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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549



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FORM 10-Q



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



FOR THE QUARTERLY PERIOD ENDED September 30, 2005



OR



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



FOR THE TRANSITION PERIOD FROM  TO
.



COMMISSION FILE NUMBER: 0-31265



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TELIK, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)



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



3165 PORTER DRIVE,
PALO ALTO, CA 94304

(ADDRESS, INCLUDING ZIP CODE, OF PRINCIPAL EXECUTIVE OFFICES)



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



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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 an accelerated filer (as defined in Rule 12b-2 of the Exchange
Act).    Yes  x    No ̈



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



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



|                                    |  |                                                   
|----------------------------------- |  | --------------------------------------------------
|Class: Common Stock $0.01 par value |  | Outstanding at October 31, 2005: 52,024,897 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 September 30, 2005 and December 31, 2004                               |  | 3   
|           |  |                                                                                                   
|           |  | Condensed Statements of Operations for the three and nine months ended September 30, 2005 and 2004 |  | 4   
|           |  |                                                                                                   
|           |  | Condensed Statements of Cash Flows for the nine months ended September 30, 2005 and 2004           |  | 5   
|           |  |                                                                                                   
|           |  | Notes to Condensed Financial Statements                                                            |  | 6   
|           |  |                                                                                                   
|Item 2:    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations              |  | 11  
|           |  |                                                                                                   
|Item 3:    |  | Quantitative and Qualitative Disclosures About Market Risk                                         |  | 29  
|           |  |                                                                                                   
|Item 4:    |  | Controls and Procedures                                                                            |  | 29  
|           |  |                                                                                                   
|PART II.   |  | OTHER INFORMATION                                                                                  |  |     
|           |  |                                                                                                   
|Item 6:    |  | Exhibits                                                                                           |  | 31  
|           | 
|SIGNATURES |  | 32                                                                                                



2



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##### Table of Contents

PART I. FINANCIAL INFORMATION



Item 1. Financial Statements (Unaudited)



TELIK, INC.

CONDENSED BALANCE SHEETS

(In thousands, except share and per share data)



|                                                                                                                                                                  |  |                   |          |   |                  |   |          |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                                                  |  | September 30,2005 |          |   | December 31,2004 |  
|                                                                                                                                                                  |  | (Unaudited)       |          |   | (Note 1)         |  
|Assets                                                                                                                                                            |  |                   |          |   |                  |   |          |  
|Current assets:                                                                                                                                                   |  |                   |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                                                         |  | $                 | 110,635  |   |                  | $ | 56,221   |  
|Short-term investments                                                                                                                                            |  |                   | 106,683  |   |                  |   | 80,630   |  
|Other receivables                                                                                                                                                 |  |                   | 701      |   |                  |   | 517      |  
|Prepaids and other current assets                                                                                                                                 |  |                   | 2,065    |   |                  |   | 1,640    |  
|                                                                                                                                                                  |  |                   |          |   |                  |   |          |  
|Total current assets                                                                                                                                              |  |                   | 220,084  |   |                  |   | 139,008  |  
|                                                                                                                                                                  |  |                  
|Property and equipment, net                                                                                                                                       |  |                   | 5,308    |   |                  |   | 5,269    |  
|Restricted investments                                                                                                                                            |  |                   | 1,796    |   |                  |   | 1,796    |  
|Other assets                                                                                                                                                      |  |                   | 154      |   |                  |   | 60       |  
|                                                                                                                                                                  |  |                   |          |   |                  |   |          |  
|Total assets                                                                                                                                                      |  | $                 | 227,342  |   |                  | $ | 146,133  |  
|                                                                                                                                                                  |  |                   |          |   |                  |   |          |  
|Liabilities and Stockholders Equity                                                                                                                              |  |                   |          |   |                  |   |          |  
|Current liabilities:                                                                                                                                              |  |                   |          |   |                  |   |          |  
|Accounts payable                                                                                                                                                  |  | $                 | 1,699    |   |                  | $ | 4,697    |  
|Accrued clinical trials costs                                                                                                                                     |  |                   | 9,557    |   |                  |   | 7,719    |  
|Accrued compensation                                                                                                                                              |  |                   | 3,010    |   |                  |   | 3,349    |  
|Accrued liabilities                                                                                                                                               |  |                   | 1,095    |   |                  |   | 529      |  
|Deferred revenue                                                                                                                                                  |  |                   |         |   |                  |   | 19       |  
|Current portion of capital leases and equipment loans                                                                                                             |  |                   | 1,085    |   |                  |   | 1,339    |  
|                                                                                                                                                                  |  |                   |          |   |                  |   |          |  
|Total current liabilities                                                                                                                                         |  |                   | 16,446   |   |                  |   | 17,652   |  
|                                                                                                                                                                  |  |                  
|Non-current portion of capital leases and equipment loans                                                                                                         |  |                   | 286      |   |                  |   | 1,029    |  
|Other liabilities                                                                                                                                                 |  |                   |         |   |                  |   | 1,108    |  
|                                                                                                                                                                  |  |                  
|Commitments                                                                                                                                                       |  |                   |          |   |                  |   |          |  
|Stockholders equity:                                                                                                                                             |  |                   |          |   |                  |   |          |  
|Preferred stock, $0.01 par value: 5,000,000 shares authorized; none issued or outstanding                                                                         |  |                   |         |   |                  |   |         |  
|Common stock, $0.01 par value, 100,000,000 shares authorized; shares issued and outstanding: 52,024,633 at September 30, 2005 and
43,832,529 at December 31, 2004 |  |                   | 520      |   |                  |   | 438      |  
|Additional paid-in capital                                                                                                                                        |  |                   | 507,513  |   |                  |   | 363,872  |  
|Accumulated other comprehensive loss                                                                                                                              |  |                   | (372     | ) |                  |   | (218     | )
|Accumulated deficit                                                                                                                                               |  |                   | (297,051 | ) |                  |   | (237,748 | )
|                                                                                                                                                                  |  |                   |          |   |                  |   |          |  
|Total stockholders equity                                                                                                                                        |  |                   | 210,610  |   |                  |   | 126,344  |  
|                                                                                                                                                                  |  |                   |          |   |                  |   |          |  
|Total liabilities and stockholders equity                                                                                                                        |  | $                 | 227,342  |   |                  | $ | 146,133  |  
|                                                                                                                                                                  |  |                   |          |   |                  |   |          |  



