agreement,  dated March 3, 2006, between Allos and Michael E. Hart.                                                                                                                                                                              |
| 10.30.1† |   | (32)   |   | First Amendment to  Separation Agreement dated March 9, 2006 between Allos and Michael E.  Hart.                                                                                                                                                            |
| 10.30.2† |   | (33)   |   | Second Amendment to Separation  Agreement dated May 10, 2006 between Allos and Michael E. Hart.                                                                                                                                                             |
| 10.31†   |   | (29)   |   | Nonqualified Stock  Option Letter Agreement, dated March 3, 2006, between Allos and Michael  E. Hart.                                                                                                                                                       |
| 10.32†   |   | (34)   |   | Summary of Compensation  Arrangements between Allos and its Non-Employee Directors.                                                                                                                                                                              |
| 10.33†   |   | (34)   |   | Summary of Compensation  Arrangements between Allos and Stephen J. Hoffman.                                                                                                                                                                                      |
| 10.35†   |   | (35)   |   | Restricted Stock Award  dated March 9, 2006 between Allos and Paul L. Berns.                                                                                                                                                                                |
| 10.36†   |   | (36)   |   | Consulting Agreement  dated May 10, 2006 between Allos and Michael E. Hart.                                                                                                                                                                                 |
| 10.37†   |   | (37)   |   | Consulting Agreement  dated May 10, 2006 between Allos and Marvin E. Jaffe, M.D.                                                                                                                                                                            |
| 10.38†   |   | (38)   |   | 2006 Inducement Award  Plan, including forms of Stock Option Grant Notice with Stock Option  Agreement and Restricted Stock Grant Notice with Restricted Stock Grant  Agreement.                                                                                 |
| 10.39†   |   | (39)   |   | Employment Agreement  dated June 5, 2006 between Allos and James V. Caruso.                                                                                                                                                                                 |
| 10.40†   |   | (40)   |   | Amended and Restated  Employment Agreement dated December 12, 2006 between Allos and Paul L.  Berns.                                                                                                                                                        |
| 10.41         |   | (41)   |   | Letter agreement dated  January 28, 2007 among Allos, Baker Bros. Investments, L.P.,  Baker Bros. Investments II, L.P., Baker/Tisch Investments, L.P.,  Baker Biotech Fund I, L.P., 14159, L.P. and Baker Brothers Life  Sciences, L.P. |
| 10.42†   |   | (42)   |   | Separation Agreement,  dated February 16, 2007, between Allos and David A. DeLong.                                                                                                                                                                          |
| 23.01         |   |   |   | Consent of  PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm.                                                                                                                                                                           |
| 24.01         |   |   |   | Power of Attorney  (included on signature page hereto).                                                                                                                                                                                                     |
| 31.01         |   |   |   | Rule 13a-14(a)/15d-14(a) Certification.                                                                                                                                                                                                                |
| 31.02         |   |   |   | Rule 13a-14(a)/15d-14(a) Certification.                                                                                                                                                                                                                |
| 32.01         |   |   |   | Section 1350  Certification.                                                                                                                                                                                                                                |

 

62

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                 † Management contract or compensatory plan orarrangement required to be filed as an exhibit pursuant to Item 15(b) ofForm 10-K.

                 * Confidential treatment has been granted withrespect to specific portions of this exhibit. Omitted portions have been filedwith the Securities and Exchange Commission (“SEC”).

       (1) Incorporated by reference to the same numbered exhibit filed withour Registration Statement on Form S-1 (File No. 333-95439),as amended, declared effective March 27, 2000.

       (2) Incorporated by reference to Exhibit 99.2 filed with ourCurrent Report on Form 8-K filed on May 9, 2003.

       (3) Incorporated by reference to Exhibit 99.3 filed with ourCurrent Report on Form 8-K filed on May 9, 2003.

       (4) Incorporated by reference to Exhibit 4.06 filed with ourCurrent Report on Form 8-K filed on March 4, 2005.

       (5) Incorporated by reference to Exhibit 10.11 filed with ourRegistration Statement on Form S-1 (File No. 333-95439),as amended, declared effective March 27, 2000.

       (6) Incorporated by reference to Exhibit 99.1 filed with ourCurrent Report on Form 8-K filed on February 11, 2005.

       (7) Incorporated by reference to Exhibit 99.2 filed with ourCurrent Report on Form 8-K filed on February 11, 2005.

       (8) Incorporated by reference to Exhibit 10.24 filed with ourAnnual Report on Form 10-K for the year ended December 31,2000.

       (9) Incorporated by reference to Exhibit 10.26 filed with ourAnnual Report on Form 10-K for the year ended December 31,2000.

(10) Incorporated by reference to Exhibit 10.27 filed with ourQuarterly Report on Form 10-Q for the quarter ended June 30,2001.

(11) Incorporated by reference to Exhibit 10.27.1 filed with ourAnnual Report on Form 10-K for the year ended December 31,2002.

(12) Incorporated by reference to Exhibit 10.27.2 filed with ourAnnual Report on Form 10-K for the year ended December 31,2003.

(13) Incorporated by reference to Exhibit 99.1 filed with ourRegistration Statement on Form S-8 (File No. 333-76804),as filed with the SEC on January 16, 2002.

(14) Incorporated by reference to Exhibit 10.16 filed with ourAnnual Report on Form 10-K for the year ended December 31,2001.

(15) Incorporatedby reference to Exhibit 10.26 filed with our Quarterly Report on Form 10-Qfor the quarter ended September 30, 2002.

(16) Incorporated by reference to Exhibit 99.2 filed with ourCurrent Report on Form 8-K filed on November 21, 2003.

(17) Incorporated by reference to Exhibit 10.37 filed with ourAnnual Report on Form 10-K for the year ended December 31,2003.

63

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(18) Incorporated by reference to Exhibit 10.1 filed with ourCurrent Report on Form 8-K filed on October 14, 2004.

(19) Incorporated by reference to Exhibit 10.41 filed with ourCurrent Report on Form 8-K/A filed on March 10, 2005.

(20) Incorporated by reference to Exhibit 10.42 filed with ourCurrent Report on Form 8-K/A filed on March 10, 2005.

(21) Incorporated by reference to Exhibit 10.43 filed with ourCurrent Report on Form 8-K filed on March 4, 2005.

(22) Incorporated by reference to the same numbered exhibit filed withour Annual Report on Form 10-K for the year ended December 31,2004.

(23) Incorporated by reference to Exhibit 10.1 filed with our CurrentReport on Form 8-K filed on December 22, 2005.

(24) Incorporated by reference to Exhibit 10.1 filed with ourCurrent Report on Form 8-K filed on February 24, 2006.

(25) Incorporated by reference to Exhibit 10.1 filed with ourQuarterly Report on Form 10-Q for the quarter ended June 30,2005.

(26) Incorporated by reference to Exhibit 10.1 filed with ourCurrent Report on Form 8-K filed on December 16, 2005.

(27) Incorporated by reference to Exhibit 10.1 filed with ourCurrent Report on Form 8-K filed on February 10, 2006.

(28) Incorporated by reference to Exhibit 10.1 filed with ourCurrent Report on Form 8-K filed on March 6, 2006.

(29) Incorporated by reference to Exhibit 10.2 filed with ourCurrent Report on Form 8-K filed on March 6, 2006.

(30) Incorporated by reference to the same numbered exhibit filed withour Quarterly Report on Form 10-Q for the quarter ended June 30,2006.

(31) Incorporated by reference to Exhibit 4.1 filed with our CurrentReport on Form 8-K filed on January 30, 2007.

(32) Incorporated by reference to Exhibit 10.3 filed with ourCurrent Report on Form 8-K filed on March 14, 2006.

(33) Incorporated by reference to Exhibit 10.1 filed with ourCurrent Report on Form 8-K filed on May 16, 2006.

(34) Incorporated by reference to the same numbered exhibit filed withour Annual Report on Form 10-K for the year ended December 31,2005.

(35)   Incorporated by reference to Exhibit 10.2filed with our Current Report on Form 8-K filed on March 14,2006.

(36)   Incorporated by reference to Exhibit 10.2filed with our Current Report on Form 8-K filed on May 16,2006.

(37) Incorporated by reference to Exhibit 10.3 filed with ourCurrent Report on Form 8-K filed on May 16, 2006.

64

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(38) Incorporated by reference to Exhibit 10.1 filed with ourCurrent Report on Form 8-K filed on June 6, 2006.

(39) Incorporated by reference to Exhibit 10.2 filed with ourCurrent Report on Form 8-K filed on June 6, 2006.

(40) Incorporated by reference to Exhibit 10.1 filed with ourCurrent Report on Form 8-K/A filed on January 29, 2007.

(41) Incorporated by reference to Exhibit 10.1 filed with ourCurrent Report on Form 8-K filed on January 30, 2007.

(42) Incorporated by reference to Exhibit 10.1 filed with ourCurrent Report on Form 8-K filed on February 23, 2007.

65

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**SIGNATURES**

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.
|                           | ** ** | **ALLOS  THERAPEUTICS, INC.**            |
|---------------------------|------------|------------------------------------------|
|                      |       |                                     |
| Date: March 12, 2007 | By:        | /s/ PAUL L. BERNS                        |
|                      |       | Paul L. Berns                            |
|                      |       | *President  and Chief Executive Officer* |

 

**POWER OF ATTORNEY**

KNOW ALL PERSONS BY THESE PRESENTS, that eachindividual whose signature appears below constitutes and appoints Stephen J.Hoffman and Paul L. Berns, and each of them, as his true and lawfulattorneys-in-fact and agents, with full power of substitution, for him and inhis name, place and stead, in any and all capacities, to sign any and all amendmentsto this Annual Report on Form 10-K, and to file the same, with allexhibits thereto and all other documents in connection therewith, with theSecurities and Exchange Commission, granting unto said attorneys-in-fact andagents, full power and authority to do and perform each and every act and thingrequisite and necessary to be done therewith, as fully to all intents andpurposes as he might or could do in person, hereby ratifying and confirming allthat said attorneys-in-fact and agents, and any of them or his substitute orsubstitutes, may lawfully do or cause to be done by virtue hereof.

**Pursuant to therequirements of the Securities Exchange Act of 1934, as amended, this reporthas been signed by the following persons on behalf of the registrant on March 12,2007, and in the capacities indicated:**

|                        | **Name** | ** **                                                      | ** ** | ** ** | **Title** | ** ** |
|------------------------|----------|-----------------------------------------------------------------|------------|------------|-----------|------------|
|                   |     |                                                            |
| /s/ STEPHEN J. HOFFMAN |     | Chairman of Board of  Directors and Director                    |
| Stephen  J. Hoffman    |     |                                                            |
| /s/ PAUL L.  BERNS     |     | President, Chief  Executive Officer and Director                |
| Paul  L. Berns         |     | (Principal Executive  Officer)                                  |
| /s/ DAVID C.  CLARK    |     | Corporate  Controller and Treasurer                             |
| David  C. Clark        |     | (Principal Financial  Officer and Principal Accounting Officer) |
| /s/ MICHAEL D.  CASEY  |     | Director                                                        |
| Michael  D. Casey      |     |                                                            |
| /s/ MARK G.  EDWARDS   |     | Director                                                        |
| Mark  G. Edwards       |     |                                                            |
| /s/ STEWART  HEN       |     | Director                                                        |
| Stewart  Hen           |     |                                                            |
| /s/ JONATHAN  S. LEFF  |     | Director                                                        |
| Jonathan  S. Leff      |     |                                                            |
| /s/ TIMOTHY P.  LYNCH  |     | Director                                                        |
| Timothy  P. Lynch      |     |                                                            |
| /s/ WILLIAM R.  RINGO  |     | Director                                                        |
| William R. Ringo       |     |                                                            |

 

66

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**Allos Therapeutics, Inc.**

**Indexto Financial Statements**

|                                                               | ** ** | **Page** |
|---------------------------------------------------------------|------------|----------|
| Report of Independent Registered Public Accounting  Firm      |       |     | F-2 |   |
| Balance Sheets                                                |       |     | F-4 |   |
| Statements of Operations                                      |       |     | F-5 |   |
| Statements of Changes in Stockholders’ Equity  (Deficit) |       |     | F-6 |   |
| Statements of Cash Flows                                      |       |     | F-10 |   |
| Notes to Financial Statements                                 |       |     | F-11 |   |

 

F-1

----

**Report ofIndependent Registered Public Accounting Firm**

To the Board ofDirectors and Stockholders ofAllos Therapeutics, Inc.:

We have completedintegrated audits of Allos Therapeutics, Inc.’s financial statements andof its internal control over financial reporting as of December 31, 2006in accordance with the standards of the Public Company Accounting OversightBoard (United States). Our opinions, based on our audits, are presented below.

*Financialstatements*

In our opinion, the accompanying balance sheets andrelated statements of operations, changes in stockholders’ equity (deficit),and cash flows present fairly, in all material respects, the financial positionof Allos Therapeutics, Inc. (a development stage enterprise) at December 31,2006 and 2005, and the results of its operations and its cash flows for each ofthe three years in the period ended December 31, 2006 and, cumulatively,for the period from September 1, 1992 (date of inception) to December 31,2006, in conformity with accounting principles generally accepted in the UnitedStates of America. These financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audits. We conducted our audits of thesestatements in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit of financial statementsincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

As discussed in Note 4 tothe financial statements, the Company changed the manner in which it accountsfor stock-based compensation in 2006.

*Internal controlover financial reporting*

Also, in our opinion, management’s assessment,included in Management’s Report on Internal Control Over Financial Reporting,appearing under Item 9A, that the Company maintained effective internalcontrol over financial reporting as of December 31, 2006 based on criteriaestablished in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission (COSO), is fairly stated, in all material respects, basedon those criteria. Furthermore, in our opinion, the Company maintained, in allmaterial respects, effective internal control over financial reporting as of December 31,2006, based on criteria established in *InternalControl—Integrated Framework* issued by the COSO. The Company’smanagement is responsible for maintaining effective internal control overfinancial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting. Our responsibility is to express opinions onmanagement’s assessment and on the effectiveness of the Company’s internalcontrol over financial reporting based on our audit. We conducted our audit ofinternal control over financial reporting in accordance with the standards ofthe Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether effective internal control over financial reporting was maintained inall material respects. An audit of internal control over financial reportingincludes obtaining an understanding of internal control over financialreporting, evaluating management’s assessment, testing and evaluating thedesign and operating effectiveness of internal control, and performing suchother procedures as we consider necessary in the circumstances. We believe thatour audit provides a reasonable basis for our opinions.

F-2

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A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies and proceduresthat (i) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assetsof the company; (ii) provide reasonable assurance that transactions arerecorded as necessary to permit preparation of financial statements inaccordance with generally accepted accounting principles, and that receipts andexpenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and (iii) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

/s/ PricewaterhouseCoopers LLPDenver, ColoradoMarch 12, 2007

F-3

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**ALLOS THERAPEUTICS, INC.BALANCE SHEETS**

| ** **                                                                                                                                                                                                                                                                     | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                                     | ** ** | **2005**              | ** ** | **2006** | ** ** |
| **ASSETS**                                                                                                                                                                                                                                                                     | ** ** | ** **            | ** ** | ** ** | ** ** |
| Current assets:                                                                                                                                                                                                                                                                |       |                  |       |   |   |
| Cash and cash equivalents                                                                                                                                                                                                                                                      |       | $                     | 4,224,634  |   | $ | 10,070,526 |   |
| Restricted cash                                                                                                                                                                                                                                                                |       | 550,000               |       | 366,667 |   |
| Investments in marketable securities                                                                                                                                                                                                                                           |       | 50,931,466            |       | 22,725,525 |   |
| Prepaid research and development expenses                                                                                                                                                                                                                                      |       | 222,473               |       | 496,265 |   |
| Prepaid expenses and other assets                                                                                                                                                                                                                                              |       | 338,393               |       | 2,069,840 |   |
| Total current assets                                                                                                                                                                                                                                                           |       | 56,266,966            |       | 35,728,823 |   |
| Investments in  marketable securities                                                                                                                                                                                                                                          |       | 125,872               |       | — |   |
| Property and  equipment, net                                                                                                                                                                                                                                                   |       | 687,728               |       | 603,520 |   |
| Other assets                                                                                                                                                                                                                                                                   |       | —                |       | 49,247 |   |
| Total assets                                                                                                                                                                                                                                                                   |       | $                     | 57,080,566 |   | $ | 36,381,590 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                                                  |       |                  |       |   |   |
| Current liabilities:                                                                                                                                                                                                                                                           |       |                  |       |   |   |
| Accounts payable                                                                                                                                                                                                                                                               |       | $                     | 365,212    |   | $ | 400,133 |   |
| Accrued liabilities                                                                                                                                                                                                                                                            |       | 3,424,904             |       | 6,431,521 |   |
| Total current liabilities                                                                                                                                                                                                                                                      |       | 3,790,116             |       | 6,831,654 |   |
| Commitments and  contingencies (Note 8)                                                                                                                                                                                                                                   |       |                  |       |   |   |
| Stockholders’ equity:                                                                                                                                                                                                                                                     |       |                  |       |   |   |
| Preferred stock, $0.001 par value; 10,000,000 shares  authorized at December 31, 2005 and December 31, 2006; no shares  issued or outstanding                                                                                                                        |       | —                |       | — |   |
| Series A Junior Participating Preferred Stock,  $0.001 par value; 1,000,000 shares designated from authorized preferred stock  at December 31, 2005 and December 31, 2006; no shares issued or  outstanding                                                     |       | —                |       | — |   |
| Common stock, $0.001 par value; 75,000,000 and  150,000,000 shares authorized at December 31, 2005 and December 31,  2006, respectively; 55,078,969 and 56,695,633 shares issued and outstanding  at December 31, 2005 and December 31, 2006, respectively |       | 55,079                |       | 56,695 |   |
| Additional paid-in  capital                                                                                                                                                                                                                                                    |       | 231,582,277           |       | 238,052,617 |   |
| Deficit  accumulated during the development stage                                                                                                                                                                                                                              |       | (178,346,906          | )          | (208,559,376 | ) |
| Total stockholders’ equity                                                                                                                                                                                                                                                |       | 53,290,450            |       | 29,549,936 |   |
| Total liabilities  and stockholders’ equity                                                                                                                                                                                                                               |       | $                     | 57,080,566 |   | $ | 36,381,590 |   |

 

The accompanying notes are an integral part of these financial statements.

