##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549





FORM 10-Q







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

FOR THE QUARTERLY PERIOD ENDED September 30, 2009

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





TELIK, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|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 has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).    Yes   ̈    No   ̈

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



|                        |  |                                                  |  |                           |  |  
|----------------------- |  | ------------------------------------------------ |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈                                                |  | Accelerated filer         |  |  ̈
|                        |  |                                                  | 
|Non-accelerated filer   |  |  ̈  (Do not check if a smaller reporting company) |  | Smaller reporting company |  | x

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

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 October 30, 2009: 53,430,083 shares









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TELIK, INC.

INDEX



|                              |  |                                                                                                    |  |     
|----------------------------- |  | -------------------------------------------------------------------------------------------------- |  | ----
|                              |  |                                                                                                    |  | Page
|PART I. FINANCIAL INFORMATION |  |                                                                                                   
|                              |  |                                                                                                   
|Item 1:                       |  | Financial Statements (Unaudited)                                                                   |  |     
|                              |  |                                                                                                   
|                              |  | Condensed Balance Sheets at September 30, 2009 and December 31, 2008                               |  | 3   
|                              |  |                                                                                                   
|                              |  | Condensed Statements of Operations for the three and nine months ended September 30, 2009 and 2008 |  | 4   
|                              |  |                                                                                                   
|                              |  | Condensed Statements of Cash Flows for the nine months ended September 30, 2009 and 2008           |  | 5   
|                              |  |                                                                                                   
|                              |  | Notes to Condensed Financial Statements                                                            |  | 6   
|                              |  |                                                                                                   
|Item 2:                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations              |  | 15  
|                              |  |                                                                                                   
|Item 3:                       |  | Quantitative and Qualitative Disclosures About Market Risk                                         |  | 24  
|                              |  |                                                                                                   
|Item 4:                       |  | Controls and Procedures                                                                            |  | 25  
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                                   
|                              |  |                                                                                                   
|Item 1A:                      |  | Risk Factors                                                                                       |  | 26  
|                              |  |                                                                                                   
|Item 6:                       |  | Exhibits                                                                                           |  | 38  
|                              | 
|SIGNATURES                    |  | 39                                                                                                



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PART I. FINANCIAL INFORMATION



|Item 1. | Financial Statements (Unaudited)
|------- | --------------------------------

TELIK, INC.

CONDENSED BALANCE SHEETS

(In thousands)



|                                                    |  |                   |          |   |                  |   |          |  
|--------------------------------------------------- |  | ----------------- | -------- | - | ---------------- | - | -------- | -
|                                                    |  | September 30,2009 |          |   | December 31,2008 |  
|                                                    |  | (Unaudited)       |          |   | (Note 1)         |  
|Assets                                              |  |                   |          |   |                  |   |          |  
|Current assets:                                     |  |                   |          |   |                  |   |          |  
|Cash and cash equivalents                           |  | $                 | 7,017    |   |                  | $ | 50,562   |  
|Short-term investments                              |  |                   | 37,509   |   |                  |   | 1,999    |  
|Interest and other receivables                      |  |                   | 274      |   |                  |   | 38       |  
|Prepaids and other current assets                   |  |                   | 4,280    |   |                  |   | 909      |  
|                                                    |  |                   |          |   |                  |   |          |  
|Total current assets                                |  |                   | 49,080   |   |                  |   | 53,508   |  
|                                                    |  |                  
|Property and equipment, net                         |  |                   | 1,571    |   |                  |   | 2,288    |  
|Long-term investments                               |  |                   |         |   |                  |   | 10,010   |  
|Restricted investments                              |  |                   | 674      |   |                  |   | 898      |  
|Other assets                                        |  |                   |         |   |                  |   | 8,709    |  
|                                                    |  |                   |          |   |                  |   |          |  
|Total assets                                        |  | $                 | 51,325   |   |                  | $ | 75,413   |  
|                                                    |  |                   |          |   |                  |   |          |  
|                                                    |  |                  
|Liabilities and Stockholders Equity                |  |                   |          |   |                  |   |          |  
|Current liabilities:                                |  |                   |          |   |                  |   |          |  
|Accounts payable                                    |  | $                 | 630      |   |                  | $ | 1,581    |  
|Accrued clinical trial costs                        |  |                   | 519      |   |                  |   | 1,822    |  
|Accrued compensation                                |  |                   | 1,236    |   |                  |   | 684      |  
|Accrued liabilities                                 |  |                   | 764      |   |                  |   | 643      |  
|Notes payable                                       |  |                   | 3,100    |   |                  |   |         |  
|                                                    |  |                   |          |   |                  |   |          |  
|Total current liabilities                           |  |                   | 6,249    |   |                  |   | 4,730    |  
|                                                    |  |                  
|Long-term debt                                      |  |                   |         |   |                  |   | 8,000    |  
|                                                    |  |                  
|Long-term deferred rent                             |  |                   | 359      |   |                  |   | 311      |  
|                                                    |  |                  
|Commitments and contingencies Stockholders equity: |  |                   |          |   |                  |   |          |  
|Common stock                                        |  |                   | 534      |   |                  |   | 533      |  
|Additional paid-in capital                          |  |                   | 543,555  |   |                  |   | 541,710  |  
|Accumulated other comprehensive gain                |  |                   | 13       |   |                  |   | 21       |  
|Accumulated deficit                                 |  |                   | (499,385 | ) |                  |   | (479,892 | )
|                                                    |  |                   |          |   |                  |   |          |  
|Total stockholders equity                          |  |                   | 44,717   |   |                  |   | 62,372   |  
|                                                    |  |                   |          |   |                  |   |          |  
|Total liabilities and stockholders equity          |  | $                 | 51,325   |   |                  | $ | 75,413   |  
|                                                    |  |                   |          |   |                  |   |          |  

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 EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                                              |  | 2009                            |        |   | 2008                           |   |        | 2009 |  |   | 2008    |  
|Operating costs and expenses:                                 |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Research and development                                      |  | $                               | 3,416  |   |                                | $ | 4,820  |      |  | $ | 10,428  |   |  | $ | 21,251  |  
|General and administrative                                    |  |                                 | 2,759  |   |                                |   | 2,822  |      |  |   | 8,845   |   |  |   | 8,008   |  
|Restructuring costs                                           |  |                                 |       |   |                                |   | 199    |      |  |   | 951     |   |  |   | 199     |  
|                                                              |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total operating costs and expenses                            |  |                                 | 6,175  |   |                                |   | 7,841  |      |  |   | 20,224  |   |  |   | 29,458  |  
|                                                              |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Loss from operations                                          |  |                                 | (6,175 | ) |                                |   | (7,841 | )    |  |   | (20,224 | ) |  |   | (29,458 | )
|                                                              |  |                                 |        |  
|Interest and other income (expense), net                      |  |                                 | 80     |   |                                |   | (168   | )    |  |   | 803     |   |  |   | (1,928  | )
|Interest expense                                              |  |                                 | (12    | ) |                                |   |       |      |  |   | (72     | ) |  |   |        |  
|                                                              |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Net loss                                                      |  | $                               | (6,107 | ) |                                | $ | (8,009 | )    |  | $ | (19,493 | ) |  | $ | (31,386 | )
|                                                              |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Basic and diluted net loss per share                          |  | $                               | (0.11  | ) |                                | $ | (0.15  | )    |  | $ | (0.37   | ) |  | $ | (0.59   | )
|                                                              |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Shares used to calculate basic and diluted net loss per share |  |                                 | 53,381 |   |                                |   | 53,241 |      |  |   | 53,351  |   |  |   | 53,139  |  
|                                                              |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  

See accompanying Notes to Condensed Financial Statements.



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TELIK, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                            |  |                                |         |   |      |   |         |  
|--------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                                                            |  | Nine Months EndedSeptember 30, |        
|                                                                            |  | 2009                           |         |   | 2008 |  
|Cash flows from operating activities:                                       |  |                                |         |   |      |   |         |  
|Net loss                                                                    |  | $                              | (19,493 | ) |      | $ | (31,386 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                                |         |   |      |   |         |  
|Depreciation and amortization                                               |  |                                | 420     |   |      |   | 823     |  
|Gain on disposal of property and equipment                                  |  |                                | (344    | ) |      |   |        |  
|Stock-based compensation expense                                            |  |                                | 1,799   |   |      |   | 4,895   |  
|Change in fair value of marketable securities                               |  |                                | (5,237  | ) |      |   | 3,877   |  
|Change in fair value of rights to sell ARS to UBS                           |  |                                | 5,196   |   |      |   |        |  
|Changes in assets and liabilities:                                          |  |                                |         |   |      |   |         |  
|Other receivables                                                           |  |                                | (236    | ) |      |   | 438     |  
|Prepaids and other current assets                                           |  |                                | (3,371  | ) |      |   | 417     |  
|Other assets                                                                |  |                                | 3,513   |   |      |   |        |  
|Accounts payable                                                            |  |                                | (951    | ) |      |   | 1,428   |  
|Accrued liabilities                                                         |  |                                | (582    | ) |      |   | (4,086  | )
|                                                                            |  |                                |         |   |      |   |         |  
|Net cash used in operating activities                                       |  |                                | (19,286 | ) |      |   | (23,594 | )
|                                                                            |  |                                |         |   |      |   |         |  
|                                                                            |  |                               
|Cash flows from investing activities:                                       |  |                                |         |   |      |   |         |  
|Purchases of investments                                                    |  |                                | (33,171 | ) |      |   | (13,685 | )
|Sales of investments                                                        |  |                                | 224     |   |      |   | 15,527  |  
|Maturities of investments                                                   |  |                                | 8,000   |   |      |   | 15,500  |  
|Purchases of property and equipment                                         |  |                                |        |   |      |   | (50     | )
|Proceeds from sale of property and equipment                                |  |                                | 641     |   |      |   |        |  
|                                                                            |  |                                |         |   |      |   |         |  
|Net cash provided by (used in) investing activities                         |  |                                | (24,306 | ) |      |   | 17,292  |  
|                                                                            |  |                                |         |   |      |   |         |  
|                                                                            |  |                               
|Cash flows from financing activities:                                       |  |                                |         |   |      |   |         |  
|Proceeds from issuance of common stock                                      |  |                                | 47      |   |      |   | 549     |  
|                                                                            |  |                                |         |   |      |   |         |  
|Net cash provided by financing activities                                   |  |                                | 47      |   |      |   | 549     |  
|                                                                            |  |                                |         |   |      |   |         |  
|Net decrease in cash and cash equivalents                                   |  |                                | (43,545 | ) |      |   | (5,753  | )
|Cash and cash equivalents at beginning of period                            |  |                                | 50,562  |   |      |   | 41,646  |  
|                                                                            |  |                                |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                  |  | $                              | 7,017   |   |      | $ | 35,893  |  
|                                                                            |  |                                |         |   |      |   |         |  
|                                                                            |  |                               
|Supplementary information:                                                  |  |                                |         |   |      |   |         |  
|                                                                            |  |                               
|Interest paid                                                               |  | $                              | 72      |   |      | $ |        |  

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 Securities Exchange Act of 1934, or 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 and
nine months ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009 or any other future period. The condensed balance sheet at December 31, 2008 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, 2008, which are included in our
Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 2, 2009. Furthermore, we evaluated subsequent events after the balance sheet date of September 30, 2009 through November 13, 2009, the date we
issued our Condensed Financial Statements. All appropriate subsequent event disclosures, if any, have been made in notes to our Condensed Financial Statements.