See accompanying Notes
to Condensed Financial Statements.



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TELIK, INC.

CONDENSED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)



|                                                                     |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|-------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                     |  | Three Months EndedSeptember 30, |         |   | Nine Months EndedSeptember 30, |  
|                                                                     |  | 2005                            |         |   | 2004                           |   |         | 2005 |  |   | 2004    |  
|Contract revenue from collaborations                                 |  | $                               |        |   |                                | $ | 44      |      |  | $ | 19      |   |  | $ | 119     |  
|                                                                     |  |                                 |         |  
|Operating costs and expenses:                                        |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Research and development                                             |  |                                 | 17,057  |   |                                |   | 14,250  |      |  |   | 55,858  |   |  |   | 43,063  |  
|General and administrative                                           |  |                                 | 2,772   |   |                                |   | 2,551   |      |  |   | 8,534   |   |  |   | 7,904   |  
|                                                                     |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Total operating costs and expenses                                   |  |                                 | 19,829  |   |                                |   | 16,801  |      |  |   | 64,392  |   |  |   | 50,967  |  
|                                                                     |  |                                 |         |  
|Loss from operations                                                 |  |                                 | (19,829 | ) |                                |   | (16,757 | )    |  |   | (64,373 | ) |  |   | (50,848 | )
|                                                                     |  |                                 |         |  
|Interest income                                                      |  |                                 | 1,930   |   |                                |   | 746     |      |  |   | 5,178   |   |  |   | 1,946   |  
|Interest expense                                                     |  |                                 | (29     | ) |                                |   | (51     | )    |  |   | (108    | ) |  |   | (153    | )
|                                                                     |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Net loss                                                             |  | $                               | (17,928 | ) |                                | $ | (16,062 | )    |  |   | (59,303 | ) |  | $ | (49,055 | )
|                                                                     |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Basic and diluted net loss per common share                          |  | $                               | (0.34   | ) |                                | $ | (0.37   | )    |  | $ | (1.16   | ) |  | $ | (1.12   | )
|                                                                     |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Shares used to calculate basic and diluted net loss per common share |  |                                 | 51,995  |   |                                |   | 43,714  |      |  |   | 50,986  |   |  |   | 43,675  |  
|                                                                     |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  



See accompanying Notes
to Condensed Financial Statements.



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TELIK, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                            |  |                                |          |   |      |   |          |  
|--------------------------------------------------------------------------- |  | ------------------------------ | -------- | - | ---- | - | -------- | -
|                                                                            |  | Nine Months EndedSeptember 30, |         
|                                                                            |  | 2005                           |          |   | 2004 |  
|Cash flows from operating activities:                                       |  |                                |          |   |      |   |          |  
|Net loss                                                                    |  | $                              | (59,303  | ) |      | $ | (49,055  | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                                |          |   |      |   |          |  
|Depreciation and amortization                                               |  |                                | 1,135    |   |      |   | 1,018    |  
|Amortization of deferred stock compensation                                 |  |                                |         |   |      |   | 93       |  
|Stock options granted to non-employees                                      |  |                                |         |   |      |   | 197      |  
|Changes in assets and liabilities:                                          |  |                                |          |   |      |   |          |  
|Other receivables                                                           |  |                                | (184     | ) |      |   | (288     | )
|Prepaid expenses and other current assets                                   |  |                                | (425     | ) |      |   | (379     | )
|Accounts payable                                                            |  |                                | (2,998   | ) |      |   | 364      |  
|Accrued clinical trials, compensation and other liabilities                 |  |                                | 863      |   |      |   | 1,266    |  
|Deferred revenue                                                            |  |                                | (19      | ) |      |   | 38       |  
|                                                                            |  |                                |          |   |      |   |          |  
|Net cash used in operating activities                                       |  |                                | (60,931  | ) |      |   | (46,746  | )
|                                                                            |  |                                |          |   |      |   |          |  
|Cash flows from investing activities:                                       |  |                                |          |   |      |   |          |  
|Purchases of investments                                                    |  |                                | (130,928 | ) |      |   | (109,782 | )
|Sales of investments                                                        |  |                                | 72,750   |   |      |   | 122,435  |  
|Maturities of investments                                                   |  |                                | 31,971   |   |      |   | 30,215   |  
|Purchases of property and equipment                                         |  |                                | (1,174   | ) |      |   | (1,000   | )
|                                                                            |  |                                |          |   |      |   |          |  
|Net cash provided by (used) in investing activities                         |  |                                | (27,381  | ) |      |   | 41,868   |  
|                                                                            |  |                                |          |   |      |   |          |  
|Cash flows from financing activities:                                       |  |                                |          |   |      |   |          |  
|Proceeds from equipment loans                                               |  |                                |         |   |      |   | 1,091    |  
|Principal payments under capital leases and equipment loans                 |  |                                | (997     | ) |      |   | (805     | )
|Proceeds from issuance of common stock                                      |  |                                | 143,723  |   |      |   | 1,486    |  
|                                                                            |  |                                |          |   |      |   |          |  
|Net cash provided by financing activities                                   |  |                                | 142,726  |   |      |   | 1,772    |  
|                                                                            |  |                                |          |   |      |   |          |  
|Net increase (decrease) in cash and cash equivalents                        |  |                                | 54,414   |   |      |   | (3,106   | )
|Cash and cash equivalents at beginning of period                            |  |                                | 56,221   |   |      |   | 76,851   |  
|                                                                            |  |                                |          |   |      |   |          |  
|Cash and cash equivalents at end of period                                  |  | $                              | 110,635  |   |      | $ | 73,745   |  
|                                                                            |  |                                |          |   |      |   |          |  
|Supplementary information:                                                  |  |                                |          |   |      |   |          |  
|Interest paid                                                               |  | $                              | 108      |   |      | $ | 153      |  



