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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 June 30, 2008

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 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  x    Non-accelerated filer   ̈     (Do not check if a smaller reporting company)

Smaller reporting company   ̈

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 July 31, 2008: 53,213,252 shares









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##### Table of Contents

TELIK, INC.

INDEX



|           |  |                                                                                              |  |     
|---------- |  | -------------------------------------------------------------------------------------------- |  | ----
|           |  |                                                                                              |  | Page
|           |  |                                                                                             
|PART I.    |  | FINANCIAL INFORMATION                                                                        |  |     
|           |  |                                                                                             
|Item 1:    |  | Financial Statements (Unaudited)                                                             |  |     
|           |  |                                                                                             
|           |  | Condensed Balance Sheets at June 30, 2008 and December 31, 2007                              |  | 3   
|           |  |                                                                                             
|           |  | Condensed Statements of Operations for the three and six months ended June 30, 2008 and 2007 |  | 4   
|           |  |                                                                                             
|           |  | Condensed Statements of Cash Flows for the six months ended June 30, 2008 and 2007           |  | 5   
|           |  |                                                                                             
|           |  | Notes to Condensed Financial Statements                                                      |  | 6   
|           |  |                                                                                             
|Item 2:    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations        |  | 13  
|           |  |                                                                                             
|Item 3:    |  | Quantitative and Qualitative Disclosures About Market Risk                                   |  | 23  
|           |  |                                                                                             
|Item 4:    |  | Controls and Procedures                                                                      |  | 24  
|           |  |                                                                                             
|PART II.   |  | OTHER INFORMATION                                                                            |  |     
|           |  |                                                                                             
|Item 1:    |  | Legal Proceedings                                                                            |  | 25  
|           |  |                                                                                             
|Item 1A:   |  | Risk Factors                                                                                 |  | 25  
|           |  |                                                                                             
|Item 4:    |  | Submission of Matters To a Vote of Security Holders                                          |  | 37  
|           |  |                                                                                             
|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)



|                                              |  |              |          |   |                  |   |          |  
|--------------------------------------------- |  | ------------ | -------- | - | ---------------- | - | -------- | -
|                                              |  | June 30,2008 |          |   | December 31,2007 |  
|                                              |  | (Unaudited)  |          |   | (Note 1)         |  
|Assets                                        |  |              |          |   |                  |   |          |  
|Current assets:                               |  |              |          |   |                  |   |          |  
|Cash and cash equivalents                     |  | $            | 40,850   |   |                  | $ | 41,646   |  
|Short-term investments                        |  |              | 16,368   |   |                  |   | 36,853   |  
|Interest and other receivables                |  |              | 178      |   |                  |   | 601      |  
|Prepaids and other current assets             |  |              | 1,024    |   |                  |   | 1,377    |  
|                                              |  |              |          |   |                  |   |          |  
|Total current assets                          |  |              | 58,420   |   |                  |   | 80,477   |  
|Property and equipment, net                   |  |              | 2,724    |   |                  |   | 3,257    |  
|Long-term investments                         |  |              | 14,246   |   |                  |   | 13,611   |  
|Restricted investments                        |  |              | 898      |   |                  |   | 1,123    |  
|Other assets                                  |  |              | 60       |   |                  |   | 60       |  
|                                              |  |              |          |   |                  |   |          |  
|Total assets                                  |  | $            | 76,348   |   |                  | $ | 98,528   |  
|                                              |  |              |          |   |                  |   |          |  
|Liabilities and Stockholders Equity          |  |              |          |   |                  |   |          |  
|Current liabilities:                          |  |              |          |   |                  |   |          |  
|Accounts payable                              |  | $            | 640      |   |                  | $ | 756      |  
|Accrued clinical trial costs                  |  |              | 6,600    |   |                  |   | 6,777    |  
|Accrued compensation                          |  |              | 1,406    |   |                  |   | 1,608    |  
|Accrued liabilities                           |  |              | 1,052    |   |                  |   | 831      |  
|Accrued legal and related expenses            |  |              | 83       |   |                  |   | 1,095    |  
|                                              |  |              |          |   |                  |   |          |  
|Total current liabilities                     |  |              | 9,781    |   |                  |   | 11,067   |  
|Other liabilities                             |  |              | 227      |   |                  |   | 142      |  
|Commitments and contingencies                 |  |              |          |   |                  |   |          |  
|Stockholders equity:                         |  |              |          |   |                  |   |          |  
|Common stock                                  |  |              | 532      |   |                  |   | 529      |  
|Additional paid-in capital                    |  |              | 538,728  |   |                  |   | 534,881  |  
|Accumulated other comprehensive income (loss) |  |              | (1,414   | ) |                  |   | 38       |  
|Accumulated deficit                           |  |              | (471,506 | ) |                  |   | (448,129 | )
|                                              |  |              |          |   |                  |   |          |  
|Total stockholders equity                    |  |              | 66,340   |   |                  |   | 87,319   |  
|                                              |  |              |          |   |                  |   |          |  
|Total liabilities and stockholders equity    |  | $            | 76,348   |   |                  | $ | 98,528   |  
|                                              |  |              |          |   |                  |   |          |  

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 EndedJune 30, |         |   | Six Months EndedJune 30, |  
|                                                              |  | 2008                       |         |   | 2007                     |   |         | 2008 |  |   | 2007    |  
|Operating costs and expenses:                                 |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Research and development                                      |  | $                          | 8,236   |   |                          | $ | 11,869  |      |  | $ | 16,431  |   |  | $ | 24,813  |  
|General and administrative                                    |  |                            | 2,773   |   |                          |   | 3,979   |      |  |   | 5,186   |   |  |   | 7,631   |  
|Restructuring costs                                           |  |                            |        |   |                          |   | (33     | )    |  |   |        |   |  |   | 1,356   |  
|                                                              |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Total operating costs and expenses                            |  |                            | 11,009  |   |                          |   | 15,815  |      |  |   | 21,617  |   |  |   | 33,800  |  
|                                                              |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Loss from operations                                          |  |                            | (11,009 | ) |                          |   | (15,815 | )    |  |   | (21,617 | ) |  |   | (33,800 | )
|Interest and other income (expense), net                      |  |                            | (2,560  | ) |                          |   | 1,512   |      |  |   | (1,760  | ) |  |   | 3,198   |  
|Interest expense                                              |  |                            |        |   |                          |   | (20     | )    |  |   |        |   |  |   | (43     | )
|                                                              |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Net loss                                                      |  | $                          | (13,569 | ) |                          | $ | (14,323 | )    |  | $ | (23,377 | ) |  | $ | (30,645 | )
|                                                              |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Basic and diluted net loss per share                          |  | $                          | (0.26   | ) |                          | $ | (0.27   | )    |  | $ | (0.44   | ) |  | $ | (0.58   | )
|                                                              |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Shares used to calculate basic and diluted net loss per share |  |                            | 53,185  |   |                          |   | 52,490  |      |  |   | 53,088  |   |  |   | 52,449  |  
|                                                              |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  

See accompanying Notes to Condensed Financial Statements.



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TELIK, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                            |  |                          |         |   |      |   |         |  
|--------------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | -
|                                                                            |  | Six Months EndedJune 30, |        
|                                                                            |  | 2008                     |         |   | 2007 |  
|Cash flows from operating activities:                                       |  |                          |         |   |      |   |         |  
|Net loss                                                                    |  | $                        | (23,377 | ) |      | $ | (30,645 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                          |         |   |      |   |         |  
|Depreciation and amortization                                               |  |                          | 583     |   |      |   | 874     |  
|Stock-based compensation expense                                            |  |                          | 3,344   |   |      |   | 4,966   |  
|Write-down of marketable securities                                         |  |                          | 3,207   |   |      |   |        |  
|Changes in assets and liabilities:                                          |  |                          |         |   |      |   |         |  
|Other receivables                                                           |  |                          | 423     |   |      |   | 265     |  
|Prepaid expenses and other current assets                                   |  |                          | 353     |   |      |   | 660     |  
|Accounts payable                                                            |  |                          | (116    | ) |      |   | (803    | )
|Accrued clinical trials, compensation and other liabilities                 |  |                          | (1,085  | ) |      |   | (2,620  | )
|                                                                            |  |                          |         |   |      |   |         |  
|Net cash used in operating activities                                       |  |                          | (16,668 | ) |      |   | (27,303 | )
|                                                                            |  |                          |         |   |      |   |         |  
|Cash flows from investing activities:                                       |  |                          |         |   |      |   |         |  
|Purchases of investments                                                    |  |                          | (13,611 | ) |      |   | (7,474  | )
|Sales of investments                                                        |  |                          | 15,527  |   |      |   | 50      |  
|Maturities of investments                                                   |  |                          | 13,500  |   |      |   | 13,965  |  
|Purchases of property and equipment                                         |  |                          | (50     | ) |      |   | (121    | )
|                                                                            |  |                          |         |   |      |   |         |  
|Net cash provided by investing activities                                   |  |                          | 15,366  |   |      |   | 6,420   |  
|                                                                            |  |                          |         |   |      |   |         |  
|Cash flows from financing activities:                                       |  |                          |         |   |      |   |         |  
|Principal payments under capital leases and equipment loans                 |  |                          |        |   |      |   | (289    | )
|Proceeds from issuance of common stock                                      |  |                          | 506     |   |      |   | 545     |  
|                                                                            |  |                          |         |   |      |   |         |  
|Net cash provided by financing activities                                   |  |                          | 506     |   |      |   | 256     |  
|                                                                            |  |                          |         |   |      |   |         |  
|Net decrease in cash and cash equivalents                                   |  |                          | (796    | ) |      |   | (20,627 | )
|Cash and cash equivalents at beginning of period                            |  |                          | 41,646  |   |      |   | 77,846  |  
|                                                                            |  |                          |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                  |  | $                        | 40,850  |   |      | $ | 57,219  |  
|                                                                            |  |                          |         |   |      |   |         |  
|Supplementary information:                                                  |  |                          |         |   |      |   |         |  
|Interest paid                                                               |  | $                        |        |   |      | $ | 43      |  

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, as amended (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 six months ended June 30, 2008 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2008 or any other future period. The condensed balance sheet at December 31, 2007 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, 2007, which are included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on
March 3, 2008.