F-4

----

**ALLOS THERAPEUTICS, INC.STATEMENTS OF OPERATIONS**

| ** **                                                            | ** ** | **Years Ended December 31,** | ** **  | **Cumulative  Period from  September 1, 1992  (date of inception)  through  December 31,** | ** ** |
|-----------------------------------------------------------------------|------------|---------------------------------------------|-------------|--------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                            | ** ** | **2004**                                    | ** **  | **2005**                                                                                                                 | ** ** | **2006** | ** ** | **2006** | ** ** |
| Operating expenses:                                                   |       |                                        |        |                                                                                                                     |       |   |   |   |   |   |   |
| Research and development                                              |       | $                                           | 10,158,553  |                                                                                                                     | $          | 11,215,132 |   | $ | 14,322,601 |   |   | $ | 107,855,552 |   |   |
| Clinical manufacturing                                                |       | 2,978,684                                   |        | 1,265,663                                                                                                                |       | 2,283,907 |   |   | 29,064,695 |   |   |
| Marketing, general and administrative                                 |       | 9,193,719                                   |        | 9,043,768                                                                                                                |       | 14,876,273 |   |   | 83,158,527 |   |   |
| Restructuring and separation costs                                    |       | —                                      |        | 380,085                                                                                                                  |       | 645,666 |   |   | 1,663,821 |   |   |
| Total operating expenses                                              |       | 22,330,956                                  |        | 21,904,648                                                                                                               |       | 32,128,447 |   |   | 221,742,595 |   |   |
| Loss from  operations                                                 |       | (22,330,956                                 | )           | (21,904,648                                                                                                              | )          | (32,128,447 | ) |   | (221,742,595 | ) |   |
| Gain on  settlement claims                                            |       | —                                      |        | —                                                                                                                   |       | — |   |   | 5,110,083 |   |   |
| Interest and other  income, net                                       |       | 493,671                                     |        | 1,768,060                                                                                                                |       | 1,915,977 |   |   | 18,309,600 |   |   |
| Net loss                                                              |       | (21,837,285                                 | )           | (20,136,588                                                                                                              | )          | (30,212,470 | ) |   | (198,322,912 | ) |   |
| Dividend related  to beneficial conversion feature of preferred stock |       | —                                      |        | (623,489                                                                                                                 | )          | — |   |   | (10,236,464 | ) |   |
| Net loss attributable  to common stockholders                         |       | $                                           | (21,837,285 | )                                                                                                                        | $          | (20,760,077 | ) | $ | (30,212,470 | ) |   | $ | (208,559,376 | ) |   |
| Net loss per  share: basic and diluted                                |       | $                                           | (0.70       | )                                                                                                                        | $          | (0.45 | ) | $ | (0.55 | ) |   |   |   |   |
| Weighted average shares:  basic and diluted                           |       | 31,139,192                                  |        | 46,070,686                                                                                                               |       | 55,299,614 |   |   |   |   |   |

 

The accompanying notes are an integral part of these financial statements.

F-5

----

**ALLOS THERAPEUTICS, INC.STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)**

| ** **                                                                                                                                                | ** ** | ** **            | ** ** | ** **                        | ** ** | ** **     | ** ** | ** **                                  | ** ** | ** **                                                                            | ** ** | **Deficit**         | ** **                                              | ** **             | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------------------|------------|----------------|------------|---------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|---------------------|---------------------------------------------------------|------------------------|------------|
| ** **                                                                                                                                                | ** ** | ** **            | ** ** | ** **                        | ** ** | ** **     | ** ** | **Notes**                                   | ** ** | ** **                                                                            | ** ** | **Accumulated**     | ** **                                              | **Total**              | ** ** |
| ** **                                                                                                                                                | ** ** | ** **            | ** ** | ** **                        | ** ** | **Additional** | ** ** | **Receivable**                              | ** ** | ** **                                                                            | ** ** | **During the** | ** **                                              | **Stockholders’** | ** ** |
| ** **                                                                                                                                                | ** ** | **Common Stock** | ** ** | **Preferred Stock**          | ** ** | **Paid-in**    | ** ** | **From**                                    | ** ** | **Deferred**                                                                          | ** ** | **Development**     | ** **                                              | **Equity**             | ** ** |
| ** **                                                                                                                                                | ** ** | ** **            | ** ** | ** **                        | ** ** | ** **     | ** ** | ** **                                  | ** ** | ** **                                                                            | ** ** | ** **          | ** **                                              | ** **             | ** ** |
| ** **                                                                                                                                                | ** ** | **Shares**            | ** ** | **Amount**                        | ** ** | **Shares**     | ** ** | **Amount**                                  | ** ** | **Capital**                                                                           | ** ** | **Stockholders**    | ** **                                              | **Compensation**       | ** ** | **Stage** | ** ** | **(Deficit)** | ** ** |
|                                                                                                                                                      |       |                  |       |                              |       |           |       |                                        |       |                                                                                  |       |                |                                                    |                   |       |   |   |   |   |   |   |   |
| Subscription receivable for common stock at $1.61 per  share                                                                                              |       | —                |       | $     90 |       | —         |       | $      — |       | $             — |       |                | $        — |                   |       |   | $           — |   |   | $              — |   | $            90 |   |
| **Balance at December 31, 1992**                                                                                                                     |       | —                |       | 90                                |       | —         |       | —                                      |       | —                                                                                |       |                | —                                                  |                   |       |   | — |   |   | — |   | 90 |   |
| Subscription receivable for common stock at $1.61 per  share                                                                                              |       | —                |       | 10                                |       | —         |       | —                                      |       | —                                                                                |       |                | —                                                  |                   |       |   | — |   |   | — |   | 10 |   |
| Issuance of common stock for subscription receivable                                                                                                      |       | 992,000               |       | 892                               |       | —         |       | —                                      |       | (892                                                                                  | )          |                | —                                                  |                   |       |   | — |   |   | — |   | — |   |
| Net loss                                                                                                                                                  |       | —                |       | —                            |       | —         |       | —                                      |       | —                                                                                |       |                | —                                                  |                   |       |   | — |   |   | (24,784 | ) | (24,784 | ) |
| **Balance at December 31, 1993**                                                                                                                     |       | 992,000               |       | 992                               |       | —         |       | —                                      |       | (892                                                                                  | )          |                | —                                                  |                   |       |   | — |   |   | (24,784 | ) | (24,684 | ) |
| Issuance of $.001 par value common stock in exchange  for license agreement                                                                               |       | 248,000               |       | 248                               |       | —         |       | —                                      |       | 39,752                                                                                |       |                | —                                                  |                   |       |   | — |   |   | — |   | 40,000 |   |
| Issuance of Series A convertible preferred stock  ($.001 par value) together with Series A and Series B stock  warrants at $1.00 per share |       | —                |       | —                            |       | 700,000        |       | 704                                         |       | 529,023                                                                               |       |                | —                                                  |                   |       |   | — |   |   | — |   | 529,727 |   |
| Issuance of Series A convertible preferred stock  upon exercise of Series A warrants at $1.00 per share                                         |       | —                |       | —                            |       | 1,300,000      |       | 1,300                                       |       | 1,298,700                                                                             |       |                | —                                                  |                   |       |   | — |   |   | — |   | 1,300,000 |   |
| Accretion to redemption value of preferred stock                                                                                                          |       | —                |       | —                            |       | —         |       | —                                      |       | 58,839                                                                                |       |                | —                                                  |                   |       |   | — |   |   | (58,839 | ) | — |   |
| Net loss                                                                                                                                                  |       | —                |       | —                            |       | —         |       | —                                      |       | —                                                                                |       |                | —                                                  |                   |       |   | — |   |   | (898,929 | ) | (898,929 | ) |
| **Balance at December 31, 1994**                                                                                                                     |       | 1,240,000             |       | 1,240                             |       | 2,000,000      |       | 2,004                                       |       | 1,925,422                                                                             |       |                | —                                                  |                   |       |   | — |   |   | (982,552 | ) | 946,114 |   |
| Issuance of Series A convertible preferred stock  at $1.00 per share                                                                                 |       | —                |       | —                            |       | 3,000,000      |       | 3,000                                       |       | 2,973,454                                                                             |       |                | —                                                  |                   |       |   | — |   |   | — |   | 2,976,454 |   |
| Accretion to redemption value of preferred stock                                                                                                          |       | —                |       | —                            |       | —         |       | —                                      |       | 229,837                                                                               |       |                | —                                                  |                   |       |   | — |   |   | (229,837 | ) | — |   |
| Net loss                                                                                                                                                  |       | —                |       | —                            |       | —         |       | —                                      |       | —                                                                                |       |                | —                                                  |                   |       |   | — |   |   | (2,384,176 | ) | (2,384,176 | ) |
| **Balance at December 31, 1995**                                                                                                                     |       | 1,240,000             |       | 1,240                             |       | 5,000,000      |       | 5,004                                       |       | 5,128,713                                                                             |       |                | —                                                  |                   |       |   | — |   |   | (3,596,565 | ) | 1,538,392 |   |
| Issuance of Series B convertible preferred stock  at $1.60 per share, net of issuance costs                                                          |       | —                |       | —                            |       | 5,032,500      |       | 5,033                                       |       | 7,992,705                                                                             |       |                | —                                                  |                   |       |   | — |   |   | — |   | 7,997,738 |   |
| Cancellation of Series B warrants previously  issued with Series A                                                                              |       | —                |       | —                            |       | —         |       | (4                                          | )          | 4                                                                                     |       |                | —                                                  |                   |       |   | — |   |   | — |   | — |   |
| Cancellation of Series A redemption rights                                                                                                           |       | —                |       | —                            |       | —         |       | —                                      |       | (288,676                                                                              | )          |                | —                                                  |                   |       |   | — |   |   | 288,676 |   | — |   |
| Issuance of common stock upon exercise of stock  options for cash of $4,024 and notes receivable of $90,000 at $0.16 per share                            |       | 582,950               |       | 583                               |       | —         |       | —                                      |       | 93,441                                                                                |       |                | (90,000                                                 | )                      |       |   | — |   |   | — |   | 4,024 |   |
| Net loss                                                                                                                                                  |       | —                |       | —                            |       | —         |       | —                                      |       | —                                                                                |       |                | —                                                  |                   |       |   | — |   |   | (4,053,027 | ) | (4,053,027 | ) |
| **Balance  at December 31, 1996**                                                                                                                    |       | 1,822,950             |       | 1,823                             |       | 10,032,500     |       | 10,033                                      |       | 12,926,187                                                                            |       |                | (90,000                                                 | )                      |       |   | — |   |   | (7,360,916 | ) | 5,487,127 |   |

F-6

----

 

| **Balance at December 31,  1996**                                                                                                 |   | 1,822,950  |   | 1,823  |   | 10,032,500  |   | 10,033  |   | 12,926,187  |   |   | (90,000  | )      |   |   | —     |   |   | (7,360,916  | )      | 5,487,127   |   |
|----------------------------------------------------------------------------------------------------------------------------------------|--------|------------|--------|--------|--------|-------------|--------|---------|--------|-------------|--------|--------|----------|--------|--------|--------|------------|--------|--------|-------------|--------|-------------|--------|
| Issuance of common stock  upon exercise of stock options for cash of $20,288 and notes receivable of  $49,687 at $0.16-$0.40 per share |   | 175,770    |   | 176    |   | —      |   | —  |   | 69,799      |   |   | (49,687  | )      |   |   | —     |   |   | —      |   | 20,288      |   |
| Net loss                                                                                                                               |   | —     |   | — |   | —      |   | —  |   | —      |   |   | —   |   |   |   | —     |   |   | (6,512,591  | )      | (6,512,591  | )      |
| **Balance  at December 31, 1997**                                                                                                 |   | 1,998,720  |   | 1,999  |   | 10,032,500  |   | 10,033  |   | 12,995,986  |   |   | (139,687 | )      |   |   | —     |   |   | (13,873,507 | )      | (1,005,176  | )      |
| Issuance of  Series C convertible preferred stock at $1.81 per share, net of issuance  costs                                      |   | —     |   | — |   | 9,944,750   |   | 9,945   |   | 17,937,102  |   |   | —   |   |   |   | —     |   |   | —      |   | 17,947,047  |   |
| Issuance of common  stock upon exercise of stock options for cash of $3,464 at $0.16-$0.40  per share                                  |   | 13,239     |   | 13     |   | —      |   | —  |   | 3,451       |   |   | —   |   |   |   | —     |   |   | —      |   | 3,464       |   |
| Net loss                                                                                                                               |   | —     |   | — |   | —      |   | —  |   | —      |   |   | —   |   |   |   | —     |   |   | (8,573,923  | )      | (8,573,923  | )      |
| **Balance  at December 31, 1998**                                                                                                 |   | 2,011,959  |   | 2,012  |   | 19,977,250  |   | 19,978  |   | 30,936,539  |   |   | (139,687 | )      |   |   | —     |   |   | (22,447,430 | )      | 8,371,412   |   |
| Issuance of  Series C convertible preferred stock at $1.81 per share, net of issuance  costs                                      |   | —     |   | — |   | 5,311,036   |   | 5,311   |   | 9,529,532   |   |   | —   |   |   |   | —     |   |   | —      |   | 9,534,843   |   |
| Issuance of common  stock upon exercise of stock options for cash of $3,695 at $0.16-$0.56  per share                                  |   | 10,179     |   | 10     |   | —      |   | —  |   | 3,685       |   |   | —   |   |   |   | —     |   |   | —      |   | 3,695       |   |
| Deferred  compensation related to options                                                                                              |   | —     |   | — |   | —      |   | —  |   | 6,811,055   |   |   | —   |   |   |   | (4,442,294 | )      |   | —      |   | 2,368,761   |   |
| Beneficial  conversion feature related to issuance of preferred stock                                                                  |   | —     |   | — |   | —      |   | —  |   | 9,612,975   |   |   | —   |   |   |   | —     |   |   | (9,612,975  | )      | —      |   |
| Net loss                                                                                                                               |   | —     |   | — |   | —      |   | —  |   | —      |   |   | —   |   |   |   | —     |   |   | (11,287,740 | )      | (11,287,740 | )      |
| **Balance  at December 31, 1999**                                                                                                 |   | 2,022,138  |   | 2,022  |   | 25,288,286  |   | 25,289  |   | 56,893,786  |   |   | (139,687 | )      |   |   | (4,442,294 | )      |   | (43,348,145 | )      | 8,990,971   |   |
| Issuance of  5,000,000 shares of common stock, net of issuance costs                                                                   |   | 5,000,000  |   | 5,000  |   | —      |   | —  |   | 82,764,396  |   |   | —   |   |   |   | —     |   |   | —      |   | 82,769,396  |   |
| Conversion of  preferred stock to common stock upon IPO                                                                                |   | 15,678,737 |   | 15,679 |   | (25,288,286 | )      | (25,289 | )      | 9,610       |   |   | —   |   |   |   | —     |   |   | —      |   | —      |   |
| Extinguishments of  notes receivable                                                                                                   |   | —     |   | — |   | —      |   | —  |   | —      |   |   | 139,687  |   |   |   | —     |   |   | —      |   | 139,687     |   |
| Issuance of common  stock upon exercise of stock options for cash of $73,855 at $0.16-$0.56  per share                                 |   | 254,001    |   | 254    |   | —      |   | —  |   | 73,601      |   |   | —   |   |   |   | —     |   |   | —      |   | 73,855      |   |
| Deferred  compensation related to options                                                                                              |   | —     |   | — |   | —      |   | —  |   | 16,860,998  |   |   | —   |   |   |   | (2,062,800 | )      |   | —      |   | 14,798,198  |   |
| Net loss                                                                                                                               |   | —     |   | — |   | —      |   | —  |   | —      |   |   | —   |   |   |   | —     |   |   | (23,361,475 | )      | (23,361,475 | )      |
| **Balance  at December 31, 2000**                                                                                                 |   | 22,954,876 |   | 22,955 |   | —      |   | —  |   | 156,602,391 |   |   | —   |   |   |   | (6,505,094 | )      |   | (66,709,620 | )      | 83,410,632  |   |
| Issuance of common  stock upon exercise of stock options for cash of $103,831 at $0.40-$2.42  per share                                |   | 175,096    |   | 175    |   | —      |   | —  |   | 103,656     |   |   | —   |   |   |   | —     |   |   | —      |   | 103,831     |   |
| Issuance of common  stock upon exercise of purchase rights at an exercise price of $3.84 per  share                                    |   | 9,225      |   | 9      |   | —      |   | —  |   | 35,433      |   |   | —   |   |   |   | —     |   |   | —      |   | 35,442      |   |
| Stock compensation  expense                                                                                                            |   | —     |   | — |   | —      |   | —  |   | 283,512     |   |   | —   |   |   |   | —     |   |   | —      |   | 283,512     |   |
| Deferred  compensation related to options                                                                                              |   | —     |   | — |   | —      |   | —  |   | (99,700     | )      |   | —   |   |   |   | 3,561,504  |   |   | —      |   | 3,461,804   |   |
| Net loss                                                                                                                               |   | —     |   | — |   | —      |   | —  |   | —      |   |   | —   |   |   |   | —     |   |   | (20,144,325 | )      | (20,144,325 | )      |
| **Balance  at December 31, 2001**                                                                                                 |   | 23,139,197 |   | 23,139 |   | —      |   | —  |   | 156,925,292 |   |   | —   |   |   |   | (2,943,590 | )      |   | (86,853,945 | )      | 67,150,896  |   |