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 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. 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 accruals) considered necessary for a fair presentation have been included. Operating results for the three months and nine months ended
September 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005 or any other period. The balance sheet at December 31, 2004 has been derived from the audited financial
statements at that date. You should read these financial statements and notes in conjunction with our audited financial statements for the year ended December 31, 2004, which are included in our Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 9, 2005.



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.



Revenue recognition



Contract revenue consists of revenue from research and development collaboration agreements. Our research and development
collaboration agreements provide for periodic payments in support of our research activities. We recognize contract revenue from these agreements as earned based upon the performance requirements of the agreements and we recognize payments of
up-front technology access and license fees ratably over the period of the related research program. Payments received, which are related to future performance, are deferred and recognized as revenue when earned over future performance periods.



Stock-based compensation



We issue stock options to our employees and outside directors and provide
employees the right to purchase our stock pursuant to stockholder approved stock option and employee stock purchase programs. We account for our stock-based compensation plans under the intrinsic value method of accounting as defined by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. For pro forma disclosures, the estimated fair value of the options is amortized over the vesting period, typically four years,
and the estimated fair value of the stock purchases is amortized over the six-month purchase period. The following table illustrates the effect on net loss and net loss per common share if we had accounted for our stock option and stock purchase
plans under the fair value method of accounting under Statement of Financial Accounting Standards, or SFAS, No. 123, Accounting for Stock Based Compensation, as amended by SFAS No. 148:



|                                                                                                         |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|-------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                                         |  | Three Months EndedSeptember 30, |         |   | Nine Months EndedSeptember 30, |  
|                                                                                                         |  | 2005                            |         |   | 2004                           |   |         | 2005 |  |   | 2004    |  
|                                                                                                         |  | (in thousands)                  |        
|Net loss  as reported                                                                                   |  | $                               | (17,928 | ) |                                | $ | (16,062 | )    |  | $ | (59,303 | ) |  | $ | (49,055 | )
|Add: Stock-based employee compensation included in reported net loss                                     |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   | 93      |  
|Deduct: Total stock-based employee compensation expense under the fair value based method for all awards |  |                                 | (5,194  | ) |                                |   | (3,441  | )    |  |   | (14,887 | ) |  |   | (11,182 | )
|                                                                                                         |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Net loss  pro forma                                                                                     |  | $                               | (23,122 | ) |                                | $ | (19,503 | )    |  | $ | (74,190 | ) |  | $ | (60,144 | )
|                                                                                                         |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Basic and diluted net loss per common share  as reported                                                |  | $                               | (0.34   | ) |                                | $ | (0.37   | )    |  | $ | (1.16   | ) |  | $ | (1.12   | )
|                                                                                                         |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Basic and diluted net loss per common share  pro forma                                                  |  | $                               | (0.44   | ) |                                | $ | (0.45   | )    |  | $ | (1.46   | ) |  | $ | (1.38   | )
|                                                                                                         |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  



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We estimate the fair value of our options using the Black-Scholes option valuation model, which is one of
several methods that can be used to estimate option values. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Option valuation
models require the input of highly subjective assumptions, including the expected stock price volatility. Our options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can
materially affect the fair value estimates. The fair value of options granted and employee purchase plan shares were estimated at the date of grant using a Black-Scholes pricing model with the following weighted-average assumptions:



|                                |  |                                 |   |  |                                 |   |  |      |   |  |      |  
|------------------------------- |  | ------------------------------- | - |  | ------------------------------- | - |  | ---- | - |  | ---- | -
|                                |  | Stock Option Plans              |   |  | Stock Purchase Plan             |  
|                                |  | Three Months EndedSeptember 30, |   |  | Three Months EndedSeptember 30, |  
|                                |  | 2005                            |   |  | 2004                            |   |  | 2005 |   |  | 2004 |  
|Expected stock price volatility |  | 65.3                            | % |  | 70.3                            | % |  | 65.3 | % |  | 78.5 | %
|Risk-free interest rate         |  | 3.88                            | % |  | 3.50                            | % |  | 3.85 | % |  | 1.51 | %
|Expected life (in years)        |  | 5.01                            |   |  | 5.02                            |   |  | 1.22 |   |  | 1.58 |  
|Expected dividend yield         |  |                                |   |  |                                |   |  |     |   |  |     |  
|                                |  |                                
|                                |  | Stock Option Plans              |   |  | Stock Purchase Plan             |  
|                                |  | Nine Months EndedSeptember 30,  |   |  | Nine Months EndedSeptember 30,  |  
|                                |  | 2005                            |   |  | 2004                            |   |  | 2005 |   |  | 2004 |  
|Expected stock price volatility |  | 67.1                            | % |  | 71.6                            | % |  | 67.5 | % |  | 78.9 | %
|Risk-free interest rate         |  | 3.86                            | % |  | 3.09                            | % |  | 3.18 | % |  | 1.34 | %
|Expected life (in years)        |  | 5.03                            |   |  | 5.07                            |   |  | 1.26 |   |  | 1.33 |  
|Expected dividend yield         |  |                                |   |  |                                |   |  |     |   |  |     |  



Stock compensation
expense for options granted to non-employees has been determined in accordance with SFAS 123 and EITF 96-18, Accounting for Equity Investments that are issued to other than Employees for Acquiring, or in Conjunction with Selling Goods or
Services, as the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measured. The fair value of options granted to non-employees is periodically re-measured as the underlying
options vest.



