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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549



---

FORM 10-Q



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

FOR THE QUARTERLY PERIOD ENDED March 31, 2007

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

FOR THE TRANSITION PERIOD FROM  TO
.

COMMISSION FILE NUMBER: 0-31265



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TELIK, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|DELAWARE                                                       |  | 93-0987903                          
|(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) |  | (I.R.S. EMPLOYER IDENTIFICATION NO.)

3165 PORTER DRIVE, PALO ALTO, CA 94304

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE: (650) 845-7700



---

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2
of the Exchange Act.

Large accelerated filer  x    Accelerated
Filer ̈Non-accelerated Filer ̈

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

Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.



|                                    |  |                                                 
|----------------------------------- |  | ------------------------------------------------
|Class: Common Stock $0.01 par value |  | Outstanding at April 30, 2007: 52,459,626 shares



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##### Table of Contents

TELIK, INC.

INDEX



|           |  |                                                                                       |  |     
|---------- |  | ------------------------------------------------------------------------------------- |  | ----
|           |  |                                                                                       |  | Page
|PART I.    |  | FINANCIAL INFORMATION                                                                 |  |     
|           |  |                                                                                      
|Item 1:    |  | Financial Statements (Unaudited)                                                      |  |     
|           |  |                                                                                      
|           |  | Condensed Balance Sheets at March 31, 2007 and December 31, 2006                      |  | 3   
|           |  |                                                                                      
|           |  | Condensed Statements of Operations for the three months ended March 31, 2007 and 2006 |  | 4   
|           |  |                                                                                      
|           |  | Condensed Statements of Cash Flows for the three months ended March 31, 2007 and 2006 |  | 5   
|           |  |                                                                                      
|           |  | Notes to Condensed Financial Statements                                               |  | 6   
|           |  |                                                                                      
|Item 2:    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 12  
|           |  |                                                                                      
|Item 3:    |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 20  
|           |  |                                                                                      
|Item 4:    |  | Controls and Procedures                                                               |  | 21  
|           |  |                                                                                      
|PART II.   |  | OTHER INFORMATION                                                                     |  |     
|           |  |                                                                                      
|Item 1A:   |  | Risk Factors                                                                          |  | 22  
|           |  |                                                                                      
|Item 6:    |  | Exhibits                                                                              |  | 33  
|           | 
|SIGNATURES |  | 34                                                                                   



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PART I. FINANCIAL INFORMATION



|It
em 1. | Financial Statements (Unaudited)
|-------- | --------------------------------

TELIK, INC.

CONDENSED BALANCE SHEETS

(In thousands, except share and per share data)



|                                                      |  |               |          |   |                  |   |          |  
|----------------------------------------------------- |  | ------------- | -------- | - | ---------------- | - | -------- | -
|                                                      |  | March 31,2007 |          |   | December 31,2006 |  
|                                                      |  | (Unaudited)   |          |   | (Note 1)         |  
|Assets                                                | 
|Current assets:                                       |  |               |          |   |                  |   |          |  
|Cash and cash equivalents                             |  | $             | 64,039   |   |                  | $ | 77,846   |  
|Short-term investments                                |  |               | 58,803   |   |                  |   | 56,983   |  
|Other receivables                                     |  |               | 483      |   |                  |   | 677      |  
|Prepaids and other current assets                     |  |               | 1,645    |   |                  |   | 1,931    |  
|                                                      |  |               |          |   |                  |   |          |  
|Total current assets                                  |  |               | 124,970  |   |                  |   | 137,437  |  
|                                                      |  |              
|Property and equipment, net                           |  |               | 4,308    |   |                  |   | 4,753    |  
|Long-term investments                                 |  |               |         |   |                  |   | 5,489    |  
|Restricted investments                                |  |               | 1,123    |   |                  |   | 1,347    |  
|Other assets                                          |  |               | 120      |   |                  |   | 188      |  
|                                                      |  |               |          |   |                  |   |          |  
|Total assets                                          |  | $             | 130,521  |   |                  | $ | 149,214  |  
|                                                      |  |               |          |   |                  |   |          |  
|                                                      |  |              
|Liabilities and Stockholders Equity                  |  |               |          |   |                  |   |          |  
|Current liabilities:                                  |  |               |          |   |                  |   |          |  
|Accounts payable                                      |  | $             | 884      |   |                  | $ | 2,373    |  
|Accrued clinical trials                               |  |               | 8,503    |   |                  |   | 10,275   |  
|Accrued compensation                                  |  |               | 1,438    |   |                  |   | 1,400    |  
|Accrued liabilities                                   |  |               | 791      |   |                  |   | 2,104    |  
|Current portion of capital leases and equipment loans |  |               | 282      |   |                  |   | 440      |  
|                                                      |  |               |          |   |                  |   |          |  
|Total current liabilities                             |  |               | 11,898   |   |                  |   | 16,592   |  
|                                                      |  |              
|Commitments                                           |  |               |          |   |                  |   |          |  
|Stockholders equity:                                 |  |               |          |   |                  |   |          |  
|Common stock                                          |  |               | 525      |   |                  |   | 524      |  
|Additional paid-in capital                            |  |               | 527,357  |   |                  |   | 525,066  |  
|Accumulated other comprehensive loss                  |  |               | (23      | ) |                  |   | (54      | )
|Accumulated deficit                                   |  |               | (409,236 | ) |                  |   | (392,914 | )
|                                                      |  |               |          |   |                  |   |          |  
|Total stockholders equity                            |  |               | 118,623  |   |                  |   | 132,622  |  
|                                                      |  |               |          |   |                  |   |          |  
|Total liabilities and stockholders equity            |  | $             | 130,521  |   |                  | $ | 149,214  |  
|                                                      |  |               |          |   |                  |   |          |  

See accompanying Notes to Condensed Financial Statements.



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TELIK, INC.

CONDENSED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)



|                                                              |  |                             |         |   |      |   |         |  
|------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                              |  | Three Months EndedMarch 31, |        
|                                                              |  | 2007                        |         |   | 2006 |  
|Revenue                                                       |  | $                           |        |   |      | $ |        |  
|                                                              |  |                            
|Operating costs and expenses:                                 |  |                             |         |   |      |   |         |  
|Research and development                                      |  |                             | 12,944  |   |      |   | 17,658  |  
|General and administrative                                    |  |                             | 3,652   |   |      |   | 4,509   |  
|Restructuring costs                                           |  |                             | 1,389   |   |      |   |        |  
|                                                              |  |                             |         |   |      |   |         |  
|Total operating costs and expenses                            |  |                             | 17,985  |   |      |   | 22,167  |  
|                                                              |  |                             |         |   |      |   |         |  
|Loss from operations                                          |  |                             | (17,985 | ) |      |   | (22,167 | )
|                                                              |  |                            
|Interest income                                               |  |                             | 1,686   |   |      |   | 2,107   |  
|Interest expense                                              |  |                             | (23     | ) |      |   | (16     | )
|                                                              |  |                             |         |   |      |   |         |  
|Net loss                                                      |  | $                           | (16,322 | ) |      | $ | (20,076 | )
|                                                              |  |                             |         |   |      |   |         |  
|Basic and diluted net loss per share                          |  | $                           | (0.31   | ) |      | $ | (0.38   | )
|                                                              |  |                             |         |   |      |   |         |  
|Shares used to calculate basic and diluted net loss per share |  |                             | 52,408  |   |      |   | 52,162  |  
|                                                              |  |                             |         |   |      |   |         |  

See accompanying Notes to Condensed Financial Statements.



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TELIK, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                            |  |                             |         |   |      |   |         |  
|--------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                                            |  | Three Months EndedMarch 31, |        
|                                                                            |  | 2007                        |         |   | 2006 |  
|Cash flows from operating activities:                                       |  |                             |         |   |      |   |         |  
|Net loss                                                                    |  | $                           | (16,322 | ) |      | $ | (20,076 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                             |         |   |      |   |         |  
|Depreciation and amortization                                               |  |                             | 452     |   |      |   | 442     |  
|Stock-based compensation expense                                            |  |                             | 1,921   |   |      |   | 3,623   |  
|Changes in assets and liabilities:                                          |  |                             |         |   |      |   |         |  
|Other receivables                                                           |  |                             | 194     |   |      |   | 116     |  
|Prepaid expenses and other current assets                                   |  |                             | 286     |   |      |   | (6      | )
|Accounts payable                                                            |  |                             | (1,489  | ) |      |   | 692     |  
|Accrued clinical trials, compensation and other liabilities                 |  |                             | (2,979  | ) |      |   | (4,712  | )
|                                                                            |  |                             |         |   |      |   |         |  
|Net cash used in operating activities                                       |  |                             | (17,937 | ) |      |   | (19,921 | )
|                                                                            |  |                             |         |   |      |   |         |  
|Cash flows from investing activities:                                       |  |                             |         |   |      |   |         |  
|Purchases of investments                                                    |  |                             | (7,041  | ) |      |   | (19,042 | )
|Sales of investments                                                        |  |                             |        |   |      |   | 3,000   |  
|Maturities of investments                                                   |  |                             | 10,965  |   |      |   | 4,995   |  
|Purchases of property and equipment                                         |  |                             | (7      | ) |      |   | (140    | )
|                                                                            |  |                             |         |   |      |   |         |  
|Net cash provided by (used in) investing activities                         |  |                             | 3,917   |   |      |   | (11,187 | )
|                                                                            |  |                             |         |   |      |   |         |  
|Cash flows from financing activities:                                       |  |                             |         |   |      |   |         |  
|Principal payments under capital leases and equipment loans                 |  |                             | (158    | ) |      |   | (321    | )
|Proceeds from issuance of common stock                                      |  |                             | 371     |   |      |   | 1,886   |  
|                                                                            |  |                             |         |   |      |   |         |  
|Net cash provided by financing activities                                   |  |                             | 213     |   |      |   | 1,565   |  
|                                                                            |  |                             |         |   |      |   |         |  
|Net decrease in cash and cash equivalents                                   |  |                             | (13,807 | ) |      |   | (29,543 | )
|Cash and cash equivalents at beginning of period                            |  |                             | 77,846  |   |      |   | 127,971 |  
|                                                                            |  |                             |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                  |  | $                           | 64,039  |   |      | $ | 98,428  |  
|                                                                            |  |                             |         |   |      |   |         |  
|Supplementary information:                                                  |  |                             |         |   |      |   |         |  
|Interest paid                                                               |  | $                           | 23      |   |      | $ | 16      |  

See accompanying Notes to Condensed Financial Statements.



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TELIK, INC.

Notes to Condensed Financial Statements

(Unaudited)



|1. | Basis of presentation and summary of significant accounting policies
|-- | --------------------------------------------------------------------

We have prepared the accompanying condensed financial statements in accordance with U.S. generally accepted accounting principles, or GAAP, for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X of the Exchange Act. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. We believe all adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair presentation have been included herein. Operating results for the three months March 31, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007 or any
other future period. The condensed balance sheet at December 31, 2006 has been derived from the audited financial statements at that date. You should read these condensed financial statements and notes in conjunction with our audited financial
statements for the year ended December 31, 2006, which are included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2007.

Use of estimates

The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates.

Cash and cash equivalents and investments

We invest our excess cash in money market funds and in highly liquid debt instruments of the U.S. government, its agencies and municipalities and corporate notes. All highly liquid investments with stated maturities
of three months or less from date of purchase are classified as cash equivalents. Debt securities with original maturities greater than approximately three months and remaining maturities less than one year are classified as short-term investments.
Debt securities with remaining maturities greater than one year and which we intend to hold until maturity are classified as long-term investments.

We classify all cash equivalents and investments as available-for-sale. Available-for-sale securities are carried at estimated fair value, with unrealized gains and losses reported as a component of accumulated other comprehensive income
(loss). Any realized gains or losses on the sale of investments are determined on a specific identification method, and such gains and losses are reflected as a component of interest income.



|2. | Employee stock-based compensation
|-- | ---------------------------------

In
December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Accounting Standards No. 123R Share-Based Payment (SFAS 123(R)), which requires the measurement and recognition of
compensation expense for all stock-based compensation payments. We adopted the provisions of SFAS 123(R) on January 1, 2006 which superseded our previous accounting under Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees(APB 25). Accordingly, compensation cost for all share-based payment awards to employees is measured based on the grant date fair value of those awards and recognized over the period during which
the employee is required to perform service in exchange for the award (generally over the vesting period of the award). In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (SAB 107)
relating to SFAS 123(R). We have applied the provisions of SAB 107 in our adoption of SFAS 123(R).

SFAS 123(R)

Stock-based compensation expense is based on the fair value of that portion of employee stock options that are ultimately expected to vest during the
period. Stock-based compensation expense recognized in our condensed statements of operations for the three months ended March 31, 2007 and 2006 included compensation expense for stock-based awards granted prior to, but not yet vested as of,
December 31, 2005,



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based on the grant date fair value estimated in accordance with the pro forma provisions of SFAS 123, and share-based payment awards granted subsequent to
December 31, 2005 based on the grant date fair value estimated in accordance with SFAS 123(R). For stock options granted after January 1, 2006, the fair value of each award is amortized using the straight-line single-option method. For
share awards granted prior to 2006, the fair value of each award is amortized using the accelerated multiple-option valuation method prescribed by SFAS 123. Stock-based compensation expense is based on awards ultimately expected to vest, therefore,
it has been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We estimated forfeitures based
on our historical experience. In March 2007, we increased our forfeiture rate from 9.2% to 11.4% to reflect the cancellation of unvested options due to workforce reduction in February 2007.