F-7

----

 

| **Balance  at December 31, 2001**                                                                                                             |   | 23,139,197 |   | 23,139        |   | — |   | —                                      |   | 156,925,292        |   |   | —                                                  |   |   |   | (2,943,590           | )      |   | (86,853,945         | )      | 67,150,896        |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|--------|---------------|--------|--------|--------|---------------------------------------------|--------|--------------------|--------|--------|---------------------------------------------------------|--------|--------|--------|----------------------|--------|--------|---------------------|--------|-------------------|--------|
| Issuance of common  stock in private placement for $6.00 per share, net of issuance costs                                                          |   | 2,500,000  |   | 2,500         |   | — |   | —                                      |   | 14,929,273         |   |   | —                                                  |   |   |   | —               |   |   | —              |   | 14,931,773        |   |
| Issuance of common  stock upon exercise of stock options for cash of $290,753 at $0.40-$7.38  per share                                            |   | 187,126    |   | 187           |   | — |   | —                                      |   | 290,566            |   |   | —                                                  |   |   |   | —               |   |   | —              |   | 290,753           |   |
| Issuance of common stock upon exercise of purchase  rights at an exercise price of $3.84-$6.39 per share                                           |   | 27,446     |   | 27            |   | — |   | —                                      |   | 120,252            |   |   | —                                                  |   |   |   | —               |   |   | —              |   | 120,279           |   |
| Issuance of common stock upon exercise of warrants  for equipment lease line                                                                       |   | 9,685      |   | 10            |   | — |   | —                                      |   | 21,521             |   |   | —                                                  |   |   |   | —               |   |   | —              |   | 21,531            |   |
| Stock compensation expense                                                                                                                         |   | —     |   | —        |   | — |   | —                                      |   | 190,378            |   |   | —                                                  |   |   |   | —               |   |   | —              |   | 190,378           |   |
| Deferred compensation related to options                                                                                                           |   | —     |   | —        |   | — |   | —                                      |   | (1,456,577         | )      |   | —                                                  |   |   |   | 1,842,124            |   |   | —              |   | 385,547           |   |
| Net loss                                                                                                                                           |   | —     |   | —        |   | — |   | —                                      |   | —             |   |   | —                                                  |   |   |   | —               |   |   | (25,768,974         | )      | (25,768,974       | )      |
| **Balance at December 31, 2002**                                                                                                              |   | 25,863,454 |   | 25,863        |   | — |   | —                                      |   | 171,020,705        |   |   | —                                                  |   |   |   | (1,101,466           | )      |   | (112,622,919        | )      | 57,322,183        |   |
| Issuance of common stock upon exercise of stock  options for cash of $75,686 at $.56-$2.42 per share                                               |   | 35,400     |   | 35            |   | — |   | —                                      |   | 75,651             |   |   | —                                                  |   |   |   | —               |   |   | —              |   | 75,686            |   |
| Issuance of common stock upon exercise of purchase  rights at an exercise price of $2.48-$2.58 per share                                           |   | 32,189     |   | 33            |   | — |   | —                                      |   | 81,466             |   |   | —                                                  |   |   |   | —               |   |   | —              |   | 81,499            |   |
| Issuance of common stock in private placement for  $2.32 per share together with common stock warrants for $3.14 per share, net  of issuance costs |   | 5,172,412  |   | 5,173         |   | — |   | —                                      |   | 11,196,549         |   |   | —                                                  |   |   |   | —               |   |   | —              |   | 11,201,722        |   |
| Stock compensation expense                                                                                                                         |   | —     |   | —        |   | — |   | —                                      |   | 178,166            |   |   | —                                                  |   |   |   | —               |   |   | —              |   | 178,166           |   |
| Deferred compensation related to options                                                                                                           |   | —     |   | —        |   | — |   | —                                      |   | (1,137,244         | )      |   | —                                                  |   |   |   | 815,890              |   |   | —              |   | (321,354          | )      |
| Net loss                                                                                                                                           |   | —     |   | —        |   | — |   | —                                      |   | —             |   |   | —                                                  |   |   |   | —               |   |   | (23,126,625         | )      | (23,126,625       | )      |
| **Balance at December 31, 2003**                                                                                                              |   | 31,103,455 |   | 31,104        |   | — |   | —                                      |   | 181,415,293        |   |   | —                                                  |   |   |   | (285,576             | )      |   | (135,749,544        | )      | 45,411,277        |   |
| Issuance of common stock upon exercise of stock  options for cash of $97,794 at $.40-$4.75 per share                                               |   | 35,935     |   | 36            |   | — |   | —                                      |   | 97,758             |   |   | —                                                  |   |   |   | —               |   |   | —              |   | 97,794            |   |
| Issuance of common stock upon exercise of purchase  rights at an exercise price of $1.85-$1.91 per share                                           |   | 36,393     |   | 36            |   | — |   | —                                      |   | 68,239             |   |   | —                                                  |   |   |   | —               |   |   | —              |   | 68,275            |   |
| Stock issuance costs                                                                                                                               |   | —     |   | —        |   | — |   | —                                      |   | (8,279             | )      |   | —                                                  |   |   |   | —               |   |   | —              |   | (8,279            | )      |
| Stock compensation recovery                                                                                                                        |   | —     |   | —        |   | — |   | —                                      |   | (170,118           | )      |   | —                                                  |   |   |   | —               |   |   | —              |   | (170,118          | )      |
| Deferred compensation related to options                                                                                                           |   | —     |   | —        |   | — |   | —                                      |   | 50,583             |   |   | —                                                  |   |   |   | 250,756              |   |   | —              |   | 301,339           |   |
| Net loss                                                                                                                                           |   | —     |   | —        |   | — |   | —                                      |   | —             |   |   | —                                                  |   |   |   | —               |   |   | (21,837,285         | )      | (21,837,285       | )      |
| **Balance  at December 31, 2004**                                                                                                             |   | 31,175,783 |   | $ 31,176 |   | — |   | $      — |   | $ 181,453,476 |   |   | $        — |   |   |   | $  (34,820 | )      |   | $ (157,586,829 | )      | $ 23,863,003 |   |

F-8

----

 

| **Balance  at December 31, 2004**                                                                              |   | 31,175,783 |   | $ 31,176 |   | —     |   | $      — |   | $ 181,453,476 |   |   | $        — |   |   |   | $  (34,820                                                      | )      |   | $ (157,586,829 | )      | $ 23,863,003 |   |
|---------------------------------------------------------------------------------------------------------------------|--------|------------|--------|---------------|--------|------------|--------|---------------------------------------------|--------|--------------------|--------|--------|---------------------------------------------------------|--------|--------|--------|---------------------------------------------------------------------------|--------|--------|---------------------|--------|-------------------|--------|
| Issuance of common  stock upon exercise of stock options for cash of $197,513 at $.16-$1.78  per share              |   | 352,081    |   | 352           |   | —     |   | —                                      |   | 197,161            |   |   | —                                                  |   |   |   | —                                                                    |   |   | —              |   | 197,513           |   |
| Issuance of common stock upon exercise of purchase  rights at an exercise price of $1.82 and $1.85 per share        |   | 26,675     |   | 27            |   | —     |   | —                                      |   | 48,804             |   |   | —                                                  |   |   |   | —                                                                    |   |   | —              |   | 48,831            |   |
| Issuance of Series A Exchangeable Preferred  Stock at $22.10 per share, net of issuance costs                  |   | —     |   | —        |   | 2,352,443  |   | 2,352                                       |   | 48,837,479         |   |   | —                                                  |   |   |   | —                                                                    |   |   | —              |   | 48,839,831        |   |
| Beneficial conversion feature related to issuance of  preferred stock                                               |   | —     |   | —        |   | —     |   | —                                      |   | 623,489            |   |   | —                                                  |   |   |   | —                                                                    |   |   | (623,489            | )      | —            |   |
| Conversion of Series A Exchangeable Preferred  Stock to common stock                                           |   | 23,524,430 |   | 23,524        |   | (2,352,443 | )      | (2,352                                      | )      | (21,172            | )      |   | —                                                  |   |   |   | —                                                                    |   |   | —              |   | —            |   |
| Stock compensation expense                                                                                          |   | —     |   | —        |   | —     |   | —                                      |   | 443,644            |   |   | —                                                  |   |   |   | —                                                                    |   |   | —              |   | 443,644           |   |
| Deferred compensation related to options                                                                            |   | —     |   | —        |   | —     |   | —                                      |   | (604               | )      |   | —                                                  |   |   |   | 34,820                                                                    |   |   | —              |   | 34,216            |   |
| Net loss                                                                                                            |   | —     |   | —        |   | —     |   | —                                      |   | —             |   |   | —                                                  |   |   |   | —                                                                    |   |   | (20,136,588         | )      | (20,136,588       | )      |
| **Balance at December 31, 2005**                                                                               |   | 55,078,969 |   | $ 55,079 |   | —     |   | $      — |   | $ 231,582,277 |   |   | $        — |   |   |   | $           — |   |   | $ (178,346,906 | )      | $ 53,290,450 |   |
| Issuance of common stock upon exercise of stock  options for cash of $561,097 at $.40-$3.20 per share               |   | 413,680    |   | 414           |   | —     |   | —                                      |   | 560,683            |   |   | —                                                  |   |   |   | —                                                                    |   |   | —              |   | 561,097           |   |
| Issuance of common stock upon exercise of purchase  rights at an exercise price of $1.82, $1.96 and $3.05 per share |   | 44,319     |   | 44            |   | —     |   | —                                      |   | 90,627             |   |   | —                                                  |   |   |   | —                                                                    |   |   | —              |   | 90,671            |   |
| Issuance of common stock upon net exercise of  warrants at an exercise price of $3.14 per share                     |   | 37,459     |   | 37            |   | —     |   | —                                      |   | (37                | )      |   | —                                                  |   |   |   | —                                                                    |   |   | —              |   | —            |   |
| Issuance of common stock upon exercise of warrants  for cash of $2,233,187 at an exercise price of $3.14 per share  |   | 711,206    |   | 711           |   | —     |   | —                                      |   | 2,232,476          |   |   | —                                                  |   |   |   | —                                                                    |   |   | —              |   | 2,233,187         |   |
| Issuance of restricted stock                                                                                        |   | 410,000    |   | 410           |   | —     |   | —                                      |   | (410               | )      |   | —                                                  |   |   |   | —                                                                    |   |   | —              |   | —            |   |
| Stock compensation expense                                                                                          |   | —     |   | —        |   | —     |   | —                                      |   | 3,587,001          |   |   | —                                                  |   |   |   | —                                                                    |   |   | —              |   | 3,587,001         |   |
| Net loss                                                                                                            |   | —     |   | —        |   | —     |   | —                                      |   | —             |   |   | —                                                  |   |   |   | —                                                                    |   |   | (30,212,470         | )      | (30,212,470       | )      |
| **Balance  at December 31, 2006**                                                                              |   | 56,695,633 |   | $ 56,695 |   | —     |   | $      — |   | $ 238,052,617 |   |   | $        — |   |   |   | $           — |   |   | $ (208,559,376 | )      | $ 29,549,936 |   |

 

The accompanyingnotes are an integral part of these financial statements.

F-9

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**ALLOS THERAPEUTICS, INC.STATEMENTS OF CASH FLOWS**

| ** **                                                                                                              | ** ** | **Years Ended December 31,** | ** **  | **Cumulative  Period from  September 1, 1992  (date of inception)  through  December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|-------------|--------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                              | ** ** | **2004**                                    | ** **  | **2005**                                                                                                                 | ** ** | **2006** | ** ** | **2006** | ** ** |
| Cash Flows From Operating Activities:                                                                                   |       |                                        |        |                                                                                                                     |       |   |   |   |   |   |   |
| Net loss                                                                                                                |       | $                                           | (21,837,285 | )                                                                                                                        | $          | (20,136,588 | ) | $ | (30,212,470 | ) |   | $ | (198,322,912 | ) |   |
| Adjustments to reconcile  net loss to net cash used in operating activities:                                            |       |                                        |        |                                                                                                                     |       |   |   |   |   |   |   |
| Depreciation and  amortization                                                                                          |       | 530,386                                     |        | 401,106                                                                                                                  |       | 312,251 |   |   | 3,087,264 |   |   |
| Stock-based  compensation expense                                                                                       |       | 131,221                                     |        | 477,860                                                                                                                  |       | 3,587,001 |   |   | 25,631,094 |   |   |
| Write-off of  long-term investment                                                                                      |       | —                                      |        | —                                                                                                                   |       | — |   |   | 1,000,000 |   |   |
| Other                                                                                                                   |       | 558                                         |        | 179                                                                                                                      |       | — |   |   | 99,121 |   |   |
| Changes in operating  assets and liabilities:                                                                           |       |                                        |        |                                                                                                                     |       |   |   |   |   |   |   |
| Prepaid expenses  and other assets                                                                                      |       | 326,170                                     |        | 233,786                                                                                                                  |       | (2,054,486 | ) |   | (2,605,352 | ) |   |
| Interest  receivable on investments                                                                                     |       | 201,354                                     |        | (190,882                                                                                                                 | )          | 179,326 |   |   | (434,108 | ) |   |
| Accounts payable                                                                                                        |       | 230,288                                     |        | (105,259                                                                                                                 | )          | 34,921 |   |   | 400,133 |   |   |
| Accrued  liabilities                                                                                                    |       | (682,264                                    | )           | 1,584,898                                                                                                                |       | 3,006,617 |   |   | 6,431,521 |   |   |
| Net cash used in  operating activities                                                                                  |       | (21,099,572                                 | )           | (17,734,900                                                                                                              | )          | (25,146,840 | ) |   | (164,713,239 | ) |   |
| Cash Flows From Investing Activities:                                                                                   |       |                                        |        |                                                                                                                     |       |   |   |   |   |   |   |
| Acquisition of  property and equipment                                                                                  |       | (55,700                                     | )           | (108,771                                                                                                                 | )          | (228,043 | ) |   | (3,436,778 | ) |   |
| Purchases of  marketable securities                                                                                     |       | (39,706,097                                 | )           | (69,931,521                                                                                                              | )          | (33,847,513 | ) |   | (426,644,194 | ) |   |
| Proceeds from  sales of marketable securities                                                                           |       | 57,170,000                                  |        | 41,804,925                                                                                                               |       | 62,000,000 |   |   | 404,352,777 |   |   |
| Purchase of long-term  investment                                                                                       |       | —                                      |        | —                                                                                                                   |       | — |   |   | (1,000,000 | ) |   |
| Payments received  on notes receivable                                                                                  |       | —                                      |        | —                                                                                                                   |       | — |   |   | 49,687 |   |   |
| Net cash provided  by (used in) investing activities                                                                    |       | 17,408,203                                  |        | (28,235,367                                                                                                              | )          | 27,924,444 |   |   | (26,678,508 | ) |   |
| Cash Flows From Financing Activities:                                                                                   |       |                                        |        |                                                                                                                     |       |   |   |   |   |   |   |
| Principal payments  under capital leases                                                                                |       | —                                      |        | —                                                                                                                   |       | — |   |   | (422,088 | ) |   |
| Proceeds from sales  leaseback                                                                                          |       | —                                      |        | —                                                                                                                   |       | — |   |   | 120,492 |   |   |
| Release (pledge)  of restricted cash                                                                                    |       | —                                      |        | —                                                                                                                   |       | 183,333 |   |   | (366,667 | ) |   |
| Proceeds from  issuance of convertible preferred stock, net of issuance costs                                           |       | —                                      |        | 48,839,831                                                                                                               |       | — |   |   | 89,125,640 |   |   |
| Proceeds from  issuance of common stock associated with stock options, stock warrants and  employee stock purchase plan |       | 166,069                                     |        | 246,344                                                                                                                  |       | 2,884,955 |   |   | 4,110,284 |   |   |
| Proceeds from  issuance of common stock, net of issuance costs                                                          |       | (8,279                                      | )           | —                                                                                                                   |       | — |   |   | 108,894,612 |   |   |
| Net cash provided  by financing activities                                                                              |       | 157,790                                     |        | 49,086,175                                                                                                               |       | 3,068,288 |   |   | 201,462,273 |   |   |
| Net increase  (decrease) in cash and cash equivalents                                                                   |       | (3,533,579                                  | )           | 3,115,908                                                                                                                |       | 5,845,892 |   |   | 10,070,526 |   |   |
| Cash and cash  equivalents, beginning of period                                                                         |       | 4,642,305                                   |        | 1,108,726                                                                                                                |       | 4,224,634 |   |   | — |   |   |
| Cash and cash  equivalents, end of period                                                                               |       | $                                           | 1,108,726   |                                                                                                                     | $          | 4,224,634 |   | $ | 10,070,526 |   |   | $ | 10,070,526 |   |   |
| Supplemental Schedule of Cash and Non-cash  Operating and Financing Activities:                                         |       |                                        |        |                                                                                                                     |       |   |   |   |   |   |   |
| Cash paid for  interest                                                                                                 |       | $                                           | —      |                                                                                                                     | $          | — |   | $ | — |   |   | $ | 1,033,375 |   |   |
| Issuance of stock  in exchange for license   agreement                                                                  |       | —                                      |        | —                                                                                                                   |       | — |   |   | 40,000 |   |   |
| Capital lease  obligations incurred for acquisition of property and equipment                                           |       | —                                      |        | —                                                                                                                   |       | — |   |   | 422,088 |   |   |
| Issuance of stock  in exchange for notes receivable                                                                     |       | —                                      |        | —                                                                                                                   |       | — |   |   | 139,687 |   |   |
| Conversion of  preferred stock to common stock                                                                          |       | —                                      |        | 48,839,831                                                                                                               |       | — |   |   | 89,125,640 |   |   |

 

The accompanying notes are an integral part of these financial statements.

F-10

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** **

**ALLOS THERAPEUTICS, INC.NOTES TO FINANCIAL STATEMENTS**

Unless the contextotherwise requires, references in this report to “Allos,” the “Company,” “we,” “us”and “our” refer to Allos Therapeutics, Inc.

**1.**                 Formation and Business of the Company

We are a biopharmaceuticalcompany focused on developing and commercializing innovative small moleculedrugs for the treatment of cancer. We have three product candidates that arecurrently under development, EFAPROXYN (efaproxiral), PDX (pralatrexate) andRH1.

·       **EFAPROXYN** (efaproxiral) is the firstsynthetic small molecule designed to sensitize hypoxic, or oxygen-deprived,areas of tumors during radiation therapy by facilitating the release of oxygenfrom hemoglobin, the oxygen-carrying protein contained within red bloodcells, thereby increasing the level of oxygen in tumors. The presence of oxygenin tumors is an essential element for the effectiveness of radiation therapy. Byincreasing tumor oxygenation, we believe EFAPROXYN has the potential to enhancethe efficacy of standard radiation therapy.