In December 2004, the Financial Accounting
Standards Board, or FASB, issued Statement of Financial Accounting Standards 123R (SFAS 123R), Share-Based Payment, effective beginning after June 15, 2005. SFAS 123R supersedes APB Opinion No. 25, Accounting for Stock
Issued to Employees, and will require companies to recognize compensation expense, using a fair-value based method, for costs related to share-based payments including stock options and stock issued under our employee stock purchase plans. In
April 2005, the Securities and Exchange Commission issued a rule allowing companies to implement SFAS 123R as of the beginning of their next fiscal year that begins after June 15, 2005. We will be required to implement SFAS 123R beginning
January 1, 2006. Our adoption will be applied on a modified prospective basis and measured and recognized on January 1, 2006. We are currently evaluating option valuation methodologies and assumptions in light of SFAS 123R, and therefore
cannot estimate the impact of our adoption at this time. These methodologies and assumptions may be different than those currently employed by us in applying SFAS 123 as outlined in our Stock-based Compensation section above. We expect
that our adoption of SFAS 123R will have a material impact on our financial statements and results of operations.



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2. 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. Comprehensive loss for the three and nine months ended September 30, 2005 and 2004 was as follows:



|                                                    |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|--------------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                    |  | Three Months EndedSeptember 30, |         |   | Nine Months EndedSeptember 30, |  
|                                                    |  | 2005                            |         |   | 2004                           |   |         | 2005 |  |   | 2004    |  
|                                                    |  | (in thousands)                  |        
|Net loss                                            |  | $                               | (17,928 | ) |                                | $ | (16,062 | )    |  | $ | (59,303 | ) |  | $ | (49,055 | )
|Changes in unrealized gains (losses) on investments |  |                                 | (65     | ) |                                |   | 74      |      |  |   | (154    | ) |  |   | (157    | )
|                                                    |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Comprehensive loss                                  |  | $                               | (17,993 | ) |                                | $ | (15,988 | )    |  | $ | (59,457 | ) |  | $ | (49,212 | )
|                                                    |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  



3. Basic and diluted net loss per
share



We have computed net loss per common share according to SFAS
No. 128, Earnings Per Share, which requires disclosure of basic and diluted earnings per share. Basic earnings per share exclude any dilutive effects of options, shares subject to repurchase, warrants and convertible securities.
Diluted earnings per share include the impact of potentially dilutive securities.



Outstanding options to purchase an aggregate of 8,371,771 and 6,397,285 shares of our common stock for the nine months ending September 30, 2005 and 2004 were excluded from diluted net loss per common share
calculations because inclusion of such options would have an anti-dilutive effect on losses in these periods.



4. Cash, cash equivalents, investments and restricted investments



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



|                            |  |                    |         |                      |   |                       |  |   |                     |   |  |   |        
|--------------------------- |  | ------------------ | ------- | -------------------- | - | --------------------- |  | - | ------------------- | - |  | - | -------
|                            |  | September 30, 2005
|                            |  | AmortizedCosts     |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | EstimatedFair Value
|                            |  | (in thousands)    
|Certificate of deposits     |  | $                  | 1,796   |                      | $ |                      |  | $ |                    |   |  | $ | 1,796  
|Corporate notes             |  |                    | 43,160  |                      |   |                      |  |   | (18                 | ) |  |   | 43,142 
|Commercial paper            |  |                    | 101,433 |                      |   |                      |  |   | (15                 | ) |  |   | 101,418
|Government notes            |  |                    | 63,880  |                      |   |                      |  |   | (339                | ) |  |   | 63,541 
|Cash and money market funds |  |                    | 9,217   |                      |   |                      |  |   |                    |   |  |   | 9,217  
|                            |  |                    |         |                      |   |                       |  |   |                     |   |  |   |        
|Total                       |  | $                  | 219,486 |                      | $ |                      |  | $ | (372                | ) |  | $ | 219,114
|                            |  |                    |         |                      |   |                       |  |   |                     |   |  |   |        
|Reported as:                |  |                    |         |                      |   |                       |  |   |                     |   |  |   |        
|Cash and cash equivalents   |  |                    |         |                      |   |                       |  |   |                     |   |  | $ | 110,635
|Short term investments      |  |                    |         |                      |   |                       |  |   |                     |   |  |   | 106,683
|Restricted investments      |  |                    |         |                      |   |                       |  |   |                     |   |  |   | 1,796  
|                            |  |                    |         |                      |   |                       |  |   |                     |   |  |   |        
|Total                       |  |                    |         |                      |   |                       |  |   |                     |   |  | $ | 219,114
|                            |  |                    |         |                      |   |                       |  |   |                     |   |  |   |        