Use of estimates

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

Cash and cash equivalents and investments

We invest our excess cash in money market funds and in 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. Debt securities with remaining
maturities greater than one year and which we intend to hold until maturity and all auction rate securities are classified as long-term investments. Perpetual auction rate securities with no effective maturity dates and no recent reset dates due to
current market condition are classified as long-term investments.

We classify all cash equivalents and investments as available-for-sale.
Available-for-sale securities are carried at estimated fair value, with unrealized gains and losses reported as a component of accumulated other comprehensive income (loss). 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 and other income (expense), net.

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 investment basis is written down to fair value and the
charge is included in interest and other income (expense), net.

Fair value measurements

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements
(FAS 157). FAS 157 is effective for fiscal years beginning after November 15, 2007 for financial assets and liabilities as well as for non-financial assets and liabilities that are recognized or disclosed at fair value on a
recurring basis in the financial statements. In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157, which provides a one year deferral of the effective date of FAS 157 for
non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually.



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On January 1, 2008, we adopted the provisions of FAS 157 on a prospective basis for our financial
assets and liabilities only, which require that we determine the fair value of financial assets and liabilities using the fair value hierarchy established in FAS 157. For all other non-financial assets and liabilities, FAS 157 will be effective for
fiscal years beginning after November 15, 2008.

FAS 157 defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosure about fair value measurements. The objective of fair value measurement is to determine the price that would be received to sell the asset or paid to transfer the liability (an exit
price) in an orderly transaction between market participants at the measurement date. The statement emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and that market participant assumptions include
assumptions about risk and effect of a restriction on the sale or use of an asset. To increase consistency and comparability in fair value measurement and related disclosures, this statement establishes a fair value hierarchy that prioritize the
inputs to valuation techniques used to measure fair value into three broad levels: (1) Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at
the measurement date; (2) Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly through corroboration with observable market data; and (3) Level
3 inputs are unobservable inputs for asset or liability that reflect the reporting entitys own assumptions about risk and the assumptions market participants would use in pricing the asset or liability developed based on the best information
available in the circumstances.



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

Stock
based compensation under FAS 123R

Employee stock-based compensation expenses recognized in the three and six months ended
June 30, 2008 and 2007 were calculated based on awards ultimately expected to vest and have been reduced for estimated forfeitures. Statement of Financial Accounting Standards No. 123R, Share-Based Payment (FAS 123R)
requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. In March 2008, we increased our forfeiture rate from 14.0% as of December 31, 2007 to
15.7% to reflect actual historical and expected cancellations of unvested options due to a higher than estimated level of terminations.

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



|                                                      |  |                            |       |   |                          |   |       |      |  |   |       |   |  |   |       |  
|----------------------------------------------------- |  | -------------------------- | ----- | - | ------------------------ | - | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|(in thousands except per share amounts)               |  | Three Months EndedJune 30, |       |   | Six Months EndedJune 30, |  
|                                                      |  | 2008                       |       |   | 2007                     |   |       | 2008 |  |   | 2007  |  
|Research and development                              |  | $                          | 1,268 |   |                          | $ | 1,910 |      |  | $ | 2,481 |   |  | $ | 3,066 |  
|General and administrative                            |  |                            | 704   |   |                          |   | 1,135 |      |  |   | 863   |   |  |   | 1,900 |  
|                                                      |  |                            |       |   |                          |   |       |      |  |   |       |   |  |   |       |  
|Stock-based compensation expense before taxes         |  |                            | 1,972 |   |                          |   | 3,045 |      |  |   | 3,344 |   |  |   | 4,966 |  
|                                                      |  |                            |       |   |                          |   |       |      |  |   |       |   |  |   |       |  
|Effect on net loss                                    |  | $                          | 1,972 |   |                          | $ | 3,045 |      |  | $ | 3,344 |   |  | $ | 4,966 |  
|                                                      |  |                            |       |   |                          |   |       |      |  |   |       |   |  |   |       |  
|Effect on net loss per basic and diluted common share |  | $                          | (0.04 | ) |                          | $ | (0.06 | )    |  | $ | (0.06 | ) |  | $ | (0.09 | )
|                                                      |  |                            |       |   |                          |   |       |      |  |   |       |   |  |   |       |  



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Because we had a net operating loss carryforward as of June 30, 2008, 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 three and six months ended June 30,
2008 and 2007, 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 June 30, 2008, $8.8 million of total
unrecognized compensation costs, net of forfeitures, related to non-vested awards is expected to be recognized over a weighted average period of 2 years.

Valuation assumptions

The employee stock-based expense recognized under FAS 123R was
determined using a Black-Scholes-Merton option valuation model (the Black-Scholes model). The expected volatility is a blended rate of 50% historical volatility and 50% implied volatility since sufficient market activity exists with
respect to our traded options. The expected term of options granted is based on the simplified method in accordance with Staff Accounting Bulletin No. 110 (SAB 110) as our historical share option exercise experience does not provide
a reasonable basis for estimation. SAB 110 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 SFAS
No. 123(R), Share-Based Payment. SAB 110 amends SAB 107 to allow 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 EndedJune 30, |   |  | Three Months EndedJune 30, |  
|                                |  | 2008                       |   |  | 2007                       |   |  | 2008 |   |  | 2007 |  
|Expected stock price volatility |  | 77.3                       | % |  | 70.9                       | % |  | 87.5 | % |  | 92.9 | %
|Risk-free interest rate         |  | 3.31                       | % |  | 4.77                       | % |  | 1.71 | % |  | 4.87 | %
|Expected life (in years)        |  | 6.08                       |   |  | 5.79                       |   |  | 1.26 |   |  | 1.25 |  
|Expected dividend yield         |  |                           |   |  |                           |   |  |     |   |  |     |  



|                                |  |                          |   |  |                          |   |  |      |   |  |      |  
|------------------------------- |  | ------------------------ | - |  | ------------------------ | - |  | ---- | - |  | ---- | -
|                                |  | Stock Option Plans       |   |  | Stock Purchase Plan      |  
|                                |  | Six Months EndedJune 30, |   |  | Six Months EndedJune 30, |  
|                                |  | 2008                     |   |  | 2007                     |   |  | 2008 |   |  | 2007 |  
|Expected stock price volatility |  | 76.8                     | % |  | 65.2                     | % |  | 87.5 | % |  | 92.9 | %
|Risk-free interest rate         |  | 2.97                     | % |  | 5.07                     | % |  | 1.71 | % |  | 4.87 | %
|Expected life (in years)        |  | 6.08                     |   |  | 5.53                     |   |  | 1.26 |   |  | 1.25 |  
|Expected 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 is as follows:



|                                                    |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|--------------------------------------------------- |  | -------------------------- | ------- | - | ------------------------ | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                    |  | Three Months EndedJune 30, |         |   | Six Months EndedJune 30, |  
|                                                    |  | 2008                       |         |   | 2007                     |   |         | 2008 |  |   | 2007    |  
|                                                    |  | (in thousands)             |        
|Net loss                                            |  | $                          | (13,569 | ) |                          | $ | (14,323 | )    |  | $ | (23,377 | ) |  | $ | (30,645 | )
|Changes in unrealized gains (losses) on investments |  |                            | (309    | ) |                          |   | (6      | )    |  |   | (1,452  | ) |  |   | 25      |  
|                                                    |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Comprehensive loss                                  |  | $                          | (13,878 | ) |                          | $ | (14,329 | )    |  | $ | (24,829 | ) |  | $ | (30,620 | )
|                                                    |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  



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|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 10,774,884 and 10,064,457 shares of our common stock for the three months ended June 30, 2008 and 2007 and 10,205,491 and 9,803,893 shares of our common stock for the six months ended June 30, 2008
and 2007 were excluded from the diluted net loss per common share calculations because inclusion of such options was anti-dilutive.



|5. | Fair value measurements
|-- | -----------------------

As described in Note 1, we
adopted FAS 157 on January 1, 2008. FAS 157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value.