·       **PDX** (pralatrexate) is a novel, smallmolecule chemotherapeutic agent that inhibits dihydrofolate reductase, or DHFR,a folic acid (folate)-dependent enzyme involved in the building ofnucleic acid, or DNA, and other processes. PDX was rationally designed forefficient transport into tumor cells via the reduced folate carrier, or RFC-1,and effective intracellular drug retention. We believe these biochemicalfeatures, together with preclinical and clinical data in a variety of tumors,suggest that PDX may have a favorable potency and toxicity profile relative tomethotrexate and other related DHFR inhibitors. We believe PDX has thepotential to be delivered as a single agent or in combination therapy regimens.

·       **RH1** is a small molecule chemotherapeuticagent that we believe is bioactivated by the enzyme DT-diaphorase, or DTD,otherwise known as NAD(P)H quinone oxidoreductase, or NQ01, which isover-expressed in many tumors relative to normal tissue, including lung, colon,breast and liver tumors. We believe that because RH1 is bioactivated in thepresence of DTD, it has the potential to provide targeted drug delivery tothese tumor types while limiting the amount of toxicity to normal tissue.

We incorporated in the Commonwealth of Virginia on September 1,1992 as HemoTech Sciences, Inc. and filed amended Articles of Incorporationto change our name to Allos Therapeutics, Inc. on October 19, 1994.We reincorporated in Delaware on October 28, 1996. We operate as a singlebusiness segment.

Since our inception in 1992, we have not generated anyrevenue from product sales and have experienced significant net losses andnegative cash flows from operations. We have incurred these losses principallyfrom costs incurred in our research and development programs and from ourgeneral and administrative expenses. For the years ended December 31,2004, 2005 and 2006, we had net losses attributable to common stockholders of$21.8 million, $20.8 million, and $30.2 million, respectively. Research anddevelopment expenses for the years ended December 31, 2004, 2005 and 2006were $10.2 million, $11.2 million and $14.3 million, respectively. As of December 31,2006, we had accumulated a deficit during our development stage of $208.6million.

F-11

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Our ability to generate revenue and achieveprofitability is dependent on our ability, alone or with partners, tosuccessfully complete the development of our product candidates, conductclinical trials, obtain the necessary regulatory approvals, and manufacture andmarket our product candidates. The timing and costs to complete the successfuldevelopment of any of our product candidates are highly uncertain, andtherefore difficult to estimate. The lengthy process of seeking regulatoryapprovals for our product candidates, and the subsequent compliance withapplicable regulations, require the expenditure of substantial resources. For amore complete discussion of the regulatory approval process, please refer tothe “Government Regulation” section of Item 1 of this report. Clinicaldevelopment timelines, likelihood of success and total costs vary widely andare impacted by a variety of factors discussed in the “Risk Factors” section ofItem IA of this report. Because of these risks and uncertainties, wecannot predict when or whether we will successfully complete the development ofany of our product candidates or the ultimate costs of such efforts. Due tothese same factors, we cannot be certain when, or if, we will generate anyrevenue or net cash inflow from any of our current product candidates.

Even if our clinical trials demonstrate the safety andeffectiveness of our product candidates in their target conditions, we do notexpect to be able to record commercial sales of any our product candidatesuntil mid-2008 at the earliest. As of result of our research anddevelopment expenses and the costs of preparing for the possible commerciallaunch of EFAPROXYN and PDX, we expect to incur significant and growing lossesfor the foreseeable future. Although the size and timing of our futureoperating losses are subject to significant uncertainty, we expect them to increaseover the next several years as we continue to fund our development programs andprepare for the potential commercial launch of our product candidates.

As of December 31, 2006, we had$32.8 million in cash, cash equivalents, and investments in marketablesecurities. In February 2007, we raised approximately $50.5 million in netproceeds from the sale of 9,000,000 shares of common stock in an underwrittenoffering, after deducting underwriting commissions and other expenses. Basedupon the current status of our product development plans, we believe that ourexisting cash, cash equivalents, and investments in marketable securities,including the net proceeds of the February 2007 financing, will beadequate to satisfy our capital needs through at least the next twelve months. Ifour ongoing Phase 3 ENRICH trial meets its primary endpoint in mid-2007,we would expect to raise additional capital resources to prepare for thepotential commercialization of EFAPROXYN and support the future development ofEFAPROXYN in other indications. If the ENRICH trial fails to meet its primaryendpoint, we believe that our existing resources could be adequate to supportour operations through the end of 2008, although there can be no assurance thatthis can, in fact, be accomplished.

Our forecasts ofthe periods of time through which our financial resources will be adequate tosupport our operations are forward-looking statements that involve risksand uncertainties, and actual results could vary materially. We anticipatecontinuing our current development programs and/or beginning other long-termdevelopment projects involving our product candidates. These projects mayrequire many years and substantial expenditures to complete and may ultimatelybe unsuccessful. Therefore, we may need to obtain additional funds from outsidesources to continue research and development activities, fund operatingexpenses, pursue regulatory approvals and build sales and marketingcapabilities, as necessary. However, our actual capital requirements willdepend on many factors, including:

·       thestatus of our product development programs;

·       thetime and cost involved in conducting clinical trials and obtaining regulatoryapprovals;

·       thetime and cost involved in filing, prosecuting and enforcing patent claims;

·       competingtechnological and market developments; and

F-12

----

·       our ability to market anddistribute our future products and establish new collaborative and licensingarrangements.

**2.**                 Summary of Significant Accounting Policies

*Basis of Presentation*

We have not generated anyrevenue to date and our activities have consisted primarily of developingproducts, raising capital and recruiting personnel. Accordingly, we areconsidered to be in the development stage at December 31, 2006, as definedin Statement of Financial Accounting Standards (“SFAS”) No. 7, *Accounting and Reporting by Development StageEnterprises*.

*Use of Estimates*

The preparation offinancial statements in conformity with generally accepted accountingprinciples in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements, and the reported amount of expenses during thereporting period. Actual results could differ from these estimates.

*Cash, CashEquivalents and Investments in Marketable Securities*

All highly liquidinvestments with original maturities of three months or less are considered tobe cash equivalents. The carrying values of our cash equivalents andinvestments in marketable securities approximate their market values based onquoted market prices. We account for investments in marketable securities inaccordance with SFAS No. 115, *Accountingfor Certain Investments in Debt and Equity Securities*. Investmentsin marketable securities are classified as held to maturity and are carried atcost plus accrued interest. Our cash, cash equivalents and investments inmarketable securities at December 31, 2005 and 2006 are maintained in afinancial institution in amounts that, at times, may exceed federally insuredlimits. We have not experienced any losses in such accounts and believe suchaccounts are not exposed to any significant credit risk in this area. We placeinvestments in high-quality securities in accordance with our investment policy.Substantially all of our investments in marketable securities as of December 31,2006 are held in corporate notes with remaining maturities ranging from one tofive months.

*Restricted Cash*

On May 24, 2001,$550,000 of cash was pledged as collateral on a letter of credit related to ourbuilding lease and was classified as restricted cash on the balance sheet. During2006, in accordance with the terms of the building lease, the amount of theletter of credit was reduced by $183,333. The remaining amount of $366,667 onthe letter of credit is classified as restricted cash on the balance sheet asof December 31, 2006.

*Prepaid Researchand Development Expenses*

Research and developmentexpenditures are charged to expense as incurred. In accordance with certainresearch and development agreements, we are obligated to make certain upfrontpayments upon execution of the agreement. We record these upfront payments asprepaid research and development expenses. Such payments are recorded toresearch and development expense as services are performed. We evaluate on aquarterly basis whether events and circumstances have occurred that mayindicate impairment of remaining prepaid research and development expenses.

F-13

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*Prepaid Expensesand Other Assets*

Prepaidexpenses and other assets are comprised of the following:

| ** **                                                             | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                             | ** ** | **2005**              | ** ** | **2006** | ** ** |
| Prepaid expenses  and other assets                                     |       | $                     | 338,393    |   | $ | 320,840 |   |
| Receivable  related to pending litigation settlement (see Note 8) |       | —                |       | 1,749,000 |   |
|                                                                   |       | $                     | 338,393    |   | $ | 2,069,840 |   |

 

*Property andEquipment*

Property and equipment is recorded at cost and isdepreciated using the straight-line method over estimated useful lives.Depreciation and amortization expense was $530,386, $401,106 and $312,251 forthe years ended December 31, 2004, 2005 and 2006, respectively, and$3,087,264 for the cumulative period from inception through December 31,2006.

Thecomponents of property and equipment are as follows:

| ** **                                      | ** ** | **December 31,** | ** ** | **Estimated** | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|---------------|------------|
| ** **                                      | ** ** | **2005**              | ** ** | **2006**      | ** ** | **Lives** | ** ** |
| Office furniture  and equipment                 |       | $                     | 1,207,240  |          | $          | 1,244,924 |   | 5-7 years |   |
| Computer hardware  and software                 |       | 1,164,929             |       | 1,291,675     |       | 3 years |   |
| Lab equipment                                   |       | 79,109                |       | 76,763        |       | 5 years |   |
| Leasehold  improvements                         |       | 394,740               |       | 394,740       |       | 7 years |   |
|                                            |       | 2,846,018             |       | 3,008,102     |       |   |   |
| Less accumulated  depreciation and amortization |       | (2,158,290            | )          | (2,404,582    | )          |   |   |
| Property and equipment,  net                    |       | $                     | 687,728    |          | $          | 603,520 |   |   |   |

 

*Long-lived Assets*

Long-lived assets,consisting primarily of property and equipment, are reviewed for impairmentwhen events or changes in circumstances indicate the carrying value of theassets may not be recoverable. Recoverability is measured by comparison of theassets’ book value to future net undiscounted cash flows the assets areexpected to generate. If such assets are considered to be impaired, theimpairment to be recognized is measured by the amount by which the book valueof the assets exceed their fair value, which is measured based on the projecteddiscounted future net cash flows arising from the assets.

*Accounts Payable*

Accountspayable are comprised of the following (certain prior year amounts have beenreclassified to conform to the current year presentation):

| ** **              | ** ** | **December 31,** | ** ** |
|-------------------------|------------|-----------------------|------------|
| ** **              | ** ** | **2005**              | ** ** | **2006** | ** ** |
| Trade accounts  payable |       | $                     | 352,266    |   | $ | 388,133 |   |
| Related parties         |       | 12,946                |       | 12,000 |   |
|                    |       | $                     | 365,212    |   | $ | 400,133 |   |

 

F-14

----

*Accrued liabilities*

Accruedliabilities are comprised of the following (certain prior year amounts havebeen reclassified to conform to the current year presentation):

| ** **                                               | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------|------------|-----------------------|------------|
| ** **                                               | ** ** | **2005**              | ** ** | **2006** | ** ** |
| Accrued research  and development expenses               |       | $                     | 1,570,534  |   | $ | 1,430,417 |   |
| Accrued  restructuring and separation costs (see Note 5) |       | 208,786               |       | 427,266 |   |
| Accrued personnel  costs                                 |       | 1,201,821             |       | 1,481,849 |   |
| Accrued  litigation settlement costs (see Note 8)        |       | —                |       | 2,000,000 |   |
| Accrued clinical  manufacturing expenses                 |       | 165,479               |       | 655,552 |   |
| Accrued  expenses—other                             |       | 278,284               |       | 436,437 |   |
|                                                     |       | $                     | 3,424,904  |   | $ | 6,431,521 |   |

 

*Fair Value ofFinancial Instruments*

Our financial instrumentsinclude cash and cash equivalents, investments in marketable securities,prepaid expenses, accounts payable and accrued liabilities. The carryingamounts of financial instruments approximate their fair value due to theirshort maturities. The fair value of our long-term investments in marketablesecurities approximates $125,872 based on quoted market prices at December 31,2005. We had no long-term investments in marketable securities at December 31,2006.

*Stock-BasedCompensation*

We adopted SFAS No. 123 (Revised 2004), *Share-Based Payment* (“SFAS 123R”) effective January 1,2006. Under the provisions of SFAS 123R, stock-based compensation is measuredat the grant date based on the fair value of the award and is recognized asexpense over the required service period of the award. Prior to the adoption ofSFAS 123R, we accounted for grants of stock-based awards according to theintrinsic value method as prescribed by Accounting Principles Board (“APB”)Opinion No. 25,*Accounting for StockIssued to Employees* (“APB 25”) and related Interpretations.

In March 2005, the Securities and ExchangeCommission issued Staff Accounting Bulletin No. 107 (“SAB 107”) relatingto SFAS 123R. We applied the provisions of SAB 107 in connection with ouradoption of SFAS 123R. We adopted SFAS 123R using the modified prospectivetransition method, which requires the application of the accounting standard asof January 1, 2006, the first day of our fiscal year 2006. Our financialstatements as of and for the year ended December 31, 2006 reflect theimpact of SFAS 123R (see Note 4). In accordance with the modified prospectivetransition method, our financial statements for prior periods have not beenrestated to reflect, and do not include, the impact of SFAS 123R.

In November 2005, theFinancial Accounting Standards Board (“FASB”) issued Staff Position (“FSP”) No. FAS 123(R)-3,*Transition Election Related to Accounting for TaxEffects of Share-Based Payment Awards* (“FSP 123R-3”). Weelected to adopt the alternative transition method provided in FSP 123R-3for calculating the tax effects of stock-based compensation pursuant toSFAS 123R. The alternative transition method includes simplified methodsto establish the beginning balance of the additional paid-in capital (“APIC”)pool related to the tax effects of employee stock-based compensation, and todetermine the subsequent impact on the APIC pool and our Statements of CashFlows of the tax effects of employee stock-based compensation awards that areoutstanding upon adoption of SFAS 123R. This adoption did not have animpact on our financial statements.

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*Research andDevelopment*

Research and developmentexpenditures are charged to expense as incurred. Research and developmentexpenses include the costs of certain personnel, basic research, preclinical studies,clinical trials, regulatory affairs, biostatistical data analysis, patents andlicensing fees for our product candidates. We record upfront fees and milestonepayments made under our licensing agreements for our product candidates as researchand development expense as incurred. We accrue research and developmentexpenses for activity as incurred during the fiscal year and prior to receivinginvoices from clinical sites and third party clinical and preclinical researchorganizations. We accrue external costs for clinical and preclinical studiesbased on an evaluation of the following: the progress of the studies, includingpatient enrollment, dosing levels of patients enrolled, estimated costs to dosepatients, invoices received, and contracted costs with clinical sites and thirdparty clinical and preclinical research organizations. Significant judgmentsand estimates must be made and used in determining the accrued balance in anyaccounting period. Actual results could differ from those estimates. During theyears ended December 31, 2004, 2005, and 2006, we did not have any changesin estimates that would have resulted in material adjustments to research anddevelopment expenses accrued in the prior period. However, during the quarterended December 31, 2006, we did change our estimate relating to certaincosts for our Phase 3 ENRICH trial for EFAPROXYN as a result of newinformation, which resulted in a reduction of research and development expensesof approximately $400,000 and a corresponding decrease in accrued research anddevelopment expenses as of December 31, 2006.

*ClinicalManufacturing*

Clinical manufacturingexpenses include the costs of certain personnel and third party manufacturingcosts for our product candidates for use in clinical trials and preclinicalstudies, and certain costs associated with pre-commercial scale-up ofmanufacturing to support regulatory and anticipated commercial requirements. Ourfinished drug inventory is expensed to clinical manufacturing since we arestill a development stage company and we have not received regulatory approvalto market our product candidates. If and when we receive regulatory approval,we will be required to capitalize any future costs of our marketed products atthe lower of cost or market and then expense the sold inventory as a componentof cost of goods sold.

*Income Taxes*

Income taxes are accountedfor under SFAS No. 109, *Accounting forIncome Taxes* (“SFAS 109”). Deferred income tax assets and liabilitiesare recognized for the future tax consequences attributable to differencesbetween the financial statement carrying amounts of existing assets andliabilities at each year end and their respective tax bases using enacted taxrates in effect for the year in which the differences are expected to affecttaxable income. Valuation allowances have been established to reduce theCompany’s deferred tax assets to zero, as we believe that it is more likelythan not that such assets will not be realized.

*Net Loss Per Share*

Net loss per share is calculated in accordance withSFAS No. 128, *Earnings Per Share*(“SFAS 128”). Under the provisions of SFAS 128, basic net loss pershare is computed by dividing the net loss attributable to common stockholdersfor the period by the weighted average number of common shares outstandingduring the period. Diluted earnings per share is computed by giving effect toall dilutive potential common stock outstanding during the period, includingstock options, restricted stock, stock warrants and shares to be issued underour employee stock purchase plan.

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Dilutednet loss per share is the same as basic net loss per share for all periodspresented because any potential dilutive common shares were anti-dilutive dueto our net loss (i.e., including such shares would decrease our basic net lossper share). Potential dilutive common shares that would have been included inthe calculation of diluted earnings per share if we had net income are asfollows:

| ** **             | ** ** | **Year ended December 31,** | ** ** |
|------------------------|------------|--------------------------------------------|------------|
| ** **             | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2006** | ** ** |
| Common stock  options  |       | 693,772                                    |       | 233,063 |   | 1,142,205 |   |
| Restricted stock       |       | —                                     |       | — |   | 410,000 |   |
| Common stock  warrants |       | —                                     |       | — |   | 123,072 |   |
|                   |       | 693,772                                    |       | 233,063 |   | 1,675,277 |   |

 

*Recent AccountingPronouncements*

In February 2006, the FASB issued SFASNo. 155, *Accounting for Certain Hybrid FinancialInstruments* (“SFAS 155”), which amends SFAS No. 133 and SFASNo. 140. SFAS 155 will be effective for the Company beginning in the firstquarter of 2007. SFAS 155 permits interests in hybrid financial instrumentsthat contain an embedded derivative that would otherwise require bifurcation,to be accounted for as a single financial instrument at fair value, withchanges in fair value recognized in earnings. This election is permitted on aninstrument-by-instrument basis for all hybrid financial instruments held,obtained, or issued as of the adoption date. We are currently assessing theimpact of the adoption of SFAS 155 on our financial statements.

In June 2006, the FASB issued Interpretation No. 48,*Accounting for Uncertainty in Income Taxes*(“FIN 48”), which clarifies the accounting for uncertainty in income taxesrecognized in the financial statements in accordance with SFAS No. 109, *Accounting for Income Taxes*. FIN 48 prescribes a recognitionthreshold and measurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a tax return. FIN48 is effective for fiscal years beginning after December 15, 2006. We arecurrently assessing the impact of the adoption of FIN 48 on our financialstatements.