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|                            |  |                   |         |                      |   |                       |  |   |                     |   |  |   |        
|--------------------------- |  | ----------------- | ------- | -------------------- | - | --------------------- |  | - | ------------------- | - |  | - | -------
|                            |  | December 31, 2004
|                            |  | AmortizedCosts    |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | EstimatedFair Value
|                            |  | (in thousands)   
|Certificate of deposits     |  | $                 | 1,796   |                      | $ |                      |  | $ |                    |   |  | $ | 1,796  
|Corporate notes             |  |                   | 29,146  |                      |   |                      |  |   | (32                 | ) |  |   | 29,114 
|Commercial paper            |  |                   | 47,213  |                      |   |                      |  |   | (1                  | ) |  |   | 47,212 
|Government notes            |  |                   | 53,699  |                      |   | 6                     |  |   | (191                | ) |  |   | 53,514 
|Cash and money market funds |  |                   | 7,011   |                      |   |                      |  |   |                    |   |  |   | 7,011  
|                            |  |                   |         |                      |   |                       |  |   |                     |   |  |   |        
|Total                       |  | $                 | 138,865 |                      | $ | 6                     |  | $ | (224                | ) |  | $ | 138,647
|                            |  |                   |         |                      |   |                       |  |   |                     |   |  |   |        
|Reported as:                |  |                   |         |                      |   |                       |  |   |                     |   |  |   |        
|Cash and cash equivalents   |  |                   |         |                      |   |                       |  |   |                     |   |  | $ | 56,221 
|Short term investments      |  |                   |         |                      |   |                       |  |   |                     |   |  |   | 80,630 
|Restricted investments      |  |                   |         |                      |   |                       |  |   |                     |   |  |   | 1,796  
|                            |  |                   |         |                      |   |                       |  |   |                     |   |  |   |        
|Total                       |  |                   |         |                      |   |                       |  |   |                     |   |  | $ | 138,647
|                            |  |                   |         |                      |   |                       |  |   |                     |   |  |   |        



The net realized gains
on sales of available-for-sale investments were not material for the nine months ended September 30, 2005 and 2004. Realized gains and losses were calculated based on the specific identification method.



The following is a summary of the cost and estimated fair value of
available-for-sale securities at September 30, 2005 and December 31, 2004, classified by stated maturity date of the security:



|                             |  |                    |         |                   |   |               |  |            |         |  |   |        
|---------------------------- |  | ------------------ | ------- | ----------------- | - | ------------- |  | ---------- | ------- |  | - | -------
|                             |  | September 30, 2005 |         | December 31, 2004
|                             |  | AmortizedCost      |         | Fair Value        |   | AmortizedCost |  | Fair Value
|                             |  | (in thousands)    
|Mature in less than one year |  | $                  | 167,963 |                   | $ | 167,747       |  | $          | 105,964 |  | $ | 105,762
|Mature in one to three years |  |                    | 20,760  |                   |   | 20,604        |  |            | 1,744   |  |   | 1,728  
|Mature in over three years   |  |                    | 19,750  |                   |   | 19,750        |  |            | 22,350  |  |   | 22,350 
|                             |  |                    |         |                   |   |               |  |            |         |  |   |        
|Total                        |  | $                  | 208,473 |                   | $ | 208,101       |  | $          | 130,058 |  | $ | 129,840
|                             |  |                    |         |                   |   |               |  |            |         |  |   |        



5. Property and equipment, net



Property and equipment consisted of the following:



|                                               |  |                   |        |   |                  |   |        |  
|---------------------------------------------- |  | ----------------- | ------ | - | ---------------- | - | ------ | -
|                                               |  | September 30,2005 |        |   | December 31,2004 |  
|                                               |  | (in thousands)    |       
|Computer and lab equipment                     |  | $                 | 6,926  |   |                  | $ | 6,476  |  
|Capitalized software                           |  |                   | 547    |   |                  |   |       |  
|Office furniture and fixtures                  |  |                   | 410    |   |                  |   | 337    |  
|Leasehold improvements                         |  |                   | 3,219  |   |                  |   | 3,196  |  
|                                               |  |                   |        |   |                  |   |        |  
|                                               |  |                   | 11,102 |   |                  |   | 10,009 |  
|Less accumulated depreciation and amortization |  |                   | (5,794 | ) |                  |   | (4,740 | )
|                                               |  |                   |        |   |                  |   |        |  
|Property and equipment, net                    |  | $                 | 5,308  |   |                  | $ | 5,269  |  
|                                               |  |                   |        |   |                  |   |        |  



Depreciation expense
relating to our property and equipment for the three and nine months ending September 30, 2005 was $383,000 and $1.1 million. For the same periods in 2004 our depreciation expense was $344,000 and $1.0 million. We capitalized $547,000 of
computer software costs as of September 30, 2005 of which approximately $15,000 was amortized for the same period.



We record the costs of computer software in accordance with AICPA Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. SOP 98-1 requires that certain internal-use computer software costs be capitalized and amortized over the useful life of the asset.



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6. Capital leases and equipment loans



At September 30, 2005, there were no draws available under our Master Lease and Master Security credit facilities of
approximately $2.5 million. The lease and credit facilities, secured by equipment and tenant improvements and bearing annual interest rates between 4.3% and 11.5%, were fully utilized by the end of 2003. Pursuant to the terms of these credit
facilities, we are required to maintain a balance of cash and investments of at least $20.5 million. In the event our cash and investments balance falls below $20.5 million, we are obligated to provide the lessor with a continuing irrevocable
letter of credit from a financial institution acceptable to the lessor in an amount equal to 100% of the outstanding balance of all indebtedness and loans. We were in compliance with the financial covenants at September 30, 2005.