The following is a summary of the estimated fair value of our cash equivalents and investments at June 30, 2008 and their corresponding valuation inputs established under FAS 157:



|                          |  |                |        |                                                             |   |                                             |  |                                         |        |  |   |       
|------------------------- |  | -------------- | ------ | ----------------------------------------------------------- | - | ------------------------------------------- |  | --------------------------------------- | ------ |  | - | ------
|                          |  |                |        | Fair Value Measurement at June 30, 2008 Using              
|                          |  | June 30,2008   |        | Quoted Prices inActive Marketsfor IdenticalAssets (Level 1) |   | Significant OtherObservableInputs (Level 2) |  | SignificantUnobservableInputs (Level 3)
|                          |  | (in thousands)
|Money market funds        |  | $              | 36,104 |                                                             | $ | 36,104                                      |  | $                                       |       |  | $ |      
|Corporate notes           |  |                | 5,438  |                                                             |   |                                            |  |                                         | 5,438  |  |   |      
|US Treasury bills         |  |                | 11,863 |                                                             |   |                                            |  |                                         | 11,863 |  |   |      
|US Government agencies    |  |                |       |                                                             |   |                                            |  |                                         |       |  |   |      
|Auction preferred stock   |  |                | 4,960  |                                                             |   |                                            |  |                                         |       |  |   | 4,960 
|Auction rate certificates |  |                | 8,353  |                                                             |   |                                            |  |                                         |       |  |   | 8,353 
|                          |  |                |        |                                                             |   |                                             |  |                                         |        |  |   |       
|Total                     |  | $              | 66,718 |                                                             | $ | 36,104                                      |  | $                                       | 17,301 |  | $ | 13,313
|                          |  |                |        |                                                             |   |                                             |  |                                         |        |  |   |       

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







|                                                       |  |                                                                         |        |   |                          |   |        |       |  |   |        |  
|------------------------------------------------------ |  | ----------------------------------------------------------------------- | ------ | - | ------------------------ | - | ------ | ----- |  | - | ------ | -
|                                                       |  | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |       
|                                                       |  | (in thousands)                                                          |       
|                                                       |  | Auction Preferred Stock                                                 |        |   | Auction RateCertificates |   |        | Total | 
|Balance at December 31, 2007                           |  | $                                                                       | 8,167  |   |                          | $ |       |       |  | $ | 8,167  |  
|Transfers in                                           |  |                                                                         |       |   |                          |   | 9,800  |       |  |   | 9,800  |  
|Unrealized losses included in other comprehensive loss |  |                                                                         |       |   |                          |   | (1,447 | )     |  |   | (1,447 | )
|Impairment losses included in net loss                 |  |                                                                         | (3,207 | ) |                          |   |       |       |  |   | (3,207 | )
|                                                       |  |                                                                         |        |   |                          |   |        |       |  |   |        |  
|Balance at June 30, 2008                               |  | $                                                                       | 4,960  |   |                          | $ | 8,353  |       |  | $ | 13,313 |  
|                                                       |  |                                                                         |        |   |                          |   |        |       |  |   |        |  



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Our investment portfolio includes $18.7 million (par value) in corporate and municipal notes investments
with an auction reset feature (auction rate certificates and auction preferred stock), collectively known as auction rate securities, or ARS. In September 2007, $8.9 million invested in ARS had failed to settle in
scheduled auctions. An auction failure means that the parties wishing to sell securities could not, but does not result in the securities going into default because the issuer continues to pay interest. In February 2008, auctions failed for the
remaining $9.8 million of our ARS whose underlying assets are generally student loans which are substantially backed by the federal government. While we continue to earn interest rates on these investments, these investments are not liquid and their
carrying amounts are impaired due to the adverse change in the corporate debt market.

At June 30, 2008, the fair values of our ARS
were estimated using discounted cash flow models. 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 fair value of our auction preferred stock takes into account factors such as 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 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. As a result of the lack of liquidity in the ARS market and not as a result of the quality of the underlying collateral, we recorded an unrealized loss on our auction rate certificates of $1.4 million, which
is reflected in accumulated other comprehensive income in our condensed balance sheet and a charge to interest and income (expense), net of approximately $3.2 million in the carrying value of our auction preferred stock for the six months ended
June 30, 2008.

Because we have no visibility as to when our ARS will eventually settle, we have classified them as long-term
investments on our balance sheet. Based on our ability to access our cash and other short-term investments and our expected operating cash flow needs, we do not anticipate that the lack of liquidity on these investments will affect our ability to
operate our business as planned.



|6. | Cash, cash equivalents, investments and restricted investments
|-- | --------------------------------------------------------------

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



|                                 |  |                |        |                      |   |                       |  |   |                     |   |  |   |       
|-------------------------------- |  | -------------- | ------ | -------------------- | - | --------------------- |  | - | ------------------- | - |  | - | ------
|                                 |  | June 30, 2008 
|                                 |  | AmortizedCost  |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | EstimatedFair Value
|                                 |  | (in thousands)
|Certificate of deposits          |  | $              | 898    |                      | $ |                      |  | $ |                    |   |  | $ | 898   
|Corporate notes                  |  |                | 10,373 |                      |   | 25                    |  |   |                    |   |  |   | 10,398
|Municipal notes and bonds        |  |                | 9,800  |                      |   |                      |  |   | (1,447              | ) |  |   | 8,353 
|Government sponsored enterprises |  |                | 11,855 |                      |   | 8                     |  |   |                    |   |  |   | 11,863
|Cash and money market funds      |  |                | 40,850 |                      |   |                      |  |   |                    |   |  |   | 40,850
|                                 |  |                |        |                      |   |                       |  |   |                     |   |  |   |       
|Total                            |  | $              | 73,776 |                      | $ | 33                    |  | $ | (1,447              | ) |  | $ | 72,362
|                                 |  |                |        |                      |   |                       |  |   |                     |   |  |   |       
|Reported as:                     |  |                |        |                      |   |                       |  |   |                     |   |  |   |       
|Cash and cash equivalents        |  |                |        |                      |   |                       |  |   |                     |   |  | $ | 40,850
|Short term investments           |  |                |        |                      |   |                       |  |   |                     |   |  |   | 16,368
|Restricted investments           |  |                |        |                      |   |                       |  |   |                     |   |  |   | 898   
|Long term investments            |  |                |        |                      |   |                       |  |   |                     |   |  |   | 14,246
|                                 |  |                |        |                      |   |                       |  |   |                     |   |  |   |       
|Total                            |  |                |        |                      |   |                       |  |   |                     |   |  | $ | 72,362
|                                 |  |                |        |                      |   |                       |  |   |                     |   |  |   |       



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|                                 |  |                   |        |                      |   |                       |  |   |                     |   |  |   |       
|-------------------------------- |  | ----------------- | ------ | -------------------- | - | --------------------- |  | - | ------------------- | - |  | - | ------
|                                 |  | December 31, 2007
|                                 |  | AmortizedCost     |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | EstimatedFair Value
|                                 |  | (in thousands)   
|Certificate of deposits          |  | $                 | 1,223  |                      | $ |                      |  | $ |                    |   |  | $ | 1,223 
|Corporate notes.                 |  |                   | 21,541 |                      |   | 28                    |  |   | (6                  | ) |  |   | 21,563
|Municipal notes and bonds        |  |                   | 9,800  |                      |   |                      |  |   |                    |   |  |   | 9,800 
|Commercial paper                 |  |                   | 15,943 |                      |   | 1                     |  |   | (3                  | ) |  |   | 15,941
|Government sponsored enterprises |  |                   | 40,550 |                      |   | 18                    |  |   |                    |   |  |   | 40,568
|Cash and money market funds      |  |                   | 4,138  |                      |   |                      |  |   |                    |   |  |   | 4,138 
|                                 |  |                   |        |                      |   |                       |  |   |                     |   |  |   |       
|Total                            |  | $                 | 93,195 |                      | $ | 47                    |  | $ | (9                  | ) |  | $ | 93,233
|                                 |  |                   |        |                      |   |                       |  |   |                     |   |  |   |       
|Reported as:                     |  |                   |        |                      |   |                       |  |   |                     |   |  |   |       
|Cash and cash equivalents        |  |                   |        |                      |   |                       |  |   |                     |   |  | $ | 41,646
|Short-term investments           |  |                   |        |                      |   |                       |  |   |                     |   |  |   | 36,853
|Restricted investments           |  |                   |        |                      |   |                       |  |   |                     |   |  |   | 1,123 
|Long-term investments            |  |                   |        |                      |   |                       |  |   |                     |   |  |   | 13,611
|                                 |  |                   |        |                      |   |                       |  |   |                     |   |  |   |       
|Total                            |  |                   |        |                      |   |                       |  |   |                     |   |  | $ | 93,233
|                                 |  |                   |        |                      |   |                       |  |   |                     |   |  |   |       

The realized gains on sales of available-for-sale investments were none for the three months and
$12,000 for the six months ended June 30, 2008 and none for the same periods in 2007. Realized gains and losses were calculated based on the specific identification method.