Total estimated stock-based compensation expense, related to all of our share-based payment awards, recognized under SFAS 123(R) was comprised of the
following:



|                                                      |  |                              |       |   |      |   |       |  
|----------------------------------------------------- |  | ---------------------------- | ----- | - | ---- | - | ----- | -
|(in thousands except per share amount)                |  | Three Months Ended March 31, |      
|                                                      |  | 2007                         |       |   | 2006 |  
|Research and development                              |  | $                            | 1,156 |   |      | $ | 2,275 |  
|General and administrative                            |  |                              | 765   |   |      |   | 1,348 |  
|                                                      |  |                              |       |   |      |   |       |  
|Stock-based compensation expense before taxes         |  |                              | 1,921 |   |      |   | 3,623 |  
|Related income tax benefits                           |  |                              |      |   |      |   |      |  
|                                                      |  |                              |       |   |      |   |       |  
|Effect on net loss                                    |  | $                            | 1,921 |   |      | $ | 3,623 |  
|                                                      |  |                              |       |   |      |   |       |  
|Effect on net loss per basic and diluted common share |  | $                            | (0.04 | ) |      | $ | (0.07 | )
|                                                      |  |                              |       |   |      |   |       |  

Because we have a net operating loss carryforward as of March 31, 2007, no excess tax
benefits for the tax deductions related to stock-based compensation expense were recognized in our condensed statement of operations. Additionally, no incremental tax benefits were recognized from stock options exercised in the three months ended
March 31, 2007 and 2006, which would have resulted in a reclassification to reduce net cash provided by operating activities with an offsetting increase in net cash provided by financing activities. As of March 31, 2007, $19.2 million
of total unrecognized compensation costs, net of forfeitures, related to non-vested awards is expected to be recognized over a weighted average period of 2.32 years.

Valuation assumptions

The employee stock-based expense recognized under SFAS 123(R) was
determined using a Black-Scholes-Merton option valuation model (the Black-Scholes model). The expected volatility for 2007 is a blended rate of 50% of historical volatility and 50% implied volatility since sufficient market activity
exists with respect to our traded options. The expected volatility for awards in 2006 was based on historical volatility only. The expected term of options granted is based on the simplified method in accordance with SAB 107 as our historical share
option exercise experience does not provide a reasonable basis for estimation. The risk-free interest rates are based on the U.S. Treasury yield for a period consistent with the expected term of the option in effect at the time of the grant.
Assumptions used in the Black-Scholes model were as follows:



|                                |  |                             |   |  |                             |   |  |      |   |  |      |  
|------------------------------- |  | --------------------------- | - |  | --------------------------- | - |  | ---- | - |  | ---- | -
|                                |  | Stock Option Plans          |   |  | Stock Purchase Plan         |  
|                                |  | Three Months EndedMarch 31, |   |  | Three Months EndedMarch 31, |  
|                                |  | 2007                        |   |  | 2006                        |   |  | 2007 |   |  | 2006 |  
|Expected stock price volatility |  | 64.9                        | % |  | 63.1                        | % |  | 91.9 | % |  | 37.4 | %
|Risk-free interest rate         |  | 5.08                        | % |  | 4.56                        | % |  | 4.86 | % |  | 4.68 | %
|Expected life (in years)        |  | 5.52                        |   |  | 6.08                        |   |  | 1.28 |   |  | 1.01 |  
|Expected dividend yield         |  |                            |   |  |                            |   |  |     |   |  |     |  



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Stock option activity

A summary of option activity under our equity compensation plans for the three months ended March 31, 2007 is presented below.



|                                 |  |                 |   |  |                                       |       |                                                    |      |                                       |   |    
|-------------------------------- |  | --------------- | - |  | ------------------------------------- | ----- | -------------------------------------------------- | ---- | ------------------------------------- | - | ---
|                                 |  | Number ofshares |   |  | Weightedaverageexerciseprice pershare |       | Weightedaverageremainingcontractualterm (in years) |      | Aggregateintrinsicvalue (in millions)
|Outstanding at December 31, 2006 |  | 9,154,624       |   |  | $                                     | 14.32 |                                                    |      |                                       |   |    
|Granted                          |  | 2,127,500       |   |  | $                                     | 5.80  |                                                    |      |                                       |   |    
|Exercised                        |  | (9,200          | ) |  | $                                     | 3.52  |                                                    |      |                                       |   |    
|Forfeited or expired             |  | (840,196        | ) |  | $                                     | 16.53 |                                                    |      |                                       |   |    
|                                 |  |                 |   |  |                                       |       |                                                    |      |                                       |   |    
|Outstanding at March 31, 2007    |  | 10,432,728      |   |  | $                                     | 12.41 |                                                    | 6.70 |                                       | $ | 4.5
|                                 |  |                 |   |  |                                       |       |                                                    |      |                                       |   |    
|Exercisable at March 31, 2007    |  | 6,452,896       |   |  | $                                     | 12.34 |                                                    | 5.24 |                                       | $ | 4.5
|                                 |  |                 |   |  |                                       |       |                                                    |      |                                       |   |    

The weighted average grant-date fair value of options granted during the three months ended
March 31, 2007 and 2006 were $3.56 and $12.50 per share. The total intrinsic value of options exercised during the three months ended March 31, 2007 and 2006 was $19,000 and $2 million. The total fair value of shares vested during the
three months ended March 31, 2007 and 2006 was $4.6 million and $9.0 million.

The following table summarizes information about the
stock options outstanding at March 31, 2007 (in thousands, except years and per-share amounts):



|                        |  |                     |  |                                                    |  |                                       |       |                         |   |                 |  |                                       |  |                         |       |  |   |      
|----------------------- |  | ------------------- |  | -------------------------------------------------- |  | ------------------------------------- | ----- | ----------------------- | - | --------------- |  | ------------------------------------- |  | ----------------------- | ----- |  | - | -----
|                        |  | Options Outstanding |  | Options Exercisable                               
|Range of Exercise Price |  | Number of Shares    |  | WeightedAverageRemainingContractualLife (in years) |  | WeightedAverageExercisePrice perShare |       | AggregateIntrinsicValue |   | Number ofShares |  | WeightedAverageExercisePrice perShare |  | AggregateIntrinsicValue
|$  1.60 - $  3.81       |  | 1,343               |  | 2.10                                               |  | $                                     | 2.11  |                         | $ | 4,463           |  | 1,343                                 |  | $                       | 2.11  |  | $ | 4,463
|$  5.80 - $  5.80       |  | 2,035               |  | 9.91                                               |  | $                                     | 5.80  |                         |   |                |  | 82                                    |  | $                       | 5.80  |  |   |     
|$  6.58 - $10.27        |  | 1,266               |  | 4.63                                               |  | $                                     | 9.42  |                         |   |                |  | 1,260                                 |  | $                       | 9.43  |  |   |     
|$10.80 - $14.30         |  | 1,566               |  | 5.41                                               |  | $                                     | 11.85 |                         |   |                |  | 1,561                                 |  | $                       | 11.84 |  |   |     
|$14.47 - $18.86         |  | 1,907               |  | 7.93                                               |  | $                                     | 17.71 |                         |   |                |  | 862                                   |  | $                       | 18.10 |  |   |     
|$18.87 - $23.05         |  | 1,221               |  | 8.14                                               |  | $                                     | 19.82 |                         |   |                |  | 467                                   |  | $                       | 19.66 |  |   |     
|$23.25 - $29.04         |  | 1,095               |  | 6.83                                               |  | $                                     | 24.12 |                         |   |                |  | 878                                   |  | $                       | 24.13 |  |   |     
|                        |  |                     |  |                                                    |  |                                       |       |                         |   |                 |  |                                       |  |                         |       |  |   |      
|                        |  | 10,433              |  | 6.70                                               |  | $                                     | 12.41 |                         | $ | 4,463           |  | 6,453                                 |  | $                       | 12.34 |  | $ | 4,463
|                        |  |                     |  |                                                    |  |                                       |       |                         |   |                 |  |                                       |  |                         |       |  |   |      



|3. | Comprehensive loss
|-- | ------------------

Comprehensive loss is comprised
of net loss and other comprehensive income (loss). Other comprehensive income (loss) includes changes in unrealized gains (losses) on investments. The activity in comprehensive loss was as follows:



|                                            |  |                             |         |   |      |   |         |  
|------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                            |  | Three Months EndedMarch 31, |        
|                                            |  | 2007                        |         |   | 2006 |  
|                                            |  | (In thousands)              |        
|Net loss                                    |  | $                           | (16,322 | ) |      | $ | (20,076 | )
|Changes in unrealized losses on investments |  |                             | 31      |   |      |   | (16     | )
|                                            |  |                             |         |   |      |   |         |  
|Comprehensive loss                          |  | $                           | (16,291 | ) |      | $ | (20,092 | )
|                                            |  |                             |         |   |      |   |         |  



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|4. | Basic and diluted net loss per share
|-- | ------------------------------------

Basic and diluted net loss
per share is computed by dividing net loss by the weighted average number of common shares outstanding during the year.

Outstanding
options to purchase an aggregate of 10,432,728 and 8,994,903 shares of our common stock for the three months ended March 31, 2007 and 2006 were excluded from the diluted net loss per common share calculations because inclusion of such options
was anti-dilutive



|5. | Cash, cash equivalents, investments and restricted investments
|-- | --------------------------------------------------------------

The following is a summary of cash and cash equivalents, investments and restricted investments:



|                                 |  |                |         |                      |   |                       |  |   |                     |   |  |   |        
|-------------------------------- |  | -------------- | ------- | -------------------- | - | --------------------- |  | - | ------------------- | - |  | - | -------
|                                 |  | March 31, 2007
|                                 |  | AmortizedCosts |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | EstimatedFair Value
|                                 |  | (in thousands)
|Certificate of deposits          |  | $              | 1,796   |                      | $ |                      |  | $ |                    |   |  | $ | 1,796  
|Corporate notes                  |  |                | 21,817  |                      |   | 3                     |  |   | (3                  | ) |  |   | 21,817 
|Municipal notes and bonds        |  |                | 14,500  |                      |   |                      |  |   |                    |   |  |   | 14,500 
|Commercial paper                 |  |                | 57,418  |                      |   | 7                     |  |   |                    |   |  |   | 57,425 
|Government sponsored enterprises |  |                | 21,843  |                      |   | 2                     |  |   | (32                 | ) |  |   | 21,813 
|Cash and money market funds      |  |                | 6,614   |                      |   |                      |  |   |                    |   |  |   | 6,614  
|                                 |  |                |         |                      |   |                       |  |   |                     |   |  |   |        
|Total                            |  | $              | 123,988 |                      | $ | 12                    |  | $ | (35                 | ) |  | $ | 123,965
|                                 |  |                |         |                      |   |                       |  |   |                     |   |  |   |        
|Reported as:                     |  |                |         |                      |   |                       |  |   |                     |   |  |   |        
|Cash and cash equivalents        |  |                |         |                      |   |                       |  |   |                     |   |  | $ | 64,039 
|Short term investments           |  |                |         |                      |   |                       |  |   |                     |   |  |   | 58,803 
|Restricted investments           |  |                |         |                      |   |                       |  |   |                     |   |  |   | 1,123  
|                                 |  |                |         |                      |   |                       |  |   |                     |   |  |   |        
|Total                            |  |                |         |                      |   |                       |  |   |                     |   |  | $ | 123,965
|                                 |  |                |         |                      |   |                       |  |   |                     |   |  |   |        



|                                 |  |                   |         |                      |   |                       |  |   |                     |   |  |   |        
|-------------------------------- |  | ----------------- | ------- | -------------------- | - | --------------------- |  | - | ------------------- | - |  | - | -------
|                                 |  | December 31, 2006
|                                 |  | AmortizedCosts    |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | EstimatedFair Value
|                                 |  | (in thousands)   
|Certificate of deposits          |  | $                 | 1,796   |                      | $ |                      |  | $ |                    |   |  | $ | 1,796  
|Corporate notes                  |  |                   | 14,778  |                      |   | 3                     |  |   |                    |   |  |   | 14,781 
|Municipal notes and bonds        |  |                   | 14,500  |                      |   |                      |  |   |                    |   |  |   | 14,500 
|Commercial paper                 |  |                   | 67,095  |                      |   | 8                     |  |   |                    |   |  |   | 67,103 
|Government sponsored enterprises |  |                   | 32,807  |                      |   |                      |  |   | (65                 | ) |  |   | 32,742 
|Cash and money market funds      |  |                   | 10,743  |                      |   |                      |  |   |                    |   |  |   | 10,743 
|                                 |  |                   |         |                      |   |                       |  |   |                     |   |  |   |        
|Total                            |  | $                 | 141,719 |                      | $ | 11                    |  | $ | (65                 | ) |  | $ | 141,665
|                                 |  |                   |         |                      |   |                       |  |   |                     |   |  |   |        
|Reported as:                     |  |                   |         |                      |   |                       |  |   |                     |   |  |   |        
|Cash and cash equivalents        |  |                   |         |                      |   |                       |  |   |                     |   |  | $ | 77,846 
|Short-term investments           |  |                   |         |                      |   |                       |  |   |                     |   |  |   | 56,983 
|Long-term investments            |  |                   |         |                      |   |                       |  |   |                     |   |  |   | 5,489  
|Restricted investments           |  |                   |         |                      |   |                       |  |   |                     |   |  |   | 1,347  
|                                 |  |                   |         |                      |   |                       |  |   |                     |   |  |   |        
|Total                            |  |                   |         |                      |   |                       |  |   |                     |   |  | $ | 141,665
|                                 |  |                   |         |                      |   |                       |  |   |                     |   |  |   |        

The net realized gains on sales of available-for-sale investments were not material for the three
months ended March 31, 2007 and 2006. Realized gains and losses were calculated based on the specific identification method.