Need for Additional Capital

We have incurred net losses since
inception and we expect to incur substantial and increasing losses for at least the next several years as we continue our research and development activities. To date, we have funded operations primarily through the sale of equity securities,
non-equity payments from collaborators and interest income. Future revenue, if any, for at least the next few years is expected to consist primarily of payments under corporate collaborations and interest income. The process of developing our
products will require significant additional research and development, preclinical testing and clinical trials, as well as regulatory approval. We expect these activities, together with general and administrative expenses, to result in substantial
operating losses for the foreseeable future. We will not receive product revenue unless we or our collaborative partners complete clinical trials, obtain regulatory approval and successfully commercialize one or more of our products.

We expect continuing losses over the next several years. We plan to obtain capital through public or private equity or debt financing,
capital lease financing and collaborative arrangements with corporate partners. We may have to seek other sources of capital or re-evaluate our operating plans if we are unable to consummate some or all of the capital financing arrangements noted
above.

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, Short-Term and Long-Term Investments

We invest our excess cash in money market funds, 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 three months and
remaining maturities less than one year are classified as short-term investments and all our auction rate securities including perpetual rate securities are classified as short-term investments based on our intention to sell these securities in less
than one year. Debt securities with remaining maturities greater than one year and which we intend to hold until maturity are classified as long-term investments.



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TELIK, INC.

Notes to Condensed Financial Statements(Continued)

(Unaudited)



Due to the unprecedented events in the Auction Rate Securities, or ARS, market and our
November 2008 ARS rights agreement with UBS AG and with its affiliates, or UBS, we elected a one-time transfer of our ARS investments from the classification of available-for-sale to trading securities under Accounting Standards Codification, or
ASC, 320, Investments-Debt and Equity Securities. See Note 7 for further explanation. Trading securities are carried at estimated fair value, with unrealized gains and losses resulting from changes in fair value reported in
earnings. We classify all cash equivalents and non-ARS 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). 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.

Marketable security investments are evaluated periodically for impairment. We take into account general market conditions, changes in
economic environment as well as specific investment attributes, such as credit downgrade or illiquidity for each investment, to estimate the fair value of our investments and to determine whether impairment is other than temporary. If it is
determined that a decline of any investment is other than temporary, then the unrealized loss related to credit risk would be included in interest and other income (expense), net.

Fair Value of Financial Instruments

Effective January 1, 2009, we adopted ASC 820, Fair Value Measurements and Disclosure, a newly issued accounting standard for fair value measurements of all nonfinancial assets and
nonfinancial liabilities not recognized or disclosed at fair value in the financial statements on a recurring basis. ASC 820 also clarifies the application of the standard in a market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the market for that financial asset is not active. ASC 820 is applicable to the valuation of auction rate securities held by us for which there was no active market as of
September 30, 2009 and is effective upon issuance, including prior periods for which financial statements have not been issued. See Note 5, Fair Value Measurements on a Recurring Basis in the Notes to Condensed Financial Statements
for additional disclosures.

During the quarter ended June 30, 2009, we adopted three accounting standard updates on fair
value measurements and impairments of securities. These updates are intended to provide additional application guidance and enhanced disclosures. These three accounting standard updates are: (i) ASC 820-10-65, which provides guidance for
determining fair value when the volume and level of activity for the asset or liability have significantly decreased and identifying transactions that are not orderly, (ii) ASC 320-10-65, which replaces the current requirement that a holder
should have the positive intent and ability to hold an impaired security to recovery in order to conclude an impairment was temporary with a requirement that an entity should conclude it does not intend to sell an impaired security and it will not
be required to sell the security before the recovery of its amortized cost basis, and (iii) ASC 825-10-65, which requires disclosures about fair value of financial instruments in interim as well as in annual financial statements. These updates
were effective for fiscal years and interim periods ended after June 15, 2009. The adoption of these accounting updates did not have any impact on our Condensed Financial Statements.

New Accounting Pronouncements

In May 2009, the FASB issued ASC 855, Subsequent Events, which establishes general standards of accounting for, and disclosure of, events that occur after the balance sheet date but
before financial statements are issued or are available to be issued. This Topic applies prospectively to both interim and annual financial periods ending after June 15, 2009. Our adoption of ASC 855 in the quarter ended June 30, 2009 did
not have a significant impact on our Condensed Financial Statements. In connection with preparation of our Condensed Financial Statements, we evaluated subsequent events after the balance sheet date of September 30, 2009 through
November 13, 2009.

In June 2009, the FASB issued ASC 105, Generally Accepted Accounting Principles,
which establishes the FASB Accounting Standards Codification, or Codification, as the source of authoritative accounting principles and the framework for selecting the principles used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with the



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TELIK, INC.

Notes to Condensed Financial Statements(Continued)

(Unaudited)



GAAP. Except for certain nonpublic nongovernmental entities, ASC 105 is generally effective for interim and annual periods ending after September 15, 2009. We began using the new guidelines
and numbering system prescribed by the Codification when referring to GAAP in the third quarter of 2009. As the Codification was not intended to change or alter existing GAAP, it did not have any impact on our financial statements.

In August 2009, the FASB issued Accounting Standards Update No. 2009-05, Measuring Liabilities at Fair Value, or ASU
2009-05. ASU 2009-05 amends ASC 820, Fair Value Measurements and Disclosures.Specifically, ASU 2009-05 provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not
available, a reporting entity is required to measure fair value using one or more of the following methods: 1) a valuation technique that uses a) the quoted price of the identical liability when traded as an asset or b) quoted prices
for similar liabilities or similar liabilities when traded as assets and/or 2) a valuation technique that is consistent with the principles of ASC 820. ASU 2009-05 also clarifies that when estimating the fair value of a liability, a reporting
entity is not required to adjust to include inputs relating to the existence of transfer restrictions on that liability. This standard is effective beginning fourth quarter of 2009 for us. The adoption of this standard update is not expected to
impact our financial statements.

2. Employee Stock-Based Compensation

Stock based compensation

Total estimated stock-based compensation expense, related to all of our share-based payment awards recognized under ASC 718, CompensationStock Compensationcomprised of the
following:



|                                                      |  |                                         |       |   |                                |   |       |      |  |   |       |   |  |   |       |  
|----------------------------------------------------- |  | --------------------------------------- | ----- | - | ------------------------------ | - | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                                                      |  | Three Months EndedSeptember 30,         |       |   | Nine Months EndedSeptember 30, |  
|                                                      |  | 2009                                    |       |   | 2008                           |   |       | 2009 |  |   | 2008  |  
|                                                      |  | (in thousands except per share amounts) |      
|Research and development                              |  | $                                       | 134   |   |                                | $ | 890   |      |  | $ | 425   |   |  | $ | 3,371 |  
|General and administrative                            |  |                                         | 388   |   |                                |   | 661   |      |  |   | 1,374 |   |  |   | 1,524 |  
|                                                      |  |                                         |       |   |                                |   |       |      |  |   |       |   |  |   |       |  
|Stock-based compensation expense before taxes         |  |                                         | 522   |   |                                |   | 1,551 |      |  |   | 1,799 |   |  |   | 4,895 |  
|                                                      |  |                                         |       |   |                                |   |       |      |  |   |       |   |  |   |       |  
|Effect on net loss                                    |  | $                                       | 522   |   |                                | $ | 1,551 |      |  | $ | 1,799 |   |  | $ | 4,895 |  
|                                                      |  |                                         |       |   |                                |   |       |      |  |   |       |   |  |   |       |  
|Effect on net loss per basic and diluted common share |  | $                                       | (0.01 | ) |                                | $ | (0.03 | )    |  | $ | (0.03 | ) |  | $ | (0.09 | )
|                                                      |  |                                         |       |   |                                |   |       |      |  |   |       |   |  |   |       |  

Because we had a net operating loss carryforward as of September 30, 2009, no
tax benefits for the tax deductions related to stock-based compensation expense were recognized in our condensed statements of operations. Additionally, no incremental tax benefits were recognized from stock options exercised in the nine months
ended September 30, 2009 and 2008, 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 September 30, 2009,
$2.2 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 1.62 years.

Valuation Assumptions

The employee stock-based expense recognized under ASC 718 was determined using a Black-Scholes-Merton option valuation model, or the Black-Scholes model. Our expected stock-price volatility assumption for
the period from January 1, 2007 to June 30, 2008, was based on a blended rate of 50% historical volatility and 50% implied volatility since we had sufficient market activity with respect to our traded options during such period. For the
period from July 1, 2008 to September 30, 2009, the expected volatility was based solely on historical volatility as there was insufficient traded option activity resulting from our declining stock price. The



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TELIK, INC.

Notes to Condensed Financial Statements(Continued)

(Unaudited)



expected term of options granted is based on the simplified method in accordance with Staff Accounting Bulletin, or SAB, Topic 14.D.2, as our historical share option exercise experience does not
provide a reasonable basis for estimation. SAB Topic 14.D.2 was effective on January 1, 2008 and provided guidance to issuers on the method allowed in developing estimates of expected term of plain vanilla share options in
accordance with ASC 718. SAB Topic 14.D.2 allows companies to continue to use the simplified method, under certain circumstances, beyond December 31, 2007. 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 EndedSeptember 30, |   |  | Three Months EndedSeptember 30, |  
|                                          |  | 2009                            |   |  | 2008                            |   |  | 2009  |   |  | 2008 |  
|Weighted average expected volatility      |  | 97.2                            | % |  | 76.2                            | % |  | 141.3 | % |  | 91.3 | %
|Weighted average risk-free interest rate  |  | 2.80                            | % |  | 3.28                            | % |  | 0.48  | % |  | 2.19 | %
|Weighted average expected life (in years) |  | 6.08                            |   |  | 6.08                            |   |  | 0.99  |   |  | 1.25 |  
|Weighted average dividend yield           |  |                                |   |  |                                |   |  |      |   |  |     |  
|                                          |  |                                
|                                          |  | Stock Option Plans              |   |  | Stock Purchase Plan             |  
|                                          |  | Nine Months EndedSeptember
30,  |   |  | Nine Months EndedSeptember
30,  |  
|                                          |  | 2009                            |   |  | 2008                            |   |  | 2009  |   |  | 2008 |  
|Weighted average expected volatility      |  | 96.4                            | % |  | 76.7                            | % |  | 141.1 | % |  | 90.8 | %
|Weighted average risk-free interest rate  |  | 2.64                            | % |  | 3.01                            | % |  | 0.66  | % |  | 2.14 | %
|Weighted average expected life (in years) |  | 6.08                            |   |  | 6.08                            |   |  | 1.20  |   |  | 1.25 |  
|Weighted average dividend yield           |  |                                |   |  |                                |   |  |      |   |  |     |  

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 EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                                    |  | 2009                            |        |   | 2008                           |   |        | 2009 |  |   | 2008    |  
|                                                    |  | (in thousands)                  |       
|Net loss                                            |  | $                               | (6,107 | ) |                                | $ | (8,009 | )    |  | $ | (19,493 | ) |  | $ | (31,386 | )
|Changes in unrealized gains (losses) on investments |  |                                 |       |   |                                |   | (178   | )    |  |   | (8      | ) |  |   | (1,630  | )
|                                                    |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Comprehensive loss                                  |  | $                               | (6,107 | ) |                                | $ | (8,187 | )    |  | $ | (19,501 | ) |  | $ | (33,016 | )
|                                                    |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  

4. Basic and Diluted Net Loss per Share

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

Outstanding options to purchase 8,479,063 and 10,488,017 shares of our common stock for the three months ended
September 30, 2009 and 2008; and 9,253,976 and 10,300,355 shares of our common stock for the nine months ended September 30, 2009 and 2008 were excluded from the diluted net loss per common share calculations because inclusion of such
options was anti-dilutive.