Investments which are in unrealized loss positions for which other-than-temporary impairments have not been recognized at June 30, 2008 and
December 31, 2007, are summarized below (in thousands):



|                        |  |                     |   |                      |   |           |       |                  |       |  |           |        |                  |  |   |       |  |   |        |  
|----------------------- |  | ------------------- | - | -------------------- | - | --------- | ----- | ---------------- | ----- |  | --------- | ------ | ---------------- |  | - | ----- |  | - | ------ | -
|                        |  | Less Than 12 Months |   | 12 Months or Greater |   |           | Total |                 
|June 30, 2008           |  | FairValue           |   | UnrealizedLosses     |   | FairValue |       | UnrealizedLosses |       |  | FairValue |        | UnrealizedLosses | 
|Municipal notes & bonds |  | $                   |  |                      | $ |          |       | $                | 8,353 |  | $         | (1,447 | )                |  | $ | 8,353 |  | $ | (1,447 | )
|                        |  |                     |   |                      |   |           |       |                  |       |  |           |        |                  |  |   |       |  |   |        |  



|                  |  |                     |        |                  |                      |    |           |  |                  |   |           |   |                  |  |   |        |  |   |    |  
|----------------- |  | ------------------- | ------ | ---------------- | -------------------- | -- | --------- |  | ---------------- | - | --------- | - | ---------------- |  | - | ------ |  | - | -- | -
|                  |  | Less Than 12 Months |        |                  | 12 Months or Greater |    | Total     | 
|December 31, 2007 |  | FairValue           |        | UnrealizedLosses |                      |    | FairValue |  | UnrealizedLosses |   | FairValue |   | UnrealizedLosses | 
|Commercial paper  |  | $                   | 9,964  |                  | $                    | (3 | )         |  | $                |  |           | $ |                 |  | $ | 9,964  |  | $ | (3 | )
|Corporate notes   |  |                     | 5,982  |                  |                      | (6 | )         |  |                  |  |           |   |                 |  |   | 5,982  |  |   | (6 | )
|                  |  |                     |        |                  |                      |    |           |  |                  |   |           |   |                  |  |   |        |  |   |    |  
|Total             |  | $                   | 15,946 |                  | $                    | (9 | )         |  | $                |  |           | $ |                 |  | $ | 15,946 |  | $ | (9 | )
|                  |  |                     |        |                  |                      |    |           |  |                  |   |           |   |                  |  |   |        |  |   |    |  

The following is a summary of the cost and estimated fair value of available-for-sale securities
at June 30, 2008 and December 31, 2007, classified by stated maturity date of the security:



|                             |  |                |        |                   |   |               |  |            |        |  |   |       
|---------------------------- |  | -------------- | ------ | ----------------- | - | ------------- |  | ---------- | ------ |  | - | ------
|                             |  | June 30, 2008  |        | December 31, 2007
|                             |  | AmortizedCost  |        | Fair Value        |   | AmortizedCost |  | Fair Value
|                             |  | (in thousands)
|Mature in less than one year |  | $              | 16,343 |                   | $ | 16,368        |  | $          | 64,430 |  | $ | 64,461
|Mature in one to three years |  |                | 924    |                   |   | 933           |  |            | 5,437  |  |   | 5,444 
|Mature in over three years   |  |                | 9,800  |                   |   | 8,353         |  |            | 9,800  |  |   | 9,800 
|Perpetual maturity           |  |                | 8,900  |                   |   | 4,960         |  |            | 8,900  |  |   | 8,167 
|                             |  |                |        |                   |   |               |  |            |        |  |   |       
|Total                        |  | $              | 35,967 |                   | $ | 30,614        |  | $          | 88,567 |  | $ | 87,872
|                             |  |                |        |                   |   |               |  |            |        |  |   |       



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

We adopted Financial Accounting
Standards Interpretation No. 48, Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109 (FIN 48) effective January 1, 2007. The implementation of FIN 48 did not
result in any increase or decrease in the liability for unrecognized tax benefits related to tax positions taken in prior periods, therefore, there was no corresponding adjustment in accumulated deficit. Our total amount of unrecognized tax benefits
as of December 31, 2007 was $9.8 million.



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Our only major tax jurisdiction is the United States and we are subject to U.S. federal income tax
examination for the calendar years ending 2004 through 2007. Additionally, we are subject to various state income tax examinations for the 2003 through 2007 calendar tax years.



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

On February 12, 2007, our
Board of Directors committed to a restructuring plan intended to reduce our operating expenses following our announcement in December 2006 of the preliminary results of our Phase 3 ASSIST-1, ASSIST-2 and ASSIST-3 trials for our lead product
candidate, TELCYTA. On February 14, 2007, we implemented the restructuring plan that focused our priorities on the ASSIST-5 trial and the Phase 1-2a trial of the TELINTRA Tablets and selected research and development programs. To match
these priorities, we reduced our workforce by 38 positions, streamlined our infrastructure and postponed some clinical research projects. As a result of the restructuring plan which has been completed, we recorded a one-time restructuring charge of
approximately $1.4 million in the quarter ended March 30, 2007, of which approximately $33,000 was reversed in the quarter ended June 30, 2007 as certain health benefits accrued were not utilized. Approximately $1.3 million was paid in the
quarter ended March 31, 2007 as severance, payroll taxes and other personnel related costs with the balance of approximately $30,000 paid in the quarter ended June 30, 2007. The restructuring plan has been completed and we will continue to
investigate alternative opportunities for the advancement of our product development programs, including collaborations with pharmaceutical and larger biotechnology companies.



|9. | Contingencies
|-- | -------------

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. All of the complaints allege 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 drug TELCYTA. The allegations of the consolidated amended complaint are similar, but more narrow
than the original complaints. Plaintiffs seek 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. This
agreement is contingent on a number of factors, including the disposition of any objections and court approval. As such, the ultimate outcome of the class action cannot presently be determined. It is currently anticipated that the settlement will be
funded primarily by proceeds from insurance. The court has given its preliminary approval of the settlement, the class has been notified, and a hearing on final approval of the settlement is currently set for September 5, 2008.

In August 2007, a separate party who claims to be an owner of our common stock filed a derivative action on behalf of the company against certain of our
current and former directors. The allegations are similar to those made in the class action regarding the development of TELCYTA; however, it seeks a recovery only on behalf of the company. In January 2008, the plaintiff voluntarily dismissed this
complaint without prejudice.



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

Special Note Regarding Statements of Expected Future Performance

This Quarterly Report on Form 10-Q
contains statements indicating expectations about future performance and other forward-looking statements that involve risks and uncertainties. We usually use words such as may, will, should, expect,
plan, anticipate, believe, estimate, predict, future, intend, potential, or continue or the negative of these terms or similar expressions to
identify forward-looking statements. These statements appear throughout this Quarterly Report on Form 10-Q and are statements regarding our current intent, belief or expectation, primarily with respect to our operations and related industry
developments. Examples of these statements include, but are not limited to, statements regarding the following: the implications of positive 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, 2007 filed with the Securities
and Exchange Commission on March 3, 2008.

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

Overview

Telik is engaged in the discovery, development and commercialization of small molecule drugs. We have incurred net losses since inception and expect to
incur substantial and increasing losses for the next several years as we expand our research and development activities and move our product candidates into later stages of development. As of June 30, 2008, we had an accumulated deficit of
$471.5 million.

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

We are subject to risks 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 each of our
product candidates to be commercialized, it is necessary for us to conduct



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

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

Product
Development

TELCYTA, our first product candidate, is a small molecule tumor-activated cancer product candidate that we are evaluating
to initially treat cancers that are resistant to standard chemotherapy drugs. We completed three randomized Phase 3 registration trials in platinum refractory or resistant ovarian cancer and in platinum resistant non-small cell lung cancer. On
June 3, 2007, we presented final results indicating that the Phase 3 ASSIST-1 and ASSIST-2 trials did not achieve their primary endpoint of demonstrating statistically significant improvement in overall survival for TELCYTA as compared to the
active controls. The ASSIST-3 trial showed a major discordance between the clinical review of the tumor scans and the independent radiology review and therefore the results of this trial have been compromised and are not suitable for regulatory
submission. Our subsequent analysis concluded that a subpopulation of 38 platinum resistant ovarian cancer patients in the ASSIST-3 trial had a treatment-free period of six months or more as measured from the date of completion of platinum-based
chemotherapy to the date of initiation of treatment on the trial. This subgroup of patients were balanced for key ovarian cancer disease characteristics, platinum refractory or resistant status, and other prognostic or predictive factors and
randomized between treatment arms with the combination of TELCYTA and carboplatin and the active control with pegylated liposmal doxorubicin, or PLD. Nineteen patients with these characteristics were in each treatment arm. A statistically
significant difference in survival between the two treatment groups was observed. Median progression-free survival in this subset was 7.1 months on the TELCYTA plus carboplatin arm versus 3.5 months on the PLD arm. Median survival in the subset was
23.4 months on the TELCYTA in combination with carboplatin arm versus 12.9 months on the PLD arm.

In May 2006, we initiated another
multinational randomized Phase 3 clinical trial, ASSIST-5, to evaluate TELCYTA in combination with PLD versus PLD alone as second line therapy in platinum refractory or resistant ovarian cancer. 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 on TELCYTA clinical trials, and patients being treated on the 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 on TELCYTA to a partial hold, thereby enabling 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. On October 12, 2007, the FDA completed their review of our TELCYTA data and
removed the partial hold, permitting the resumption of TELCYTA clinical development. No further patients were enrolled in the ASSIST-5 trial since the FDA removal of the partial hold and the study on patients enrolled prior to June 2007 has now been
completed. We are in the process of analyzing data from patients enrolled in this trial.