In September 2006,the FASB issued SFAS No. 157, *Fair Value Measurements*(“SFAS 157”), which is effective for fiscal years beginning after November 15,2007 and for interim periods within those years. SFAS 157 defines fair value,establishes a framework for measuring fair value and expands the relateddisclosure requirements. We are currently assessing the impact of the adoptionof SFAS 157 on our financial statements.

**3.**                 Stockholders’ Equity

**Common Stock**

*2000 Initial PublicOffering*

On March 27, 2000, the Securities and ExchangeCommission (“SEC”) declared effective our Registration Statement on Form S-1.Pursuant to this Registration Statement, we completed an Initial PublicOffering of 5,000,000 shares of our common stock at a price of $18.00 per share(the “IPO”). Proceeds to us from the IPO, after calculation of the underwriters’discount and commission, totaled approximately $82.8 million, net ofoffering costs of approximately $1.0 million (excluding underwritersdiscounts and commissions). Concurrent with the closing of the IPO, all outstandingshares of our convertible preferred stock were automatically converted into15,678,737 shares of common stock.

Concurrent with theclosing of our IPO, our Certificate of Incorporation was amended to authorize10,000,000 shares of undesignated preferred stock, none of which were issued oroutstanding at 

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December 31,2006. Our Board of Directors is authorized to fix the designation, powers,preferences, and rights of any such series.

*2002 PrivatePlacement*

In April 2002, wecompleted a private placement of 2,500,000 shares of common stock at a purchaseprice of $6.00 per share to Perseus-Soros BioPharmaceutical Fund, L.P.for an aggregate purchase price of $15.0 million, net of $100,000 inissuance costs, which resulted in net cash proceeds to us of approximately$14.9 million.

*2003 PrivatePlacement*

In November 2003, wecompleted a private placement of 5,172,412 shares of common stock at a purchaseprice of $2.32 per share to various purchasers for an aggregate purchase priceof $12.0 million, net of $800,000 in issuance costs, which resulted in netcash proceeds to us of approximately $11.2 million. The purchase price wasprivately negotiated with the purchasers to represent an approximately 16%discount to the market value of our common stock on November 14, 2003.

*2005 Series AExchangeable Preferred Stock Financing*

In March 2005, we entered into a SecuritiesPurchase Agreement with Warburg Pincus Private Equity VIII, L.P. (“Warburg”)and certain other investors pursuant to which we issued and sold 2,352,443shares of Series A Exchangeable Preferred Stock (the “ExchangeablePreferred”), at a price per share of $22.10 (the “Preferred Purchase Price”),for aggregate gross proceeds of approximately $52.0 million (the “PreferredStock Financing”). We incurred offering expenses of $3.2 million inconnection with the sale of Exchangeable Preferred, resulting in net cashproceeds to the Company of approximately $48.8 million. The shares ofExchangeable Preferred were sold under our shelf Registration Statement on Form S-3(File No. 333-113353) declared effective by the Securities andExchange Commission on April 21, 2004.

On May 18, 2005, at our 2005 Annual Meeting ofStockholders, our stockholders voted to approve the issuance of shares of ourcommon stock upon exchange of all of the outstanding shares of ExchangeablePreferred. As a result of such approval, we issued a total of 23,524,430 sharesof common stock upon exchange of 2,352,443 shares of Exchangeable Preferred(the “Share Exchange”).

The Preferred Purchase Price represented a 7.5%discount to the 20-day trailing average closing price of our common stockon the Nasdaq National Market as of March 2, 2005, calculated on anas-exchanged for common stock basis. In connection with the Share Exchange, we recordeda deemed dividend related to the beneficial conversion feature of theExchangeable Preferred equal to $623,489, representing the difference betweenthe effective conversion price per share of common stock and the market valueper share of common stock as of the closing date of the Preferred StockFinancing. As reflected on the Statements of Operations, this dividendincreases the net loss attributable to common stockholders for the year ended December 31,2005.

In connection with the sale of Exchangeable Preferred,we entered into a Registration Rights Agreement between us and the purchasersof Exchangeable Preferred. Pursuant to this Registration Rights Agreement,beginning on March 4, 2007, the purchasers of Exchangeable Preferred willbe entitled to certain registration rights with respect to the shares of commonstock that were issued upon exchange of the Exchangeable Preferred.

Pursuant to the Securities Purchase Agreement, for solong as Warburg owns at least two-thirds of the shares of common stock issuedupon exchange of such Exchangeable Preferred, we will nominate and use ourreasonable best efforts to cause to be elected and cause to remain as directorson our Board of Directors two individuals designated by Warburg (each, an “InvestorDesignee” and collectively, the 

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“Investor Designees”). IfWarburg no longer has the right to designate two members of our Board ofDirectors, then, for so long as Warburg owns at least 50% of the shares ofcommon stock issued upon exchange of such Exchangeable Preferred, we willnominate and use our reasonable best efforts to cause to be elected and causeto remain as a director on our Board of Directors, one Investor Designee. Inaddition, subject to applicable law and the rules and regulations of theSEC and the Nasdaq Stock Market, we will use our reasonable best efforts tocause one of the Investor Designees to be a member of each principal committeeof our Board of Directors; however, our Board of Directors has determined,based on its analysis of Rule 10A-3 under the Securities ExchangeAct of 1934, as amended, that the Investor Designees are not eligible to serveas members of the Audit Committee of the Board of Directors due to the size ofWarburg’s ownership interest. Effective upon the closing of the sale ofExchangeable Preferred to Warburg on March 4, 2005, Messrs. StewartHen and Jonathan Leff, each of whom is a Managing Director of Warburg, wereappointed to our Board of Directors pursuant to Warburg’s right to nominatedirectors.

On November 7, 2005,we filed a Certificate of Elimination of Series A Exchangeable PreferredStock (the “Certificate of Elimination”) with the Secretary of State of theState of Delaware. The Certificate of Elimination had the effect of eliminatingfrom our Restated Certificate of Incorporation, as amended, all matters withrespect to the Series A Exchangeable Preferred Stock set forth in theCertificate of Designations, Number, Voting Power, Preferences and Rights of Series AExchangeable Preferred Stock (the “Certificate of Designations”) filed with theSecretary of State of the State of Delaware on March 3, 2005. As a resultof the Certificate of Elimination, all 2,714,932 shares of Series AExchangeable Preferred Stock authorized pursuant to the Certificate ofDesignations have resumed their status as authorized and unissued PreferredStock as of November 7, 2005.

*2007 Common StockFinancing*

On February 2, 2007, we sold 9,000,000 shares ofour common stock in an underwritten offering at a price of $6.00 per share (the“February 2007 Financing”). We received net proceeds from the offering ofapproximately $50.5 million, after deducting underwriting commissions ofapproximately $3.2 million and other offering expenses of approximately$250,000. The shares of common stock were sold under our shelf RegistrationStatement on Form S-3 (File No. 333-134965), declaredeffective by the Securities and Exchange Commission on July 10, 2006.

Baker Brothers LifeSciences, L.P. and certain other affiliated funds (collectively “Baker”) purchased3,300,000 shares of common stock in the February 2007 Financing. As aresult of such purchase, Baker holds in excess of 15% of our outstanding commonstock following the closing of the February 2007 Financing. In connectionwith the February 2007 Financing, Baker entered into a standstillagreement with the Company, agreeing not to pursue, for four years, certainactivities the purpose or effect of which may be to change or influence controlof the Company.

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*Common StockReserved for Future Issuance*

At December 31,2006, we have reserved shares of common stock for future issuance as follows:

| ** **                              | ** ** | **Outstanding at  December 31,  2006** | ** ** | **Available for  grant at  December 31,  2006** | ** ** | **Shares of  Common Stock  Reserved at  December 31,  2006** | ** ** |
|-----------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| 1995 Stock Option  Plan                 |       |                                             | 438,427    |                                                           |       |                                                                             | —     |   |   |   | 438,427 |   |   |
| 2000 Stock Option  Plan                 |       |                                             | 4,331,644  |                                                           |       |                                                                             | 2,594,855  |   |   |   | 6,926,499 |   |   |
| 2001 Employee  Stock Purchase Plan      |       |                                             | —     |                                                           |       |                                                                             | 2,323,753  |   |   |   | 2,323,753 |   |   |
| 2002 Broad Based  Equity Incentive Plan |       |                                             | 658,500    |                                                           |       |                                                                             | 305,393    |   |   |   | 963,893 |   |   |
| 2006 Inducement  Award Plan             |       |                                             | 350,000    |                                                           |       |                                                                             | 1,040,000  |   |   |   | 1,390,000 |   |   |
| Total for Equity Incentive Plans        |       |                                             | 5,778,571  |                                                           |       |                                                                             | 6,264,001  |   |   |   | 12,042,572 |   |   |
| Stock warrants                          |       |                                             | 748,187    |                                                           |       |                                                                             | —     |   |   |   | 748,187 |   |   |
| Grand total                             |       |                                             | 6,526,758  |                                                           |       |                                                                             | 6,264,001  |   |   |   | 12,790,759 |   |   |

 

**Stock Warrants**

In November 2003, inconjunction with the private placement of 5,172,412 shares of common stock tovarious purchasers, we issued warrants to purchase 1,706,893 shares of commonstock at an exercise price of $3.14 per share with a life of four years. As of December 31,2006, 748,187 of these warrants remained outstanding.

**Stockholder RightsPlan**

In May 2003, we designated 1,000,000 shares ofour authorized Preferred Stock as Series A Junior Participating PreferredStock, par value $0.001 per share, pursuant to a Stockholder Rights Planapproved by our Board of Directors under which all stockholders of record as ofMay 28, 2003 received a dividend distribution of one preferred sharepurchase right (a “Right”) for each outstanding share of our common stock. TheRights trade with the common stock and no separate Right certificates will bedistributed until such time as the Rights become exercisable in accordance withthe Stockholder Rights Plan. The Stockholder Rights Plan is intended as a meansto guard against abusive takeover tactics and to provide for fair and equaltreatment for all stockholders in the event that an unsolicited attempt is madeto acquire us.

In connection with the sale of shares of ExchangeablePreferred to Warburg in March 2005, we amended the Stockholder Rights Planto provide that Warburg and its affiliates will be exempt from the StockholderRights Plan, unless Warburg and its affiliates become, without the priorconsent of our Board of Directors, the beneficial owner of more than 44% of ourcommon stock.

In connection with the acquisition of shares of ourcommon stock by Baker in the February 2007 Financing, we amended theStockholder Rights Plan to provide that Baker will be exempt from theStockholder Rights Plan, unless Baker becomes, without the Company’s priorconsent, the beneficial owner of more than 20% of our common stock.

Until the Rights becomeexercisable, the Rights will have no dilutive impact on our earnings per sharedata. The Rights are protected by customary anti-dilution provisions. As of December 31,2006, no shares of Series A Junior Participating Preferred Stock wereissued or outstanding.

**Stock Options**

During 1995, our Board of Directors terminated the1992 Stock Plan (the “1992 Plan”) and adopted the 1995 Stock Option Plan (the “1995Plan”). The 1995 Plan was amended and restated in 1997. Termination of the 1992Plan had no effect on the options outstanding under that plan, as they were 

F-20

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assumed under the 1995Plan. Under the 1995 Plan, we could grant fixed and performance-basedstock options and stock appreciation rights to officers, employees, consultantsand directors. The stock options were intended to qualify as “incentive stockoptions” under Section 422 of the Internal Revenue Code, unlessspecifically designated as non-qualifying stock options or unless exceeding theapplicable statutory limit.

During 2000, concurrent with our IPO, the Board ofDirectors suspended the 1995 Plan and adopted the Allos Therapeutics, Inc.2000 Stock Incentive Compensation Plan (the “2000 Plan”). The 2000 Planprovides for the granting of stock options similar to the terms of the 1995Plan as described above. Any shares remaining for future option grants and anyfuture cancellations of options from our 1995 Plan will be available for futuregrant under the 2000 Plan. Suspension of the 1995 Plan had no effect on theoptions outstanding under the 1995 Plan. Under the 2000 Plan, we are authorizedto increase the number of shares of common stock that shall be availableannually on the first day of each fiscal year beginning in 2001 in an amountequal to the lesser of 440,000 shares or 2% of the adjusted average commonshares outstanding used to calculate fully diluted earnings per share asreported in our Annual Report to Stockholders for the preceding year, or alternatively,by any lesser amount determined by our Board of Directors. On December 21,2005, our stockholders approved an amendment and restatement of the 2000 Planto: (i) increase the aggregate number of shares of common stock authorizedfor issuance under the 2000 Plan by 3,500,000 shares and (ii) provide thatthe number of shares of common stock that may be granted under the 2000 Plan toany one employee during any calendar year cannot exceed 2,000,000 shares.

In January 2002, our Board of Directors approvedthe Allos Therapeutics, Inc. 2002 Broad Based Equity Incentive Plan (the “2002Plan”). Under the 2002 Plan, we are authorized to issue up to 1,000,000 sharesof common stock to employees, consultants and members of the Board ofDirectors. Under the terms of the 2002 Plan, the aggregate number of sharesunderlying stock awards to officers and directors once employed by us cannotexceed 49% of the number of shares underlying all stock awards granted, asdetermined on certain specific dates. The 2002 Plan will terminate on January 7,2012.

In June 2006, our Board of Directors approved theAllos Therapeutics, Inc. 2006 Inducement Award Plan (the “2006 Plan”). Underthe 2006 Plan, we are authorized to issue up to 1,500,000 shares of commonstock pursuant to equity awards, including nonstatutory stock options, stockgrant awards, stock purchase awards, stock unit awards and other forms ofequity compensation. We may grant awards under the 2006 Plan only to personsnot previously an employee or director of ours, or following a bona fide periodof non-employment, as an inducement material to such individual’s entering intoemployment with us and to provide incentives for such persons to exert maximumefforts for our success.

The 1995, 2000, 2002 and 2006 Plans (the “Plans”)provide for appropriate adjustments in the number of shares reserved andoutstanding options in the event of certain changes to our outstanding commonstock by reason of merger, recapitalization, stock split or other similarevents. Options granted under the Plans may be exercised for a period of notmore than 10 years from the date of grant or any shorter period asdetermined by our Board of Directors. Options vest as determined by the Boardof Directors, generally over a period of two to four years, subject toacceleration under certain events. The exercise price of any incentive stockoption granted under the Plans must equal or exceed the fair market value ofour common stock on the date of grant, or 110% of the fair market value pershare in the case of a 10% or greater stockholder.

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Thefollowing table summarizes our stock option activity and related informationfor the 1995, 2000, 2002 and 2006 Plans:

| ** **                                 | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**               | ** ** |
|--------------------------------------------|------------|------------------------------|------------|--------------------------------------------|------------|
| ** **                                 | ** ** | **Number of  Shares**   | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
| **Outstanding  at December 31, 2003** |       | 3,539,818                    |       |                                       | $          | 4.14 |   |   | 2,161,725 |   |   | $ | 3.60 |   |   |
| Granted                                    |       | 1,018,310                    |       |                                       | 3.29       |   |   |   |   |   |   |   |   |
| Exercised                                  |       | (35,935                      | )          |                                       | 2.72       |   |   |   |   |   |   |   |   |
| Canceled                                   |       | (648,745                     | )          |                                       | 4.66       |   |   |   |   |   |   |   |   |
| **Outstanding  at December 31, 2004** |       | 3,873,448                    |       |                                       | $          | 3.84 |   |   | 2,537,256 |   |   | $ | 3.76 |   |   |
| Granted                                    |       | 602,764                      |       |                                       | 2.37       |   |   |   |   |   |   |   |   |
| Exercised                                  |       | (352,081                     | )          |                                       | 0.56       |   |   |   |   |   |   |   |   |
| Canceled                                   |       | (179,756                     | )          |                                       | 4.69       |   |   |   |   |   |   |   |   |
| **Outstanding  at December 31, 2005** |       | 3,944,375                    |       |                                       | $          | 3.87 |   |   | 2,809,991 |   |   | $ | 4.20 |   |   |
| Granted                                    |       | 2,660,343                    |       |                                       | 2.93       |   |   |   |   |   |   |   |   |
| Exercised                                  |       | (413,680                     | )          |                                       | 1.36       |   |   |   |   |   |   |   |   |
| Canceled                                   |       | (412,467                     | )          |                                       | 4.15       |   |   |   |   |   |   |   |   |
| **Outstanding at  December 31, 2006** |       | 5,778,571                    |       |                                       | $          | 3.60 |   |   | 2,900,556 |   |   | $ | 4.27 |   |   |

 

Thefollowing table summarizes information about options outstanding andexercisable as of December 31, 2006:

| ** **                                  | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**                            | ** ** |
|---------------------------------------------|------------|------------------------------|------------|---------------------------------------------------------|------------|
| **Range of Exercise Prices** | ** ** | **Outstanding**              | ** ** | **Weighted  Average  Remaining  Contractual Life** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Exercisable** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
| $0.00—$1.38                            |       |                         | 20,336     |                                                    |       |   | 1.2 |   |   |   | $ | 0.48 |   |   | 20,336 |   |   | $ | 0.48 |   |   |
| $1.39—$2.75                            |       |                         | 2,423,659  |                                                    |       |   | 7.6 |   |   |   | 2.49 |   |   | 989,713 |   |   | 2.32 |   |   |
| $2.76—$4.13                            |       |                         | 1,878,800  |                                                    |       |   | 8.6 |   |   |   | 3.15 |   |   | 518,347 |   |   | 3.22 |   |   |
| $4.14—$5.50                            |       |                         | 767,181    |                                                    |       |   | 5.8 |   |   |   | 4.97 |   |   | 684,712 |   |   | 4.96 |   |   |
| $5.51—$6.88                            |       |                         | 388,090    |                                                    |       |   | 4.6 |   |   |   | 6.16 |   |   | 388,090 |   |   | 6.16 |   |   |
| $6.89—$8.25                            |       |                         | 95,000     |                                                    |       |   | 5.8 |   |   |   | 7.31 |   |   | 93,853 |   |   | 7.31 |   |   |
| $8.26—$9.63                            |       |                         | 162,205    |                                                    |       |   | 5.5 |   |   |   | 8.79 |   |   | 162,205 |   |   | 8.79 |   |   |
| $9.64—$11.00                           |       |                         | 28,500     |                                                    |       |   | 3.5 |   |   |   | 10.95 |   |   | 28,500 |   |   | 10.95 |   |   |
| $12.39—$13.75                          |       |                         | 14,800     |                                                    |       |   | 3.6 |   |   |   | 13.75 |   |   | 14,800 |   |   | 13.75 |   |   |
|                                        |       |                         | 5,778,571  |                                                    |       |   | 7.3 |   |   |   | $ | 3.60 |   |   | 2,900,556 |   |   | $ | 4.27 |   |   |

 

Thefollowing table summarizes information about outstanding stock options that arefully vested and currently exercisable, and outstanding stock options that areexpected to vest in the future:

| ** **                                                                | ** ** | **Number  Outstanding** | ** ** | **Weighted Average  Remaining  Contractual Term** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|---------------------------------------------------------------------------|------------|-------------------------|------------|-------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------|------------|
| **As of  December 31, 2006:**                                        | ** ** |                    | ** ** | ** **                                                  |       |                                       | ** ** | ** **                          |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Options fully vested and exercisable                                      |       |                    | 2,900,556  | ** **                                                  |       |                                       | 5.7        | ** **                          |       |   | $ | 4.27 | ** ** |   |   | $ | 5,571,808 | ** ** |   |
| Options expected to vest, including effects  of expected forfeitures |       |                    | 2,583,705  | ** **                                                  |       |                                       | 9.0        | ** **                          |       |   | $ | 2.93 | ** ** |   |   | 7,641,181 | ** ** |   |
| Options fully  vested and expected to vest                                |       |                    | 5,484,261  | ** **                                                  |       |                                       | 7.3        | ** **                          |       |   | $ | 3.64 | ** ** |   |   | $ | 13,212,989 | ** ** |   |

 

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The aggregate intrinsic value in the tables aboverepresents the total pretax intrinsic value, based on our closing stock priceof $5.85 as of December 31, 2006, which would have been received by theoption holders had all option holders with in-the-money options exercised theiroptions as of that date. The total number of in-the-money options exercisableas of December 31, 2006 was 2,313,108. The total fair value of optionsvested during the year ended December 31, 2006 was approximately $1,117,000.