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##### Table of Contents

TELIK, INC.

Notes to Condensed Financial Statements(Continued)

(Unaudited)



5. Fair Value Measurements on a Recurring Basis

We measure certain financial assets at fair value on a recurring basis, including cash equivalents, available-for-sale securities, trading
securities and put options. The fair value of these financial assets was determined based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the
following:

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or
liabilities.

The following table presents information about our financial assets that are measured at fair value on a
recurring basis as of September 30, 2009 and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value:



|                               |  |                   |        |                                                             |   |                                             |  |                                         |        |  |   |       
|------------------------------ |  | ----------------- | ------ | ----------------------------------------------------------- | - | ------------------------------------------- |  | --------------------------------------- | ------ |  | - | ------
|                               |  |                   |        | Fair Value Measurement at September 30, 2009 Using         
|                               |  | September 30,2009 |        | Quoted Prices inActive Marketsfor IdenticalAssets (Level 1) |   | Significant OtherObservableInputs (Level 2) |  | SignificantUnobservableInputs (Level 3)
|                               |  | (in thousands)   
|Available-for-sale securities: |  |                   |       
|Money market funds             |  | $                 | 6,461  |                                                             | $ | 6,461                                       |  | $                                       |       |  | $ |      
|US Treasury bills              |  |                   | 6,000  |                                                             |   |                                            |  |                                         | 6,000  |  |   |      
|US Treasury notes              |  |                   | 21,162 |                                                             |   |                                            |  |                                         | 21,162 |  |   |      
|Trading securities:            |  |                   |        |                                                             |   |                                             |  |                                         |        |  |   |       
|Auction preferred stock        |  |                   | 1,600  |                                                             |   |                                            |  |                                         |       |  |   | 1,600 
|Auction rate certificates      |  |                   | 8,747  |                                                             |   |                                            |  |                                         |       |  |   | 8,747 
|                               |  |                   |        |                                                            
|Other current assets:          |  |                   |        |                                                             |   |                                             |  |                                         |        |  |   |       
|Put option                     |  |                   | 3,453  |                                                             |   |                                            |  |                                         |       |  |   | 3,453 
|                               |  |                   |        |                                                             |   |                                             |  |                                         |        |  |   |       
|Total                          |  | $                 | 47,423 |                                                             | $ | 6,461                                       |  | $                                       | 27,162 |  | $ | 13,800
|                               |  |                   |        |                                                             |   |                                             |  |                                         |        |  |   |       

The following table presents information about our financial assets that are measured
at fair value on a recurring basis as of December 31, 2008, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value:



|                               |  |                  |        |                                                             |   |                                             |  |                                         |       |  |   |       
|------------------------------ |  | ---------------- | ------ | ----------------------------------------------------------- | - | ------------------------------------------- |  | --------------------------------------- | ----- |  | - | ------
|                               |  |                  |        | Fair Value Measurement at December 31, 2008 Using          
|                               |  | December 31,2008 |        | Quoted Prices inActive Marketsfor IdenticalAssets (Level 1) |   | Significant OtherObservableInputs (Level 2) |  | SignificantUnobservableInputs (Level 3)
|                               |  | (in thousands)  
|Available-for-sale securities: |  |                  |       
|Money market funds             |  | $                | 49,536 |                                                             | $ | 49,536                                      |  | $                                       |      |  | $ |      
|US Treasury bills              |  |                  | 1,999  |                                                             |   |                                            |  |                                         | 1,999 |  |   |      
|Trading securities:            |  |                  |        |                                                             |   |                                             |  |                                         |       |  |   |       
|Auction preferred stock        |  |                  | 3,070  |                                                             |   |                                            |  |                                         |      |  |   | 3,070 
|Auction rate certificates      |  |                  | 6,940  |                                                             |   |                                            |  |                                         |      |  |   | 6,940 
|                               |  |                  |        |                                                            
|Other assets:                  |  |                  |        |                                                             |   |                                             |  |                                         |       |  |   |       
|Put option                     |  |                  | 8,649  |                                                             |   |                                            |  |                                         |      |  |   | 8,649 
|                               |  |                  |        |                                                             |   |                                             |  |                                         |       |  |   |       
|Total                          |  | $                | 70,194 |                                                             | $ | 49,536                                      |  | $                                       | 1,999 |  | $ | 18,659
|                               |  |                  |        |                                                             |   |                                             |  |                                         |       |  |   |       



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TELIK, INC.

Notes to Condensed Financial Statements(Continued)

(Unaudited)



The following is a reconciliation of our financial assets measured at fair value on a
recurring basis using significant unobservable inputs (Level 3):



|                                            |  |                                                                        |        |   |                        |   |        |       |  |   |        |  
|------------------------------------------- |  | ---------------------------------------------------------------------- | ------ | - | ---------------------- | - | ------ | ----- |  | - | ------ | -
|                                            |  | Fair Value Measurements Using Significant Unobservable Inputs(Level 3) |       
|                                            |  | Put Option                                                             |        |   | Auction RateSecurities |   |        | Total | 
|                                            |  | (in thousands)                                                         |       
|Balance at December 31, 2008                |  | $                                                                      | 8,649  |   |                        | $ | 10,010 |       |  | $ | 18,659 |  
|Impairment gain (loss) included in net loss |  |                                                                        | (1,283 | ) |                        |   | 1,159  |       |  |   | (124   | )
|                                            |  |                                                                        |        |   |                        |   |        |       |  |   |        |  
|Balance at March 31, 2009                   |  | $                                                                      | 7,366  |   |                        | $ | 11,169 |       |  | $ | 18,535 |  
|Impairment gain included in net loss        |  |                                                                        | 53     |   |                        |   | 112    |       |  |   | 165    |  
|Sales                                       |  |                                                                        | (3,920 | ) |                        |   | (980   | )     |  |   | (4,900 | )
|                                            |  |                                                                        |        |   |                        |   |        |       |  |   |        |  
|Balance at June 30, 2009                    |  |                                                                        | 3,499  |   |                        |   | 10,301 |       |  |   | 13,800 |  
|Impairment gain (loss) included in net loss |  |                                                                        | (46    | ) |                        |   | 46     |       |  |   |       |  
|                                            |  |                                                                        |        |   |                        |   |        |       |  |   |        |  
|Balance at September 30, 2009               |  | $                                                                      | 3,453  |   |                        | $ | 10,347 |       |  | $ | 13,800 |  
|                                            |  |                                                                        |        |   |                        |   |        |       |  |   |        |  

On June 10, 2009, UBS repurchased $4.9 million of our ARS from the original
balance of $18.7 million. At September 30, 2009, our ARS had an aggregate fair value of $10.3 million and par value of $13.8 million. The ARS investments, purchased through our investment account with UBS at par value, have an auction reset
feature. Historically, the fair value of ARS investments approximated par value due to the frequent resets through the auction process. Beginning in late 2007, our securities invested in ARS failed to settle in scheduled auctions due to liquidity
crises. An auction failure means that the parties wishing to sell securities could not make the sale, but does not result in the securities going into default because the issuer continues to pay interest. The interest rates may be reset to
predetermined penalty or maximum rates based on mathematical formulas in accordance with each securitys prospectus. While we continue to earn interest on our ARS investments at the contractual rate, these investments
are not currently trading and therefore do not have a readily determinable market value. Accordingly, the estimated fair value of the ARS no longer approximates par value.

At September 30, 2009, we estimated the fair value of our ARS after consideration of several factors, including input provided by UBS.
Valuation techniques involved the use of a discounted cash flow approach. Although these securities would typically be measured using Level 2 inputs, the failure of auctions and the lack of market activity required that these securities be measured
using Level 3 inputs. The assumptions used in preparing the discounted cash flow model to determine the fair value of our auction preferred stock take into account factors such as interest rates, credit quality, likelihood of redemption, duration
and credit default swap data points for monoline insurers. The underlying assets of our auction rate certificates are primarily comprised of student loans and their fair values were measured by considering factors such as interest rates, tax status,
credit quality, duration, insurance wraps, the portfolio composition of Federal Family Education Loan Program, or FFELP, and private loans and likelihood of redemption.



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TELIK, INC.

Notes to Condensed Financial Statements(Continued)

(Unaudited)



These assumptions are highly subjective and involve significant judgment and are subject to change as the underlying sources of these assumptions and market conditions change. Based on this Level
3 valuation, for the three months ended September 30, 2009, we recorded a gain of $46,000 in fair value of our ARS to interest and income (expense), net, which was fully netted by a loss of $46,000 in fair value of our put option. For the nine
months ended September 30, 2009, we recorded (i) a net gain of approximately $41,000 to interest and income (expense), net due to a change in fair values of our ARS and put option and (ii) a reduction of approximately $3.9 million and
$980,000 in fair values of our put option and ARS respectively, as a result of certain ARS repurchased by UBS in June 2009. For additional information, see Note 7 to the Financial Statements.

6. Cash, Cash Equivalents, Investments and Restricted Investments

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



|                            |  |                   |        |                  |   |       
|--------------------------- |  | ----------------- | ------ | ---------------- | - | ------
|                            |  | September 30,2009 |        | December 31,2008
|                            |  | (in thousands)   
|Certificate of deposits     |  | $                 | 674    |                  | $ | 898   
|Auction rate securities     |  |                   | 10,347 |                  |   | 10,010
|U.S. government securities  |  |                   | 27,162 |                  |   | 1,999 
|Cash and money market funds |  |                   | 7,017  |                  |   | 50,562
|                            |  |                   |        |                  |   |       
|Total                       |  | $                 | 45,200 |                  | $ | 63,469
|                            |  |                   |        |                  |   |       
|Reported as:                |  |                   |        |                  |   |       
|Cash and cash equivalents   |  | $                 | 7,017  |                  | $ | 50,562
|Short-term investments      |  |                   | 37,509 |                  |   | 1,999 
|Restricted investments      |  |                   | 674    |                  |   | 898   
|Long-term investments       |  |                   |       |                  |   | 10,010
|                            |  |                   |        |                  |   |       
|Total                       |  | $                 | 45,200 |                  | $ | 63,469
|                            |  |                   |        |                  |   |       

ARS securities with an aggregate estimated fair value of $10.3 million as of
September 30, 2009 and $10.0 million as of December 31, 2008 were determined as securities held for trading. Accordingly, these securities are carried at estimated fair value, with unrealized gains and losses resulting from changes in fair
value reported in earnings. All other marketable debt securities continue to be held as available for sale.