TELINTRA, our second product candidate, is a small molecule bone marrow stimulant we are developing for the treatment of blood disorders associated with low blood cell levels, such as neutropenia or anemia. Myelodysplastic syndrome, or MDS,
is a disease characterized by defects in the blood-producing cells of the bone marrow, in which low blood cell levels occur. A Phase 2 clinical trial in patients with MDS was completed in December 2005 with clinically significant improvement
demonstrated in all blood cell lineages and across all major MDS subtypes. TELINTRA was well-tolerated in this predominantly elderly patient population. In February 2006, we initiated a Phase 1-2a trial in MDS using a tablet formulation of TELINTRA.
At the 49thannual meeting of the American Society of Hematology in December 2007, we reported positive clinical data demonstrating that TELINTRA
Tablets are well tolerated and clinically active in



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patients with all types of MDS. In April 2008 at the 99thAnnual Meeting of the American Association for Cancer Research, we presented data highlighting TLK199, a novel glutathione analog inhibitor of the enzyme glutathione S-transferase P1-1, which induces cancer cell death, in human leukemia
cells. Treatment of the leukemia cells with TLK199 also resulted in an increase of the phosphorylation of eIF2a, a key signaling event that may contribute to cancer cell death. 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. The randomized Phase 2 study in MDS is expected to enroll 86 patients and the randomized Phase 2 in CIN is expected to enroll 135 patients.

TLK58747, a novel metabolically activated cytotoxic small molecule with activity not restricted to GST positive cancers, was identified in 2006 as a new product candidate. TLK58747 causes apoptosis and G2/M cell cycle
arrest in a broad array of human cancer cell lines including those not expressing GST P1-1. It has shown significant anti-tumor activity in human breast, pancreatic 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 to support the potential filing of an IND application with the FDA.

Using our TRAP technology we discovered a MCP-1 antagonist, C243, a small molecule that has been shown to prevent leukocyte infiltration, a process linked to tissue injury in chronic autoimmune and inflammatory
diseases such as multiple sclerosis, rheumatoid arthritis and atherosclerosis. In January 2007, we announced an agreement with SRI International, or SRI, under which SRI will fund and conduct preclinical studies of C243 for the potential treatment
of multiple sclerosis and other autoimmune and inflammatory diseases.

We discovered all of our product candidates using our proprietary
technology, Target-Related Affinity Profiling, or TRAP, which we believe enables the rapid and efficient discovery of small molecule 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.

Restructuring Plan

In February 2007,
we implemented a restructuring plan that focused our priorities on the ASSIST-5 trial and the Phase 1-2a trial of TELINTRA Tablets and selected research and development programs. To match these priorities, we reduced our workforce by 38 positions,
streamlined our infrastructure and postponed some clinical research projects. As a result of the restructuring plan, we recorded a one-time restructuring charge of approximately $1.4 million of which approximately $1.3 million was paid in the
quarter ended March 31, 2007 as severance, payroll taxes and other personnel related costs and the remaining payments of approximately $30,000 paid in the quarter ended June 30, 2007. Approximately $33,000 of the charge was reversed in the
quarter ended June 30, 2007 as certain health benefits accrued were not utilized. The restructuring plan has been completed and we will continue to investigate alternative opportunities for the advancement of our product development programs,
including collaborations with pharmaceutical and larger biotechnology companies.

Critical Accounting Policies and Significant Judgments and Estimates

Our managements discussion and analysis of our financial condition and results of operations are based on our financial
statements, which have been prepared in accordance with U.S. generally accepted accounting principles, 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 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.



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

Fair value measurements

Effective January 1, 2008, we adopted FAS 157 which establishes a framework for measuring fair value in generally accepted accounting principles and
expands disclosure about fair value measurements. In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157, which provides a one year deferral of the effective date of FAS 157 for
non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. Therefore, we have adopted the provisions of FAS 157 with respect to our financial assets
and liabilities only.

Fair value is defined under FAS 157 as the exchange price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under FAS 157 must
maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy 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; and
|        | 
|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.                                                                                                                                                                                            

Stock-based compensation expense

On January 1, 2006, we adopted FAS 123R, and use the fair value method to account for share-based payment awards following the modified prospective
method of adoption which provides for certain changes to the method for valuing stock-based compensation. Under the provisions of FAS 123R, employee stock-based compensation is estimated at the date of grant based on the employee stock awards
fair value using the Black-Scholes option-pricing model and is recognized as expense ratably over the requisite service period in a manner similar to other forms of compensation paid to employees. The Black-Scholes option-pricing model requires the
use of certain subjective assumptions. The most significant of these assumptions are our estimates of the expected volatility of the market price of our stock and the expected term of the award. Our expected stock-price volatility assumption for
2007 and 2008 is a blended rate of 50% of historical volatility and 50% implied volatility since sufficient market activity exists with respect to our traded options. The expected term of options granted is based on the simplified method in
accordance with the SEC Staff Accounting Bulletin No. 110 (SAB 110) as our historical share option exercise experience does not provide a reasonable basis for estimation. SAB 110 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 SFAS No. 123(R), Share-Based Payment. SAB 110 amends SAB 107 allowing companies to
continue using the simplified method, under certain circumstances, beyond December 31, 2007. FAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from
those estimates. We adjusted our forfeiture rate during the first quarter of 2008 to reflect actual historical and expected cancellations of unvested options due to a higher than estimated level of terminations. See also Note 2, Employee
Stock-Based Compensation, in the Notes to Condensed Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information.



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

Research and
development expenses

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

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

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 2007 and currently do not expect to record any revenues in 2008. 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 June 30, 2008 and 2007 were $8.2 million and
$11.9 million. Research and development expenses for the six months ended June 30, 2008 and 2007 were $16.4 million and $24.8 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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The approximate costs associated with research and preclinical and clinical development activities were
as follows:



|                               |  |                                    |       |         |   |        |                          |     |         |  |   |        |  |   |        |  |     |   
|------------------------------ |  | ---------------------------------- | ----- | ------- | - | ------ | ------------------------ | --- | ------- |  | - | ------ |  | - | ------ |  | --- | --
|                               |  | Three Months EndedJune 30,         |       | %Change |   |        | Six Months EndedJune 30, |     | %Change | 
|                               |  | 2008                               |       | 2007    |   |        | 2008                     |     | 2007    | 
|                               |  | (In thousands, except percentages) |      
|Research and preclinical       |  | $                                  | 3,713 |         | $ | 4,655  |                          | (20 | )%      |  | $ | 7,733  |  | $ | 9,389  |  | (18 | )%
|Clinical development           |  |                                    | 4,523 |         |   | 7,214  |                          | (37 | )%      |  |   | 8,698  |  |   | 15,424 |  | (44 | )%
|                               |  |                                    |       |         |   |        |                          |     |         |  |   |        |  |   |        |  |     |   
|Total research and development |  | $                                  | 8,236 |         | $ | 11,869 |                          | (31 | )%      |  | $ | 16,431 |  | $ | 24,813 |  | (34 | )%
|                               |  |                                    |       |         |   |        |                          |     |         |  |   |        |  |   |        |  |     |   

The decrease of 31%, or $3.6 million, in research and development expenses for the three months
ended June 30, 2008 compared to the same period in 2007 was principally due to the following:



| |  |  | decreased costs of approximately $1.2 million associated with headcount reduction and corresponding reduction in personnel costs and clinical activities;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | reduction of approximately $1.8 million as Phase 3 clinical trial study activities in our ASSIST-1, ASSIST-2, ASSIST-3 and ASSIST-5 are near completion;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | lower stock-based compensation expense of approximately $642,000 primarily due to an increase in our forfeiture rate and complete vesting of stock options granted
in earlier periods.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The decrease of 34%, or $8.4 million, in research and development expenses for the six months ended
June 30, 2008 compared to the same period in 2007 was principally due to the following:



| |  |  | decreased costs of approximately $3.4 million associated with headcount reduction including our corporate restructuring implemented in February 2007 and
corresponding reduction in clinical activities;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | reduction of approximately $4.1 million as Phase 3 clinical trial study activities in our ASSIST-1, ASSIST-2, ASSIST-3 and ASSIST-5 are near completion;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | decrease of approximately $518,000 in Phase 2 study expenses in TELCYTA Phase 1-2 clinical trials in ovarian and lung cancer combination and TELINTRA Phase 1-2a
clinical trials in MDS, and partially offset by a $294,000 increase in drug supply costs for two new TELINTRA Tablets clinical trials;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | lower stock-based compensation expense of approximately $584,000 primarily due to an increase in our forfeiture rate and complete vesting of stock options granted
in earlier periods.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We expect total research and development expenditures to decrease in the next twelve months as we
focus on the Phase 2 clinical trials of TELINTRA Tablets, preclinical studies on TLK58747 and reduced development of TELCYTA. We expect both clinical and manufacturing expenditures to be lower than previous quarters and the timing and the amount of
these expenditures will depend on the results of the interim analysis of the ASSIST-5 trial and the progress of the TELINTRA Tablets Phase 2 clinical trials.