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Investments which are in unrealized loss positions for which other-than-temporary impairments have not
been recognized at March 31, 2007 and December 31, 2006 are summarized below (in thousands):



|                                 |  |                     |        |                      |   |            |  |                   |  |            |  |                  |        |  |   |     
|-------------------------------- |  | ------------------- | ------ | -------------------- | - | ---------- |  | ----------------- |  | ---------- |  | ---------------- | ------ |  | - | ----
|                                 |  | Less Than 12 Months |        | 12 Months or Greater |   | Total     
|March 31, 2007                   |  | Fair Value          |        | Unrealized Losses    |   | Fair Value |  | Unrealized Losses |  | Fair Value |  | UnrealizedLosses
|Government sponsored enterprises |  | $                   | 21,813 |                      | $ | (32)       |  | -                 |  | -          |  | $                | 21,813 |  | $ | (32)
|Corporate notes                  |  | $                   | 21,817 |                      | $ | (3)        |  | -                 |  | -          |  | $                | 21,817 |  | $ | (3) 



|                                 |  |                     |        |                      |   |            |  |                   |        |            |   |                  |  |   |        |  |   |     
|-------------------------------- |  | ------------------- | ------ | -------------------- | - | ---------- |  | ----------------- | ------ | ---------- | - | ---------------- |  | - | ------ |  | - | ----
|                                 |  | Less Than 12 Months |        | 12 Months or Greater |   | Total     
|December 31, 2006                |  | Fair Value          |        | Unrealized Losses    |   | Fair Value |  | Unrealized Losses |        | Fair Value |   | UnrealizedLosses
|Government sponsored enterprises |  | $                   | 21,175 |                      | $ | (22)       |  | $                 | 11,567 |            | $ | (43)             |  | $ | 32,742 |  | $ | (65)

The following is a summary of the cost and estimated fair value of available-for-sale securities
at March 31, 2007 and December 31, 2006, classified by stated maturity date of the security:



|                             |  |                |         |                   |   |               |  |            |         |  |   |        
|---------------------------- |  | -------------- | ------- | ----------------- | - | ------------- |  | ---------- | ------- |  | - | -------
|                             |  | March 31, 2007 |         | December 31, 2006
|                             |  | AmortizedCost  |         | Fair Value        |   | AmortizedCost |  | Fair Value
|                             |  | (in thousands)
|Mature in less than one year |  | $              | 101,078 |                   | $ | 101,055       |  | $          | 109,182 |  | $ | 109,137
|Mature in one to three years |  |                |        |                   |   |              |  |            | 5,498   |  |   | 5,489  
|Mature in over three years   |  |                | 14,500  |                   |   | 14,500        |  |            | 14,500  |  |   | 14,500 
|                             |  |                |         |                   |   |               |  |            |         |  |   |        
|Total                        |  | $              | 115,578 |                   | $ | 115,555       |  | $          | 129,180 |  | $ | 129,126
|                             |  |                |         |                   |   |               |  |            |         |  |   |        



|6. | Property and equipment, net
|-- | ---------------------------

Property and equipment
consist of the following:



|                                               |  |                |        |   |                  |   |        |  
|---------------------------------------------- |  | -------------- | ------ | - | ---------------- | - | ------ | -
|                                               |  | March 31,2007  |        |   | December 31,2006 |  
|                                               |  | (in thousands) |       
|Computer and lab equipment                     |  | $              | 8,119  |   |                  | $ | 8,112  |  
|Capitalized software                           |  |                | 547    |   |                  |   | 547    |  
|Office furniture and fixtures                  |  |                | 509    |   |                  |   | 509    |  
|Leasehold improvements                         |  |                | 3,363  |   |                  |   | 3,363  |  
|                                               |  |                |        |   |                  |   |        |  
|                                               |  |                | 12,538 |   |                  |   | 12,531 |  
|Less accumulated depreciation and amortization |  |                | (8,230 | ) |                  |   | (7,778 | )
|                                               |  |                |        |   |                  |   |        |  
|Property and equipment, net                    |  | $              | 4,308  |   |                  | $ | 4,753  |  
|                                               |  |                |        |   |                  |   |        |  



|7. | Income taxes
|-- | ------------

Effective January 1, 2007, we
adopted Financial Accounting Standards Interpretation, or FIN 48, Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109. FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of uncertain tax positions taken or expected to be taken in a companys income tax return, and also provides guidance on de-recognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition. FIN 48 utilizes a two-step approach for evaluating uncertain tax positions accounted for in accordance with SFAS No. 109, Accounting for Income Taxes (SFAS 109). Step one,
Recognition, requires a company to determine if the weight of available evidence indicates that a tax position is more likely



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than not to be sustained upon audit, including resolution of related appeals or litigation processes, if any. Step two, Measurement, is based on the
largest amount of benefit, which is more likely than not to be realized on ultimate settlement. The cumulative effect of adopting FIN 48 on January 1, 2007 is recognized as a change in accounting principle, recorded as an adjustment to the
opening balance of accumulated deficit on the adoption date. As a result of the implementation of FIN 48, we did not recognize any increase or decrease in the liability for unrecognized tax benefits related to tax positions taken in prior periods,
therefore, there was no corresponding adjustment in accumulated deficit. Additionally, FIN 48 specifies that tax positions for which the timing of the ultimate resolution is uncertain should be recognized as long-term liabilities. Our total amount
of unrecognized tax benefits as of the January 1, 2007 adoption date and March 31, 2007 was $14.2 million. Also, we have no unrecognized tax benefits that, if recognized, would affect our effective tax rate for January 1, 2007 and
March 31, 2007.

Our only major tax jurisdiction is the United States and our 1989  2006 tax years remain subject to examination
by the appropriate governmental agencies due to our operating loss positions.



|8. | Restructuring plan
|-- | ------------------

On February 12, 2007, our
Board of Directors committed to a restructuring plan intended to reduce our operating expenses following our announcement in December 2006 of the preliminary results of our Phase 3 ASSIST-1, ASSIST-2 and ASSIST-3 trials for our lead product
candidate, TELCYTA. On February 14, 2007, we implemented the restructuring plan that focused our priorities on the ASSIST-5 trial and the Phase 1-2a trial of the TELINTRA tablet formulation and selected research and development programs.
To match these priorities, we reduced our workforce by 38 positions, streamlined our infrastructure and postponed some clinical research projects. As a result of the restructuring plan which has been completed, we recorded a one-time restructuring
charge of approximately $1.4 million, of which approximately $1.3 million has been paid in the quarter ended March 31, 2007 as severance, payroll taxes and other personnel related costs.



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|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

Special Note Regarding Statements of Expected Future Performance

This Quarterly Report on Form 10-Q
contains statements indicating expectations about future performance and other forward-looking statements that involve risks and uncertainties. We usually use words such as may, will, should, expect,
plan, anticipate, believe, estimate, predict, future, intend, potential, or continue or the negative of these terms or similar expressions to
identify forward-looking statements. These statements appear throughout this Quarterly Report on Form 10-Q and are statements regarding our current intent, belief or expectation, primarily with respect to our operations and related industry
developments. Examples of these statements include, but are not limited to, statements regarding the following: the implications of positive interim results of our Phase 2 clinical trials, the progress of our research programs, including clinical
testing, the extent to which our issued and pending patents may protect our products and technology, our ability to identify new product candidates using TRAP technology (our proprietary Target-Related Affinity Profiling technology), the potential
of such product candidates to lead to the development of safer or more effective therapies, our ability to develop the technology derived from our collaborations, our anticipated timing for filing additional Investigational New Drug applications, or
INDs, with the United States Food and Drug Administration, or FDA, or for the initiation or completion of Phase 1, Phase 2 or Phase 3 clinical trials for any of our product candidates, our future operating expenses, our future losses, our future
expenditures for research and development and the sufficiency of our cash resources. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q. Our actual results
could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks faced by us and described in Part II, Item 1A of this Quarterly Report on Form 10-Q.

The following discussion and analysis should be read in conjunction with the unaudited condensed financial statements and notes thereto included in Part
I, Item 1 of this Quarterly Report on Form 10-Q and with the financial statements and notes thereto and Managements Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for
the year ended December 31, 2006 filed with the Securities and Exchange Commission on February 28, 2007.

Telik, the
Telik logo, TRAP, TELCYTA and TELINTRA are trademarks of Telik, Inc. All other brand names or trademarks appearing in this Quarterly Report on Form 10-Q are the property of their respective owners.

Overview

Telik is engaged in the discovery,
development and commercialization of small molecule drugs. We have incurred net losses since inception and expect to incur substantial and increasing losses for the next several years as we expand our research and development activities and move our
product candidates into later stages of development. As of March 31, 2007, we had an accumulated deficit of $409.2 million.

Our
expenses have consisted primarily of those incurred for research and development and general and administrative costs associated with our operations. The process of carrying out the development of our product candidates to later stages of
development and our research programs may require significant additional research and development expenditures, including for preclinical testing and clinical trials, as well as for manufacturing development efforts and obtaining regulatory
approval. We outsource our clinical trials and our manufacturing development activities to third parties to maximize efficiency and minimize our internal overhead. To date, we have funded our operations primarily through the sale of equity
securities, and, to a much lesser extent, non-equity payments from collaborative partners, interest earned on investments and equipment lease and loan financings.

We are subject to risks common to biopharmaceutical companies, including risks inherent in our research, development and commercialization efforts, preclinical testing, clinical trials, uncertainty of regulatory and
marketing approvals, enforcement of patent and proprietary rights, the need for future capital, potential competition, use of hazardous materials and retention of key employees. In order for a product to be commercialized, it is necessary for us to
conduct preclinical tests and clinical trials, demonstrate efficacy and



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safety of our product candidates to the satisfaction of regulatory authorities, obtain marketing approval, enter into manufacturing, distribution and
marketing arrangements, obtain market acceptance and, in many cases, obtain adequate reimbursement from government and private insurers. We cannot provide assurance that we will commercialize any product, generate revenues or achieve and sustain
profitability in the future.

We expect that our quarterly and annual results of operations will fluctuate for the foreseeable future due
to several factors, including the timing and extent of our research and development efforts and the outcome of our clinical trial activities. The successful development of our products is uncertain. As such, an accurate prediction of future
operating results is difficult or impossible.

Clinical Status

TELCYTA, our lead product candidate, is a small molecule tumor-activated cancer product candidate that we are evaluating initially to treat cancers that are resistant to standard chemotherapy drugs. On
December 26, 2006, we announced preliminary results from our first three randomized TELCYTA Phase 3 registration trials, known as the ASSIST trials. The following summarizes the preliminary results of those trials:

ASSIST-1 is a 440 patient multinational, randomized Phase 3 trial designed to evaluate TELCYTA as compared to the active control agents liposomal
doxorubicin or topotecan in the third-line therapy of platinum resistant ovarian cancer. The ASSIST-1 trial did not achieve the primary endpoint of demonstrating a statistically significant improvement in overall survival for TELCYTA as compared to
the active controls. While the preliminary analysis revealed a number of internal inconsistencies that need to be further investigated, resolution of these inconsistencies may not change the preliminary results.

ASSIST-2 is a 520 patient multinational, randomized Phase 3 trial designed to evaluate TELCYTA as compared to gefitinib in the third-line therapy of
advanced non-small cell lung cancer. The ASSIST-2 trial did not achieve the primary endpoint of demonstrating a statistically significant improvement in overall survival for TELCYTA as compared to the active control.

ASSIST-3 is a 244 patient randomized Phase 3 trial conducted in the U.S. designed to demonstrate a statistically significant improvement in overall
objective response rate with the combination of TELCYTA plus carboplatin compared to liposomal doxorubicin in the second-line treatment of platinum resistant ovarian cancer. Under the trial protocol, patients were to have received treatment until
tumor progression or unacceptable toxicity. However, a major discordance was observed between the clinical review of the tumor scans and the independent radiology review. Approximately 25% of the patients were discontinued prematurely from the
assigned study treatment as judged by the independent review of the scans. Therefore, we believe the trial was compromised and may not be suitable for a regulatory submission.

Objective tumor responses were observed on the investigational arms containing TELCYTA in all three trials based on the prospective central blinded
independent radiology review. Preliminary analysis of the safety data from the ASSIST-1 and ASSIST-2 trials, in which TELCYTA was administered as monotherapy, indicates that TELCYTA was generally well-tolerated. TELCYTA treatment was associated with
mild to moderate nausea, vomiting and fatigue. Preliminary analysis of the safety data from the ASSIST-3 trial, combining TELCYTA plus carboplatin, demonstrated toxicities expected of each drug alone and no unexpected or cumulative toxicities were
reported. Further analyses of each of these trials are underway.