The following is
a summary of amortized cost, unrealized gains and losses and estimated fair value of cash and cash equivalents and marketable debt securities held as available for sale.



|                            |  |                    |        |                      |   |                       |  |                     |   |  |   |       
|--------------------------- |  | ------------------ | ------ | -------------------- | - | --------------------- |  | ------------------- | - |  | - | ------
|                            |  | September 30, 2009
|                            |  | AmortizedCost      |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | EstimatedFair Value
|                            |  | (in thousands)    
|Certificate of deposits     |  | $                  | 674    |                      | $ |                      |  | $                   |  |  | $ | 674   
|U.S. government securities  |  |                    | 27,149 |                      |   | 13                    |  |                     |  |  |   | 27,162
|Cash and money market funds |  |                    | 7,017  |                      |   |                      |  |                     |  |  |   | 7,017 
|                            |  |                    |        |                      |   |                       |  |                     |   |  |   |       
|Total                       |  | $                  | 34,840 |                      | $ | 13                    |  | $                   |  |  | $ | 34,853
|                            |  |                    |        |                      |   |                       |  |                     |   |  |   |       
|                            | 
|                            |  | December 31, 2008 
|                            |  | AmortizedCost      |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | EstimatedFair Value
|                            |  | (in thousands)    
|Certificate of deposits     |  | $                  | 898    |                      | $ |                      |  | $                   |  |  | $ | 898   
|U.S. government securities  |  |                    | 1,978  |                      |   | 21                    |  |                     |  |  |   | 1,999 
|Cash and money market funds |  |                    | 50,562 |                      |   |                      |  |                     |  |  |   | 50,562
|                            |  |                    |        |                      |   |                       |  |                     |   |  |   |       
|Total                       |  | $                  | 53,438 |                      | $ | 21                    |  | $                   |  |  | $ | 53,459
|                            |  |                    |        |                      |   |                       |  |                     |   |  |   |       



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TELIK, INC.

Notes to Condensed Financial Statements(Continued)

(Unaudited)



There were no realized gains on sales of available-for-sale investments for the three
and nine months ended September 30, 2009 and zero and $12,000 for the same periods, respectively, in 2008. Realized gains and losses were calculated based on the specific identification method. No investments were in an unrealized loss position
at September 30, 2009 and December 31, 2008.

The following is a summary of the cost and estimated fair value of
available-for-sale securities at September 30, 2009 and December 31, 2008, classified by stated maturity date of the security:



|                             |  |                    |        |                   |   |               |  |            |       |  |   |      
|---------------------------- |  | ------------------ | ------ | ----------------- | - | ------------- |  | ---------- | ----- |  | - | -----
|                             |  | September 30, 2009 |        | December 31, 2008
|                             |  | AmortizedCost      |        | Fair Value        |   | AmortizedCost |  | Fair Value
|                             |  | (in thousands)    
|Mature in less than one year |  | $                  | 27,149 |                   | $ | 27,162        |  | $          | 1,978 |  | $ | 1,999
|                             |  |                    |        |                   |   |               |  |            |       |  |   |      
|Total                        |  | $                  | 27,149 |                   | $ | 27,162        |  | $          | 1,978 |  | $ | 1,999
|                             |  |                    |        |                   |   |               |  |            |       |  |   |      

7. Prepaids and Other Current Assets

Prepaids and other current assets consist of the following:



|                           |  |                   |       |                  |   |    
|-------------------------- |  | ----------------- | ----- | ---------------- | - | ---
|                           |  | September 30,2009 |       | December 31,2008
|                           |  | (in thousands)   
|Prepaids                   |  | $                 | 827   |                  | $ | 909
|UBS Rights relating to ARS |  |                   | 3,453 |                  |   |   
|                           |  |                   |       |                  |   |    
|Total                      |  | $                 | 4,280 |                  | $ | 909

On November 10, 2008, we entered into an agreement with UBS whereby we received
rights, or the Right, to sell all our ARS held in our UBS account at par value ($18.7 million) to UBS at any time during a two-year period beginning on June 30, 2010 and ending on July 2, 2012. If we do not exercise the Right, our ARS will
continue to accrue interest as determined by the auction process or the terms outlined in the prospectus of the ARS if the auction process fails. If the Right is not exercised on or before July 2, 2012, it will expire and UBS will have no
further obligation to buy our ARS. The Right is a nontransferable security registered with the SEC. UBSs obligations under the Right are not secured by its assets and do not require UBS to obtain any financing to support its performance
obligations under the Right. UBS has disclaimed any assurance that it will have sufficient financial resources to satisfy its obligations under the Right.

The enforceability of the Right results in a put option which is recognized as a separate freestanding asset and accounted for separately from the ARS investment. On June 10, 2009, UBS elected to
repurchase a portion of our ARS under the agreement at par value of $4.9 million. For the quarter ended September 30, 2009, we reclassified the put option from a long-term asset to a short-term asset on our balance sheet based on our intention
to sell all our remaining ARS to UBS in less than a year. The put option was measured at its fair value of $3.5 million at September 30, 2009, compared to fair value of $8.6 million at December 31, 2008. The decrease of $5.1 million of put
option resulted primarily from a $3.9 million reduction due to the UBS purchase and an increase of $1.2 million in fair value of our ARS which was recorded in interest and other income (expense), net, in the Condensed Statement of Operations. The
put option does not meet the definition of a derivative instrument under ASC 815, Derivatives and Hedging. Therefore, we elected to measure the put option at fair value under ASC 825-10-25, which permits an entity to elect the
fair value option for recognized financial assets, in order to match the changes in the fair value of the ARS. We valued the Right using a



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##### Table of Contents

TELIK, INC.

Notes to Condensed Financial Statements(Continued)

(Unaudited)



discounted cash flow approach including estimates of, based on data available as of September 30, 2009, interest rates, timing and amount of cash flow, adjusted for any bearer risk
associated with UBSs financial ability to repurchase the ARS beginning June 30, 2010. These assumptions are volatile and subject to change as the underlying sources of these assumptions and market conditions change.

Prior to accepting the UBS offer, we recorded our ARS as available-for-sale investments, and therefore recorded resulting losses that were
determined to be temporarily impaired in accumulated other comprehensive income in stockholders equity. In connection with the acceptance of the UBS offer in November 2008, resulting in a right to require UBS to purchase the ARS at par value
beginning on June 30, 2010, we have reclassified our ARS subject to the Right and held by UBS from available-for-sale to trading under ASC 320-10. The transfer to trading securities reflects our intent to exercise our put option during the
period June 30, 2010 to July 3, 2012.

8. Property and Equipment

As a result of our restructuring plan implemented in February 2009, as described in Note 10 to the Financial Statements, we reclassified
certain computers and laboratory equipment that were not in use to held-for-sale and ceased the depreciation of these assets. For the three months ended September 30, 2009, we sold approximately $1.6 million (at cost) of computer and laboratory
equipment with a net book value of $152,000 and recorded a net loss of $11,300 in interest and other income (expense), net. For the nine months ended September 30, 2009, we sold approximately $6.0 million (at cost) of computer and laboratory
equipment with a net book value of $297,000 and recorded a net gain of $344,000 after the deduction of costs of sale in interest and other income (expense), net in the Condensed Statement of Operations. As of September 30, 2009, we had $256,000
(at cost) of computer and laboratory equipment with a net book value of $61,000 that were held-for-sale.

9. Notes Payable

In connection with our acceptance of the offer to enter into the agreement with UBS whereby we received the Right to sell all our ARS at
par value to UBS at any time during a two-year period beginning on June 30, 2010 and ending on July 2, 2012, UBS would also make available to us no net cost loans up to 75% of the market value of our ARS. The no net
cost loans must be repaid upon commencement of the exercise of the Right. On December 31, 2008, we entered into a loan agreement with UBS and drew down $8 million with our ARS pledged as collateral. The loan is treated as a no net
cost loan as defined in the agreement, meaning that the loan will bear interest at a rate equal to the average rate of interest paid or deemed paid to Telik on the pledged ARS such that the interest cost, net of interest received by us on the
pledged ARS, will be zero. On June 10, 2009, UBS elected to repurchase a portion of our ARS under the Rights Agreement at par value of $4.9 million. Proceeds of the sale of our ARS were applied to repayment of the credit line leaving a balance
of $3.1 million due to UBS as of September 30, 2009. For the nine months ended September 30, 2009, interest paid on the loan was approximately $72,000 which was offset entirely by interest earned on the pledged securities. As of
September 30, 2009, we had a credit line of approximately $4.6 million available to us under the Rights Agreement. Though the loan is payable on demand, if UBS should exercise its discretionary right to demand repayment of any portion of the
loan prior to the date we can exercise our repurchase rights, UBS and certain of its affiliates will arrange for alternative financing on terms and conditions substantially the same as those contained in the loan, and if alternative financing cannot
be established, then UBS or one of its affiliates will purchase our pledged ARS at par. UBS obligation to arrange such alternative financing does not apply under certain circumstances, including, but not limited to, if we sell the ARS pledged
as collateral. Proceeds of sales of our ARS will first be applied to repayment of the credit line with the balance, if any, for our account.

10. Restructuring Plan

In February 2009, we implemented a restructuring plan to further reduce our operating
expenses and to streamline our infrastructure to focus on our most advanced preclinical and clinical development programs. As a result of the restructuring plan we reduced our workforce by 37 positions and recorded a charge of approximately $951,000
for the nine months ended September 30, 2009. We paid $750,000 in the quarter ended March 31, 2009, $111,000 in the quarter ended June 30, 2009 and $90,000 in the quarter ended September 30, 2009, as severance, payroll taxes and
other personnel related costs.



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##### Table of Contents

|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 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 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, 2008 filed with the Securities and Exchange Commission on March 2, 2009.

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 and development of small molecule drugs. Our business strategy is to advance our drug product candidate
TELINTRA through Phase 2 clinical studies, and after obtaining clinical data, enter into a partnership with a pharmaceutical or biotechnology company to assist in further development and commercialization, to advance our two leading preclinical drug
candidates, TLK58747 and TLK60404, into clinical trials and to seek a partnership for TELCYTA for further development. We have incurred net losses since inception and expect to incur losses for the next several years as we continue our research and
development activities.

During the nine months ended September 30, 2009, loss from operations was $20.2 million and net
loss was $19.5 million. Net cash used in operations for the nine months ended September 30, 2009 was $19.3 million and net cash, cash equivalents, investments and restricted investments at September 30, 2009 were $45.2 million. As of
September 30, 2009, we had an accumulated deficit of $499.4 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 from non-equity payments from collaborative
partners.



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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 will be necessary for us to conduct preclinical tests and clinical trials, demonstrate efficacy and 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 generate revenues or achieve and sustain profitability in the future.

In February 2009,
we implemented a restructuring plan to further reduce our operating expenses and to streamline our infrastructure to focus on our most advanced preclinical and clinical development programs. As a result of the restructuring plan we reduced our
workforce by 37 positions and recorded a charge of approximately $951,000 which consists primarily of employee severance and related costs. As a result of our restructuring plan, we believe our existing cash resources will be sufficient to satisfy
our current operating plan until mid-2011. 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 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 Product
Development

TELINTRA, our current drug product candidate in clinical development, is a small molecule glutathione analog
inhibitor of the enzyme glutathione S-transferase P1-1. We are developing TELINTRA for the treatment of blood disorders associated with low blood cell levels, such as neutropenia or anemia. In May 2008, we initiated two Phase 2 clinical trials of
TELINTRA tablets, one for the treatment of patients with Myelodysplastic Syndrome, or MDS, and the other for the treatment of chemotherapy induced neutropenia, or CIN, in patients with locally advanced or metastatic non-small cell lung cancer
receiving first-line chemotherapy. In April 2009, we initiated a new Phase 2 randomized study in Severe Chronic Idiopathic Neutropenia, or SCIN, to determine the effect of TELINTRA on absolute neutrophil count, in patients with severe chronic
neutropenia. In June 2009, we discontinued the trial for CIN to focus resources on the development of TELINTRA in MDS. The trial for MDS is intended to enroll 86 patients and enrollment is expected to be completed by the end of 2009. The trial for
SCIN is intended to enroll a total of 20 patients.