Draws under our Loan and Security Agreement credit facility at
September 30, 2005 totaled approximately $1.5 million, bearing annual interest rates between 5.91% and 6.98%. The credit facility was fully utilized as of July 2004. Pursuant to the terms of the credit facility, we are required to maintain a
balance of cash and investments with the lender of at least $5.0 million. We were in compliance with this financial requirement at September 30, 2005.



As of September 30, 2005, future payments under capital leases and loans were as follows:



|                                  |  |                |     |       |   |       |  |   |      
|--------------------------------- |  | -------------- | --- | ----- | - | ----- |  | - | -----
|                                  |  | Capital Leases |     | Loans |   | Total
|                                  |  | (in thousands)
|2005                              |  | $              | 75  |       | $ | 273   |  | $ | 348  
|2006                              |  |                | 264 |       |   | 673   |  |   | 937  
|2007                              |  |                |    |       |   | 148   |  |   | 148  
|                                  |  |                |     |       |   |       |  |   |      
|Total                             |  | $              | 339 |       | $ | 1,094 |  | $ | 1,433
|                                  |  |                |     |       |   |       |  |   |      
|Less amount representing interest |  |                |     |       |   |       |  |   | 62   
|                                  |  |                |     |       |   |       |  |   |      
|Present value of future payments  |  |                |     |       |   |       |  | $ | 1,371
|                                  |  |                |     |       |   |       |  |   |      
|Reported as current portion       |  |                |     |       |   |       |  | $ | 1,085
|                                  |  |                |     |       |   |       |  |   |      
|Non-current portion               |  |                |     |       |   |       |  | $ | 286  
|                                  |  |                |     |       |   |       |  |   |      



7. Follow-on public offering



In April 2004, we filed a registration statement on Form S-3 to offer and
sell, from time to time, equity securities in one or more offerings up to a total amount of $200 million. On February 2, 2005, we sold 7,000,000 shares of common stock at a public offering price of $18.75 per share in an underwritten public
offering pursuant to this registration statement. On February 9, 2005, the underwriters fully exercised their option to purchase 1,050,000 shares of our common stock from us to cover over-allotments. We received approximately $142.2 million in
net proceeds after deducting underwriting discounts and commissions and related offering expenses.



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



Special Note Regarding Statements of Expected Future Performance



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



The following discussion and analysis should be read in conjunction with the unaudited 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, 2004 filed with the Securities and Exchange Commission on March 9, 2005.



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 September 30, 2005, we had an accumulated deficit of $297.1 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, non-equity payments from collaborative partners, interest earned on investments and equipment lease and loan financings.



We are subject to risks common to biopharmaceutical companies, including
risks inherent in our research, development and commercialization efforts, preclinical testing, clinical trials, uncertainty of regulatory and marketing approvals, enforcement of patent and proprietary rights, the availability of future capital,
existing or potential competition, use of hazardous materials and the ability to attract and retain key employees. In order for a product to be commercialized, it will be necessary for us to conduct preclinical tests and clinical trials, demonstrate
efficacy and safety of our product candidates to the satisfaction of regulatory authorities, obtain marketing approval, enter into manufacturing, distribution and marketing arrangements, obtain market



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acceptance and, in many cases, obtain adequate reimbursement from government and private insurers. We cannot provide assurance that we will generate any
product revenues or achieve and sustain profitability in the future.



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



Clinical Status



TELCYTA, our lead product candidate, is a small molecule tumor-activated cancer product candidate that we are evaluating initially to treat cancers that
are resistant to standard chemotherapy drugs. We have three on-going Phase 3 registration trials with TELCYTA. The first Phase 3 clinical trial (ASSIST-1) is for the treatment of advanced ovarian cancer. The second Phase 3 clinical trial (ASSIST-2)
is for the treatment of advanced non-small cell lung cancer. Enrollment is complete for the first and second Phase 3 clinical trials. The third Phase 3 clinical trial (ASSIST-3) is evaluating TELCYTA in combination with carboplatin for the treatment
of second-line platinum resistant or refractory ovarian cancer.



In addition, in 2004 we initiated two Phase 2 clinical trials of TELCYTA for the treatment of Stage IIIb or IV non-small cell lung cancer for patients who have not previously received chemotherapy. One clinical trial is in combination with
cisplatin, and the other clinical trial is in combination with carboplatin and paclitaxel. Platinum and taxane-based drug combinations are the current standard for the front-line chemotherapy of lung and ovarian cancer. In July 2005, we reported
positive interim data from the clinical study evaluating the triplet combination of TELCYTA with carboplatin and paclitaxel in the first line treatment of advanced non-small cell lung cancer, or NSCLC, at the Eleventh World Conference on Lung Cancer
in Barcelona. In the trial, a 58% objective response rate (by the National Cancer Institutes Response Evaluation Criteria in Solid Tumors, or RECIST) and a 92% disease stabilization rate were observed at an interim analysis and the regimen was
generally well tolerated. At the conference we updated the interim data originally reported at the annual meeting of the American Society of Clinical Oncology in May 2005 for the clinical study evaluating TELCYTA in combination with cisplatin for
patients with NSCLC. In this trial a 32% objective response rate (by RECIST) and an 88% disease stabilization rate were observed. Enrollment in this trial is complete.



TELINTRA, our second product candidate, is a small molecule bone marrow stimulant that we are developing for the treatment
of blood disorders associated with low blood cell levels, such as neutropenia or anemia. Our Phase 2 clinical trial in patients with myelodysplastic syndrome, or MDS, a pre-leukemic condition, is on-going and has not identified a dose limiting
toxicity. MDS is a disease characterized by defects in the blood-producing cells of the bone marrow, in which low blood cell levels occur. We presented positive interim data at the American Society of Hematology annual meeting in December 2004. In
this interim analysis, clinically significant improvement was observed across all major subtypes and in all blood cell lineages. TELINTRA was well-tolerated in this predominantly elderly patient population. Enrollment in this trial is on-going.