We also have a 244 patient, multinational randomized Phase 3 clinical
trial, ASSIST-5, initiated in May 2006, evaluating TELCYTA in combination with liposomal doxorubicin versus liposomal doxorubicin as second line therapy in platinum refractory or resistant ovarian cancer. Enrollment is ongoing in this trial

In addition, we have conducted two Phase 2 clinical trials of TELCYTA for the treatment of Stage IIIb or IV non-small cell lung cancer for
patients who have not previously received chemotherapy. One clinical trial is in combination with cisplatin, and the other clinical trial is in combination with carboplatin and paclitaxel. Platinum and taxane-based drug combinations are the current
standard for the front-line chemotherapy of lung and ovarian cancer.In April 2007 we announced that results from the Phase 2 clinical trial of TELCYTA in combination with carboplatin and paclitaxel include statistically and clinically
significant improvement in both progression-free survival and overall survival in responding patients who received TELCYTA maintenance therapy as compared with those who did not receive TELCYTA maintenance therapy.



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TELINTRA, our second product candidate, is a small molecule bone marrow stimulant we are developing for
the treatment of blood disorders associated with low blood cell levels, such as neutropenia or anemia. Myelodysplastic syndrome, or MDS, is a disease characterized by defects in the blood-producing cells of the bone marrow, in which low blood cell
levels occur. A Phase 2 clinical trial in patients with MDS was completed in December 2005 with clinically significant improvement demonstrated in all blood cell lineages and across all major MDS subtypes. TELINTRA was well-tolerated in this
predominantly elderly patient population. In February 2006, we initiated a Phase 1-2a trial in MDS using a tablet formulation of TELINTRA. Enrollment is on-going in this trial. We also announced positive pre-clinical results for TELINTRA at the
American Society of Hematology annual meeting in December 2006.

TLK58747 a novel metabolically activated cytotoxic small molecule with
activity not restricted to GST positive cancers, was identified as a new product candidate in 2006. TLK58747 causes apoptosis and G2/M cell cycle arrest in a broad array of human cancer cell lines. It has shown significant anti-tumor activity in
human breast, pancreatic and colon tumors in vivo when administered either orally or by injection. We are conducting the required preclinical safety studies to support the potential filing of an IND, application with the FDA.

We discovered all of our product candidates using our proprietary technology, Target-Related Affinity Profiling, or TRAP, which enables the rapid and
efficient discovery of small molecule product candidates. We expect to enter into collaborative arrangements with third parties for clinical trials, development, manufacturing, regulatory approvals or commercialization of some of our products,
particularly outside North America, or in disease areas requiring larger and longer clinical trials than cancer.

Restructuring Plan

In February 2007, we implemented a restructuring plan that focused our priorities on the ASSIST-5 trial and the Phase 1-2a trial of the TELINTRA tablet
formulation and selected research and development programs. To match these priorities, we reduced our workforce by 38 positions, streamlined our infrastructure and postponed some clinical research projects. As a result of the restructuring plan, we
recorded a one-time restructuring charge of approximately $1.4 million for severance costs and other charges in the quarter ending March 31, 2007. The restructuring plan has been completed with substantially all of the severance payments made
in the quarter ending March 31, 2007. We will continue to investigate alternative opportunities for the advancement of our product development programs, including collaborations with pharmaceutical and larger biotechnology companies.

Critical Accounting Policies and Significant Judgments and Estimates

Our managements discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting
principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial
statements as well as the reported revenues and expenses during the reporting periods. On an on-going basis, we evaluate our estimates and judgments related to clinical development costs. We base our estimates on historical experience and on various
other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may
differ significantly from these estimates under different assumptions or conditions.

We believe the following accounting policies are
critical to the process of making significant judgments and estimates in the preparation of our financial statements.



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Stock-based compensation expense

We grant stock options to our employees, outside directors and consultants and provide employees the right to purchase our stock pursuant to stockholder approved stock option and employee stock purchase plans. The
benefits provided under these plans are share-based payment awards subject to the provisions of revised Statement of Financial Accounting Standards No. 123, Share-Based Payment (SFAS 123 (R)). Effective January 1,
2006, we adopted SFAS 123(R) and use the fair value method to account for share-based payment awards following the modified prospective method of adoption which provides for certain changes to the method for valuing stock-based compensation. The
valuation provisions of SFAS 123(R) apply to new awards and to awards that are outstanding on the effective date and subsequently modified or cancelled. Under the modified prospective method of adoption, prior periods are not revised for comparative
purposes. Total compensation cost for our share-based payment awards recognized in the first quarter of 2007 and 2006 were $1.9 million and $3.6 million. As of March 31, 2007, $19.1 million of total unrecognized compensation costs related
to non-vested awards is expected to be recognized over a weighted average period of 2.32 years.

We were required to make significant
estimates related to the adoption of SFAS 123(R). Our expected stock-price volatility assumption for 2007 is a blended rate of 50% of historical volatility and 50% implied volatility since sufficient market activity exists with respect to our traded
options. In 2006, historical volatility, obtained from public data sources, was used. For stock option grants issued during the quarters ended March 31, 2007 and 2006, we used a weighted-average expected stock-price volatility of 64.9% and
63.1%. The expected term of options granted is based on the simplified method in accordance with the SECs Staff Accounting Bulletin No. 107 (SAB 107) as our historical share option exercise experience does not provide a
reasonable basis for estimation. As such, we used a weighted-average expected option life assumption of 5.52 years and 6.08 years for the quarters ending March 31, 2007 and 2006. Our forfeiture rate increased to 11.4% in the quarter ended
March 31, 2007 compared to 9.2% for the same period in 2006 to reflect the cancellation of unvested options due to workforce reduction in February 2007. FAS 123R requires forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those estimates.

If factors change and we develop different assumptions
in the application of SFAS 123(R) in future periods, the compensation expense that we record under SFAS 123(R) may differ significantly from what we have recorded in the current period.

Research and development expenses

Our research and development expenses include salaries and
benefits costs, fees for contractors, consultants and third-party contract research organizations, and an allocation of facility and administrative costs. Research and development expenses consist of costs incurred for drug and product development,
manufacturing, clinical activities, discovery research, screening and identification of product candidates, and preclinical studies. All such costs are charged to research and development expenses as incurred.

Clinical development costs are a significant component of research and development expenses. We have a history of contracting with third parties that
perform various clinical trial activities on our behalf in the on-going development of our product candidates. The financial terms of these contracts are subject to negotiation and may vary from contract to contract and may result in uneven payment
flows. We accrue and expense costs for clinical trial activities performed by third parties based upon estimates of the percentage of work completed over the life of the individual study in accordance with agreements established with contract
research organizations and clinical trial sites. We determine our estimates through discussion with internal clinical personnel and outside service providers as to progress or stage of completion of trials or services and the agreed upon fee to be
paid for such services. These estimates may or may not match the actual services performed by the organizations as determined by patient enrollment levels and related activities. We monitor patient enrollment levels and related activities to the
extent possible; however, if we underestimate activity levels associated with various studies at a given point in time, we could record significant research and development expenses in future periods.



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Use of estimates

In preparing our financial statements to conform with GAAP, we make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Actual results may differ from these
estimates.

Results of operations

Revenues

We did not record any revenue in 2006 and currently do not expect to record any revenue in 2007. Future revenues will depend upon the
extent to which we enter into new collaborative research agreements and the amounts of payments relating to such agreements.

Research and development
expenses

Research and development expenses for the three months ended March 31, 2007 and 2006 were $12.9 million and $17.7
million. Our research and development activities consist primarily of drug development, clinical supply manufacturing, clinical activities, discovery research, screening and identification of product candidates and preclinical studies. We group
these activities into two major categories: research and preclinical and clinical development.

The approximate
costs associated with research and preclinical and clinical development activities were as follows:



|                               |  |                                    |        |      |   |          |  |     |   
|------------------------------ |  | ---------------------------------- | ------ | ---- | - | -------- |  | --- | --
|                               |  | Three Months EndedMarch 31,        |        |      |  
|                               |  | 2007                               |        | 2006 |   | % Change | 
|                               |  | (In thousands, except percentages) |       
|Research and preclinical       |  | $                                  | 4,734  |      | $ | 5,533    |  | (14 | )%
|Clinical development           |  |                                    | 8,210  |      |   | 12,125   |  | (32 | )%
|                               |  |                                    |        |      |   |          |  |     |   
|Total research and development |  | $                                  | 12,944 |      | $ | 17,658   |  | (27 | )%
|                               |  |                                    |        |      |   |          |  |     |   

The decrease of 27%, or $4.7 million, in research and development expenses for the three months
ended March 31, 2007 compared to the same period in 2006 was principally due to the following:



| |  |  | decreased costs of approximately $1.2 million associated with headcount reduction as a result of our corporate restructuring and corresponding reduction in clinical
activities;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | lower stock-based compensation expense of approximately $1.1 million primarily due to vesting of stock options granted in earlier periods;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | reduction of approximately $2.5 million as study activities in our ASSIST-1, ASSIST-2 and ASSIST-3 clinical trials are close to completion partially offset by
start-up costs related to our ASSIST-5 clinical trial of approximately $1.8 million; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | corresponding decreased costs in our clinical drug supply manufacturing cost of approximately $1.0 million.
| | - |  | -----------------------------------------------------------------------------------------------------------

We expect total research and development expenditures to decrease in the next twelve months as we focus on the TELCYTA ASSIST-5 clinical trial and the
Phase 1-2a clinical trial of the TELINTRA tablet formulation resulting in decreased manufacturing and clinical development costs. The timing and the amount of these expenditures will depend upon the results of the on-going analyses of the completed
TELCYTA Phase 3 trials which may result in potential changes to the ASSIST-5 trial, and the progress of the TELINTRA tablet formulation Phase 1-2a clinical trial.

The following table summarizes our principal product candidate development initiatives, including the related stages of development for each product in development and the research and development expenses



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recognized in connection with each product candidate. The information in the column labeled Estimated or Actual Completion of Enrollment is our
current estimate of the timing of completion of enrollment. The actual timing of completion of enrollment could differ materially from the estimates provided in the table. For a discussion of the risks and uncertainties associated with the timing of
completing a product development phase, see the risk factors All of our product candidates are in research and development. If clinical trials of TELCYTA or TELINTRA are delayed or unsuccessful or if we are unable to complete the preclinical
development of our other preclinical product candidates, our business may suffer, If we do not obtain regulatory approval to market products in the United States and foreign countries, we or our collaborators will not be permitted to
commercialize our product candidates, As our product programs advance, we will need to hire additional scientific and management personnel. Our research and development efforts will be seriously jeopardized if we are unable to attract
and retain key personnel, and If we are unable to enter into or maintain existing contracts with third parties to manufacture our product candidates or any products that we may develop in sufficient quantities and at an acceptable cost,
clinical development of product candidates could be delayed and we may be unable to meet demand for any products that we may develop and lose potential revenue as described in Part II, Item 1A Risk Factors below.



|                                       |  |                                |  |             |  |                                |        |                                                   |       |        |   |       
|-------------------------------------- |  | ------------------------------ |  | ----------- |  | ------------------------------ | ------ | ------------------------------------------------- | ----- | ------ | - | ------
|                                       |  |                                |  | Phase of    |  | Estimated orActualCompletionof |        | Related R&D Expenses Three Months Ended March 31,
|Product                                |  | Description                    |  | Development |  | Enrollment                     |        | 2007                                              |       | 2006  
|                                       |  |                                |  |             |  |                                |        | (in thousands)                                   
|TELCYTA                                |  |                                |  |             |  |                                |        | $                                                 | 8,238 |        | $ | 11,936
|                                       |  | Ovarian, ASSIST-1              |  | Phase 3     |  | 2004                           |        |                                                   |       |        |   |       
|                                       |  | Non-small cell lung, ASSIST-2  |  | Phase 3     |  | 2005                           |        |                                                   |       |        |   |       
|                                       |  | Ovarian, ASSIST-3              |  | Phase 3     |  | 2006                           |        |                                                   |       |        |   |       
|                                       |  | Ovarian, ASSIST-5              |  | Phase 3     |  | 2007                           |        |                                                   |       |        |   |       
|                                       |  | Combination (with other drugs) |  | Phase 2     |  | 2006                           |        |                                                   |       |        |   |       
|                                       |  |                                |  |             | 
|TELINTRA                               |  | MDS                            |  | Phase 1-2   |  | 2005                           |        |                                                   | 481   |        |   | 994   
|                                       |  | MDS tablet formulation         |  | Phase 2     |  | 2007                           |        |                                                   |       |        |   |       
|                                       |  |                                |  |             | 
|Other (1)                              |  |                                |  |             |  |                                |        |                                                   | 4,225 |        |   | 4,728 
|                                       |  |                                |  |             |  |                                |        |                                                   |       |        |   |       
|Total research and development expense |  |                                |  |             |  | $                              | 12,944 |                                                   | $     | 17,658
|                                       |  |                                |  |             |  |                                |        |                                                   |       |        |   |       

---

|(1) | Other constitutes research and development activities performed by our Chemistry, Biology, preclinical and Quality Assurance departments as these costs cannot be
allocated to any individual project.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The largest component of our total operating expenses is our on-going investments in
our research and development activities and, in particular, the clinical development of our product candidate pipeline. The process of conducting the clinical research necessary to obtain FDA approval is costly and time consuming. Current FDA
requirements for a new human drug to be marketed in the United States include:



| |  |  | the successful conclusion of preclinical laboratory and animal tests, if appropriate, to gain preliminary information on the drug product candidates safety;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | filing with the FDA of an Investigational New Drug application, or IND, to conduct initial human clinical trials for drug candidates;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the successful completion of adequate and well-controlled human clinical trials to establish the safety and efficacy of the drug product candidate; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | filing by us and acceptance and approval by the FDA of a New Drug Application, or NDA, for a drug product candidate to allow commercial distribution of the drug.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

In light of the factors mentioned above, we consider the active management and development of our clinical pipeline to
be crucial to our long-term success. The actual probability of success for each candidate and clinical program may be impacted by a variety of factors, including, among others, the quality of the



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candidate, the validity of the target and disease indication, early clinical data, investment in the program, competition, manufacturing capability and
commercial viability. Due to these and other factors, it is difficult to give accurate guidance on the anticipated proportion of our research and development investments or the future cash inflows from these programs.