TELCYTA, our first product candidate, is a small molecule cancer drug
product candidate designed to be activated in cancer cells. TELCYTA has shown clinical antitumor activity alone and in combination with standard chemotherapeutic agents in multiple Phase 2 clinical trials in refractory or resistant ovarian,
non-small cell lung, breast and colorectal cancer. In addition, TELCYTA demonstrated clinical activity in two Phase 2 trials in combination regimens as first line treatment in patients with Stage IIIb or IV non-small cell lung cancer.

We initiated four randomized Phase 3 registration trials of TELCYTA in platinum refractory or resistant ovarian cancer and in platinum
resistant non-small cell lung cancer. The ASSIST-1 and ASSIST-3 trials were designed to evaluate TELCYTA in the treatment of platinum resistant ovarian cancer. The ASSIST-2 trial was designed to evaluate TELCYTA in the treatment of advanced
non-small cell lung cancer. In June 2007, we reported that these trials did not achieve their primary endpoints. ASSIST-5, our fourth randomized Phase 3 trial, was initiated in May 2006 to evaluate TELCYTA in combination with PLD versus PLD alone as
second line therapy in platinum refractory or resistant ovarian cancer. On October 29, 2008, we announced top-line results from the ASSIST-5 trial demonstrating that statistically significant improvement was observed in a sub-set of patients
with platinum refractory or primary resistant disease. We are currently seeking a partnership with a pharmaceutical or biotechnology company to further advance the development and commercialization of TELCYTA.



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##### Table of Contents

Pre-Clinical Drug Product Development

TLK58747Cytotoxic Small Molecule

TLK58747 is a novel metabolically activated cytotoxic small molecule. TLK58747 induces apoptosis and G2/M, or cell division, cell cycle arrest in a broad array of human cancer cell lines including those
not expressing glutathione S-transferase P1-1, or GST P1-1. It has shown significant anti-tumor activity in human breast, pancreatic, brain and colon tumors in pre-clinical models of human cancer when administered either orally or by injection. We
are conducting the required preclinical safety studies that if successful may support the potential filing of an Investigational New Drug, or IND, application with the FDA.

TLK60404Aurora Kinase/VEGFR2 Inhibitors

We currently have a small molecule compound inhibiting both Aurora kinase and VEGFR2 kinase in pre-clinical development. Aurora kinase is a signaling enzyme whose function is required for cancer cell
division, while vascular endothelial growth factor receptor, or VEGFR, plays a key role in tumor blood vessel formation, ensuring an adequate supply of nutrients to support tumor growth. The lead compounds of our first dual inhibitor program met a
development milestone in August 2008 by demonstrating anticancer activity in preclinical models of human colon cancer and human leukemia. A development drug product candidate, TLK60404, has been selected. We are conducting the required preclinical
safety studies that, if successful, may support the potential filing of an IND application with the FDA.

MCP-1
Antagonists (C243)Small Molecule for Autoimmune and Inflammatory Disorders

MCP-1 antagonists, including our lead
compound C243, is a small molecule that prevents leukocyte infiltration, a process linked to tissue injury in chronic autoimmune and inflammatory diseases such as multiple sclerosis, rheumatoid arthritis and atherosclerosis. In February 2007, we
announced an agreement with SRI International under which SRI will fund and conduct preclinical studies of C243 in multiple sclerosis and other autoimmune and inflammatory diseases.

We discovered all of our drug product candidates using our proprietary technology, TRAP, which we believe enables the rapid and efficient
discovery of small molecule drug product candidates. We expect to enter into collaborative arrangements with third parties, such as contract research organizations 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.

In August 2008, we announced a license agreement with ReceptorBio, Inc. which would enable ReceptorBio to develop and commercialize our oral small molecule insulin receptor kinase activators. These
compounds were identified through the application of TRAP. The agreement is contingent on ReceptorBios reimbursement of Teliks patent expenses. It also provides for payments to Telik related to regulatory milestones and royalties based
on product sales or licensing fees; and will expire at the end of the royalty period. Our development focus does not currently include metabolic diseases like diabetes.

Nasdaq Stock Listing Compliance Status

On September 19, 2008, we
received notification from Nasdaq informing us that the bid price for our common stock had closed below the minimum $1.00 per share requirement for continued inclusion on the Nasdaq Global Market under Nasdaq Marketplace Rule 5450(a)(1) and giving
us 180 days to regain compliance. Nasdaq subsequently implemented temporary suspensions of the minimum bid price requirement. We have until January 4, 2010 to regain compliance and are considering various strategies in order to satisfy the
minimum bid price requirement.



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UBS Purchase Rights and Loan

On November 10, 2008, we entered into an agreement with UBS AG and with its affiliates, or UBS, whereby we received rights, or the
Right, to sell all our auction rate securities, or ARS, held in our UBS account at par value to UBS at any time during a two-year period beginning on June 30, 2010 and ending on July 2, 2012. If we do not exercise the Right, the ARS will
continue to accrue and pay interest as determined by the auction process or the terms specified in the prospectus of the ARS if the auction process fails. If the Right is not exercised on or before July 2, 2012, it will expire and UBS will have
no further obligation to buy our ARS. UBS is also granted the right to purchase or sell our ARS at any time after acceptance of the Agreement until July 2, 2012, so long as we receive par value for the ARS. The Right is a nontransferable
security registered with the SEC.

In connection with our acceptance of the offer to enter into the agreement, UBS has made
available to us no net cost loans for up to 75% of the market value of our ARS, where interest payable on the loan does not exceed interest earned on our ARS. The loan is secured by our ARS. On December 31, 2008, we borrowed $8
million from UBS in accordance with such a secured, no net cost demand facility. On June 10, 2009, UBS repurchased a portion of our ARS under the Rights Agreement at par value of $4.9 million. Proceeds of the sale of our ARS were
applied to repayment of the credit line leaving a balance of $3.1 million as of September 30, 2009. For the nine months ended September 30, 2009, interest paid on the loan was approximately $72,000 which was fully offset by interest earned
on the pledged securities.

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, or GAAP. 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 revenue recognition and 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.

There has been no material change in our critical accounting policies and significant judgments and estimates as described in our Annual
Report on Form 10-K for the year ended December 31, 2008.

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 revenues in 2008 and currently do not expect to record any revenues in 2009. Future non-product revenues, if any, 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 September 30, 2009 and 2008 were $3.4 million and $4.8
million. Research and development expenses for the nine months ended September 30, 2009 and 2008 were $10.4 million and $21.3 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.



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##### Table of Contents

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



|                               |  |                                    |       |         |   |       |                                |     |         |  |   |        |  |   |        |  |     |   
|------------------------------ |  | ---------------------------------- | ----- | ------- | - | ----- | ------------------------------ | --- | ------- |  | - | ------ |  | - | ------ |  | --- | --
|                               |  | Three Months EndedSeptember 30,    |       | %Change |   |       | Nine Months EndedSeptember 30, |     | %Change | 
|                               |  | 2009                               |       | 2008    |   |       | 2009                           |     | 2008    | 
|                               |  | (In thousands, except percentages) |      
|Research and preclinical       |  | $                                  | 828   |         | $ | 3,332 |                                | (75 | )%      |  | $ | 3,781  |  | $ | 11,065 |  | (66 | )%
|Clinical development           |  |                                    | 2,588 |         |   | 1,488 |                                | 74  | %       |  |   | 6,647  |  |   | 10,186 |  | (35 | )%
|                               |  |                                    |       |         |   |       |                                |     |         |  |   |        |  |   |        |  |     |   
|Total research and development |  | $                                  | 3,416 |         | $ | 4,820 |                                | (29 | )%      |  | $ | 10,428 |  | $ | 21,251 |  | (51 | )%
|                               |  |                                    |       |         |   |       |                                |     |         |  |   |        |  |   |        |  |     |   

The decrease of 29%, or $1.4 million, in research and development expenses for the
three months ended September 30, 2009 compared to the same period in 2008 was principally due to the following:



| |  |  | decreased costs of approximately $2.3 million in connection with headcount reduction as a result of our February 2009 restructuring and reduced
research activities;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | lower stock-based compensation expense of approximately $756,000 primarily due to lower headcount associated with fewer outstanding options vested;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | offset by increased expenses of approximately $701,000, of which $614,000 was related to TLK58747-Cytotoxic Small Molecule and TLK60404-Aurora Kinase
pre-clinical development programs and $87,000 was related to our ongoing TELINTRA tablets phase 2 clinical trials; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | in addition, the quarter ended September 30, 2008 included approximately $923,000 reduction in accrued Phase 3 clinical trial expenses as a result
of final close-out of clinical sites while there was no such adjustment in 2009.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The decrease of 51%, or
$10.8 million, in research and development expenses for the nine months ended September 30, 2009 compared to the same period in 2008 was principally due to the following:



| |  |  | reduced expenses of approximately $2.8 million as Phase 3 clinical trial study activities in our ASSIST-1, ASSIST-2, ASSIST-3 and ASSIST-5 were
completed;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | decreased costs of approximately $6.0 million in connection with headcount reduction as a result of our February 2009 restructuring and reduced
research activities;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | lower stock-based compensation expense of approximately $2.9 million primarily due to lower headcount associated with fewer outstanding options vested;
and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | offset by increased expenses of approximately $942,000 for TLK58747-Cytotoxic Small Molecule and TLK60404-Aurora Kinase pre-clinical development
programs.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------

We expect total research and development expenditures to decrease in the next twelve months as we
focus primarily on the Phase 2 clinical trials of TELINTRA tablets and preclinical studies on TLK58747 and TLK60404. Traditionally, Phase 2 and pre-clinical studies incur less expense than Phase 3 studies due to comparative size of the studies.
Specifically, we expect both clinical and manufacturing expenditures to be lower than previous years and the timing and the amount of these expenditures will depend on the progress of the TELINTRA tablets Phase 2 clinical trials and the progress of
our pre-clinical programs.



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##### Table of Contents

The following table summarizes our principal drug product candidate development initiatives:



|                                        |  |                                                     |        |      |   |       
|--------------------------------------- |  | --------------------------------------------------- | ------ | ---- | - | ------
|                                        |  | Related R&D ExpensesNine Months ended September 30,
|Product                                 |  | 2009                                                |        | 2008
|                                        |  | (in thousands)                                     
|TELCYTA                                 |  | $                                                   | 694    |      | $ | 7,322 
|TELINTRA                                |  |                                                     | 5,318  |      |   | 3,492 
|TLK58747                                |  |                                                     | 2,840  |      |   |      
|TLK60404                                |  |                                                     | 700    |      |   |      
|Other (1)                               |  |                                                     | 876    |      |   | 10,437
|                                        |  |                                                     |        |      |   |       
|Total research and development expenses |  | $                                                   | 10,428 |      | $ | 21,251
|                                        |  |                                                     |        |      |   |       



|(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 investment 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 products safety;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | filing with the FDA of an 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 product candidate; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



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

In view 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 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 EndedSeptember 30,    |       | %Change |   |       | Nine Months EndedSeptember 30, |    | %Change | 
|                           |  | 2009                               |       | 2008    |   |       | 2009                           |    | 2008    | 
|                           |  | (In thousands, except percentages) |      
|General and administrative |  | $                                  | 2,759 |         | $ | 2,822 |                                | (2 | )%      |  | $ | 8,845 |  | $ | 8,008 |  | 10 | %

The decrease in general and administrative expenses of 2%, or $63,000 for the three
months ended September 30, 2009 compared to the same period in 2008 was primarily due to decreased stock-based compensation expense of approximately $273,000 as a result of cancelled options and a decrease of $123,000 in corporate
administrative expenses which were partially offset by increased allocation of facility related expenses of approximately $322,000.