The following table summarizes our principal product candidate development initiatives, including the related stages of development for each product in development and the research and development expenses recognized
in connection with each product candidate. The information in the column labeled Estimated or Actual Completion of Enrollment reflects the date enrollment was completed or our current estimate of the timing of completion of enrollment
for each trial as applicable. The actual timing of completion of enrollment could differ materially from the estimates provided in the table. For a discussion of the risks and uncertainties associated with the timing of completing a product
development phase, see the risk factors in Part II, Item 1A Risk Factors entitled: All of our product candidates are in research and development. If clinical trials of TELCYTA or TELINTRA are delayed or unsuccessful or if we are unable to
complete the preclinical development of our other preclinical product candidates, our business may suffer, If we do not obtain regulatory approval to market products in the United States and foreign countries, we or our collaborators
will not be permitted to commercialize our product candidates, As our product programs advance, we 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, and If we are unable to enter into or maintain existing contracts with third parties to manufacture our product candidates or any products that we may



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develop in sufficient quantities and at an acceptable cost, clinical development of product candidates could be delayed and we may be unable to meet demand
for any products that we may develop and lose potential revenue as described in Part II, Item 1A Risk Factors below.



|                                       |  |                                |  |                     |  |                                           |  |                                             |        |  |   |       
|-------------------------------------- |  | ------------------------------ |  | ------------------- |  | ----------------------------------------- |  | ------------------------------------------- | ------ |  | - | ------
|Product                                |  | Description                    |  | Phase ofDevelopment |  | Estimated orActualCompletion ofEnrollment |  | Related R&DExpensesSix Months EndedJune 30,
|                                       |  |                                |  | 2008                |  | 2007                                     
|                                       |  |                                |  |                     |  |                                           |  | (in thousands)                             
|TELCYTA                                |  |                                |  |                     |  |                                           |  | $                                           | 7,496  |  | $ | 15,006
|                                       |  | Ovarian, ASSIST-1              |  | Phase 3             |  | 2004                                      |  |                                             |        |  |   |       
|                                       |  | Non-small cell lung, ASSIST-2  |  | Phase 3             |  | 2005                                      |  |                                             |        |  |   |       
|                                       |  | Ovarian, ASSIST-3              |  | Phase 3             |  | 2006                                      |  |                                             |        |  |   |       
|                                       |  | Ovarian, ASSIST-5              |  | Phase 3             |  | 2007                                      |  |                                             |        |  |   |       
|                                       |  | Combination (with other drugs) |  | Phase 2             |  | 2006                                      |  |                                             |        |  |   |       
|TELINTRA                               |  |                                |  |                     |  |                                           |  |                                             | 1,846  |  |   | 1,189 
|                                       |  | MDS                            |  | Phase 1-2           |  | 2005                                      |  |                                             |        |  |   |       
|                                       |  | MDS Tablets                    |  | Phase 1-2a          |  | 2007                                      |  |                                             |        |  |   |       
|                                       |  | MDS Tablets                    |  | Phase 2             |  | 2009                                      |  |                                             |        |  |   |       
|                                       |  | CIN Tablets                    |  | Phase 2             |  | 2009                                      |  |                                             |        |  |   |       
|Other (1)                              |  |                                |  |                     |  |                                           |  |                                             | 7,089  |  |   | 8,618 
|                                       |  |                                |  |                     |  |                                           |  |                                             |        |  |   |       
|Total research and development expense |  |                                |  |                     |  |                                           |  | $                                           | 16,431 |  | $ | 24,813
|                                       |  |                                |  |                     |  |                                           |  |                                             |        |  |   |       



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

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



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



| |  |  | filing with the FDA of an IND to conduct initial human clinical trials for drug candidates;
| | - |  | -------------------------------------------------------------------------------------------



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



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

In light of the factors mentioned above, we consider the active management and development of our clinical pipeline to
be crucial to our long-term success. The actual probability of success for each drug product candidate and clinical program may be impacted by a variety of factors, including, among others, the quality of the drug product 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 in these programs or the future cash inflows from these programs, if any.



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General and administrative expenses



|                           |  |                                    |       |         |   |       |                          |     |         |  |   |       |  |   |       |  |     |   
|-------------------------- |  | ---------------------------------- | ----- | ------- | - | ----- | ------------------------ | --- | ------- |  | - | ----- |  | - | ----- |  | --- | --
|                           |  | Three Months EndedJune 30,         |       | %Change |   |       | Six Months EndedJune 30, |     | %Change | 
|                           |  | 2008                               |       | 2007    |   |       | 2008                     |     | 2007    | 
|                           |  | (In thousands, except percentages) |      
|General and administrative |  | $                                  | 2,773 |         | $ | 3,979 |                          | (30 | )%      |  | $ | 5,186 |  | $ | 7,631 |  | (32 | )%

The decrease in general and administrative expenses of 30%, or $1.2 million in the three months
ended June 30, 2008 compared to the same period in 2007 was primarily due to approximately $774,000 associated with headcount reduction as well as lower marketing and patent application expenses. In addition, stock-based compensation expense
decreased by approximately $431,000 due to an increase in our forfeiture rate and complete vesting of stock options granted in earlier periods.

The decrease in general and administrative expenses of 32%, or $2.4 million in the six months ended June 30, 2008 compared to the same period in 2007 was primarily due to approximately $954,000 associated with headcount reduction and
lower marketing expenses. In addition, legal expenses decreased by approximately $452,000 primarily due to lower patent application and term extension activities. Stock-based compensation expense also decreased by approximately $1.0 million due to
an increase in our forfeiture rate and complete vesting of stock options granted in earlier periods.

We expect general and administrative
expenses in 2008 to be lower compared to 2007 primarily due to lower headcount and decreased stock-based compensation expense.

Stock-Based Compensation
Expense

Employee stock-based compensation expense related to our share-based payment awards recognized under SFAS 123R was as follows:



|                                              |  |                            |       |                          |   |       |  |      |       |  |   |      
|--------------------------------------------- |  | -------------------------- | ----- | ------------------------ | - | ----- |  | ---- | ----- |  | - | -----
|                                              |  | Three Months EndedJune 30, |       | Six Months EndedJune 30,
|                                              |  | 2008                       |       | 2007                     |   | 2008  |  | 2007
|                                              |  | (in thousands)            
|Research and development                      |  | $                          | 1,268 |                          |   | 1,910 |  | $    | 2,481 |  | $ | 3,066
|General and administrative                    |  |                            | 704   |                          |   | 1,135 |  |      | 863   |  |   | 1,900
|                                              |  |                            |       |                          |   |       |  |      |       |  |   |      
|Stock-based compensation expense before taxes |  |                            | 1,972 |                          |   | 3,045 |  |      | 3,344 |  |   | 4,966
|Related income tax benefits                   |  |                            |      |                          |   |      |  |      |      |  |   |     
|                                              |  |                            |       |                          |   |       |  |      |       |  |   |      
|Effect on net loss                            |  | $                          | 1,972 |                          | $ | 3,045 |  | $    | 3,344 |  | $ | 4,966
|                                              |  |                            |       |                          |   |       |  |      |       |  |   |      

The decrease in employee stock-based compensation expense for the six months ended June 30,
2008 compared with the same period for 2007 was principally due to complete vesting of stock options granted in earlier periods along with an increase in our forfeiture rate from 11.4% to 15.7% to reflect actual historical and expected cancellations
of unvested options due to a higher than originally estimated level of terminations.

Restructuring costs

As a result of our workforce reduction of 38 positions, we recorded a one-time restructuring charge of approximately $1.4 million for severance costs and
other charges in the quarter ended March 31, 2007. We reversed approximately $33,000 in the quarter ended June 30, 2007 as certain health benefits accrued were not utilized. The restructuring plan was completed as of June 30, 2007. We
have no restructuring charge for the three and six months ended June 30, 2008.



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Interest income and interest expense



|                                         |  |                                    |        |   |         |   |       |                          |      |      |         |      |   |        |   |  |   |       |   |  |      |   
|---------------------------------------- |  | ---------------------------------- | ------ | - | ------- | - | ----- | ------------------------ | ---- | ---- | ------- | ---- | - | ------ | - |  | - | ----- | - |  | ---- | --
|                                         |  | Three Months EndedJune 30,         |        |   | %Change |   |       | Six Months EndedJune 30, |      |      | %Change |     
|                                         |  | 2008                               |        |   | 2007    |   |       |                          | 2008 |      |         | 2007 |   |       
|                                         |  | (In thousands, except percentages) |       
|Interest and other income (expense), net |  | $                                  | (2,560 | ) |         | $ | 1,512 |                          |      | (269 | )%      |      | $ | (1,760 | ) |  | $ | 3,198 |   |  | (155 | )%
|Interest expense                         |  |                                    |       |   |         |   | (20   | )                        |      | 100  | %       |      |   |       |   |  |   | (43   | ) |  | 100  | % 

Interest and other income (expense), net resulted primarily from investment activities. The
decrease of approximately $4.1 million for the three months ended June 30, 2008 compared to 2007 was due to a $1.0 million decrease in investment income as a result of lower investment cash balances and lower interest rates and a write-down
expense of approximately $3.1 million of investments in auction rate securities due to changes in market conditions resulting in an other-than-temporary impairment.

The decrease of approximately $5.0 million for the six months ended June 30, 2008 compared to 2007 was due to a $1.8 million decrease in investment income as a result of lower investment cash balances and lower
interest rates and a write-down expense of approximately $3.2 million of investments in auction rate securities due to changes in market conditions resulting in an other-than-temporary impairment.

There was no interest expense for the three and six months ended June 30, 2008 as our lease and loan obligations were fully paid off at
December 31, 2007.