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



Critical Accounting Policies and Significant Judgments and Estimates



Our managements discussion and analysis of our financial condition and
results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported revenues and expenses during the reporting periods. On an on-going basis,
we evaluate our estimates and judgments related to clinical development costs. We base our estimates on historical experience and on various other factors that we believe are reasonable under the



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circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from
other sources. Actual results may differ significantly from these estimates under different assumptions or conditions.



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



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 development, clinical supply
manufacturing, clinical development activities, discovery research, screening and identification of product candidates, and preclinical studies. All such costs are charged to research and development expenses as incurred.



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



|         |  |                                    |   |      |   |        |                                |      |      |  |      |    |        |   |     |  |     |   
|-------- |  | ---------------------------------- | - | ---- | - | ------ | ------------------------------ | ---- | ---- |  | ---- | -- | ------ | - | --- |  | --- | --
|         |  | Three months ended September 30,   |   | %    |   |        | Nine months endedSeptember 30, |      | %    | 
|         |  | 2005                               |   | 2004 |   | Change |                                |      | 2005 |  | 2004 |    | Change |  
|         |  | (in thousands, except percentages) |  
|Revenues |  | $                                  |  |      | $ | 44     |                                | (100 | %)   |  | $    | 19 |        | $ | 119 |  | (84 | %)



Revenues in 2005 and
2004 resulted from our collaborative agreement with Hoffman La-Roche, Inc., or Roche. As a result of the completion of our Roche compound identification revenue amortization in March 2005, we recorded no revenue for the three months ended
September 30, 2005 and reported a $100,000 reduction in revenue for the nine months ended September 30, 2005 compared to the same periods in 2004.



We expect near-term revenues to fluctuate primarily depending upon the extent to which we enter into new collaborative research agreements and the amounts
of payments that we receive under such agreements.



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Research and development expenses



Research and development expenses for the three months ended September 30, 2005 and 2004 were $17.1 million and $14.3
million. Research and development expenses for the nine months ended September 30, 2005 and 2004 were $55.9 million and $43.1 million. Our research and development activities consist primarily of drug development, clinical supply manufacturing,
clinical activities, discovery research, screening and identification of product candidates and preclinical studies. We group these activities into two major categories: research and preclinical and clinical development.



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



|                               |  |                                    |        |      |   |        |                                |    |      |  |      |        |        |   |        |  |    |  
|------------------------------ |  | ---------------------------------- | ------ | ---- | - | ------ | ------------------------------ | -- | ---- |  | ---- | ------ | ------ | - | ------ |  | -- | -
|                               |  | Three Months EndedSeptember 30,    |        | %    |   |        | Nine Months EndedSeptember 30, |    | %    | 
|                               |  | 2005                               |        | 2004 |   | Change |                                |    | 2005 |  | 2004 |        | Change |  
|                               |  | (in thousands, except percentages) |       
|Research and preclinical       |  | $                                  | 4,255  |      | $ | 3,913  |                                | 9  | %    |  | $    | 13,489 |        | $ | 12,071 |  | 12 | %
|Clinical development           |  |                                    | 12,802 |      |   | 10,337 |                                | 24 | %    |  |      | 42,369 |        |   | 30,992 |  | 37 | %
|                               |  |                                    |        |      |   |        |                                |    |      |  |      |        |        |   |        |  |    |  
|Total research and development |  | $                                  | 17,057 |      | $ | 14,250 |                                | 20 | %    |  | $    | 55,858 |        | $ | 43,063 |  | 30 | %
|                               |  |                                    |        |      |   |        |                                |    |      |  |      |        |        |   |        |  |    |  



The increase of 20%,
or $2.8 million, in research and development expenses for the three months ended September 30, 2005 compared to the same period in 2004 was principally due to the increased costs for the following:



| |  |  | Clinical Development
| | - |  | --------------------



| |  |  | approximately $1.4 million due to the expansion of the clinical development programs for TELCYTA and TELINTRA; and
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | Other expenses
| | - |  | --------------



| |  |  | approximately $1.4 million associated with headcount growth and increased expenses to support clinical activities.
| | - |  | ------------------------------------------------------------------------------------------------------------------



The increase of 30%, or $12.8 million, in research and development expenses
for the nine months ended September 30, 2005 compared to the same period in 2004 was principally due to the increased costs for the following:



| |  |  | Clinical Development
| | - |  | --------------------



| |  |  | approximately $8.4 million due to the expansion of the clinical development programs for TELCYTA, in particular with our ASSIST-2 and ASSIST-3 clinical trials, and TELINTRA; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Other expenses
| | - |  | --------------



| |  |  | approximately $4.4 million associated with headcount growth and increased expenses to support clinical activities.
| | - |  | ------------------------------------------------------------------------------------------------------------------



We expect research and development expenditures to increase in the future as
a result of increased manufacturing and clinical development costs primarily relating to development of our TELCYTA and TELINTRA product candidates. The timing and the amount of these expenditures will depend upon the outcome of our on-going
clinical trials, the costs associated with the Phase 3 clinical trials of TELCYTA, including related expansion of our research and development organization, regulatory requirements, advancement of our preclinical programs and product manufacturing
costs.