The increase in general and administrative expenses of 10%, or $837,000 for the nine months ended September 30, 2009 compared to the same period in 2008 was primarily due to increased legal and professional service expenses of
approximately $469,000 related to corporate matters and business development activities and increased allocation of facility related expenses of approximately $783,000. The increase was partially offset by a $267,000 decrease in expenses due to
headcount reduction as a result of our corporate restructuring and lower stock-based compensation expense of approximately $149,000 as a result of cancelled options.



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We expect general and administrative expenses in 2009 to be slightly above the 2008 level
due to increased activities in business development.

Stock-Based Compensation Expense

Employee stock-based compensation expense related to our share-based payment awards was as follows:



|                                              |  |                                 |     |                                |   |       |  |      |       |  |   |      
|--------------------------------------------- |  | ------------------------------- | --- | ------------------------------ | - | ----- |  | ---- | ----- |  | - | -----
|                                              |  | Three Months EndedSeptember 30, |     | Nine Months EndedSeptember 30,
|                                              |  | 2009                            |     | 2008                           |   | 2009  |  | 2008
|                                              |  | (in thousands)                 
|Research and development                      |  | $                               | 134 |                                | $ | 890   |  | $    | 425   |  | $ | 3,371
|General and administrative                    |  |                                 | 388 |                                |   | 661   |  |      | 1,374 |  |   | 1,524
|                                              |  |                                 |     |                                |   |       |  |      |       |  |   |      
|Stock-based compensation expense before taxes |  |                                 | 522 |                                |   | 1,551 |  |      | 1,799 |  |   | 4,895
|Related income tax benefits                   |  |                                 |    |                                |   |      |  |      |      |  |   |     
|                                              |  |                                 |     |                                |   |       |  |      |       |  |   |      
|Effect on net loss                            |  | $                               | 522 |                                | $ | 1,551 |  | $    | 1,799 |  | $ | 4,895
|                                              |  |                                 |     |                                |   |       |  |      |       |  |   |      

The decreases in employee stock-based compensation expense for the three months ended
and nine months ended September 30, 2009 compared with the same periods in 2008 were principally due to cancellations of unvested options related to a workforce reduction in February 2009.

Restructuring Costs

In February 2009, we implemented a restructuring plan and reduced our workforce by 37 positions and recorded a charge of approximately $951, 000 for the nine months ended September 30, 2009. We paid $750,000 in the quarter ended
March 31, 2009, $111,000 in the quarter ended June 30, 2009 and $90,000 in the quarter ended September 30, 2009 as severance, payroll taxes and other personnel related costs. For the three and nine months ended September 30,
2008, we recorded a one-time restructuring charge of approximately $199,000 for severance costs and health benefits charges relating to a workforce reduction of seven positions.

Interest Income and Interest Expense



|                                         |  |                                    |     |   |         |   |      |                                |      |      |         |      |   |     |   |  |   |        |   |  |      |   
|---------------------------------------- |  | ---------------------------------- | --- | - | ------- | - | ---- | ------------------------------ | ---- | ---- | ------- | ---- | - | --- | - |  | - | ------ | - |  | ---- | --
|                                         |  | Three Months EndedSeptember 30,    |     |   | %Change |   |      | Nine Months EndedSeptember 30, |      |      | %Change |     
|                                         |  | 2009                               |     |   | 2008    |   |      |                                | 2009 |      |         | 2008 |   |    
|                                         |  | (In thousands, except percentages) |    
|Interest and other income (expense), net |  | $                                  | 80  |   |         | $ | (168 | )                              |      | 148  | %       |      | $ | 803 |   |  | $ | (1,928 | ) |  | 142  | % 
|Interest expense                         |  |                                    | (12 | ) |         |   |     |                                |      | (100 | )%      |      |   | (72 | ) |  |   |       |   |  | (100 | )%

Interest and other income (expense), net resulted primarily from investment
activities including our ARS. The increase of approximately $248,000 for the three months ended September 30, 2009 compared to the same period in 2008 was due primarily to a change of $716,000 in fair value of ARS. The increase was offset by a
change of $46,000 in fair value of our ARS Right, a decrease of $357,000 in investment income resulting from lower investment cash balances and lower interest rates and a decrease of $65,000 related to the sale of computer and laboratory equipment.



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##### Table of Contents

The increase of approximately $2.7 million for the nine months ended September 30, 2009
compared to the same period in 2008 was due primarily to a change of $5.2 million in fair value of ARS and a $270,000 gain on the sale of computer and laboratory equipment. The increase was offset by a change in value of UBS ARS Right of $1.3
million and a decrease of $1.5 million in investment income resulting from lower investment cash balances and lower interest rates.

Interest expense for the three and nine months ended September 30, 2009 was for interest payments on our UBS loan. There was no interest expense for the three and nine months ended September 30, 2008.

Liquidity and Capital Resources



|                                                               |  |                              |         |                  |   |         
|-------------------------------------------------------------- |  | ---------------------------- | ------- | ---------------- | - | --------
|                                                               |  | September 30,2009            |         | December 31,2008
|                                                               |  | (in millions, except ratios)
|Cash, cash equivalents, investments and restricted investments |  | $                            | 45.2    |                  | $ | 63.5    
|Working capital                                                |  | $                            | 42.8    |                  | $ | 48.8    
|Current ratio                                                  |  |                              | 7.9 : 1 |                  |   | 11.3 : 1



|                              |  |                                |       |   |      |   |       |  
|----------------------------- |  | ------------------------------ | ----- | - | ---- | - | ----- | -
|                              |  | Nine Months EndedSeptember 30, |      
|                              |  | 2009                           |       |   | 2008 |  
|                              |  | (in millions)                  |      
|Cash (used in) / provided by: |  |                                |       |   |      |   |       |  
|Operating activities          |  | $                              | (19.3 | ) |      | $ | (23.6 | )
|Investing activities          |  | $                              | (24.3 | ) |      | $ | 17.3  |  
|Financing activities          |  | $                              | 0.0   |   |      | $ | 0.5   |  

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 the sale
of equity securities, non-equity payments from corporate partners, interest earned on investments and equipment lease and loan financings. At September 30, 2009, we had available cash, cash equivalents, investments and restricted investments of
$45.2 million. Our cash and investment balances are held in a variety of interest-bearing instruments including obligations of U.S. government agencies, auction rate securities and money market accounts. 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 nine months ended September 30, 2009 was $19.3 million compared with $23.6 million for the same period in 2008. Net loss
of $19.5 million in 2009 included non-cash charges of $1.8 million for stock-based compensation, $420,000 for depreciation and amortization and $5.2 million for the reduction in value of the put option associated with the UBS ARS Right and were
partially offset by a $5.2 million increase in the fair value of marketable securities and a $344,000 gain on the disposal of property and equipment. Cash used in operations was further impacted by a $1.3 million reduction in accrued clinical trials
related primarily to the completion of our Phase 3 clinical trials and a $951,000 decrease in accounts payable and partially offset by an increase of $552,000 in accrued compensation. In addition, our put option valued at $3.5 million was
reclassified from other assets to other current assets based on the intention to sell our ARS in less than one year. Operating cash outflows for the same period in 2008 resulted primarily from net loss of $31.4 million which included non-cash
charges of $4.9 million for stock-based compensation, $823,000 for depreciation and amortization and $3.9 million for the write-down of marketable securities. Cash used in operations in 2008 was further impacted by a $3.2 million reduction in
accrued clinical trials related primarily to the completion of our ASSIST 1, 2 and 3 clinical trials and a $1.0 million reduction in accrued legal and related expenses primarily for amounts paid in connection with the class action lawsuit and were
partially offset by a decrease of $438,000 in interest receivables as a result of lower interest rates and investment balances and a $1.4 million increase in accounts payable.



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Cash Flows from Investing Activities. Cash used in investing activities for the nine
months ended September 30, 2009 was $24.3 million compared with cash provided by investing activities of $17.3 million for the same period in 2008. Cash used in the nine months ended September 30, 2009 was primarily for the purchase of
available-for-sale investments of $33.2 million and were partially offset by $224,000 in investment sales, $8 million in investment maturities which included a $4.9 million sale of our ARS to UBS on June 20, 2009 and the proceeds were used to
repay our loan with UBS. We had $641,000 in proceeds from the sale of property and equipment and no capital expenditures for the nine months ended September 30, 2009. Cash provided for the same period in 2008 was primarily from $15.5 million in
maturities of investments and $15.5 million from sales of investments offset by $12.1 million in purchases of available-for-sale investments and an unrealized loss of $1.6 million on our auction rate certificates.

Cash Flows from Financing Activities. Cash provided by financing activities for the nine months ended September 30, 2009 was
approximately $47,000 compared with cash provided by financing activities of $549,000 for the same period in 2008. Financing activities for the nine months ended September 30, 2009 comprised of $47,000 in proceeds from stock purchases under our
employee stock purchase plan. Financing activities for the same period in 2008 comprised of $549,000 in proceeds from stock option exercises and purchases under our employee stock purchase plan.

Working Capital. Working capital decreased to $42.8 million at September 30, 2009 from $48.8 million at December 31, 2008.
The decrease in working capital was primarily due to our use of cash for TELINTRA, TLK58747 and TLK60404 development programs, and our operating expenses.

As a result of our restructuring plan implemented in February 2009, we believe our existing cash resources will be sufficient to satisfy our current operating plan until mid-2011. 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 2 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.



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Our future contractual obligations at September 30, 2009 were as follows:



|                 |  |                |        |      |   |           |  |           |       |           |   |       |  |   |      
|---------------- |  | -------------- | ------ | ---- | - | --------- |  | --------- | ----- | --------- | - | ----- |  | - | -----
|                 |  | Total          |        | 2009 |   | 2010-2011 |  | 2012-2013 |       | After2013
|                 |  | (in thousands)
|Operating leases |  | $              | 17,591 |      | $ | 908       |  | $         | 7,595 |           | $ | 7,551 |  | $ | 1,537

We also have a contractual obligation under the terms of our manufacturing supply
agreement with Organichem Corporation, wherein we are obligated to purchase a majority of our United States requirements for the active ingredient in TELCYTA for a number of years. However, we currently do not have any requirements for the active
ingredient. 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. | Quantitative and Qualitative Disclosures About Market Risk.
|------- | -----------------------------------------------------------

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

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 maintain investments of shorter maturities. Our marketable securities portfolio is
primarily invested in money market funds, corporate debt securities, treasury bills and U.S. government agencies 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. Our
portfolio also includes auction rate securities currently classified as short-term investments. 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:



|                              |  |                                    |        |   |      |   |       |               |  |   |        |   |  |                                |        |   |  |   |       
|----------------------------- |  | ---------------------------------- | ------ | - | ---- | - | ----- | ------------- |  | - | ------ | - |  | ------------------------------ | ------ | - |  | - | ------
|                              |  | 2009                               |        |   | 2010 |   |       | 2011andBeyond |  |   | Total  |   |  | Fair Value atSeptember 30,2009
|                              |  | (In thousands, except percentages)
|Available-for-sale securities |  | $                                  | 19,036 |   |      | $ | 8,113 |               |  |   |       |   |  | $                              | 27,149 |   |  | $ | 27,162
|Trading securities            |  |                                    |       |   |      |   |      |               |  | $ | 13,800 |   |  | $                              | 13,800 |   |  | $ | 10,347
|Average interest rate         |  |                                    | 0.40   | % |      |   | 0.42  | %             |  |   | 1.29   | % |  |                                | 0.71   | % |  |   |       