The total intrinsic valueof options exercised during the year ended December 31, 2006 was$1,104,117. The total cash received from employees as a result of employeestock option exercises during the year ended December 31, 2006 was$561,097. We settle employee stock option exercises with newly issued commonshares. No tax benefits were realized by us in connection with these exercisesduring the year ended December 31, 2006 as we maintain net operating losscarryforwards and we have established a valuation allowance against the entiretax benefit as of December 31, 2006.

**Restricted Stock**

During the year endedDecember 31, 2006, we granted 410,000 shares of restricted stock. We didnot grant restricted stock during the years ended December 31, 2004 and2005. The shares of restricted stock vest in four equal annual installmentsfrom the date of grant. As of December 31, 2006, 410,000 shares ofrestricted stock were outstanding and no shares were vested.

**Employee StockPurchase Plan**

On February 28, 2001,our Board of Directors approved the Allos Therapeutics, Inc. 2001 EmployeeStock Purchase Plan (“Purchase Plan”), which was also approved by ourstockholders on April 17, 2001. Under the Purchase Plan, we are authorizedto issue up to 2,500,000 shares of common stock to qualified employees.Qualified employees can choose to have up to 10% of their annual base earningswithheld to purchase shares of our common stock during each offering period.The purchase price of the common stock is 85% percent of the lower of thefair market value of a share of common stock on the first day of the offeringor the fair market value of a share of common stock on the last day of thepurchase period. We sold 36,393, 26,675 and 44,319 shares to employees in 2004,2005 and 2006, respectively. There were 2,323,753 shares available for saleunder the Purchase Plan as of December 31, 2006. The Purchase Plan willterminate on February 27, 2011.

**4.**                 Stock-BasedCompensation

**Prior to theAdoption of SFAS 123R**

During the year ended December 31, 2004, werecorded a net recovery of stock-based compensation expense of $95,000 inmarketing, general and administrative expenses, and stock-basedcompensation expense of $170,000 and $56,000 in research and development andclinical manufacturing expenses, respectively.

During the year ended December 31, 2005, werecorded stock-based compensation expense of $476,000 and $2,000 inmarketing, general and administrative expenses and research and developmentexpenses, respectively. The $476,000 of stock-based compensation expenserecorded in marketing, general and administrative expenses is primarily due toan amendment in May 2005 of the terms surrounding the exercise period forcertain options that were granted to our Chairman of the Board of Directorsduring 2000 (see Note 9).

Priorto the adoption of SFAS 123R, we provided the disclosures required under SFAS No. 123,*Accounting for Stock-Based Compensation*(“SFAS 123”), as amended by SFAS No. 148, *Accountingfor Stock-Based Compensation—Transition and Disclosures*. Thefollowing table illustrates the pro forma effect on net loss attributable tocommon stockholders and net loss per share if we had applied the fair value 

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recognition provisions of SFAS 123 to stock-basedcompensation for the years ended December 31, 2004 and 2005:

| ** **                                                                                                     | ** ** | **2004**   | ** **  | **2005**   | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|------------|-------------|------------|------------|
| Net loss  attributable to common stockholders—as reported                                                 |       | $          | (21,837,285 | )          | $          | (20,760,077 | ) |
| Add: Stock-based employee compensation expense  included in reported net loss                                  |       | 131,221    |        | 477,860    |       |
| Deduct: Stock-based employee compensation  expense determined under the fair value based method for all awards |       | (1,618,441 | )           | (1,737,894 | )          |
| Pro forma net loss attributable to common  stockholders                                                        |       | $          | (23,324,505 | )          | $          | (22,020,111 | ) |
| Net loss per share: basic and diluted—as reported                                                         |       | $          | (0.70       | )          | $          | (0.45 | ) |
| Net loss per  share: basic and diluted—pro forma                                                          |       | $          | (0.75       | )          | $          | (0.48 | ) |

 

The weighted average estimated grant date fair value,as defined by SFAS 123, for options granted under our stock option plansduring the years ended December 31, 2004 and 2005 was $2.23 and $1.42 pershare, respectively. The weighted average estimated grant date fair value ofpurchase awards under our Allos Therapeutics, Inc. 2001 Employee StockPurchase Plan during the years ended December 31, 2004 and 2005 was $1.23and $0.84, respectively. The estimated grant date fair values were calculatedusing the Black-Scholes option-pricing model.

Thefollowing assumptions are included in the estimated grant date fair valuecalculations for our stock option and employee stock purchase awards for theyears ended December 31, 2004 and 2005:

| ** **                      | ** ** | **2004**    | ** ** | **2005**  | ** ** |
|---------------------------------|------------|-------------|------------|-----------|------------|
| Stock option plans:             |       |        |       |      |       |
| Expected dividend yield         |       | 0%          |       | 0%        |       |
| Expected stock price volatility |       | 65%-126%    |       | 78%-85%   |       |
| Risk free interest rate         |       | 2.14%-5.5%  |       | 2.3%-4.5% |       |
| Expected life (years)           |       | 0.9-5.0     |       | 4.0-5.0   |       |
| Stock purchase plan:            |       |        |       |      |       |
| Expected dividend yield         |       | 0%          |       | 0%        |       |
| Expected stock price volatility |       | 64%-119%    |       | 35%-69%   |       |
| Risk free interest rate         |       | 0.94%-1.65% |       | 1.6%-3.8% |       |
| Expected life  (years)          |       | 1.5-2.0     |       | 2.0       |       |

 

**Impact of theadoption of SFAS 123R**

In accordance with themodified prospective transition method of SFAS 123R, we recognized totalstock-based compensation expense of $3,587,001 during the year ended December 31,2006. For the year ended December 31, 2006, we allocated stock-basedcompensation expense of $2,813,661, $660,274, and $113,066 to marketing, generaland administrative, research and development and clinical manufacturingexpenses, respectively. We did not recognize a related tax benefit during theyear ended December 31, 2006 as we maintain net operating losscarryforwards and we have established a valuation allowance against the entiretax benefit as of December 31, 2006. Our adoption of SFAS 123R did notimpact our net cash flows from operating, investing or financing activities forthe year ended December 31, 2006. No stock-based compensation expense wascapitalized on our Balance Sheet as of December 31, 2006. The impact ofthe adoption of SFAS 123R for the year ended December 31, 2006 was toincrease stock-based 

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compensationexpense by $2,649,422 and increase our net loss per share by $0.03, on a basicand fully-diluted basis.

*Outstanding andunvested stock-based awards as of December 31, 2005*

For stock-based awardsthat were outstanding and unvested as of December 31, 2005, we had anunrecorded deferred stock-based compensation balance of $805,652, as calculatedunder the provisions of SFAS 123 for purposes of pro forma disclosures. In ourpro forma disclosures prior to the adoption of SFAS 123R, we accounted forforfeitures upon occurrence. SFAS 123R requires forfeitures to be estimated atthe time of grant and revised if necessary in subsequent periods if actualforfeitures differ from those estimates. Accordingly, as of January 1,2006, we estimated that the stock-based compensation for the awards notexpected to vest was $129,710, and therefore, the unrecorded deferredstock-based compensation balance related to stock options outstanding andunvested as of December 31, 2005 was adjusted to $675,942 after estimatedforfeitures. During the year ended December 31, 2006, we recorded stock-basedcompensation related to these awards of $485,173. As of December 31, 2006,the unrecorded deferred stock-based compensation balance related to outstandingand unvested stock options as of December 31, 2005 was $190,769 and willbe recognized over an estimated weighted-average amortization period of 0.8years.

*Stock-based awardsduring the year ended December 31, 2006*

During the year ended December 31, 2006, wegranted 2,660,343 stock options with an estimated total grant-date fair valueof $4,771,885, or $1.79 per share  Of this amount, we estimated that thestock-based compensation for the awards not expected to vest was $421,215.  During the year ended December 31, 2006,we recorded stock-based compensation related to these awards of $2,122,221. Asof December 31, 2006, the unrecorded deferred stock-based compensationbalance related to stock options was $2,228,449 and will be recognized over anestimated weighted-average amortization period of 1.5 years.

During the year ended December 31, 2006, weentered into a Separation Agreement with our former President and ChiefExecutive Officer, Michael E. Hart, and we entered into a consulting agreementwith a former member of our Board of Directors, Dr. Marvin E. Jaffe (thesearrangements are described in more detail in Note 9 below). Pursuant to thesearrangements, the exercise periods of certain stock options held by Mr. Hartand Dr. Jaffe were extended as a result of their consulting relationshipsand were deemed modified for accounting purposes. We have accounted for themodifications to these options in accordance with SFAS 123R and FASBInterpretation No. 44, *Accounting for CertainTransactions Involving Stock Compensation*, and recorded a one-timestock-based compensation charge of $441,129 during the year ended December 31,2006.

During the year ended December 31, 2006, wegranted 410,000 shares of restricted stock to employees with an estimated totalgrant-date fair value of $1,286,300. Theweighted-average grant-date fair value per share for restricted stock awardsgranted during the year ended December 31, 2006 was equal to $3.14 pershare and was based on the closing market price of the Company’s common stockon the grant dates of the awards. During the year ended December 31,2006, we recorded stock-based compensation related to these awards of $502,514.As of December 31, 2006, the unrecorded deferred stock-based compensationbalance related to restricted stock was $783,786 and will be recognized over anestimated weighted-average amortization period of 1.6 years.

During the year ended December 31,2006, we sold 44,319 shares of common stock to employees under our EmployeeStock Purchase Plan. During the year ended December 31, 2006, werecognized stock-based compensation expense in connection with the PurchasePlan of $35,964. As of December 31, 2006, the unrecorded deferredstock-based compensation balance related to the Purchase Plan was $17,982 andwill be recognized over an estimated weighted-average amortization period ofsix months. The 

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weighted-averageestimated grant date fair value of purchase awards under the Purchase Planduring the year ended December 31, 2006 was $0.96 per share, and wasdetermined using the following weighted-average assumptions: an expecteddividend yield of 0%; an expected stock price volatility of 46%; an expectedlife of 1.0 year; and a risk-free interest rate of 4.7%.

*Valuationassumptions for stock options granted during the year ended December 31,2006*

For stock optionsgranted during the year ended December 31, 2006, the majority vestaccording to the following schedule: 25% of the shares subject to the awardvest one year after the date of grant, and the remaining 75% of the sharessubject to the award vest in equal monthly installments thereafter over the nextthree years, until all such shares are vested and exercisable. Stock-basedcompensation calculated according to SFAS 123R is expensed over the vestingperiod of the individual options in accordance with FASB Interpretation No. 28,*Accounting for Stock Appreciation Rights and OtherVariable Stock Option and Award Plans* (“FIN 28”). The fairvalue of stock options granted to our employees during the year ended December 31,2006 was estimated on the date of each grant using the Black-Scholes optionpricing model using the following weighted-average assumptions:

·       Anexpected dividend yield of 0% as we do not expect to pay dividends during theexpected life of these awards;

·       Anexpected stock price volatility of 81% determined using our historical stockvolatility over the period equal to the expected life of each award;

·       Anexpected life of 3.9 years, determined by factoring the different vestingperiods of each award in combination with our employees’ expected exercisebehavior; and

·       A risk-free interest rate of 4.7%, based onUnited States Treasury zero-coupon issues with a remaining term equal to theexpected life of each award.

**5.**                 Restructuring and Separation Costs

In January 2005, we executed agreements tosublease approximately three-quarters of the 12,708 square feet of excessspace in our corporate offices located in Westminster, Colorado. The term ofeach sublease agreement is through the term of our office lease, or October 31,2008. The total rental payments to us under the terms of the subleaseagreements approximate $230,000. In the year ended December 31, 2005, werecorded a lease abandonment charge of $380,085 as our obligations under ourprimary lease were in excess of the sum of the actual and expected subleaserental payments for this excess space. As of December 31, 2006, the amountremaining in accrued restructuring and separation costs relating to this leaseabandonment charge was $106,808.

In January 2006,Michael E. Hart notified our Board of Directors of his intent to resign fromhis positions as President, Chief Executive Officer and Chief Financial Officerof the Company once a successor Chief Executive Officer was appointed. On March 3,2006, we entered into a separation agreement with Mr. Hart to providecertain incentives for his continued employment with the Company while weconducted our search for his successor. On March 9, 2006, we appointedPaul L. Berns as our President, Chief Executive Officer and a member of theBoard of Directors and Mr. Hart resigned from his positions in accordancewith the terms of the separation agreement. The separation agreement with Mr. Hartwas amended on March 9, 2006 and on May 10, 2006 (as so amended, the “SeparationAgreement”). Pursuant to the Separation Agreement, Mr. Hart is entitled tocertain payments and benefits from the Company, including but not limited tothe following:

·       alump sum payment equal to $181,250, which was paid on September 11, 2006,minus applicable deductions and withholdings;

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·       anamount equal to $362,500 payable over the period from September 11, 2006to September 11, 2007, minus applicable deductions and withholdings;

·       apro rata portion of his fiscal 2006 bonus, as determined in the sole discretionof our Compensation Committee of the Board, payable at the same time 2006bonuses are paid to the Company’s other executive officers;

·       reimbursementon a grossed-up basis, for the after tax payment of the premiums on hissupplemental disability and term life insurance coverage for a period oftwenty-four months following his termination of employment;

·       reimbursementfor the cost of his COBRA continuation coverage until the earlier of (i) September 10,2007, or (ii) the date on which he becomes eligible to receive comparablehealth insurance coverage from a new employer;

·       continuedvesting of his stock options granted prior to March 3, 2006 for a periodof one year following his termination of employment, which options will remainexercisable, subject to the terms of his consulting agreement with the Company(as described in Note 9 below), until ninety days following the termination ofhis consulting relationship with the Company; *providedthat* in no event will Mr. Hart’s options issued under theCompany’s 1995 Stock Option Plan remain exercisable beyond December 31,2006; and

·       upto $20,000 of outplacement assistance during the period from March 10,2006 to March 10, 2007.

We recorded separationcosts of $645,666 during the year ended December 31, 2006 relating to ourestimate of our total obligations under the Separation Agreement with Mr. Hart.During the year ended December 31, 2006, we made payments to Mr. Hartunder the Separation Agreement of $325,208. As of December 31, 2006, theremaining liability of $320,458 relating to the Separation Agreement with Mr. Hartis recorded in accrued restructuring and separation costs.

**6.**                 Income Taxes

Incometaxes computed using our net loss and the federal statutory income tax ratediffers from our effective tax primarily due to the following for the yearsended December 31, 2004, 2005 and 2006:

| ** **                                        | ** ** | **2004**  | ** ** | **2005**  | ** ** | **2006**   | ** ** |
|---------------------------------------------------|------------|-----------|------------|-----------|------------|------------|------------|
| Federal income  tax benefit at 35%                |       | $         | (7,643,000 | )         | $          | (7,047,800 | )          | $ | (10,574,400 | ) |
| State income tax,  net of federal benefit         |       | (626,400  | )          | (577,100  | )          | (813,900   | )          |
| Stock-based  compensation                         |       | 47,500    |       | 6,600     |       | 275,600    |       |
| Research and  development and orphan drug credits |       | (721,126  | )          | (756,264  | )          | (1,355,693 | )          |
| Change in  valuation allowance                    |       | 8,931,326 |       | 8,369,764 |       | 12,496,693 |       |
| Other                                             |       | 11,700    |       | 4,800     |       | (28,300    | )          |
| Benefit for  income taxes                         |       | $         | —     |      | $          | —     |       | $ | — |   |

 

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Thecomponents of our deferred tax assets as of December 31, 2005 and 2006 areas follows:

| ** **                                                     | ** ** | **2005**    | ** ** | **2006**    | ** ** |
|----------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| Deferred tax  assets:                                          |       |        |       |        |       |
| Temporary differences                                          |       | $           | 491,500    |        | $          | 1,061,200 |   |
| Research and development and orphan drug credit  carryforwards |       | 7,400,590   |       | 9,047,583   |       |
| Net operating loss carryforwards                               |       | 53,576,500  |       | 63,856,500  |       |
| Total deferred tax assets                                      |       | 61,468,590  |       | 73,965,283  |       |
| Valuation allowance                                            |       | (61,468,590 | )          | (73,965,283 | )          |
| Net deferred tax  assets                                       |       | $           | —     |        | $          | — |   |

 

Our deferred tax assets represent an unrecognizedfuture tax benefit. A valuation allowance has been established for the entiretax benefit as we believe that it is more likely than not that such assets willnot be realized.