General and administrative expenses



|                           |  |                                   |       |      |   |          |  |     |   
|-------------------------- |  | --------------------------------- | ----- | ---- | - | -------- |  | --- | --
|                           |  | Three Months EndedMarch 31,       |       |      |  
|                           |  | 2007                              |       | 2006 |   | % Change | 
|                           |  | (In thousands, except percentage) |      
|General and administrative |  | $                                 | 3,652 |      | $ | 4,509    |  | (19 | )%

The decrease in general and administrative expenses of 19%, or $857,000 in the three months ended
March 31, 2007 compared to the same period in 2006 was primarily due to lower stock-based compensation expense of approximately $584,000 as stock options granted in earlier periods became fully vested, and approximately $273,000 associated with
headcount reduction as a result of our corporate restructuring and lower administrative expenses.

We expect general and administrative
expenses to increase in 2007 to account for management bonuses and legal fees associated with potential corporate partnerships. There were no bonuses paid to management in 2006.

Restructuring costs

As a result of our workforce reduction of 38 positions we recorded a one-time
restructuring charge of approximately $1.4 million for severance costs and other charges in the quarter ending March 31, 2007. The restructuring plan has been completed with substantially all of the severance payments made in the quarter ending
March 31, 2007.

Interest income and interest expense



|                |  |                                    |       |      |   |          |  |     |   
|--------------- |  | ---------------------------------- | ----- | ---- | - | -------- |  | --- | --
|                |  | Three Months Ended March 31,       |       |      |  
|                |  | 2007                               |       | 2006 |   | % Change | 
|                |  | (In thousands, except percentages) |      
|Interest income |  | $                                  | 1,686 |      | $ | 2,107    |  | (20 | )%

Interest income resulted primarily from earnings on investments. Interest income decreased by
$421,000, or 20%, for the three months ended March 31, 2007 compared to the same periods in 2006. The decrease was due to lower investment cash balance in the three-month period ended March 31, 2007 as compared to the same periods in 2006.

Liquidity and capital resources



|                                                               |  |                              |          |                |   |         
|-------------------------------------------------------------- |  | ---------------------------- | -------- | -------------- | - | --------
|                                                               |  | March 31, 2007               |          | March 31, 2006
|                                                               |  | (in millions, except ratios)
|Cash, cash equivalents, investments and restricted investments |  | $                            | 124.0    |                | $ | 187.1   
|Working capital                                                |  | $                            | 113.1    |                | $ | 173.0   
|Current ratio                                                  |  |                              | 10.5 : 1 |                |   | 13.1 : 1



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|                                                              |  |                             |       |   |      |   |       |  
|------------------------------------------------------------- |  | --------------------------- | ----- | - | ---- | - | ----- | -
|                                                              |  | Three MonthsEnded March 31, |      
|                                                              |  | 2007                        |       |   | 2006 |  
|                                                              |  | (in millions)               |      
|Cash (used in) / provided by:                                 |  |                             |       |   |      |   |       |  
|Operating activities                                          |  | $                           | (17.9 | ) |      | $ | (19.9 | )
|Investing activities                                          |  | $                           | 3.9   |   |      | $ | (11.2 | )
|Financing activities                                          |  | $                           | 0.2   |   |      | $ | 1.6   |  
|Capital expenditures (included in investing activities above) |  | $                           |      |   |      | $ | (0.1  | )

Sources and Uses of Cash. Due to the significant research and development expenditures and
the lack of any approved products to generate revenue, we have not been profitable and have generated operating losses since we incorporated in 1988. As such, we have funded our research and development operations through sale of equity securities,
non-equity payments from corporate partners, interest earned on investments and equipment lease and loan financings. At March 31, 2007, we had available cash, cash equivalents, investments and restricted investments of $124.0 million. Our cash
and investment balances are held in highly liquid debt instruments of the U.S. government, its agencies and municipalities, high grade corporate notes and money market funds. Cash in excess of immediate requirements is invested with regard to
liquidity and capital preservation. Wherever possible, we seek to minimize the potential effects of concentration and degrees of risk.

Cash Flows from Operating Activities. Cash used in operations for the three months ended March 31, 2007 was $17.9 million compared with $19.9 million for the same period in 2006. Net loss of $16.3 million in 2007 included
non-cash charges of $1.9 million for stock-based compensation and $453,000 for depreciation and amortization. Cash used in operations was further impacted by $1.5 million reduction in accounts payable, a $1.8 million reduction in accrued clinical
trials related primarily to our Phase 3 clinical trials and a $1.3 million reduction in other accrued liabilities related mainly to manufacturing expenses. Cash outflows were partially offset by a decrease of $286,000 in prepaid expense and other
current assets primarily due to amortization of prepaid insurance balances. Operating cash outflows for the same period in 2006 reflected net loss of $20.1 million including non-cash charges of $3.6 million for share-based compensation and $442,000
for depreciation and amortization. Cash used in operations was further impacted during the first quarter of 2006 by decreases of $2.2 million in accrued compensation expense primarily due to bonus payouts and $2.6 million in accrued clinical trial
payments related primarily to our Phase 3 clinical trials. Cash outflows in 2006 were partially offset by an increase of $692,000 in accounts payable.

Cash Flows from Investing Activities. Cash provided by investing activities for the three months ended March 31, 2007 was $3.9 million compared with cash used in investing activities of $11.2 million for
the same period in 2006. Cash provided for the three months ended March 31, 2007 was primarily from $11.0 million in maturities of investments offset by $7.0 million in purchases of available-for-sale investments. Capital expenditures for the
same period in 2007 were $8,000, primarily for laboratory equipment purchases. Cash used for the same period in 2006 was primarily for $19.0 million in purchases of short-term available-for-sale investments offset by $8.0 million in sales and
maturities of investments. Capital expenditures for the same period were $140,000 primarily for laboratory, office and computer equipment purchases.

Cash Flows from Financing Activities. Cash provided by financing activities for the three months ended March 31, 2007 was approximately $213,000 compared with $1.6 million for the same period in 2006.
Financing activities for the three months ended March 31, 2007 was comprised primarily of $371,000 in proceeds from stock option exercises and purchases under our employee stock purchase plan, offset by $158,000 in payments under capital leases
and equipment loans. Financing activities for the same period in 2006 included $1.9 million in proceeds from stock option exercises and our employee stock purchase plan, offset in part by $321,000 in payments under capital leases and equipment
loans.

Working Capital. Working capital decreased to $113.1 million at March 31, 2007 from $187.1 million at March 31,
2006. The decrease in working capital was primarily due to our use of cash in operations due to our TELCYTA and TELINTRA development program.

Due to the re-focus of our research and development strategy on the ASSIST-5 clinical trial and the Phase 1-2a clinical trial of TELINTRA tablets, we believe our existing cash resources will be sufficient to satisfy our



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current operating plan until the end of 2008. We expect our on-going clinical development activities and in particular our Phase 3 ASSIST-5 clinical trial to
consume a large portion of our existing cash resources. Changes in our research and development plans or other changes affecting our operating expenses may affect actual future consumption of existing cash resources as well. In any event, we will
require substantial additional financing to fund our operations in the future. We may seek to raise any necessary additional funds through equity or debt financings, collaborative arrangements with corporate partners or other sources. To the extent
that we raise additional capital by issuing equity securities, our stockholders may experience dilution. Debt financing may subject us to restrictive covenants that may adversely affect our operations. To the extent that we raise additional capital
through licensing arrangements or arrangements with collaborative partners, we may be required to relinquish, on terms that are not favorable to us, rights to some of our technologies or product candidates that we would otherwise seek to develop or
commercialize ourselves. Our future capital uses and requirements depend on numerous factors, including the following:



| |  |  | the progress and success of preclinical studies and clinical trials of our product candidates;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | the progress and number of research programs in development;
| | - |  | ------------------------------------------------------------



| |  |  | the costs associated with conducting Phase 3 clinical trials;
| | - |  | -------------------------------------------------------------



| |  |  | the costs and timing of obtaining regulatory approvals;
| | - |  | -------------------------------------------------------



| |  |  | our ability to establish, and the scope of, any new collaborations;
| | - |  | -------------------------------------------------------------------



| |  |  | our ability to meet the milestones identified in our collaborative agreements that trigger payments;
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | the costs and timing of obtaining, enforcing and defending our patent and intellectual property rights;
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | competing technological and market developments; and
| | - |  | ----------------------------------------------------



| |  |  | the timing and scope of commercialization expenses for our product candidates as they approach regulatory approval.
| | - |  | -------------------------------------------------------------------------------------------------------------------

We currently have no commitments for any additional financings. If we need to raise additional money to fund our operations, funding may not be available
to us on acceptable terms, or at all. If we are unable to raise additional funds when needed, we may not be able to continue development of our product candidates, or we could be required to delay, scale back or eliminate some or all of our research
and development programs.

Our future contractual obligations at March 31, 2007 were as follows:



|                                   |  |       |        |      |   |                |  |           |       |           |   |       |  |   |      
|---------------------------------- |  | ----- | ------ | ---- | - | -------------- |  | --------- | ----- | --------- | - | ----- |  | - | -----
|                                   |  | Total |        | 2007 |   | 2008-2009      |  | 2009-2010 |       | After2010
|                                   |  |       |        |      |   | (in thousands) |  |           |       |          
|Operating leases                   |  | $     | 26,236 |      | $ | 2,572          |  | $         | 7,131 |           | $ | 7,531 |  | $ | 9,002
|Capital lease obligations          |  |       | 223    |      |   | 223            |  |           |      |           |   |      |  |   |     
|Equipment loans                    |  |       | 105    |      |   | 105            |  |           |      |           |   |      |  |   |     
|                                   |  |       |        |      |   |                |  |           |       |           |   |       |  |   |      
|Total contractual cash obligations |  | $     | 26,564 |      | $ | 2,900          |  | $         | 7,131 |           | $ | 7,531 |  | $ | 9,002
|                                   |  |       |        |      |   |                |  |           |       |           |   |       |  |   |      

We have a contractual obligation under the terms of our manufacturing supply agreement with
Organichem Corporation, wherein we are obligated to purchase a significant percentage of our United States requirements for the active ingredient in TELCYTA for a number of years. We have agreed on a pricing schedule for such supply, which will be
subject to future renegotiation after a defined time period.

We have no material off-balance sheet arrangements as defined in Regulation
S-K 303(a)(4)(ii).



|Item 3. | Quantit
ative and Qualitative Disclosures About Market Risk.
|------- | ------------------------------------------------------------

The following discussion about our market
risk exposure involves forward-looking statements. We are exposed to market risk related mainly to changes in interest rates and we believe our exposure to market risk is immaterial. We do not use or hold derivative financial instruments.

Our investment policy is to manage our marketable securities portfolio to preserve principal and liquidity while maximizing the return on
the investment portfolio. To minimize the exposure due to adverse shifts in interest rates we generally maintain investments of shorter maturities. Our marketable securities portfolio is



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primarily invested in corporate debt securities and commercial papers with an average maturity of under one year and a minimum investment grade rating of A
or A-1 or better to minimize credit risk. Although changes in interest rates may affect the fair value of the marketable securities portfolio and cause unrealized gains or losses, such gains or losses would not be realized unless the investments
were sold prior to maturity. Through our money managers, we maintain risk management control systems to monitor interest rate risk. The risk management control systems use analytical techniques, including sensitivity analysis. We have operated
primarily in the United States and all funding activities with our collaborators to date have been made in U.S. dollars. Accordingly, we do not have any exposure to foreign currency rate fluctuations.

The table below presents the principal amounts and weighted-average interest rates by year of stated maturity for our investment portfolio:



|                              |  |                                    |        |   |      |   |       |                |  |   |        |   |  |                            |         |   |  |   |        
|----------------------------- |  | ---------------------------------- | ------ | - | ---- | - | ----- | -------------- |  | - | ------ | - |  | -------------------------- | ------- | - |  | - | -------
|                              |  | 2007                               |        |   | 2008 |   |       | 2009 andBeyond |  |   | Total  |   |  | Fair Value atMarch 31,2007
|                              |  | (in thousands, except percentages)
|Available-for-sale securities |  | $                                  | 95,579 |   |      | $ | 5,499 |                |  | $ | 14,500 |   |  | $                          | 115,578 |   |  | $ | 115,555
|Average interest rate         |  |                                    | 5.23   | % |      |   | 5.08  | %              |  |   | 5.38   | % |  |                            | 5.24    | % |  |   |        



|Item 4. | Controls a
nd Procedures.
|------- | -------------------------

Evaluation of disclosure controls and procedures. Based on our
managements evaluation (with the participation of our chief executive officer and chief financial officer), our chief executive officer and chief financial officer have concluded that, subject to limitations described below, our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended), were effective as of March 31, 2007.