Trading securities are comprise of corporate securities, student loans and municipal
notes investments with an auction reset feature in the form of auction rate certificates and auction preferred stock, collectively known as ARS, held in our account with UBS. As discussed previously, while we continue to earn interest on the ARS,
these investments are not liquid and their carrying amounts are impaired due to the adverse change in the debt market. As a result, our ability to liquidate our investment and fully recover the carrying value of our investment in the near term may
be limited or not exist. In November 2008, we entered into an agreement with UBS whereby we received the Right to sell all our ARS held in our UBS account at par value to UBS at any time during a two-year period beginning on June 30, 2010 and
ending on July 2, 2012. We intend to exercise this right and recover par value of the ARS. The value of the Right largely offset the decline in fair value of the ARS. However, UBS obligations under the Right are not secured by its assets
and do not require UBS to obtain any financing to support its performance obligations under the Right. UBS has disclaimed any assurance that it will have sufficient financial resources to satisfy its obligations under the Right. If UBS has
insufficient



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funding to buy back the ARS and the auction process continues to fail, then we may incur further losses on the carrying value of the ARS. On December 31, 2008, we entered into a loan
agreement with UBS and drew down $8 million with our ARS pledged as collateral. The loan is treated as a no net cost loan as defined in the agreement, meaning that the loan will bear interest at a rate equal to the average rate of
interest paid or deemed paid to us on the pledged ARS such that the interest cost, net of interest received by us on the pledged ARS, will be zero. On June 10, 2009, UBS elected to repurchase a portion of our ARS under the Right Agreement at
par value of $4.9 million. Proceeds of the sale of our ARS were applied to repayment of the credit line leaving a balance of $3.1 million as of September 30, 2009. Other than the UBS loan, there were no material changes to our market exposure
risk since December 31, 2008.



|Item 4. | Controls and 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 September 30, 2009.

Changes in internal control over financial reporting. There were no changes in our internal controls over financial
reporting during the quarter ended September 30, 2009 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 INFORMATION



|Item 1A. | Risk Factors.
|-------- | -------------

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, 2008, as filed
with the SEC on March 2, 2009, 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.*

To date, we have not obtained regulatory approval for the commercial sale of any products, and we
have not received any revenue from the commercial sale of products. 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 September 30, 2009, we had an accumulated deficit of $499.4 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. 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) compared
TELCYTA to a control arm consisting of currently established standard drug treatments for ovarian and lung cancers. On June 3, 2007, we presented final results at the American Society of Clinical Oncology, or ASCO, annual meeting that the
ASSIST-1 and ASSIST-3 trials did not achieve their primary endpoints. We also announced final data on the ASSIST-2 trial confirming that the primary endpoints were not achieved.

On June 4, 2007, a full clinical hold for TELCYTA was initiated by the FDA following the presentation of the Phase 3 clinical trial
results at the ASCO annual meeting. As a result, we stopped enrolling new patients in the TELCYTA ASSIST-5 clinical trial, and patients receiving ongoing treatment in our TELCYTA trials could not receive additional treatment until such time that the
FDA released the clinical hold. On June 15, 2007, the FDA converted the full clinical hold of TELCYTA to a partial hold, thereby enabling



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patients that had been enrolled in the ASSIST-3 and ASSIST-5 trials the opportunity to continue to receive study treatments, including TELCYTA in combination with chemotherapy, subject to
re-consenting procedures. We submitted detailed safety and other information to the FDA and worked closely with the agency in its review of TELCYTA. On October 12, 2007, the FDA completed their review of all TELCYTA data and removed the partial
hold, permitting the resumption of our TELCYTA clinical development. However, during the clinical hold a number of patients discontinued therapy on the ASSIST-5 trial and no additional patients have been enrolled. On October 29, 2008, we
announced top-line results demonstrating that statistically significant improvement was observed in a sub-set of patients with platinum refractory or primary resistant disease. Because the statistically significant improvement was only observed in a
sub-set of patients, we may be required to conduct additional studies by the FDA. If the data on future clinical trials are not positive, we may not be able to continue clinical development on TELCYTA and our business will suffer.

We 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.

In January 2007, 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 Phase 1-2a clinical trial of a tablet formulation of TELINTRA in MDS and announced final data at the American Society of Hematology meeting in
December 2007. In May 2008, we initiated two Phase 2 clinical trials of TELINTRA tablets, one for the treatment of patients with MDS and the other for the treatment of chemotherapy induced neutropenia, or CIN, in patients with locally advanced or
metastatic non-small cell lung cancer receiving first-line chemotherapy. In April 2009, we initiated a third randomized Phase 2 clinical trial in Severe Chronic Idiopathic Neutropenia, or SCIN; and in June 2009, we discontinued the trial in CIN to
focus our resources on the development of TELINTRA in MDS. Our success depends in part on our ability to continue clinical development of TELINTRA.

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. 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. 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 candidates development costs. If we experience delays in clinical testing
or approvals, our product candidates 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 additional 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.



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If we do not find collaborators for our product candidates, we may have to reduce or delay our rate of
product development and/or increase our expenditures.

Our strategy to develop, manufacture and commercialize our products
includes entering into relationships with pharmaceutical companies to advance certain programs and reduce our expenditures with respect to such programs. Our product candidates will target highly competitive therapeutic markets in which we have
limited experience and expertise. If we are unable to develop this expertise ourselves, we will need to enter into agreements with one or more biotechnology or pharmaceutical companies to provide us with the necessary resources and experience for
the development and commercialization of products in these markets. In particular, we intend to seek a partnership with a pharmaceutical or biotechnology company to further advance the development and commercialization of TELCYTA. There are a
limited number of companies with the resources necessary to develop our future products commercially, and we may be unable to attract any of these firms. The current credit and financial market conditions could also impact our ability to find a
collaborator for our development programs. A company that has entered into a collaboration agreement with one of our competitors may choose not to enter into a collaboration agreement with us. We may not be able to negotiate a collaboration
agreement on acceptable terms or at all. If we are not able to establish collaborative arrangements, we may have to reduce or delay further development of some of our programs and/or increase our expenditures and undertake the development activities
at our own expense. If we elect to increase our expenditures to fund our development programs, we will need to obtain additional capital, which may not be available on acceptable terms or at all.

In addition, there have been a significant number of recent business combinations among biotechnology and pharmaceutical companies that have
reduced the number of potential future collaborators that would be willing to enter into a collaboration agreement with us. If business combinations involving potential collaborators continue to occur, our ability to find a collaborative partner
could be diminished, which could result in the termination or delay in one or more of our product candidate development programs.

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.



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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 to a pharmaceutical or biotechnology company
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 mid-2011. Unanticipated 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 do not know whether additional financing will be available when needed or that, if available, we will be able to obtain financing on terms favorable to our
stockholders. In addition, the recent tightening of credit markets and concerns regarding the availability of credit, particularly in the United States, may also have negatively impacted our ability to raise additional capital to fund our business.
As of September 30, 2009, our accumulated deficit was $499.4 million, and we expect to incur capital outlays and operating expenditures for the next several years as we continue 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.

Our stock price may not meet the minimum
bid price for continued listing on the Nasdaq Global Market. Our ability to publicly or privately sell equity securities and the liquidity of our common stock could be adversely affected if we are delisted from The Nasdaq Global Market or if we are
unable to transfer our listing to another stock market.*

On September 19, 2008, we received a letter from Nasdaq
Listing Qualification Department indicating that, for 30 consecutive business days, the bid price for our common stock had closed below the minimum $1.00 per share requirement for continued inclusion on the Nasdaq Global Market under Nasdaq
Marketplace Rule 5450(a). The letter also stated that in accordance with Nasdaq Marketplace Rule 5810(c)(3)(A), we were given 180 calendar days to regain compliance with this listing requirement, which may be accomplished if the bid price of our
common stock closes at $1.00 per share or more for a minimum of 10 consecutive business days. Subsequently, Nasdaq implemented temporary suspensions of the minimum bid price requirement. We now have until January 4, 2010 to regain compliance.
If we do not regain compliance by January 4, 2010, Nasdaq will provide written notification that our common stock will be delisted, after which we may appeal the staff determination to the Nasdaq Listing Qualifications Panel. In addition, if we
do not regain compliance with this listing requirement by January 4, 2010, but meet the initial inclusion criteria for the Nasdaq Capital Market (except for the bid price requirement), we may apply to transfer the listing of our common stock to
this market and, if accepted, be provided with an additional 180 day period to demonstrate compliance. If we are not eligible for an additional compliance period at that time, the Nasdaq staff will provide written notification that our securities
will be delisted. Upon such notice, we may appeal the Nasdaq staffs determination to the Nasdaq Listing Qualifications Panel. There can be no assurance that our common stock would be eligible for transfer to the Nasdaq Capital Market, or, if
we appeal the Nasdaq staffs determination, that such appeal would be successful.

Delisting from Nasdaq could adversely
affect our ability to raise additional financing through the public or private sale of equity securities, would significantly affect the ability of investors to trade our securities and would negatively affect the value and liquidity of our common
stock. Delisting could also have other negative results, including the potential loss of confidence by employees, the loss of institutional investor interest and fewer business development opportunities.

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
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The investment of our substantial cash balance and our investments in marketable debt securities have
resulted in a lack of liquidity which may cause losses and will continue to affect the liquidity of these investments.*

At September 30, 2009, we had $7.0 million in cash, cash equivalents and restricted cash and $38.2 million in investments in marketable debt securities. We have historically invested these amounts in U.S. government agencies, municipal
notes which may have an auction reset feature, corporate notes and bonds, commercial paper and money market funds meeting certain criteria. Certain of these investments are subject to general credit, liquidity, market and interest rate risks, which
have been exacerbated by U.S. sub-prime mortgage defaults that have affected various sectors of the financial markets and caused credit and liquidity issues. These market risks associated with our investment portfolio may have an adverse effect on
our operations, liquidity and financial condition.

As of September 30, 2009, $13.8 million (par value) of our investment
portfolio was invested in corporate and municipal notes investments with an auction reset feature in the form of auction rate certificates and auction preferred stock, collectively known as auction rate securities, or ARS. Historically, the fair
value of ARS investments approximated par value due to the frequent resets through the auction process. Beginning in late 2007, our securities invested in ARS failed to settle in scheduled auctions due to liquidity crises. An auction failure means
that the parties wishing to sell securities could not make the sale, but does not result in the securities going into default because the issuer continues to pay interest. These investments are not liquid and their carrying amounts are impaired due
to the adverse change in the corporate debt market. As a result, we have written-down the carrying amount of these investments and recognized a loss of approximately $3.5 million through September 30, 2009. If the issuers are unable to
successfully close future auctions and their credit ratings deteriorate, we may in the future be required to record additional impairment charges on these investments.