As of December 31,2006, we have approximately $168.0 million of net operating loss (“NOL”)carryforwards, approximately $7.8 million of research and development (“R&D”)credit carryforwards and a $1.2 million orphan drug credit carryforward. Thesecarryforwards will expire beginning in 2009. As of December 31, 2006,approximately $3.3 million of the NOL carryforwards relate to stock optionexercises, which will result in an increase to additional paid-in-capital and adecrease in income taxes payable when and if the tax loss carryforwards areutilized. The utilization of these carryforwards to reduce future income taxeswill depend on our ability to generate sufficient taxable income prior to theexpiration of the carryforwards. The Internal Revenue Code of 1986, as amended,contains provisions that may limit the NOL, R&D credit, and orphan drugcredit carryforwards available for use in any given year upon the occurrence ofcertain events, including significant changes in ownership interest and aresubject to review and possible adjustment by the Internal Revenue Service. Agreater than 50% change in ownership of a company within a three-year periodresults in an annual limitation on our ability to utilize our NOL, R&Dcredit and orphan drug credit carryforwards from tax periods prior to theownership change. Our NOL, R&D credit and orphan drug credit carryforwardsas of December 31, 2006 will likely be subject to annual limitation due tochanges in ownership from the February 2007 Financing and previousfinancings (see Note 3). The amount of these limitations, if any, has not beendetermined, and our NOL, R&D credit and orphan drug credit carryforwardsmay expire unused. Additionally, future ownership changes could further limitthe utilization of our NOL, R&D credit and orphan drug creditcarryforwards.

**7.**                 Employee Benefit Plan

We maintain a defined contributionplan covering substantially all employees under Section 401(k) of theInternal Revenue Code. From January 1, 1999 through December 31,2006, we provided a 50% match of employees’ contributions up to $2,000 peremployee per year. Effective January 1, 2007, we will provide a 50% matchof employees’ contributions up to $5,000 per employee per year.  We made total contributions of $108,048,$98,276 and $105,675 during the years ended December 31, 2004, 2005 and2006, respectively.

**8.**                 Commitments and Contingencies

*Lease Commitments*

We lease offices and research and developmentfacilities, as well as certain office and lab equipment under agreements thatexpire at various dates through 2010. Total rent expense for the years ended December 31,2004, 2005 and 2006 and the cumulative period from inception through December 31,2006 was $735,409, $619,581, $586,010 and $4,377,177, respectively.

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Theaggregate future minimum rental commitments as of December 31, 2006, fornon-cancelable operating leases with initial or remaining terms in excess ofone year are as follows:

| **Year Ending December 31:** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------|------------|------------|------------|
| 2007                                        |       | $          | 775,072    |       |
| 2008                                        |       | 657,014    |       |
| 2009                                        |       | 67,642     |       |
| 2010                                        |       | 5,651      |       |
| 2011                                        |       | —     |       |
| Total                                       |       | $          | 1,505,379  |       |

 

*ManufacturingCommitments*

In December 2003, we entered into an agreementwith Baxter Healthcare Corporation (“Baxter”) for certain development andmanufacturing services for the clinical and commercial production of EFAPROXYNformulated drug product. The agreement requires minimum purchase obligations byus, subject to FDA approval of EFAPROXYN. We currently have no commitments toBaxter under this agreement.

In June 2005, weentered into a manufacturing agreement with Hovione Inter Limited (“Hovione”)covering the supply of EFAPROXYN bulk drug substance, or efaproxiral sodium.Under the terms of the agreement, we are required to purchase a negotiatedpercentage of our annual requirements for efaproxiral sodium from Hovione. Wemust also meet annual minimum purchase requirements of efaproxiral sodium fromHovione equal to $2,000,000 in 2007, $3,500,000 in 2008, $5,000,000 in 2009,and $5,000,000 in each year thereafter through the end of the term of the agreement,which is the seventh anniversary of the date we obtain approval from the FDA tomarket EFAPROXYN. In the event that we do not meet these annual minimumpurchase requirements, we have the option to pay two remaining extension feesto move the annual requirements out by a total of two years. These remainingextension fees are equal to $150,000 for the first extension and $200,000 forthe second and final extension, if necessary. During the year endedDecember 31, 2006, we elected to incur an extension fee of $100,000 tomove the minimum purchase requirement of $2,000,000 for 2006 to 2007. This$100,000 extension fee has been recorded in accrued clinical manufacturingexpenses as of December 31, 2006. The Company and Hovione each have customary termination rights,including termination for material breach or other events relating toinsolvency or bankruptcy. In addition, we may terminate the agreement at anytime, without penalty, if we decide to discontinue development or, if approved,marketing of EFAPROXYN, and our obligation to Hovione would equal the amount ofany unpaid and outstanding purchase orders.

*Royalty and LicenseFee Commitments*

On January 14, 1994, we entered into a licenseagreement with the Center for Innovative Technology, or CIT, under which weobtained exclusive worldwide rights to a portfolio of patents related toallosteric hemoglobin modifier compounds, including EFAPROXYN, and their uses.In exchange for the license agreement, we paid CIT $50,000 in cash and issued248,000 shares of our common stock valued at $0.16 per share. This licenseagreement was assigned by CIT to the Virginia Commonwealth UniversityIntellectual Property Foundation, or VCUIPF, on July 28, 1997. Under theterms of the license agreement, we have the right to grant sublicenses, forwhich we must also pay royalties to VCUIPF for products produced by thesublicensees. Also, pursuant to the license agreement, we will pay VCUIPF arunning royalty of 1% to 1.25% of our worldwide net revenue arising from thesale, lease or other commercialization of the allosteric hemoglobin modifiercompounds. This license agreement terminates on the date the last United Statespatent licensed to us under the agreement expires, which is currentlyOctober 2016, but could be later depending on possible patent termextensions. Quarterly royalty 

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payments are due within60 days from the end of each calendar quarter. As of December 31,2006, no royalty payments have been incurred.

In December 2002, we entered into a licenseagreement with Memorial Sloan-Kettering Cancer Center, SRI International andSouthern Research Institute, under which we obtained exclusive worldwide rightsto several issued United States patents and equivalent foreign patentapplications to develop and market any product derived from any formulation ofPDX in connection with all diagnostic and therapeutic uses, including human andveterinary diseases. Under the terms of the agreement, we paid an up-frontlicense fee of $2.0 million upon execution of the agreement and are alsorequired to make certain additional cash payments based upon the achievement ofcertain clinical development or regulatory milestones or the passage of certaintime periods. To date, we have made aggregate milestone payments of $1.5million based on the passage of time. In the future, we could make aggregatemilestone payments of $1.5 million upon the earlier of achievement of aclinical development milestone or the passage of certain time periods (the“Clinical Milestone”), and up to $10 million upon achievement of certainregulatory milestones, including regulatory approval to market PDX in theUnited States or Europe. The next scheduled payments toward the ClinicalMilestone of $500,000 each are currently due on December 23, 2007, 2008and 2009. The up-front license fee and allmilestone payments under the agreement, have been or will be recorded toresearch and development expense when incurred. Under the terms of theagreement, we are required to fund all development programs and will have soleresponsibility for all commercialization activities. In addition, we will paythe licensors a royalty based on a percentage of net revenues arising fromsales of the product or sublicense revenues arising from sublicensing theproduct, if and when such sales or sublicenses occur. As of December 31,2006, no royalty payments have been made or accrued.

In December 2004, weentered into an agreement with the University of Colorado Health SciencesCenter, the University of Salford and Cancer Research Technology (“CRT”), underwhich we obtained exclusive worldwide rights to certain intellectual propertysurrounding a proprietary molecule known as RH1. Under the terms of theagreement, we paid an up-front license fee of $190,500 upon execution of theagreement and are also required to make certain additional cash payments basedupon the achievement of certain clinical development, regulatory andcommercialization milestones. To date, we have not made any milestone paymentsunder the agreement. In the future, we could make aggregate milestone paymentsof up to $9.2 million upon the achievement of the clinical development,regulatory and commercialization milestones set forth in the agreement. Theup-front license fee and all milestone payments under the agreement, as well asthe one-time data option fee discussed below, have been or will be recorded toresearch and development expense when incurred. Under the terms of theagreement and related data option agreement, Cancer Research UK, CRT’s parentinstitution, will continue to support an ongoing Phase 1 dose escalation study,and we will have the right to obtain an exclusive license to the results of thestudy, for use in subsequent development and regulatory activities, uponpayment of a one-time data option fee of $360,000. Upon completion of the Phase1 study, we will assume responsibility for all future development costs andactivities and will have sole responsibility for all commercializationactivities. In addition, we will pay the licensors a royalty based on a percentageof net revenues arising from sales of the product or sublicense revenuesarising from sublicensing the product, if and when such sales or sublicensesoccur. As of December 31, 2006, no royalty payments have been made oraccrued.

*Contingencies*

The Company and one of its former officers were namedas defendants in a purported securities class action lawsuit filed in May 2004in the United States District Court for the District of Colorado (the “DistrictCourt”). An amended complaint was filed in August 2004. The lawsuit wasbrought on behalf of a purported class of purchasers of our securities duringthe period from May 29, 2003 to April 29, 2004, and soughtunspecified damages relating to the issuance of allegedly false and misleadingstatements regarding 

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EFAPROXYN during thisperiod and subsequent declines in our stock price. On October 20, 2005,the District Court granted the defendants’ motion to dismiss the lawsuit withprejudice. In an opinion dated October 20, 2005, the District Courtconcluded that the plaintiff’s complaint failed to meet the legal requirementsapplicable to its alleged claims.

On November 20, 2005, the plaintiff appealed theDistrict Court’s decision to the U.S. Court of Appeals for the Tenth Circuit(the “Court of Appeals”).  In October 2006, the parties held discussions to settlethe matter, although the terms of any such potential settlement remain subjectto negotiation and no binding agreement has been reached. A settlement would besubject to various conditions, including approval of the District Court. Weexpect that any settlement in excess of our deductible would be covered by ourinsurance carrier. As with any litigation proceeding, we cannot predict withcertainty the eventual outcome of our settlement discussions or the legalproceedings. In the event a settlement is not concluded, we intend tovigorously defend against the plaintiff’s appeal. If the Court of Appealsreverses the District Court’s decision and we are not successful in our defenseof such claims, we could be forced to make significant payments to theplaintiffs, and such payments could have a material adverse effect on ourbusiness, financial condition, results of operations and cash flows to theextent such payments are not covered by our insurance carriers. Even if ourdefense against such claims is successful, the litigation could result insubstantial costs and divert management’s attention and resources, which couldadversely affect our business. As of December 31, 2006, we have recorded$2,000,000 in accrued litigation settlement costs, which represents our bestestimate of the potential gross amount of the settlement costs to be paid tothe plaintiffs, and $1,749,000 in prepaid expenses and other assets, whichrepresents the amount we expect to be reimbursed from our insurance carrier. Thenet difference of $251,000 between these amounts represents the remainingunpaid deductible under our insurance policy, and this amount has been recordedto marketing, general and administrative expenses for the year ended December 31,2006.

We enter intoindemnification provisions under our agreements with other companies in ourordinary course of business, typically with business partners, contractors,clinical sites and suppliers. Under these provisions we generally indemnify andhold harmless the indemnified party for losses suffered or incurred by theindemnified party as a result of our activities or the use of our productcandidates. These indemnification provisions generally survive termination ofthe underlying agreement. The maximum potential amount of future payments wecould be required to make under these indemnification provisions is unlimited. Wehave not incurred material costs to defend lawsuits or settle claims related tothese indemnification agreements. The estimated fair value of theindemnification provisions of these agreements is minimal as of December 31,2006, and accordingly, we have no corresponding liabilities recorded as of December 31,2006.

**9.**                 Related Party Transactions

*Dr. Donald Abraham*

In January 2001, weentered into a consulting agreement for scientific advisory services with Dr. DonaldAbraham, a director of the Company from 1994 through May 10, 2004. Underthe one-year agreement, which was renewable upon mutual consent, we paid Dr. Abrahamconsulting fees of $2,000 per month. In March 2002, this contract wasterminated. Effective July 1, 2003, we entered into another one-yearconsulting agreement, under which we paid Dr. Abraham consulting fees of$5,000 per month. Starting in June 2004, this agreement has been renewedeach year for successive one-year terms through June 30, 2007. For theyears ended December 31, 2004, 2005, 2006 and the cumulative period frominception through December 31, 2006, we paid Dr. Abraham consultingfees of $90,000, $60,000, $60,000 and $258,000, respectively.

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*Dr. StephenHoffman*

Dr. Stephen J. Hoffman has served as a member ofour Board of Directors since 1994 and as our Chairman of the Board since December 2001.He also served as our President and Chief Executive Officer from July 1994to December 2001. On January 12, 2000, we granted Dr. Hoffman astock option to purchase 328,971 shares of common stock at $2.42 per share (the“1995 Plan Option”) under the terms of our 1995 Stock Option Plan. Effective February 28,2003, we entered into a two-year consulting agreement (the “ConsultingAgreement”) with Dr. Hoffman and terminated the employment agreementpreviously entered into with him in January 2001.

Pursuant to the Consulting Agreement, Dr. Hoffmanserved us as non-executive Chairman of the Board and was required to provideconsulting services as requested by us from time to time. The ConsultingAgreement provided for an annual consulting fee of $150,000, paid monthly, solong as Dr. Hoffman provided consulting services in accordance with theagreement. For the years ended December 31, 2004, 2005, and 2006, we paid Dr. Hoffmanconsulting fees of $127,150, $20,800 and $0, respectively. The ConsultingAgreement also provided for a minimum guaranteed incentive payment of $45,000per year payable to Dr. Hoffman for each full year of consulting servicesprovided under the agreement. We paid Dr. Hoffman incentive compensationpayments in 2004, 2005 and 2006 of $45,000, $45,000 and $0, respectively.

According to the Consulting Agreement, Dr. Hoffman’sthen-outstanding options continued to vest through the end of the term of theagreement, or February 28, 2005. We have accounted for these stock optionsusing variable accounting as prescribed by FASB Interpretation No. 44, *Accounting for Certain Transactions Involving StockCompensation*, and we recorded non-cash stock-basedcompensation of $173,963 during 2003 and a recovery of stock-basedcompensation of $170,118 and $2,488 during 2004 and 2005, respectively. Stockoptions granted to Dr. Hoffman in 2004, 2005 and 2006 related to Board ofDirector services.

The Consulting Agreementexpired in accordance with its terms on February 28, 2005. On May 18,2005, in recognition of Dr. Hoffman’s efforts and services on behalf ofthe Company and as an incentive for Dr. Hoffman’s continued service as ourChairman of the Board, our Board of Directors approved an amendment to the 1995Plan Option to extend the exercise period for such option until the earlier of:(i) January 12, 2010 (the expiration date of such option), or (ii) threemonths after the date that Dr. Hoffman ceases to serve as a director ofthe Company. Prior to such amendment, the 1995 Plan Option would have expiredon May 28, 2005, or three months after the expiration of Dr. Hoffman’sConsulting Agreement with the Company. Except as set forth above, the 1995 PlanOption remains in full force and effect in accordance with its original terms.In conjunction with this amendment to the 1995 Plan Option, we recorded non-cashstock-based compensation expense of $462,000 during the year ended December 31,2005. This expense is reflected in marketing, general and administrativeexpenses in our Statement of Operations for the year ended December 31,2005.

*Dr. Marvin Jaffe,M.D.*

Dr. Marvin E. Jaffeserved as a member of our Board of Directors from 1994 to May 10, 2006. OnMarch 11, 2006, Dr. Jaffe tendered his resignation as a director ofthe Company effective immediately prior to our 2006 annual meeting ofstockholders and notified the Board that he did not intend to stand forreelection. As a result of Dr. Jaffe’s resignation as a director, on May 10,2006, we entered into a consulting agreement with Dr. Jaffe in order toallow us to retain the benefit of Dr. Jaffe’s knowledge and expertiseregarding the Company’s business and the potential clinical development andcommercialization strategies for our products (the “Jaffe Consulting Agreement”).Pursuant to the Jaffe Consulting Agreement, Dr. Jaffe has agreed toprovide up to 10 hours of consulting service per month as and when requestedfrom time to time by the Company. In connection with the performance of hisconsulting 

F-32

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services,we granted Dr. Jaffe a nonqualified stock option under the Company’s 2000Stock Incentive Compensation Plan to purchase 20,000 shares of common stock atan exercise price equal to $2.94 per share, which equals the closing sale priceof a share of our common stock on the effective date of the Jaffe ConsultingAgreement (as reported by the Nasdaq National Market). This option is subjectto the terms and conditions of the 2000 Stock Incentive Compensation Plan andvests in eighteen equal monthly installments commencing July 1, 2006.Dr. Jaffe is not entitled to any additional compensation or benefits inconnection with the performance of his consulting services. The term of theJaffe Consulting Agreement is from May 10, 2006 to December 31, 2007;*provided that*it will automaticallyterminate upon the occurrence of one or more events constituting just cause (asdefined in the agreement).

*Michael E. Hart*

Pursuant to the SeparationAgreement with Mr. Hart (as discussed in Note 5) and as a result of Mr. Hart’sresignation as a director, on May 10, 2006, we entered into a consultingagreement with Mr. Hart in order to allow us to retain the benefit of Mr. Hart’shistorical knowledge regarding the Company’s operations and corporatedevelopment strategies (the “Hart Consulting Agreement”). Pursuant to the HartConsulting Agreement, Mr. Hart has agreed to provide an average of atleast 10 hours of consulting services per month as and when requested from timeto time by the Company. Mr. Hart is not entitled to any compensation orbenefits in connection with the performance of his consulting services, exceptfor those payments and benefits being provided to him under the SeparationAgreement. The term of the Hart Consulting Agreement is from May 10, 2006to December 31, 2007; *provided that*itwill automatically terminate upon the occurrence of one or more events constitutingjust cause (as defined in the agreement).