Changes in internal control over financial reporting. There were no changes in our internal controls over financial reporting during the quarter ended March 31, 2007 that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial reporting.

Limitations on the effectiveness of
controls. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues, if any, within a company have been detected. Accordingly, our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of
our disclosure control system are met and, as set forth above, our chief executive officer and chief financial officer have concluded, based on their evaluation as of the end of the period covered by this report, that our disclosure controls and
procedures were sufficiently effective to provide reasonable assurance that the objectives of our disclosure control system were met.



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PART II. OTHER I
NFORMATION



|Item 1A. | Risk Fa
ctors.
|-------- | --------------

Included below is a description of risk factors related to our business to enable
readers to assess, and be appropriately apprised of, many of the risks and uncertainties applicable to the forward-looking statements made in this Quarterly Report on Form 10-Q. The risks and uncertainties set forth below are not all of the risks
and uncertainties facing our business, but we do believe that they reflect the more important ones. You should carefully consider these risk factors as each of these risks could adversely affect our business, operating results and financial
condition. Given these risks and uncertainties, you are cautioned not to place undue reliance on forward-looking statements.

The
risk factors described in Part II, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2006, as filed with the SEC on February 28, 2007, are set forth below. These risk factors have not substantively changed,
except for those identified by asterisk and restated below.

We have a history of net losses, which we expect to continue for the next several
years. We will never be profitable unless we develop, and obtain regulatory approval and market acceptance of, our product candidates*.

Due to the significant research and development expenditures required to develop our TRAP technology and identify new product candidates, and the lack of any products to generate revenue, we have not been profitable and have incurred
operating losses since we were incorporated in 1988. As of March 31, 2007, we had an accumulated deficit of $409.2 million. We expect to incur losses for the next several years as we continue our research and development activities and incur
significant clinical testing and drug supply manufacturing costs. We do not anticipate that we will generate product revenue for several years. Our losses, among other things, have caused and will cause our stockholders equity and working
capital to decrease. To date, we have derived substantially all of our revenues, which have not been significant, from project initiation fees and research reimbursement paid pursuant to existing collaborative agreements with third parties and
achievement of milestones under current collaborations. We expect that this trend will continue until we develop, and obtain regulatory approval and market acceptance of, our product candidates, if at all. We may never generate product revenue
sufficient to become profitable.

All of our product candidates are in research and development. If clinical trials of TELCYTA or TELINTRA are delayed
or unsuccessful or if we are unable to complete the preclinical development of our other preclinical product candidates, our business may suffer.

Preclinical testing and clinical trials are long, expensive and uncertain processes. It may take us or our collaborators several years to complete this testing, and failure can occur at any stage of the process.
Success in preclinical testing and early clinical trials does not ensure that later clinical trials will be successful, and interim results of clinical trials do not necessarily predict final results. A number of companies in the pharmaceutical
industry, including biotechnology companies, have suffered significant setbacks in advanced clinical trials, even after promising results in earlier clinical trials.

To obtain regulatory approvals, we must, among other requirements, complete carefully controlled and well-designed clinical trials demonstrating that a particular drug is safe and effective for the applicable disease.
TELCYTA has to date been evaluated in multiple Phase 1, Phase 2 and Phase 3 clinical trials. The Phase 3 clinical trials (ASSIST-1, 2, 3 and 5) compare TELCYTA to a control arm consisting of currently established standard drug treatments for ovarian
and lung cancers. In December 2006, we reported that preliminary results indicate that the ASSIST-1 and ASSIST-2 trials did not achieve their primary endpoint of demonstrating statistically significant improvement in overall survival for TELCYTA as
compared to the active controls. The ASSIST-3 trial showed a major discordance between the clinical review of the tumor scans and the independent radiology review and therefore the results of this trial may be compromised and not suitable for
regulatory submission. We are conducting further analyses of the data and meeting with our advisors, and depending on the findings, we may initiate discussions with regulatory agencies for the purpose of determining the next steps in the clinical
development program. Based on the results of our analyses of the data from our ASSIST-1 and ASSIST-3 trials, we may have to revise the on-going ASSIST-5 trial and this may delay the



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completion of the study. Future changes in standards of care may cause us to, or the FDA may require us to perform additional clinical testing of TELCYTA
against a different control arm prior to filing an NDA for marketing approval. Patient recruitment may be slower than expected and patients may drop out of the ASSIST-5 trial. Our near to medium-term outlook depends to a significant extent on the
outcome of the further analyses of the data from the completed ASSIST trials, and on the results from the on-going ASSIST-5 trial. If the results of these analyses and the ASSIST-5 trial do not demonstrate sufficient efficacy to support our NDA,
then our business will suffer and our stock price will decline.

We typically rely on third-party clinical investigators to conduct our
clinical trials and, as a result, we may face additional delays outside our control. We engaged contract research organizations, or CROs, to facilitate the administration of our Phase 3 clinical trials of TELCYTA. Dependence on a CRO subjects us to
a number of risks. We may not be able to control the amount and timing of resources the CRO may devote to our clinical trials. Should the CRO fail to administer our Phase 3 clinical trials properly, regulatory approval, development and
commercialization of TELCYTA will be delayed.

We completed a Phase 2 clinical trial of the intravenous formulation of TELINTRA in MDS, a
form of pre-leukemia, to evaluate safety, pharmacokinetics, pharmacodynamics and efficacy. In February 2006, we initiated a new Phase 2 clinical trial of a tablet formulation of TELINTRA in MDS and enrollment is on-going in this trial. Our success
depends in part on our ability to complete clinical development of TELINTRA or other preclinical product candidates and take them through early clinical trials.

We do not know whether we will begin planned clinical trials on time or whether we will complete any of our on-going clinical trials on schedule, if at all. We do not know whether any clinical trials will result in
marketable products. Typically, there is a high rate of failure for product candidates in preclinical and clinical trials. We do not anticipate that any of our product candidates will reach the market for several years.

Significant delays in clinical testing could materially impact our clinical trials. We do not know whether planned clinical trials will begin on time,
will need to be revamped or will be completed on schedule, if at all. In addition to the reasons stated above, clinical trials can be delayed for a variety of other reasons, including delays in obtaining regulatory approval to commence a study,
delays in reaching agreement on acceptable clinical study agreement terms with prospective clinical sites, delays in obtaining institutional review board approval to conduct a study at a prospective clinical site and delays in recruiting subjects to
participate in a study.

Delays in clinical testing can also materially impact our product development costs. If we experience delays in
clinical testing or approvals, our product development costs will increase. For example, we may need to make additional payments to third-party investigators and organizations to retain their services or we may need to pay recruitment incentives. If
the delays are significant, our financial results and the commercial prospects for our product candidates will be harmed, and our ability to become profitable will be delayed.

We believe that our ability to compete depends, in part, on our ability to use our proprietary TRAP technology to discover new pharmaceutical products.

TRAP, our proprietary drug discovery technology, is a relatively new drug discovery method that uses a protein panel of approximately 20 proteins
selected for their distinct patterns of interacting with small molecules. This panel may lack essential types of interactions that we have not yet identified, which may result in our inability to identify active compounds that we could potentially
develop into commercially viable drugs.

If we are unable to raise adequate funds in the future, we will not be able to continue to fund our operations,
research programs, preclinical testing and clinical trials to develop and manufacture our product candidates*.

The process of carrying
out the development of our own unpartnered product candidates to later stages of development and developing other research programs to the stage that they may be partnered will require significant additional expenditures, including the expenses
associated with preclinical testing, clinical trials and obtaining regulatory approval. We believe that our existing cash and investment securities will be sufficient to support our current operating plan until the end of 2008. Changes in our
research and development plans or



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other changes affecting our operating expenses may affect actual future consumption of existing cash resources as well. In any event, we will require
substantial additional financing to fund our operations in the future. We do not know whether additional financing will be available when needed or that, if available, we will obtain financing on terms favorable to our stockholders. As of
March 31, 2007, our accumulated deficit was $409.2 million, and we expect capital outlays and operating expenditures to increase over the next several years as we expand our clinical, research and development activities. The extent of any
actual increase in operating or capital spending will depend in part on the clinical success of our product candidates. If we fail to raise adequate funds on terms acceptable to us, if at all, we will not be able to continue to fund our operations,
research programs, preclinical testing, clinical trials and manufacturing efforts.

Raising additional capital by issuing securities or through
collaboration and licensing arrangements may cause dilution to existing stockholders or require us to relinquish rights to our technologies or product candidates.

We may seek to raise any necessary additional funds through equity or debt financings, collaborative arrangements with corporate partners or other sources. To the extent that we raise additional capital by issuing
equity securities, our stockholders may experience dilution. To the extent that we raise additional capital through licensing arrangements or arrangements with collaborative partners, we may be required to relinquish, on terms that are not favorable
to us, rights to some of our technologies or product candidates that we would otherwise seek to develop or commercialize ourselves.

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

The biotechnology and pharmaceutical industries are intensely competitive and subject to rapid and significant technological change. Some of the drugs
that we are attempting to develop will have to compete with existing therapies. In addition, a large number of companies are pursuing the development of pharmaceuticals that target the same diseases and conditions that we are targeting. We face
competition from pharmaceutical and biotechnology companies in the United States and abroad. Our competitors may develop new screening technologies and may utilize discovery techniques or partner with collaborators in order to develop products more
rapidly or successfully than we or our collaborators are able to do.

Many of our competitors, particularly large pharmaceutical companies,
have substantially greater financial, technical and human resources than we do. These organizations also compete with us to attract qualified personnel and parties for acquisitions, joint ventures, licensing arrangements or other collaborations. In
addition, academic institutions, government agencies and other public and private organizations conducting research may seek patent protection with respect to potentially competing products or technologies and may establish exclusive collaborative
or licensing relationships with our competitors.

Our competitors may succeed in developing technologies and drugs that are more effective,
better tolerated or less costly than any which are being developed by us or which would render our technology and potential drugs obsolete and noncompetitive. In addition, our competitors may succeed in obtaining FDA or other regulatory approvals
for product candidates more rapidly than us or our collaborators. Any drugs resulting from our research and development efforts, or from our joint efforts with our existing or future collaborative partners, may not be able to compete successfully
with our competitors existing products or products under development or may not obtain regulatory approval in the United States or elsewhere.

If
we do not obtain regulatory approval to market products in the United States and foreign countries, we or our collaborators will not be permitted to commercialize our product candidates.

Even if we are able to achieve success in our preclinical testing, we, or our collaborators, must provide the FDA and foreign regulatory authorities with
clinical data that demonstrate the safety and efficacy of our product candidates in humans before they can be approved for commercial sale. Failure to obtain regulatory approval will prevent commercialization of our product candidates.



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The pharmaceutical industry is subject to stringent regulation by a wide range of regulatory authorities.
We cannot predict whether regulatory clearance will be obtained for any product candidate that we are developing or hope to develop. A pharmaceutical product cannot be marketed in the United States until it has completed rigorous preclinical testing
and clinical trials and an extensive regulatory clearance process implemented by the FDA. Satisfaction of regulatory requirements typically takes many years and depends on the type, complexity and novelty of the product and requires the expenditure
of substantial resources. Of particular significance are the requirements covering research and development, testing, manufacturing, quality control, labeling and promotion of drugs for human use.

Before commencing clinical trials in humans, we, or our collaborators, must submit and receive approval from the FDA of an IND application. We must
comply with FDA Good Laboratory Practices regulations in our preclinical studies. Clinical trials are subject to oversight by institutional review boards of participating clinical sites and the FDA and:



| |  |  | must be conducted in conformance with the FDA regulations;
| | - |  | ----------------------------------------------------------



| |  |  | must meet requirements for institutional review board approval;
| | - |  | ---------------------------------------------------------------



| |  |  | must meet requirements for informed consent;
| | - |  | --------------------------------------------



| |  |  | must meet requirements for Good Clinical Practices;
| | - |  | ---------------------------------------------------



| |  |  | may require large numbers of participants; and
| | - |  | ----------------------------------------------



| |  |  | may be suspended by us, our collaborators or the FDA at any time if it is believed that the subjects participating in these trials are being exposed to unacceptable
health risks or if the FDA finds deficiencies in the IND application or the conduct of these trials.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Before receiving
FDA clearance to market a product, we, or our collaborators must demonstrate that the product candidate is safe and effective in the patient population that will be treated. Negative or inconclusive results or adverse medical events during a
clinical trial could cause a clinical trial to be repeated, a program to be terminated and could delay approval. We typically rely on third-party clinical investigators to conduct our clinical trials and other third-party organizations to perform
data collection and analysis. As a result, we may face additional delaying factors outside our control. In addition, we may encounter delays or rejections based upon additional government regulation from future legislation or administrative action
or changes in FDA policy or interpretation during the period of product development, clinical trials and FDA regulatory review. Failure to comply with applicable FDA or other applicable regulatory requirements may result in criminal prosecution,
civil penalties, recall or seizure of products, total or partial suspension of production or injunction, as well as other regulatory action. We have limited experience in conducting and managing the clinical trials necessary to obtain regulatory
approval.