Liquidity and capital resources



|                                                               |  |                              |       |                  |   |      
|-------------------------------------------------------------- |  | ---------------------------- | ----- | ---------------- | - | -----
|                                                               |  | June 30,2008                 |       | December 31,2007
|                                                               |  | (in millions, except ratios)
|Cash, cash equivalents, investments and restricted investments |  | $                            | 72.4  |                  | $ | 93.2 
|Working capital                                                |  | $                            | 48.6  |                  | $ | 69.4 
|Current ratio                                                  |  |                              | 6.0:1 |                  |   | 7.3:1



|                              |  |                          |       |   |      |   |       |  
|----------------------------- |  | ------------------------ | ----- | - | ---- | - | ----- | -
|                              |  | Six Months EndedJune 30, |      
|                              |  | 2008                     |       |   | 2007 |  
|                              |  | (in millions)            |      
|Cash (used in) / provided by: |  |                          |       |   |      |   |       |  
|Operating activities          |  | $                        | (16.7 | ) |      | $ | (27.3 | )
|Investing activities          |  | $                        | 15.4  |   |      | $ | 6.4   |  
|Financing activities          |  | $                        | 0.5   |   |      | $ | 0.3   |  

Sources and Uses of Cash. Due to the significant research and development expenditures and
the lack of any approved products to generate revenue, we have not been profitable and have generated operating losses since we incorporated in 1988. As such, we have funded our research and development operations through sale of equity securities,
non-equity payments from corporate partners, interest earned on investments and equipment lease and loan financings. At June 30, 2008, we had available cash, cash equivalents, investments and restricted investments of $72.4 million. Our cash
and investment balances are held in a variety of interest-bearing instruments including obligations of U.S. government agencies, high-grade corporate and municipal bonds, auction rate preferred securities and money market accounts. 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 six months ended June 30, 2008 was $16.7 million compared with $27.3 million for the same period in 2007. Net loss of $23.4 million in 2008 included non-cash charges of $3.3 million for stock-based compensation,
$583,000 for depreciation and amortization and $3.2 million for the write-down of marketable securities. Cash used in operations was further impacted by a $1.0 million reduction in accrued legal and related expenses primarily for amounts paid in
connection with the class action lawsuit discussed in the section entitled Legal Proceedings, below, and were partially offset by a decrease of $434,000 in interest receivables as a result of lower interest rates and



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investment balances. Operating cash outflows for the same period in 2007 resulted primarily from net loss of $30.6 million which included non-cash charges of
$5.0 million for stock-based compensation and $874,000 for depreciation and amortization. Cash used in operations was further impacted by a $2.1 million reduction in accrued clinical trials related primarily to the near completion of our Phase 3
clinical trials, a $1.4 million reduction in other accrued liabilities related mainly to manufacturing expenses and a $803,000 reduction in accounts payable. Cash outflows were partially offset by a decrease of $660,000 in prepaid expense and other
current assets primarily due to amortization of prepaid insurance balances.

Cash Flows from Investing Activities. Cash provided by
investing activities for the six months ended June 30, 2008 was $15.4 million compared with cash provided by investing activities of $6.4 million for the same period in 2007. Cash provided for the six months ended June 30, 2008 was
primarily from $13.5 million in maturities of investments and $15.5 million from sales of investments offset by $12.2 million in purchases of available-for-sale investments and an unrealized loss of $1.4 million on our auction rate
certificates. Cash provided for the same period in 2007 was primarily $14.0 million in maturities of investments and $50,000 from sales of investments offset by $7.5 million in purchases of available-for-sale investments.

Cash Flows from Financing Activities. Cash provided by financing activities for the six months ended June 30, 2008 was approximately $506,000
compared with $256,000 for the same period in 2007. Financing activities for the six months ended June 30, 2008 was comprised of $506,000 in proceeds from stock option exercises and purchases under our employee stock purchase plan. Financing
activities for the same period in 2007 was comprised primarily of $545,000 in proceeds from stock option exercises and purchases under our employee stock purchase plan, offset by $289,000 in payments under capital leases and equipment loans.

Working Capital. Working capital decreased to $48.6 million at June 30, 2008 from $69.4 million at December 31, 2007. The
decrease in working capital was primarily due to our use of cash for operating expenses and our TELCYTA and TELINTRA development programs.

Given our current development plan, we believe our existing cash resources will be sufficient to satisfy our current operating plan until the end of 2009. Changes in our research and development plans or other changes affecting our
operating expenses may affect actual future consumption of existing cash resources as well. In any event, we will require substantial additional financing to fund our operations in the future. We may seek to raise any necessary additional funds
through equity or debt financings, collaborative arrangements with corporate partners or other sources. To the extent that we raise additional capital by issuing equity securities, our stockholders may experience dilution. Debt financing may subject
us to restrictive covenants that may adversely affect our operations. To the extent that we raise additional capital through licensing arrangements or arrangements with collaborative partners, we may be required to relinquish, on terms that are not
favorable to us, rights to some of our technologies or product candidates that we would otherwise seek to develop or commercialize ourselves. Our future capital uses and requirements depend on numerous factors, including the following:



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



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



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



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



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



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



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



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



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



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

Our future contractual obligations at June 30, 2008
were as follows:



|                 |  |                |        |      |   |           |  |           |       |           |   |       |  |   |      
|---------------- |  | -------------- | ------ | ---- | - | --------- |  | --------- | ----- | --------- | - | ----- |  | - | -----
|                 |  | Total          |        | 2008 |   | 2009-2010 |  | 2011-2012 |       | After2012
|                 |  | (in thousands)
|Operating leases |  | $              | 21,922 |      | $ | 1,760     |  | $         | 7,346 |           | $ | 7,738 |  | $ | 5,078

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 US 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 long 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.

Our investment portfolio includes $18.7 million (par value) in corporate and municipal notes investments with an auction reset feature (auction
rate certificates and auction preferred stock), collectively known as auction rate securities, or ARS. In September 2007, $8.9 million invested in ARS had failed to settle in scheduled auctions. An auction failure means
that the parties wishing to sell securities could not, but does not result in the securities going into default because the issuer continues to pay interest. In February 2008, auctions failed for the remaining $9.8 million of our ARS whose
underlying assets are generally student loans which are substantially backed by the federal government. While we continue to earn interest rates on these investments, these investments are not liquid and their carrying amounts are impaired due to
the adverse change in the corporate debt market.

Effective January 1, 2008, we determine the fair market values of our financial
instruments based on the fair value hierarchy established in FAS 157 which requires an entity to maximize the use of observable inputs (Level 1 and Level 2 inputs) and minimize the use of unobservable inputs (Level 3 inputs) when measuring fair
value. At June 30, 2008, the fair values of our ARS were estimated using discounted cash flow models. 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 fair value of our auction preferred stock takes into account factors such as credit quality, likelihood of redemption, duration and credit default swap data points for monoline insurers.
The underlying assets of our auction rate certificates are



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##### Table of Contents

primarily comprised of student loans and their fair values were measured by considering factors such as 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. As a result of the lack of liquidity in the ARS market and not as a result of the quality of the underlying
collateral, we recorded an unrealized loss on our auction rate certificates of $1.4 million, which is reflected in accumulated other comprehensive income in our condensed balance sheet and a charge to interest and other income (expense), net of
approximately $3.2 million in the carrying value of our auction preferred stock for the six months ended June 30, 2008.

Because we
have no visibility as to when our ARS will eventually settle, we have classified them as long-term investments on our balance sheet. Based on our ability to access our cash and other short-term investments and our expected operating cash flow needs,
we do not anticipate the lack of liquidity on these investments will affect our ability to operate our business as planned.

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



|                              |  |                                    |        |   |      |   |       |                |  |   |        |   |  |                            |        |   |  |   |       
|----------------------------- |  | ---------------------------------- | ------ | - | ---- | - | ----- | -------------- |  | - | ------ | - |  | -------------------------- | ------ | - |  | - | ------
|                              |  | 2008                               |        |   | 2009 |   |       | 2010and Beyond |  |   | Total  |   |  | Fair Value atJune 30, 2008
|                              |  | (in thousands, except percentages)
|Available-for-sale securities |  | $                                  | 14,390 |   |      | $ | 2,877 |                |  | $ | 18,700 |   |  | $                          | 35,967 |   |  | $ | 30,614
|Average interest rate         |  |                                    | 3.07   | % |      |   | 3.10  | %              |  |   | 2.49   | % |  |                            | 2.77   | % |  |   |       



|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 June 30, 2008.

Changes in internal control over financial reporting. There were no changes in our internal controls over financial reporting
during the quarter ended June 30, 2008 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 1. | Legal Proceedings
|------- | -----------------

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. All of the complaints allege 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 drug TELCYTA. The allegations of the consolidated amended complaint are similar, but more narrow
than the original complaints. Plaintiffs seek 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. This
agreement is contingent on a number of factors, including the disposition of any objections and court approval. As such, the ultimate outcome of the class action cannot presently be determined. It is currently anticipated that the settlement will be
funded primarily by proceeds from insurance. The court has given its preliminary approval of the settlement, the class has been notified, and a hearing on final approval of the settlement is currently set for September 5, 2008.