On November 10, 2008, we entered into an agreement with UBS AG and its affiliates, or UBS, whereby we received rights to sell all our ARS held in our UBS account at par value to UBS at any time
during a two-year period beginning on June 30, 2010 and ending on July 2, 2012. In connection with our acceptance of UBS offer to enter into that agreement, UBS made available to us no net cost loans, secured by our ARS,
for up to 75% of the market value of our ARS, where interest payable on the loan does not exceed interest earned on our ARS. On December 31, 2008, we borrowed $8 million from UBS in accordance with such a secured, no net cost demand
facility. On June 10, 2009, UBS elected to purchase a portion of our ARS under the Rights Agreement at par value of $4.9 million. Proceeds of the sale of our ARS were applied to repayment of the credit line leaving a balance of $3.1 million as
of September 30, 2009. If we are unable to liquidate our remaining ARS to obtain funds when needed we may be unable to fund our operations. There can be no assurance as to the timing of when, or if, the market for ARS will recover in a manner
that will allow us to receive a return of some or all of our principal or to meet our liquidity needs.

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 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.

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

In February 2007, our Board of Directors committed to a restructuring which resulted in a reduction of 38 positions, or approximately 25%
of our workforce. In September 2008, we reduced our workforce by another seven positions or approximately 8% of our workforce. On February 11, 2009, we implemented a restructuring plan to further reduce our operating expenses. As a result of



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the restructuring plan, we reduced our workforce by 37 positions or approximately 45% of our workforce. We cannot assure you that future reductions or adjustments of our workforce will not be
made or that issues, such as reduced productivity, 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 our business and operations due to our past workforce reductions. In addition, identifying, hiring and retaining skilled executives and
employees with technical expertise in the biotechnology industry may be difficult. As a result, competition among numerous companies, academic and other research institutions for skilled personnel and experienced scientists may be intense and
turnover rates 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 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 product candidates 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 pre-clinical 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
pre-clinical 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
candidate 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 pre-clinical 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 candidate, 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 candidate is granted, this clearance
will be limited to those disease states and conditions for which the product candidate 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 product candidate 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 candidate. 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.



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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 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.

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.

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 that will expire between 2014 and 2015. For TELCYTA, we hold compound patents in the United
States and internationally that will expire in 2013 and 2014. For TELINTRA, we hold compound patents in the United States and internationally that 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. In foreign countries, these extensions are available only if approval is obtained before the patent expires, but in the United States, extensions
are available even if approval is obtained after the patent would expire normally through a system of interim extensions until approval.

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



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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.

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.

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 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. We currently depend upon two sources for the drug product manufacture of TELCYTA.



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We presently depend upon one source of supply, Isochem, for clinical quantities of the
active ingredient in TELINTRA. We currently depend upon one source, Patheon, for the manufacture of TELINTRA tablets. While we are evaluating potential alternative sources of these materials, we have no such alternative sources that are immediately
available.

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.

Working capital 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 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



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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. Under the plan, except under
certain circumstances, if a person or group acquires 20% or more of our outstanding common stock, or 10 business days after a person or group commences or announces a tender or exchange offer for 20% or more of our outstanding common stock, that
person or group becomes an Acquiring Person, and the rights (except those rights held by the Acquiring Person) would generally become exercisable for shares of our common stock at a discount. In May 2006, we amended the stockholder
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 and corporate
partnering transactions, 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 September 30, 2009, 53,430,083 shares of our common stock were outstanding, of which 53,100,447 shares were freely tradable, in some cases subject to 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. 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.



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Our stock price may be volatile, you may not be able to resell your shares at or above your purchase
price.*

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 stock price dropped by 71% on the day following the announcement in December 2006 that the preliminary top-line
results of our first three Phase 3 trials did not meet primary end-points. During the nine months ended September 30, 2009, our common stock traded between $0.27 and $1.40, and on September 30, 2009, our common stock closed at $0.79. 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. 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.
| | - |  | -------------------------------------------------------

We have been, and in the future may be, subject to securities class action lawsuits and shareholder derivative actions. These, and potential similar or related litigation, could result in substantial
damages and may divert managements time and attention from our business.

Beginning on June 6, 2007, a series
of putative securities class action lawsuits were commenced in the United States District Courts for the Southern District of New York and the Northern District of California, naming as defendants Telik, Inc. and certain of our current officers, one
of whom is also a director. The complaints filed in the Southern District of New York, which were consolidated and amended in 2007, also name as defendants the underwriters of our November 2003 and/or January 2005 stock offerings. Plaintiffs in the
Northern District of California subsequently voluntarily dismissed their complaints without prejudice. The complaints alleged violations of the Securities Act of 1933 and the Securities Exchange Act of 1934 arising out of the issuance of allegedly
false and misleading statements about our business and prospects, including the efficacy, safety and likelihood of success of our product candidate TELCYTA. The allegations of the consolidated amended complaint were similar, but more narrow than the
original complaints. Plaintiffs sought unspecified damages and injunctive relief on behalf of purchasers of our common stock during the period between March 27, 2003 and June 4, 2007, including purchasers in the January 2005 stock
offering.

In January 2008, the parties to the securities class action reached an agreement in principle to settle the claims,
the settlement to be funded primarily by proceeds from insurance. In October 2008, the court entered a final judgment approving the settlement and resolving all class claims.

In August 2007, a separate party who claimed to be an owner of our common stock filed a derivative action on behalf of Telik, Inc. against
certain of our current and former officers and directors. The allegations were similar to those made in the securities class action regarding the development of TELCYTA. In January 2008, the plaintiff voluntarily dismissed this complaint without
prejudice.

Although the parties were able to settle the class action claims and the court entered a final order approving the
settlement, the order is the subject of a pro se appeal by an unaffiliated, individual shareholder. We may in the future be the target of securities class action or shareholder derivative claims.



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|Item 6. | Exhibits.
|------- | ---------



|     |  |                                                                                                                                                                                                                            
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|3.1  |  | Amended and Restated Certificate of Incorporation. (1)                                                                                                                                                                     
|     | 
|3.2  |  | Amended and Restated Bylaws. (2)                                                                                                                                                                                           
|     | 
|4.1  |  | Specimen Stock Certificate. (3)                                                                                                                                                                                            
|     | 
|4.2  |  | Ninth Amended and Restated Registration Rights Agreement, 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, dated March 31, 2000. (4)
|     | 
|4.3  |  | Teliks Certificate of Designation of Series A Junior Participating Preferred Stock. (5)                                                                                                                                   
|     | 
|4.4  |  | Rights Agreement, between Telik and Wells Fargo Bank Minnesota, N.A., replaced by EquiServe Trust Company, N.A., as Rights Agent, dated November 2, 2001. (5)                                                              
|     | 
|4.5  |  | Amendment to Rights Agreement between Telik, Inc. and Computershare Shareholder Services, Inc. and Computershare Trust Company, N.A., dated as of May 18, 2006. (6)                                                        
|     | 
|4.6  |  | Second Amendment to Rights Agreement between Telik and Computershare Shareholder Services, Inc. and Computershare Trust Company, N.A., dated December 11, 2006. (7)                                                        
|     | 
|4.7  |  | Amended and Restated Standstill Agreement between Telik and Eastbourne Capital Management, L.L.C. and certain related persons and entities, dated December 11, 2006.
(7)                                                   
|     | 
|4.8  |  | Agreement, by and among Telik, Eastbourne Capital Management, L.L.C., Black Bear Offshore Master Fund, L.P., Black Bear Fund I, L.P., Black Bear Fund II, L.L.C., and
Richard J. Barry, dated May 18, 2006. (8)            
|     | 
|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 Exhibit 3.1 to our Annual Report on Form 10-K for the year ended December 31, 2001, as filed on March 27, 2002 (File No.
000-31265).
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Incorporated by reference to Exhibit 3.2 to our Current Report on Form 8-K dated December 11, 2007, as filed on December 14, 2007 (File No. 000-31265).
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Incorporated by reference to Exhibit 4.1 to our Registration Statement on Form S-1A filed on July 3, 2000 (File No. 333-33868).
|--- | -------------------------------------------------------------------------------------------------------------------------------

|(4) | Incorporated by reference to Exhibit 4.2 to our Registration Statement on Form S-1 filed on April 3, 2000, as amended (File No. 333-33868).
|--- | -------------------------------------------------------------------------------------------------------------------------------------------

|(5) | 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).
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Incorporated by reference to Exhibit 4.5 on our Current Report on Form 8-K, dated and filed on May 18, 2006 (File No. 000-31265).
|--- | ---------------------------------------------------------------------------------------------------------------------------------

|(7) | Incorporated by reference to exhibits to our Current Report on Form 8-K dated December 11, 2006, as filed on December 12, 2006 (File No. 000-31265).
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------

|(8) | Incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2006, as filed on August 3, 2006 (File
No. 000-31265).
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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SIGNATURES

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



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


Date: November 13, 2009



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EXHIBIT INDEX



|     |  |                                                                                                                                                                                                                            
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1  |  | Amended and Restated Certificate of Incorporation. (1)                                                                                                                                                                     
|     | 
|3.2  |  | Amended and Restated Bylaws. (2)                                                                                                                                                                                           
|     | 
|4.1  |  | Specimen Stock Certificate. (3)                                                                                                                                                                                            
|     | 
|4.2  |  | Ninth Amended and Restated Registration Rights Agreement, 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, dated March 31, 2000. (4)
|     | 
|4.3  |  | Teliks Certificate of Designation of Series A Junior Participating Preferred Stock. (5)                                                                                                                                   
|     | 
|4.4  |  | Rights Agreement, between Telik and Wells Fargo Bank Minnesota, N.A., replaced by EquiServe Trust Company, N.A., as Rights Agent, dated November 2, 2001. (5)                                                              
|     | 
|4.5  |  | Amendment to Rights Agreement between Telik, Inc. and Computershare Shareholder Services, Inc. and Computershare Trust Company, N.A., dated as of May 18, 2006. (6)                                                        
|     | 
|4.6  |  | Second Amendment to Rights Agreement between Telik and Computershare Shareholder Services, Inc. and Computershare Trust Company, N.A., dated December 11, 2006. (7)                                                        
|     | 
|4.7  |  | Amended and Restated Standstill Agreement between Telik and Eastbourne Capital Management, L.L.C. and certain related persons and entities, dated December 11, 2006.
(7)                                                   
|     | 
|4.8  |  | Agreement, by and among Telik, Eastbourne Capital Management, L.L.C., Black Bear Offshore Master Fund, L.P., Black Bear Fund I, L.P., Black Bear Fund II, L.L.C., and
Richard J. Barry, dated May 18, 2006. (8)            
|     | 
|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 Exhibit 3.1 to our Annual Report on Form 10-K for the year ended December 31, 2001, as filed on March 27, 2002 (File No.
000-31265).
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Incorporated by reference to Exhibit 3.2 to our Current Report on Form 8-K dated December 11, 2007, as filed on December 14, 2007 (File No. 000-31265).
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Incorporated by reference to Exhibit 4.1 to our Registration Statement on Form S-1A filed on July 3, 2000 (File No. 333-33868).
|--- | -------------------------------------------------------------------------------------------------------------------------------

|(4) | Incorporated by reference to Exhibit 4.2 to our Registration Statement on Form S-1 filed on April 3, 2000, as amended (File No. 333-33868).
|--- | -------------------------------------------------------------------------------------------------------------------------------------------

|(5) | 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).
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Incorporated by reference to Exhibit 4.5 on our Current Report on Form 8-K, dated and filed on May 18, 2006 (File No. 000-31265).
|--- | ---------------------------------------------------------------------------------------------------------------------------------

|(7) | Incorporated by reference to exhibits to our Current Report on Form 8-K dated December 11, 2006, as filed on December 12, 2006 (File No. 000-31265).
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------

|(8) | Incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2006, as filed on August 3, 2006 (File
No. 000-31265).
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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