If regulatory clearance of a product is granted, this clearance will be limited to those disease states and conditions for which
the product is demonstrated through clinical trials to be safe and efficacious, which could limit our market opportunity. Furthermore, product approvals, once granted, may be withdrawn if problems occur after initial marketing. We cannot ensure that
any compound developed by us, alone or with others, will prove to be safe and efficacious in clinical trials and will meet all of the applicable regulatory requirements needed to receive marketing clearance. Regulatory clearance may also contain
requirements for costly post-marketing testing and surveillance to monitor the safety and efficacy of the product. If problems occur after initial marketing, such as the discovery of previously unknown problems with our product candidates, including
unanticipated adverse events or adverse events of unanticipated severity or frequency, or manufacturer or manufacturing issues, marketing approval can be withdrawn.

Outside the United States, the ability to market a product depends on receiving a marketing authorization from the appropriate regulatory authorities. Most foreign regulatory approval processes include all of the
risks associated with FDA clearance described above and some may include additional risks.

As our product programs advance, we may need to hire
additional scientific and management personnel. Our research and development efforts will be seriously jeopardized if we are unable to attract and retain key personnel.

Our success depends in part on the continued contributions of our principal management and scientific personnel and on our ability to develop and
maintain important relationships with leading academic



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institutions, scientists and companies in the face of intense competition for such personnel. As we plan for additional advanced clinical trials, including
Phase 2 and Phase 3, we may also need to expand our clinical development personnel. In addition, our research programs depend on our ability to attract and retain highly skilled chemists and other scientists. If we lose the services of Dr. Wick
or any of our other key personnel, our research and development efforts could be seriously and adversely affected. We have generally entered into consulting or other agreements with our scientific and clinical collaborators and advisors. We do not
carry key person insurance that covers Dr. Wick or any of our other key employees.

Our restructuring efforts may have an adverse impact on our
current employees and on our ability to retain and attract future employees.

On February 12, 2007, our Board of Directors
committed to a restructuring plan intended to reduce our operating expenses following our announcement in December 2006 of the preliminary results of our Phase 3 ASSIST-1, ASSIST-2 and ASSIST-3 trials for our lead product candidate, TELCYTA.
The workforce reduction could result in reduced productivity by our remaining employees, which in turn may affect our business and financial results in future quarters. We cannot assure you that future reductions or adjustments of our workforce will
not be made or that issues associated with such reductions will not recur. In addition, employees, whether or not directly affected by the reduction, may seek future employment with our business partners, customers or competitors. Although our
employees are required to sign a confidentiality agreement at the time of hire, we cannot assure you that the confidential nature of certain proprietary information will be maintained in the course of such future employment.

Further, we believe that our future success will depend in large part upon our ability to attract and retain highly skilled personnel. We may have
difficulty attracting such personnel as a result of a perceived risk of future workforce reductions. In addition, there is currently a shortage of skilled executives and employees with technical expertise in the biotechnology industry and this
shortage is likely to continue. As a result, competition among numerous companies, academic and other research institutions for skilled personnel and experienced scientists is intense and turnover rates are high. The cost of living in the San
Francisco Bay Area is high compared to other parts of the country, which may adversely affect our ability to compete for qualified personnel and will increase costs. Because of this competitive environment, we have encountered and may continue to
encounter increasing difficulty in attracting qualified personnel if our operations expand and the demand for these professionals increases, and this difficulty could significantly impede the achievement of our research and development objectives.

If physicians and patients do not accept products that we may develop, our ability to generate product revenue in the future will be adversely
affected.

Products that we may develop may not gain market acceptance among physicians, healthcare payors, patients and the medical
community. Market acceptance of and demand for any products that we may develop will depend on many factors, including the following:



| |  |  | our ability to provide acceptable evidence of safety and efficacy;
| | - |  | ------------------------------------------------------------------



| |  |  | convenience and ease of administration;
| | - |  | ---------------------------------------



| |  |  | cost effectiveness;
| | - |  | -------------------



| |  |  | the effectiveness of our marketing strategy and the pricing of any products that we may develop;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | our ability to obtain third-party coverage or reimbursement; and
| | - |  | ----------------------------------------------------------------



| |  |  | the prevalence and severity of adverse side effects.
| | - |  | ----------------------------------------------------

Physicians may elect not to recommend products that we may develop even if our products meet the above criteria. If any product that we may develop fails to achieve market acceptance, we may not be able to
successfully market and sell that product, which would limit our ability to generate revenue and adversely affect our operations.

If we or our
licensees cannot obtain and defend our respective intellectual property rights, or if our product candidates, technologies or any products that we may develop are found to infringe patents of third parties, we could become involved in lengthy and
costly legal proceedings that could adversely affect our business.



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Our success will depend in a large part on our own and our licensees ability to obtain and defend
patents for each partys respective technologies and the compounds and other products, if any, resulting from the application of these technologies. The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and
involve complex legal and factual questions. As a result, the degree of future protection for our proprietary rights is uncertain, and we cannot assure you that:



| |  |  | we were the first to make the inventions covered by each of our pending patent applications;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | we were the first to file patent applications for these inventions;
| | - |  | -------------------------------------------------------------------



| |  |  | others will not independently develop similar or alternative technologies or duplicate any of our technologies;
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | any of our pending patent applications will result in issued patents;
| | - |  | ---------------------------------------------------------------------



| |  |  | any patents issued to us or our collaborators will provide a basis for commercially viable products, will provide us with any competitive advantages or will not be
challenged by third parties;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | any of our issued patents will be valid or enforceable; or
| | - |  | ----------------------------------------------------------



| |  |  | we will develop additional proprietary technologies that are patentable.
| | - |  | ------------------------------------------------------------------------

Accordingly, we cannot predict the breadth of claims allowed in our or other companies patents.

For TRAP, we hold patents in the United States and internationally, including a pending foreign application. These patents, and any patent that may issue
on the pending application, will expire between 2014 and 2015. For TELCYTA, we hold compound patents in the United States and internationally, including a pending foreign application. These patents, and any patent that may issue on the pending
application, will expire in 2013 and 2014. For TELINTRA, we hold compound patents in the United States and internationally, including a pending foreign application. These patents, and any patent that may issue on the pending application, will expire
in 2014. We can generally apply for patent term extensions on the patents for TELCYTA and TELINTRA when and if marketing approvals for these compounds are obtained in the relevant countries.

Our success will also depend, in part, on our ability to operate without infringing the intellectual property rights of others. We cannot assure you that
our activities will not infringe patents owned by others. As of the date of this Quarterly Report on Form 10-Q, we have not received any communications with the owners of related patents alleging that our activities infringe their patents. However,
if our product candidates, technologies or any products that we may develop are found to infringe patents issued to third parties, the manufacture, use and sale of any products that we may develop could be enjoined, and we could be required to pay
substantial damages. In addition, we may be required to obtain licenses to patents or other proprietary rights of third parties. We cannot assure you that any licenses required under any such patents or proprietary rights would be made available on
terms acceptable to us, if at all. Failure to obtain such licenses could negatively affect our business.

Others may have filed and in the
future may file patent applications covering small molecules or therapeutic products that are similar to ours. We cannot assure you that our patent applications will have priority over patent applications filed by others. Any legal action against us
or our collaborators claiming damages and seeking to enjoin commercial activities relating to the affected products and processes could, in addition to subjecting us to potential liability for damages, require us or our collaborators to obtain a
license to continue to manufacture or market the affected products and processes. We cannot predict whether we, or our collaborators, would prevail in any of these actions or that any license required under any of these patents would be made
available on commercially acceptable terms, if at all. We believe that there may be significant litigation in the industry regarding patent and other intellectual property rights. If we become involved in litigation, it could consume a substantial
portion of our managerial and financial resources, and we may not be successful in any such litigation.

In addition, we could incur
substantial costs and use of our key employees time and efforts in litigation if we are required to defend against patent suits brought by third parties or if we initiate these suits, and we cannot predict whether we would be able to prevail
in any of these suits.



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Furthermore, some of our patents and intellectual property rights are owned jointly by us and our
collaborators. While there are legal and contractual restraints on the rights of these joint owners, they may use these patents and other intellectual property in ways that may harm our business. We may not be able to prevent this type of use.

We also rely on trade secrets to protect technology, including aspects of our TRAP technology, where we believe patent protection is not
appropriate or obtainable. However, trade secrets are difficult to protect. While we require employees, academic collaborators and consultants to enter into confidentiality agreements, we may not be able to adequately protect our trade secrets or
other proprietary information in the event of any unauthorized use or disclosure or the lawful development by others of such information. If the identity of specific proteins or other elements of our TRAP technology become known, our competitive
advantage in drug discovery could be reduced.

Many of our collaborators and scientific advisors have publication and other rights to
certain information and data gained from their collaborations and research with us. Any publication or other use could limit our ability to secure intellectual property rights or impair any competitive advantage that we may possess or realize by
maintaining the confidentiality of that information or data.

We will depend on collaborative arrangements to complete the development and
commercialization of some of our product candidates. These collaborative arrangements may place the development of our product candidates outside of our control, may require us to relinquish important rights or may otherwise not be on terms
favorable to us.

We expect to enter into collaborative arrangements with third parties for clinical trials, development,
manufacturing, regulatory approvals or commercialization of some of our product candidates, particularly outside North America, or in disease areas requiring larger and longer clinical trials. Dependence on collaborative arrangements will subject us
to a number of risks. We may not be able to control the amount and timing of resources our collaborative partners may devote to the product candidates. Our collaborative partners may experience financial difficulties. Should a collaborative partner
fail to develop or commercialize a compound or product candidate to which it has rights from us, we may not receive any future milestone payments and will not receive any royalties for that compound or product candidate. Business combinations or
significant changes in a collaborative partners business strategy may also adversely affect a partners willingness or ability to complete its obligations under an arrangement. If we fail to enter into additional collaborative agreements
on favorable terms, our business, financial condition and results of operations could be materially adversely affected.

Some of our
collaborations are for early stage programs and allow partners significant discretion in electing whether to pursue any of the planned activities. We do not anticipate significant revenues to result from these relationships until the collaborator
has advanced product candidates into clinical trials, which will not occur for several years, if at all. These arrangements are subject to numerous risks, including the right of the collaboration partner to control the timing of the research and
development efforts, the advancement of lead product candidates to clinical trials and the commercialization of product candidates. In addition, a collaborative partner could independently move forward with a competing lead candidate developed
either independently or in collaboration with others, including our competitors.

If we are unable to enter into or maintain existing contracts with
third parties to manufacture our product candidates or any products that we may develop in sufficient quantities and at an acceptable cost, clinical development of product candidates could be delayed and we may be unable to meet demand for any
products that we may develop and lose potential revenue.

We do not currently operate manufacturing facilities for clinical or
commercial production of our product candidates. We expect to continue to rely on third parties for the manufacture of our product candidates and any products that we may develop. We currently lack the resources and capability to manufacture any of
our product candidates on a clinical scale or any products that we may develop on a commercial scale. As a result, we will be dependent on corporate partners, licensees or other third parties for the manufacturing of clinical and commercial scale
quantities of our product candidates and any products that we may develop. Our product candidates and any products that we may develop may be in competition with other product candidates and



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products for access to these manufacturing facilities. For this and other reasons, our collaborators or third parties may not be able to manufacture our
product candidates and products in a cost effective or timely manner. While we currently possess sufficient inventory of TELCYTA and TELINTRA that are stored in multiple locations and an additional, substantial quantity of the active ingredient in
TELCYTA, if these inventories are lost or damaged, the clinical development of our product candidates or their submission for regulatory approval could be delayed, and our ability to deliver any products that we may develop on a timely basis could
be impaired or precluded.

We are currently dependent on a single source of supply of the active ingredient in TELCYTA, Organichem
Corporation. While we have entered into an agreement with, and are working to qualify, an additional supplier, there is no certainty this will occur. We currently depend upon two sources for the drug product manufacture of TELCYTA.

We currently depend upon two sources of supply for clinical quantities of the active ingredient in TELINTRA. We depend upon a single source of supply for
key excipients used in the manufacture of TELINTRA, Lipoid GmbH. While we are evaluating potential alternative sources of these materials, we have no such alternative sources that are immediately available. We currently depend upon two sources for
the drug product manufacture of TELINTRA.

If manufacturing is not performed in a timely manner, if our suppliers fail to perform or if our
relationships with our suppliers or manufacturers should terminate, our clinical trials and commercialization of TELCYTA and TELINTRA could be delayed. We may not be able to enter into or maintain any necessary third-party manufacturing arrangements
on acceptable terms, if at all. Our current dependence upon others for the manufacture of our product candidates and our anticipated dependence upon others for the manufacture of any products that we may develop may adversely affect our future
profit margins and our ability to commercialize any products that we may develop on a timely and competitive basis.

If we are unable to create sales,
marketing and distribution capabilities or enter into agreements with third parties to perform these functions, we will not be able to commercialize any products that we may develop.