**10.**          Quarterly Information (Unaudited)

Theresults of operations on a quarterly basis for the years ended December 31,2005 and 2006 were as follows:

| ** **                                                            | ** ** | **March 31,  2005** | ** ** | **June 30,  2005** | ** ** | **Sept. 30,  2005** | ** ** | **Dec. 31,  2005** | ** ** | **March 31,  2006** | ** ** | **June 30,  2006** | ** ** | **Sept. 30,  2006** | ** ** | **Dec. 31,  2006** | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------|------------|-------------------------|------------|--------------------------|------------|-------------------------|------------|--------------------------|------------|-------------------------|------------|--------------------------|------------|-------------------------|------------|
| Operating expenses:                                                   |       |                     |       |                    |       |                     |       |                    |       |                     |       |                    |       |                     |       |                    |       |
| Research and development                                              |       | $                        | 2,348,147  |                    | $          | 2,620,782                |       | $                       | 3,000,993  |                     | $          | 3,245,210               |       | $                        | 3,439,830  |                    | $          | 3,320,667 |   | $ | 4,210,051 |   | $ | 3,352,053 |   |
| Clinical   manufacturing                                              |       | 359,747                  |       | 267,992                 |       | 306,508                  |       | 331,416                 |       | 561,573                  |       | 390,866                 |       | 485,855                  |       | 845,613                 |       |
| Marketing, general and administrative                                 |       | 2,192,707                |       | 2,614,918               |       | 2,005,397                |       | 2,230,746               |       | 2,925,798                |       | 3,738,720               |       | 3,895,094                |       | 4,316,661               |       |
| Restructuring and separation costs                                    |       | 380,085                  |       | —                  |       | —                   |       | —                  |       | 645,666                  |       | —                  |       | —                   |       | —                  |       |
| Total operating expenses                                              |       | 5,280,686                |       | 5,503,692               |       | 5,312,898                |       | 5,807,372               |       | 7,572,867                |       | 7,450,253               |       | 8,591,000                |       | 8,514,327               |       |
| Loss from operations                                                  |       | (5,280,686               | )          | (5,503,692              | )          | (5,312,898               | )          | (5,807,372              | )          | (7,572,867               | )          | (7,450,253              | )          | (8,591,000               | )          | (8,514,327              | )          |
| Interest and other income, net                                        |       | 209,116                  |       | 507,462                 |       | 521,637                  |       | 529,845                 |       | 503,952                  |       | 487,900                 |       | 479,685                  |       | 444,440                 |       |
| Net loss                                                              |       | $                        | (5,071,570 | )                       | $          | (4,996,230               | )          | $                       | (4,791,261 | )                        | $          | (5,277,527              | )          | $                        | (7,068,915 | )                       | $          | (6,962,353 | ) | $ | (8,111,315 | ) | $ | (8,069,887 | ) |
| Dividend related to beneficial conversion feature of  preferred stock |       | —                   |       | (623,489                | )          | —                   |       | —                  |       | —                   |       | —                  |       | —                   |       | —                  |       |
| Net loss attributable to common stockholders                          |       | $                        | (5,071,570 | )                       | $          | (5,619,719               | )          | $                       | (4,791,261 | )                        | $          | (5,277,527              | )          | $                        | (7,068,915 | )                       | $          | (6,962,353 | ) | $ | (8,111,315 | ) | $ | (8,069,887 | ) |
| Net loss per share: basic and diluted                                 |       | $                        | (0.16      | )                       | $          | (0.13                    | )          | $                       | (0.09      | )                        | $          | (0.10                   | )          | $                        | (0.13      | )                       | $          | (0.13 | ) | $ | (0.15 | ) | $ | (0.14 | ) |
| Weighted average  shares: basic and diluted                           |       | 31,175,783               |       | 42,683,395              |       | 55,015,757               |       | 55,047,189              |       | 55,079,180               |       | 55,102,627              |       | 55,196,369               |       | 55,813,346              |       |

 

F-33

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**EXHIBITINDEX**

| Exhibit   No. | ** ** | **Note** | ** ** | **Description**                                                                                                                                                                             |
|---------------|------------|----------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.01          |       | (30)     |       | Amended and Restated Certificate of Incorporation.                                                                                                                                          |
| 3.02          |       | (30)     |       | Certificate of  Designation of Series A Junior Participating Preferred Stock.                                                                                                          |
| 3.03          |       | (30)     |       | Certificate of Amendment  to Restated Certificate of Incorporation.                                                                                                                         |
| 3.04          |       |     |       | Bylaws, as amended.                                                                                                                                                                         |
| 4.01          |       | (1)      |       | Form of Common  Stock Certificate.                                                                                                                                                     |
| 4.02          |       |     |       | Reference is made to  Exhibits 3.01, 3.02, 3.03 and 3.04.                                                                                                                                   |
| 4.03          |       | (2)      |       | Rights Agreement dated  May 6, 2003 between Allos and Mellon Investor Services LLC.                                                                                                    |
| 4.04          |       | (3)      |       | Form of Rights  Certificate.                                                                                                                                                           |
| 4.05          |       | (4)      |       | Amendment to Rights  Agreement dated March 4, 2005 between Allos and Mellon Investor Services  LLC.                                                                                    |
| 4.06          |       | (31)     |       | Amendment to Rights  Agreement dated January 29, 2007 between Allos and Mellon Investor  Services LLC.                                                                                 |
| 10.01†   |       | (1)      |       | Form of  Indemnification Agreement between Allos and each of its directors and  officers.                                                                                              |
| 10.02         |       | (1)      |       | Hemotech and CIT Amended  and Restated Allosteric Modifiers of Hemoglobin Agreement with Center for  Innovative Technology dated January 12, 1994.                                     |
| 10.03         |       | (1)      |       | Amendment to Allos  Therapeutics, Inc. and CIT Amended and Restated Allosteric Modifiers of  Hemoglobin Agreement with Center for Innovative Technology dated  January 17, 1995.  |
| 10.04         |       | (1)      |       | Amendment to Allos  Therapeutics, Inc. and CIT Amended and Restated Allosteric Modifiers of  Hemoglobin Agreement with Center for Innovative Technology dated  March 12, 1996.    |
| 10.05         |       | (1)      |       | Assignment and  Assumption Agreement with Amendment with Center for Innovative Technology and  Virginia Commonwealth University Intellectual Property Foundation dated  July 28, 1997. |
| 10.07†   |       | (5)      |       | 1995 Stock Option Plan,  as amended.                                                                                                                                                        |
| 10.10†   |       | (23)     |       | 2000 Stock Incentive  Compensation Plan, as amended.                                                                                                                                        |
| 10.10.1† |       | (6)      |       | Form of Incentive  Stock Option Letter Agreement under 2000 Stock Incentive Compensation Plan.                                                                                         |
| 10.10.2† |       | (7)      |       | Form of  Nonqualified Stock Option Letter Agreement under 2000 Stock Incentive  Compensation Plan.                                                                                     |
| 10.10.3† |       | (24)     |       | Form of  Nonqualified Stock Option Letter Agreement for Non-Employee Directors  under 2000 Stock Incentive Compensation Plan.                                                          |
| 10.11†   |       | (8)      |       | Severance Benefit Plan,  effective January 16, 2001, and related benefit schedule thereto.                                                                                             |
| 10.12†   |       | (9)      |       | 2001 Employee Stock  Purchase Plan and form of Offering.                                                                                                                                    |
| 10.13*        |       | (10)     |       | Office Lease dated  April 4, 2001 between Allos and Catellus Development Corporation.                                                                                                  |

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| 10.13.1*      |   | (11) |   | Amended and Restated  Second Amendment to Lease dated December 9, 2002 between Allos and  Catellus Development Corporation.                         |
|---------------|--------|------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.13.2*      |   | (12) |   | Third Amendment to Lease  dated November 28, 2003 between Allos and Catellus Development  Corporation.                                              |
| 10.14†   |   | (13) |   | 2002 Broad Based Equity  Incentive Plan.                                                                                                                 |
| 10.14.1† |   | (22) |   | Form of Stock  Option Grant Notice under 2002 Broad Based Equity Incentive Plan.                                                                    |
| 10.14.2† |   | (22) |   | Form of Stock  Option Agreement under 2002 Broad Based Equity Incentive Plan.                                                                       |
| 10.15†   |   | (14) |   | Employment Agreement  dated December 17, 2001 between Allos and Michael E. Hart.                                                                    |
| 10.18†   |   | (15) |   | Employment Agreement,  effective August 12, 2002, between Allos and David A. DeLong.                                                                |
| 10.20         |   | (16) |   | Form of Common  Stock Purchase Warrant issued pursuant to Securities Purchase Agreement dated  November 20, 2003.                              |
| 10.21*        |   | (17) |   | Development and Supply  Agreement, effective December 19, 2003, between Allos and Baxter  Healthcare Corporation.                                   |
| 10.23†   |   | (18) |   | Employment Agreement  dated October 11, 2004 between Allos and Marc H. Graboyes.                                                                    |
| 10.24         |   | (19) |   | Securities Purchase  Agreement dated March 2, 2005 between Allos and the Investors listed on  the signature pages thereto.                     |
| 10.25         |   | (20) |   | Registration Rights  Agreement dated March 4, 2005 between Allos and the Investors listed on  Schedule I thereto.                                   |
| 10.26         |   | (21) |   | Letter Agreement dated  March 4, 2005 among Allos, Warburg Pincus Private Equity VIII, L.P.,  Warburg Pincus & Co. and Warburg Pincus LLC. |
| 10.27*        |   | (25) |   | Manufacturing Agreement,  effective May 30, 2005, between Allos and Hovione Inter Limited.                                                          |
| 10.28†   |   | (26) |   | Annual Incentive Plan.                                                                                                                                   |
| 10.29†   |   | (27) |   | 2006 Base Salaries for  Named Executive Officers.                                                                                                        |
| 10.30†   |   | (28) |   | Separation Agreement,  dated March 3, 2006, between Allos and Michael E. Hart.                                                                      |
| 10.30.1† |   | (32) |   | First Amendment to  Separation Agreement dated March 9, 2006 between Allos and Michael E.  Hart.                                                    |
| 10.30.2† |   | (33) |   | Second Amendment to  Separation Agreement dated May 10, 2006 between Allos and Michael E.  Hart.                                                    |
| 10.31†   |   | (29) |   | Nonqualified Stock  Option Letter Agreement, dated March 3, 2006, between Allos and Michael  E. Hart.                                               |
| 10.32†   |   | (34) |   | Summary of Compensation  Arrangements between Allos and its Non-Employee Directors.                                                                      |
| 10.33†   |   | (34) |   | Summary of Compensation  Arrangements between Allos and Stephen J. Hoffman.                                                                              |
| 10.35†   |   | (35) |   | Restricted Stock Award  dated March 9, 2006 between Allos and Paul L. Berns.                                                                        |
| 10.36†   |   | (36) |   | Consulting Agreement  dated May 10, 2006 between Allos and Michael E. Hart.                                                                         |

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| 10.37† |   | (37)   |   | Consulting Agreement  dated May 10, 2006 between Allos and Marvin E. Jaffe, M.D.                                                                                                                                                                            |
|-------------|--------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.38† |   | (38)   |   | 2006 Inducement Award  Plan, including forms of Stock Option Grant Notice with Stock Option  Agreement and Restricted Stock Grant Notice with Restricted Stock Grant  Agreement.                                                                                 |
| 10.39† |   | (39)   |   | Employment Agreement  dated June 5, 2006 between Allos and James V. Caruso.                                                                                                                                                                                 |
| 10.40† |   | (40)   |   | Amended and Restated  Employment Agreement dated December 12, 2006 between Allos and Paul L.  Berns.                                                                                                                                                        |
| 10.41       |   | (41)   |   | Letter agreement dated  January 28, 2007 among Allos, Baker Bros. Investments, L.P.,  Baker Bros. Investments II, L.P., Baker/Tisch Investments, L.P.,  Baker Biotech Fund I, L.P., 14159, L.P. and Baker Brothers Life  Sciences, L.P. |
| 10.42† |   | (42)   |   | Separation Agreement,  dated February 16, 2007, between Allos and David A. DeLong.                                                                                                                                                                          |
| 23.01       |   |   |   | Consent of  PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm.                                                                                                                                                                           |
| 24.01       |   |   |   | Power of Attorney  (included on signature page hereto).                                                                                                                                                                                                     |
| 31.01       |   |   |   | Rule 13a-14(a)/15d-14(a) Certification.                                                                                                                                                                                                                |
| 31.02       |   |   |   | Rule 13a-14(a)/15d-14(a) Certification.                                                                                                                                                                                                                |
| 32.01       |   |   |   | Section 1350  Certification.                                                                                                                                                                                                                                |

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                 † Management contract or compensatory plan orarrangement required to be filed as an exhibit pursuant toItem 15(b) of Form 10-K.

                 * Confidential treatment has been granted withrespect to specific portions of this exhibit. Omitted portions have been filedwith the Securities and Exchange Commission (“SEC”).

       (1) Incorporated by reference to the same numbered exhibit filed withour Registration Statement on Form S-1 (File No. 333-95439),as amended, declared effective March 27, 2000.

       (2) Incorporated by reference to Exhibit 99.2 filed with ourCurrent Report on Form 8-K filed on May 9, 2003.

       (3) Incorporated by reference to Exhibit 99.3 filed with ourCurrent Report on Form 8-K filed on May 9, 2003.

       (4) Incorporated by reference to Exhibit 4.06 filed with ourCurrent Report on Form 8-K filed on March 4, 2005.

       (5) Incorporated by reference to Exhibit 10.11 filed with ourRegistration Statement on Form S-1 (File No. 333-95439),as amended, declared effective March 27, 2000.

       (6) Incorporated by reference to Exhibit 99.1 filed with ourCurrent Report on Form 8-K filed on February 11, 2005.

       (7) Incorporated by reference to Exhibit 99.2 filed with ourCurrent Report on Form 8-K filed on February 11, 2005.

       (8) Incorporated by reference to Exhibit 10.24 filed with ourAnnual Report on Form 10-K for the year ended December 31,2000.

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       (9) Incorporated by reference to Exhibit 10.26 filed with ourAnnual Report on Form 10-K for the year ended December 31,2000.

(10) Incorporated by reference to Exhibit 10.27 filed with ourQuarterly Report on Form 10-Q for the quarter ended June 30,2001.

(11) Incorporated by reference to Exhibit 10.27.1 filed with ourAnnual Report on Form 10-K for the year ended December 31,2002.

(12) Incorporated by reference to Exhibit 10.27.2 filed with ourAnnual Report on Form 10-K for the year ended December 31,2003.

(13) Incorporated by reference to Exhibit 99.1 filed with ourRegistration Statement on Form S-8 (File No. 333-76804),as filed with the SEC on January 16, 2002.

(14) Incorporated by reference to Exhibit 10.16 filed with ourAnnual Report on Form 10-K for the year ended December 31,2001.

(15) Incorporatedby reference to Exhibit 10.26 filed with our Quarterly Report onForm 10-Q for the quarter ended September 30, 2002.

(16) Incorporated by reference to Exhibit 99.2 filed with ourCurrent Report on Form 8-K filed on November 21, 2003.

(17) Incorporated by reference to Exhibit 10.37 filed with ourAnnual Report on Form 10-K for the year ended December 31,2003.

(18) Incorporated by reference to Exhibit 10.1 filed with ourCurrent Report on Form 8-K filed on October 14, 2004.

(19) Incorporated by reference to Exhibit 10.41 filed with ourCurrent Report on Form 8-K/A filed on March 10, 2005.

(20) Incorporated by reference to Exhibit 10.42 filed with ourCurrent Report on Form 8-K/A filed on March 10, 2005.

(21) Incorporated by reference to Exhibit 10.43 filed with ourCurrent Report on Form 8-K filed on March 4, 2005.

(22) Incorporated by reference to the same numbered exhibit filed withour Annual Report on Form 10-K for the year ended December 31,2004.

(23) Incorporated by reference to Exhibit 10.1 filed with ourCurrent Report on Form 8-K filed on December 22, 2005.

(24) Incorporated by reference to Exhibit 10.1 filed with ourCurrent Report on Form 8-K filed on February 24, 2006.

(25) Incorporated by reference to Exhibit 10.1 filed with ourQuarterly Report on Form 10-Q for the quarter ended June 30,2005.

(26) Incorporated by reference to Exhibit 10.1 filed with ourCurrent Report on Form 8-K filed on December 16, 2005.

(27) Incorporated by reference to Exhibit 10.1 filed with ourCurrent Report on Form 8-K filed on February 10, 2006.

(28) Incorporated by reference to Exhibit 10.1 filed with ourCurrent Report on Form 8-K filed on March 6, 2006.

(29) Incorporated by reference to Exhibit 10.2 filed with ourCurrent Report on Form 8-K filed on March 6, 2006.

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(30) Incorporated by reference to the same numbered exhibit filed withour Quarterly Report on Form 10-Q for the quarter endedJune 30, 2006.

(31) Incorporated by reference to Exhibit 4.1 filed with our CurrentReport on Form 8-K filed on January 30, 2007.

(32) Incorporated by reference to Exhibit 10.3 filed with ourCurrent Report on Form 8-K filed on March 14, 2006.

(33) Incorporated by reference to Exhibit 10.1 filed with ourCurrent Report on Form 8-K filed on May 16, 2006.

(34) Incorporated by reference to the same numbered exhibit filed withour Annual Report on Form 10-K for the year ended December 31,2005.

(35)   Incorporated by reference toExhibit 10.2 filed with our Current Report on Form 8-K filed onMarch 14, 2006.

(36)   Incorporated by reference toExhibit 10.2 filed with our Current Report on Form 8-K filed onMay 16, 2006.

(37) Incorporated by reference to Exhibit 10.3 filed with ourCurrent Report on Form 8-K filed on May 16, 2006.

(38) Incorporated by reference to Exhibit 10.1 filed with ourCurrent Report on Form 8-K filed on June 6, 2006.

(39) Incorporated by reference to Exhibit 10.2 filed with ourCurrent Report on Form 8-K filed on June 6, 2006.

(40) Incorporated by reference to Exhibit 10.1 filed with ourCurrent Report on Form 8-K/A filed on January 29, 2007.

(41) Incorporated by reference to Exhibit 10.1 filed with ourCurrent Report on Form 8-K filed on January 30, 2007.

(42) Incorporated by reference to Exhibit 10.1 filed with ourCurrent Report on Form 8-K filed on February 23, 2007.

** **

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