In August 2007, a separate party who claims to be an owner of our common stock filed a derivative action on behalf of the company against certain of our
current and former directors. The allegations are similar to those made in the class action regarding the development of TELCYTA; however, it seeks a recovery only on behalf of the company. In January 2008, the plaintiff voluntarily dismissed this
complaint without prejudice.



|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, 2007, as filed with the SEC
on March 3, 2008, are set forth below. These risk factors have not substantively changed, except for those identified by asterisk and restated below.

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

Due to the significant research and development expenditures required to develop our TRAP technology and identify new product candidates, and the lack of
any products to generate revenue, we have not been profitable and have incurred operating losses since we were incorporated in 1988. As of June 30, 2008, we had an accumulated deficit of $471.5 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.



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

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

To obtain regulatory approvals, we must, among other requirements, complete carefully controlled and well-designed clinical trials demonstrating that a particular drug is safe and effective for the applicable disease.
TELCYTA has, to date, been evaluated in multiple Phase 1, Phase 2 and Phase 3 clinical trials. The Phase 3 clinical trials (ASSIST-1, 2, 3 and 5) compare TELCYTA to a control arm consisting of currently established standard drug treatments for
ovarian and lung cancers. On June 3, 2007, we presented final results at the 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 TELCYTA clinical trials, and patients being treated on the 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 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. An analysis will be conducted on the patients currently enrolled on the ASSIST-5 trial and depending on the timing and the results of the analysis, we may not be able to resume the study.
If the data on the ASSIST-5 trial is 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. Our success depends in part on our ability to continue clinical
development of TELINTRA or advance our preclinical product candidates.

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.



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

Delays in clinical testing can also materially impact our
product 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 recruitment incentives. If the delays are significant, our financial results and the commercial prospects for our product candidates will be harmed, and our ability to become profitable
will be delayed.

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

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

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

The process of carrying out the development of our own unpartnered product candidates to later stages of development and developing other research programs to the stage that they may be partnered 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 the end of 2009. 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 obtain financing on terms favorable to our
stockholders. As of June 30, 2008, our accumulated deficit was $471.5 million, and we expect capital outlays and operating expenditures to increase over the next several years as we expand our clinical, research and development activities. The
extent of any actual increase in operating or capital spending will depend in part on the clinical success of our product candidates. If we fail to raise adequate funds on terms acceptable to us, if at all, we will not be able to continue to fund
our operations, research programs, preclinical testing, clinical trials and manufacturing efforts.

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

At June 30, 2008, we had $40.9 million in cash and cash equivalents and $30.6 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, 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 a negative adverse effect on our results of operations, liquidity and financial condition.



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$18.7 million (par value) of our investment portfolio is invested in corporate and municipal notes
investments with an auction reset feature (auction rate certificates and auction preferred stock), collectively known as auction rate securities, or ARS. In September 2007, $8.9 million invested in ARS had failed to settle in
scheduled auctions. An auction failure means that the parties wishing to sell securities could not, but does not result in the securities going into default because the issuer continues to pay interest. In February 2008, auctions failed for the
remaining $9.8 million of our ARS whose underlying assets are generally student loans which are substantially backed by the federal government. 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 $3.9 million thru June 30, 2008. 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. 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. If we are unable to liquidate our ARS to obtain funds when needed we may be unable to fund our operations.

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

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

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

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

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

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



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

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

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

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



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



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



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



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



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



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

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

If regulatory clearance of a product is granted, this clearance will be limited to those disease states and conditions for which
the product is demonstrated through clinical trials to be safe and efficacious, which could limit our market opportunity. Furthermore, product approvals, once granted, may be withdrawn if problems occur after initial marketing. We cannot ensure that
any 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.



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

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

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

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

On
February 12, 2007, our Board of Directors committed to a restructuring which resulted in a reduction of 38 positions, or approximately 25% 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 future workforce reductions. In addition, there is currently a shortage of skilled executives and employees with technical expertise in the biotechnology
industry and this shortage is likely to continue. As a result, competition among numerous companies, academic and other research institutions for skilled personnel and experienced scientists is intense and turnover rates are high. The cost of living
in the San Francisco Bay Area is high compared to other parts of the country, which may adversely affect our ability to compete for qualified personnel and will increase costs. Because of this competitive environment, we have encountered and may
continue to encounter increasing difficulty in attracting qualified personnel if our operations expand and the demand for these professionals increases, and this difficulty could significantly impede the achievement of our research and development
objectives.

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

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



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



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



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



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



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



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



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

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

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



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



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



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



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



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



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



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

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

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



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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.

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 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. While we have entered into an agreement with, and are working to qualify, an additional supplier, there is no certainty this will occur. We currently depend upon two sources for the drug product
manufacture of TELCYTA.

We 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.

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

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



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

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

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

The testing and marketing of medical products entail an inherent risk of product liability. Although we are not aware of any historical or anticipated
product liability claims or specific causes for concern, if we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our product candidates and any
products that we may develop. In addition, product liability claims may also result in withdrawal of clinical trial volunteers, injury to our reputation and decreased demand for any products that we may commercialize. We currently carry product
liability insurance that covers our clinical trials up to a $10 million annual aggregate limit. We will need to increase the amount of coverage if and when we have a product that is commercially available. If we are unable to obtain sufficient
product liability insurance at an acceptable cost, potential product liability claims could prevent or inhibit the commercialization of any products that we may develop, alone or with corporate partners.

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

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

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

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



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



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



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



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



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



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

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

In November 2001, our board of directors adopted a stockholder rights plan that may
have the effect of discouraging, delaying or preventing a merger or acquisition that is beneficial to our stockholders by diluting the ability of a potential acquiror to acquire us. Pursuant to the terms of our plan, when a person or group, except
under certain circumstances, acquires 20% or more of our outstanding common stock or 10 business days after commencement or announcement of a tender or exchange offer for 20% or more of our outstanding common stock (an Acquiring Person),
the rights (except those rights held by the person or group who has acquired or announced an offer to acquire 20% or more of our outstanding common stock) would generally become exercisable for shares of our common stock at a discount. In May 2006,
we amended the stockholder 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 June 30, 2008, 53,213,252 shares of our common stock were outstanding, of which 52,914,357 shares were freely tradable and 298,895 shares were transferable in accordance with certain volume,
notice and manner of sale restrictions under Rule 144 of the Securities Act of 1933.

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

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

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

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 six months ended June 30, 2008, our common stock traded between $1.18 and $3.65. 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;
| | - |  | ---------------------------------------------------------------



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| |  |  | 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 filed 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. All of the complaints allege 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 drug TELCYTA. The allegations of the consolidated amended complaint are similar, but more narrow than the original complaints. Plaintiffs
seek 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. This agreement is contingent on a
number of factors, including the disposition of any objections and court approval. It is currently anticipated that the settlement will be funded primarily by proceeds from insurance. The court has given its preliminary approval of the settlement,
the class has been notified, and a hearing on final approval of the settlement is currently set for September 5, 2008.

In August
2007, a separate party who claims to be an owner of our common stock filed a derivative action on behalf of the company against certain of our current and former directors. The allegations are similar to those made in the class action regarding the
development of TELCYTA; however, it seeks a recovery only on behalf of the company. In January 2008, the plaintiff voluntarily dismissed this complaint without prejudice. We cannot assure you that this or separate derivative shareholder actions will
not be filed in the future.

Although the parties have reached a preliminary settlement to the class action claims, the ultimate outcome of
the class action cannot presently be determined. The current, and any future related or unrelated lawsuits or derivative actions, may require significant commitment of our financial and management resources and time, which may seriously harm our
business, financial condition and results of operations. We cannot assure you that the allegations discussed above can be resolved without costly and protracted litigation, and the outcome may have a materially adverse impact upon our financial
position, results of operations and cash flows.

In addition, the uncertainty of the currently pending litigation could lead to more
volatility in our stock price. We may in the future be the target of securities class action or shareholder derivative claims similar to those described above.



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##### Table of Contents

|Item 4. | Submission of Matters To a Vote of Security Holders
|------- | ---------------------------------------------------

We held our 2008 Annual Meeting of Stockholders on May 21, 2008. At the annual meeting, our stockholders voted to re-elect certain members of our board of directors and to ratify the selection of our independent
registered public accounting firm. The results of the voting were as follows:



| | 1. | To approve the election of Edward W. Cantrall, Ph.D., to hold office as a director until the 2011 Annual Meeting of Stockholders.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------

FOR: 42,732,238                 WITHHOLD: 5,660,136

To approve the election of Steven R. Goldring, M.D., to hold office as a director until the 2011 Annual Meeting of Stockholders.

FOR: 42,724,327                 WITHHOLD: 5,668,047

The other directors whose term of office as a director continued after the Annual Meeting of Stockholders are Stefan Ryser, Ph.D., Robert
W. Frick, Mary Ann Gray, Ph.D., Michael M. Wick, M.D., Ph.D., Richard B. Newman, and Herwig von Morzé, Ph.D.



| | 2. | To ratify the selection of Ernst & Young LLP as the independent registered public accounting firm of Telik for its fiscal year ending December 31, 2008.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------

FOR: 42,879,694                 WITHHOLD:
163,359             ABSTAIN: 5,349,321

BROKER NON-VOTES: -0-



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##### Table of Contents

|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 Exhibit4.2 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. Butitta Chief Operating Officer and Chief
Financial Officer (Duly Authorized Officer and Principal Financial Officer)


Date: August 11, 2008



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##### Table of Contents

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).
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



40