We currently have no sales, marketing or distribution capabilities. In order to commercialize any products that we may develop, we must internally
develop sales, marketing and distribution capabilities or establish collaborations or other arrangements with third parties to perform these services. We intend to market some products that we may develop directly in North America and rely on
relationships with one or more pharmaceutical companies with established distribution systems and direct sales forces to market other products that we may develop and address other markets. We may not be able to establish in-house sales and
distribution capabilities or relationships with third parties. To the extent that we enter into co-promotion or other licensing arrangements, any product revenues are likely to be lower than if we directly marketed and sold any products that we may
develop, and any revenues we receive will depend upon the efforts of third parties, whose efforts may not be successful.

Budget constraints may force
us to delay our efforts to develop certain product candidates in favor of developing others, which may prevent us from commercializing all product candidates as quickly as possible.

Because we have limited resources, and because research and development is an expensive process, we must regularly assess the most efficient allocation
of our research and development budget. As a result, we may have to prioritize development candidates and may not be able to fully realize the value of some of our product candidates in a timely manner, as they will be delayed in reaching the
market, if at all.

If product liability lawsuits are successfully brought against us, we may incur substantial liabilities and may be required to limit
commercialization of our product candidates and any products that we may develop.

The testing and marketing of medical products entail
an inherent risk of product liability. Although we are not aware of any historical or anticipated product liability claims or specific causes for concern, if we cannot successfully defend ourselves against product liability claims, we may incur
substantial liabilities or be



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required to limit commercialization of our product candidates and any products that we may develop. In addition, product liability claims may also result in
withdrawal of clinical trial volunteers, injury to our reputation and decreased demand for any products that we may commercialize. We currently carry product liability insurance that covers our clinical trials up to a $10 million annual aggregate
limit. We will need to increase the amount of coverage if and when we have a product that is commercially available. If we are unable to obtain sufficient product liability insurance at an acceptable cost, potential product liability claims could
prevent or inhibit the commercialization of any products that we may develop, alone or with corporate partners.

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

Our research and development activities involve the controlled
use of potentially harmful biological materials, hazardous materials, chemicals and various radioactive compounds, and are subject to federal, state and local laws and regulations governing the use, storage, handling and disposal of these materials
and specified waste products. We cannot eliminate the risk of accidental contamination or injury from the use, storage, handling or disposal of these materials. We currently have insurance applying to various types of biological and pollution
exposures for a total amount of $350,000 in coverage. However, in the event of contamination or injury, we could be held liable for damages that result from our use of hazardous materials, and any liability could significantly exceed our coverage
and resources.

We have implemented anti-takeover provisions which could discourage or prevent a takeover, even if an acquisition would be beneficial to
our stockholders and may prevent attempts by our stockholders to replace or remove our current management.

Provisions of our amended
and restated certificate of incorporation and bylaws, as well as provisions of Delaware law, could make it more difficult for a third-party to acquire us, even if doing so would be beneficial to our stockholders. In addition, these provisions may
frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors. Because our board of directors is responsible for appointing
the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace current members of our management team. These provisions include:



| |  |  | establishing a classified board of directors requiring that members of the board be elected in different years, which lengthens the time needed to elect a new
majority of the board;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | authorizing the issuance of blank check preferred stock that could be issued by our board of directors to increase the number of outstanding shares or
change the balance of voting control and thwart a takeover attempt;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | prohibiting cumulative voting in the election of directors, which would otherwise allow for less than a majority of stockholders to elect director candidates;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | limiting the ability of stockholders to call special meetings of the stockholders;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | prohibiting stockholder action by written consent and requiring all stockholder actions to be taken at a meeting of our stockholders; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | establishing 90 to 120 day advance notice requirements for nominations for election to the board of directors and for proposing matters that can be acted upon by
stockholders at stockholder meetings.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We adopted a stockholder rights plan that may discourage, delay or prevent a merger or
acquisition that is beneficial to our stockholders.

In November 2001, our board of directors adopted a stockholder rights plan that
may have the effect of discouraging, delaying or preventing a merger or acquisition that is beneficial to our stockholders by diluting the ability of a potential acquiror to acquire us. Pursuant to the terms of our plan, when a person or group,
except under certain circumstances, acquires 20% or more of our outstanding common stock or 10 business days after commencement or announcement of a tender or exchange offer for 20% or more of our outstanding common stock (an Acquiring
Person), the rights (except those rights held by the person or group who has acquired or announced an offer to acquire 20% or more of our outstanding common stock) would generally become exercisable for shares of our common stock at a
discount. In May 2006, we amended the stockholder



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rights plan to exclude Eastbourne Capital Management, L.L.C. and certain related persons and entities, collectively Eastbourne, from the definition of
Acquiring Person so long as neither Eastbourne nor its affiliates or associates, either individually or in the aggregate, becomes the beneficial owner of 25% or more of the common stock then outstanding. On December 11, 2006, the plan was
further amended to increase this threshold to 30% with respect to Eastbourne. Because the potential acquirors rights would not become exercisable for our shares of common stock at a discount, the potential acquiror would suffer substantial
dilution and may lose its ability to acquire us. In addition, the existence of the plan itself may deter a potential acquiror from acquiring us. As a result, either by operation of the plan or by its potential deterrent effect, mergers and
acquisitions of us that our stockholders may consider in their best interests may not occur.

Substantial future sales of our common stock by us or by
our existing stockholders could cause our stock price to fall*.

Additional equity financings or other share issuances by us, including
shares issued in connection with strategic alliances, could adversely affect the market price of our common stock. Sales by existing stockholders of a large number of shares of our common stock in the public market or the perception that additional
sales could occur could cause the market price of our common stock to drop. As of March 31, 2007, 52,459,209 shares of our common stock were outstanding, of which 52,256,586 shares were freely tradable and 193,623 shares were transferable in
accordance with certain volume, notice and manner of sale restrictions under Rule 144 of the Securities Act of 1933.

If we do not progress in our
programs as anticipated, our stock price could decrease.

For planning purposes, we estimate the timing of a variety of clinical,
regulatory and other milestones, such as when a certain product candidate will enter clinical development, when a clinical trial will be completed or when an application for regulatory approval will be filed. Some of our estimates are included in
this Annual Report on Form 10-K. Our estimates are based on present facts and a variety of assumptions. Many of the underlying assumptions are outside of our control. If milestones are not achieved when we estimated that they would be, investors
could be disappointed, and our stock price may decrease.

Our stock price may be volatile, you may not be able to resell your shares at or above your
purchase price, and we may be subject to securities class action lawsuits*.

Our stock prices and the market prices for securities of
biotechnology companies in general have been highly volatile, with recent significant price and volume fluctuations, and may continue to be highly volatile in the future. For example, our announcement that the preliminary top-line results of our
first three Phase 3 trials did not meet primary end-points caused our stock price to drop by 71% in one day. During the three months ended March 31, 2007, our common stock traded between $4.38 and $6.84. You may not be able to sell your shares
quickly or at the market price if trading in our stock is not active or the volume is low. In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. Because of
the drop in our stock price, we may be the target of similar litigation. Securities litigation could result in substantial costs and divert managements attention and resources, and could seriously harm our business. The following factors, in
addition to other risk factors described in this section, may have a significant impact on the market price of our common stock, some of which are beyond our control:



| |  |  | developments regarding, or the results of, our clinical trials;
| | - |  | ---------------------------------------------------------------



| |  |  | announcements of technological innovations or new commercial products by our competitors or us;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | developments concerning proprietary rights, including patents;
| | - |  | --------------------------------------------------------------



| |  |  | developments concerning our collaborations; publicity regarding actual or potential medical results relating to products under development by our competitors or us;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | regulatory developments in the United States and foreign countries;
| | - |  | -------------------------------------------------------------------



| |  |  | litigation;
| | - |  | -----------



| |  |  | economic and other external factors or other disaster or crisis; or
| | - |  | -------------------------------------------------------------------



| |  |  | period-to-period fluctuations in our financial results.
| | - |  | -------------------------------------------------------



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We are required to recognize expense for stock based compensation related to employee stock options and employee stock
purchases and there is no assurance that the expense we are required to recognize measures accurately the value of our share-based payment awards, and the recognition of this expense could cause the trading price of our common stock to decline.

On January 1, 2006, we adopted SFAS 123(R) which requires the measurement and recognition of compensation expense for all
stock-based compensation based on estimated fair values. As a result, our operating results will contain a charge for stock-based compensation related to employee stock options and employee stock purchases. The application of SFAS 123(R) requires
the use of an option-pricing model to determine the fair value of share-based payment awards. This determination of fair value is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These
variables include, but are not limited to, our expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. Option-pricing models were developed for use in estimating the value of
traded options that have no vesting or hedging restrictions and are fully transferable. Because our employee stock options have certain characteristics that are significantly different from traded options, and because changes in the subjective
assumptions can materially affect the estimated value, in managements opinion the existing valuation models may not provide an accurate measure of the fair value of our employee stock options. Although the fair value of employee stock options
is determined in accordance with SFAS 123(R) and SAB 107 using an option-pricing model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.

Our adoption of SFAS 123(R) has had a material impact on our financial statements and results of operations and we expect that this will continue to be
the case for future periods. We cannot predict the effect that this adverse impact on our reported operating results will have on the trading price of our common stock.



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|Ite
m 6. | Exhibits.
|-------- | ---------



|     |  |                                                                                                                                                                                                                      
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1  |  | Amended and Restated Certificate of Incorporation. (1)                                                                                                                                                               
|     | 
|3.2  |  | Amended and Restated Bylaws. (1)                                                                                                                                                                                     
|     | 
|4.1  |  | Specimen Stock Certificate. (1)                                                                                                                                                                                      
|     | 
|4.2  |  | Amended and Restated Registration Rights Agreement, dated March 31, 2000, between Telik and holders of Teliks Series B, Series E, Series F, Series G, Series H, Series I, Series J and
Series K preferred stock. (1)
|     | 
|4.3  |  | Rights Agreement dated November 2, 2001, by and between Telik and Wells Fargo Bank Minnesota, N.A., replaced by EquiServe Trust Company, N.A., as Rights Agent (the Rights Agreement).
(2)                         
|     | 
|4.4  |  | Amendment, dated as of May 18, 2006, to Rights Agreement. (3)                                                                                                                                                        
|     | 
|4.5  |  | Teliks Certificate of Designation of Series A Junior Participating Preferred Stock. (2)                                                                                                                             
|     | 
|31.1 |  | Certification required by Rule 13a-14(a) or Rule 15d-14(a).                                                                                                                                                          
|     | 
|31.2 |  | Certification required by Rule 13a-14(a) or Rule 15d-14(a).                                                                                                                                                          
|     | 
|32.1 |  | Certifications required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).                                                                   

---

|(1) | Incorporated by reference to exhibits to our Registration Statement on Form S-1 filed on April 4, 2000, as amended (File No. 333-33868).
|--- | ----------------------------------------------------------------------------------------------------------------------------------------

|(2) | Incorporated by reference to exhibits to our Current Report on Form 8-K dated November 2, 2001, as filed on November 5, 2001 (File No. 000-31265).
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Incorporated by reference to exhibits on our Current Report on Form 8-K, dated and filed on May 18, 2006 (File No. 000-31265).
|--- | ------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.



TELIK, INC./s/ CYNTHIA M. BUTITTACynthia M. ButittaChief Operating Officer and Chief Financial Officer(Duly Authorized Officer and Principal Financial Officer)


Date: May 3, 2007



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##### Table of Contents

EXHIBIT INDEX



|     |  |                                                                                                                                                                                                                      
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1  |  | Amended and Restated Certificate of Incorporation. (1)                                                                                                                                                               
|     | 
|3.2  |  | Amended and Restated Bylaws. (1)                                                                                                                                                                                     
|     | 
|4.1  |  | Specimen Stock Certificate. (1)                                                                                                                                                                                      
|     | 
|4.2  |  | Amended and Restated Registration Rights Agreement, dated March 31, 2000, between Telik and holders of Teliks Series B, Series E, Series F, Series G, Series H, Series I, Series J and
Series K preferred stock. (1)
|     | 
|4.3  |  | Rights Agreement dated November 2, 2001, by and between Telik and Wells Fargo Bank Minnesota, N.A., replaced by EquiServe Trust Company, N.A., as Rights Agent (the Rights Agreement).
(2)                         
|     | 
|4.4  |  | Amendment, dated as of May 18, 2006, to Rights Agreement. (3)                                                                                                                                                        
|     | 
|4.5  |  | Teliks Certificate of Designation of Series A Junior Participating Preferred Stock. (2)                                                                                                                             
|     | 
|31.1 |  | Certification required by Rule 13a-14(a) or Rule 15d-14(a).                                                                                                                                                          
|     | 
|31.2 |  | Certification required by Rule 13a-14(a) or Rule 15d-14(a).                                                                                                                                                          
|     | 
|32.1 |  | Certifications required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).                                                                   

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|(1) | Incorporated by reference to exhibits to our Registration Statement on Form S-1 filed on April 4, 2000, as amended (File No. 333-33868).
|--- | ----------------------------------------------------------------------------------------------------------------------------------------

|(2) | Incorporated by reference to exhibits to our Current Report on Form 8-K dated November 2, 2001, as filed on November 5, 2001 (File No. 000-31265).
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Incorporated by reference to exhibits on our Current Report on Form 8-K, dated and filed on May 18, 2006 (File No. 000-31265).
|--- | ------------------------------------------------------------------------------------------------------------------------------



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