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



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



|                                       |  |                                |  |                     |  |                                          |        |                                                    |        |        |   |       
|-------------------------------------- |  | ------------------------------ |  | ------------------- |  | ---------------------------------------- | ------ | -------------------------------------------------- | ------ | ------ | - | ------
|Product                                |  | Description                    |  | Phase ofDevelopment |  | Estimated orActualCompletionofEnrollment |        | Related R&D ExpensesNine Months EndedSeptember 30,
|                                       |  |                                |  | 2005                |  | 2004                                    
|                                       |  |                                |  |                     |  | (in thousands)                          
|TELCYTA                                |  |                                |  |                     |  |                                          |        | $                                                  | 40,454 |        | $ | 29,967
|                                       |  | Ovarian                        |  | Phase 3             |  | 2005                                     |        |                                                    |        |        |   |       
|                                       |  | Non-small cell lung            |  | Phase 3             |  | 2005                                     |        |                                                    |        |        |   |       
|                                       |  | Ovarian, 2ndline               |  | Phase 3             |  | 2005                                     |        |                                                    |        |        |   |       
|                                       |  | Combination (with other drugs) |  | Phase 2             |  | 2005                                     |        |                                                    |        |        |   |       
|                                       |  | Ovarian                        |  | Phase 2             |  | 2004                                     |        |                                                    |        |        |   |       
|                                       |  | Lung                           |  | Phase 2             |  | 2004                                     |        |                                                    |        |        |   |       
|                                       |  | Breast                         |  | Phase 2             |  | 2004                                     |        |                                                    |        |        |   |       
|                                       |  |                                |  |                     | 
|TELINTRA                               |  | Myelodysplastic syndrome       |  | Phase 1/2           |  | 2005                                     |        |                                                    | 3,518  |        |   | 2,799 
|Other (1)                              |  |                                |  |                     |  |                                          |        |                                                    | 11,886 |        |   | 10,297
|                                       |  |                                |  |                     |  |                                          |        |                                                    |        |        |   |       
|Total research and development expense |  |                                |  |                     |  | $                                        | 55,858 |                                                    | $      | 43,063
|                                       |  |                                |  |                     |  |                                          |        |                                                    |        |        |   |       

---

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



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



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



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



In view of the factors mentioned above, we consider the active management and
development of our clinical pipeline to be crucial to our long-term success. The actual probability of success for each candidate and clinical program may be impacted by a variety of factors, including, among others, the quality of the candidate,
the validity of the target and disease indication, early clinical data, investment in the program, competition, manufacturing capability and commercial viability. Due to these and other factors, it is difficult to give accurate guidance on the
anticipated proportion of our research and development investments or the future cash inflows from these programs.



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##### Table of Contents

General and administrative expenses



|                           |  |                                    |       |      |   |        |                                |   |      |  |      |       |        |   |       |  |   |  
|-------------------------- |  | ---------------------------------- | ----- | ---- | - | ------ | ------------------------------ | - | ---- |  | ---- | ----- | ------ | - | ----- |  | - | -
|                           |  | Three Months EndedSeptember 30,    |       | %    |   |        | Nine Months EndedSeptember 30, |   | %    | 
|                           |  | 2005                               |       | 2004 |   | Change |                                |   | 2005 |  | 2004 |       | Change |  
|                           |  | (in thousands, except percentages) |      
|General and administrative |  | $                                  | 2,772 |      | $ | 2,551  |                                | 9 | %    |  | $    | 8,534 |        | $ | 7,904 |  | 8 | %



The increase in
general and administrative expenses of $221,000 and $630,000 in the three and nine months ended September 30, 2005 compared to the same periods in 2004 was primarily due to increased expenses necessary to manage the growth of our operations,
including costs associated with headcount growth.



We expect
future general and administrative expenses to increase in support of expanded business activities, including costs associated with our marketing efforts to support our commercialization strategy for TELCYTA.



Interest income and interest expense



|                 |  |                                    |       |   |      |   |     |                                |  |     |      |  |   |       |   |  |        |       |   |  |     |   
|---------------- |  | ---------------------------------- | ----- | - | ---- | - | --- | ------------------------------ |  | --- | ---- |  | - | ----- | - |  | ------ | ----- | - |  | --- | --
|                 |  | Three Months EndedSeptember 30,    |       |   | %    |   |     | Nine Months EndedSeptember 30, |  |     | %    | 
|                 |  | 2005                               |       |   | 2004 |   |     | Change                         |  |     | 2005 |  |   | 2004  |   |  | Change |      
|                 |  | (in thousands, except percentages) |      
|Interest income  |  | $                                  | 1,930 |   |      | $ | 746 |                                |  | 159 | %    |  | $ | 5,178 |   |  | $      | 1,946 |   |  | 166 | % 
|Interest expense |  |                                    | (29   | ) |      |   | (51 | )                              |  | (43 | %)   |  |   | (108  | ) |  |        | (153  | ) |  | (29 | %)



Interest income
resulted primarily from earnings on investments. Interest income increased by $1.2 million for the three months ended September 30, 2005 and $3.2 million for the nine months ended September 30, 2005 compared to the same periods in 2004.
The increases in the three-month and nine-month periods ended September 30, 2005 were due to higher average interest rates in 2005 and higher principal balances of our investments as a result of $142.2 million in net proceeds obtained from our
follow-on public offering of common stock in February 2005.



Interest expense decreased by $22,000 for the three months ended September 30, 2005 and $45,000 for the nine months ended September 30, 2005 compared to the same periods in 2004. The decreases in interest expense were a result of
no new borrowings in 2005 and declining interest payments on our lease and loan obligations. We expect interest expenditures to continue to decrease in the future as we pay down our lease and loan obligations.



Liquidity and capital resources



|                                                              |  |                              |          |   |      |   |          |  
|------------------------------------------------------------- |  | ---------------------------- | -------- | - | ---- | - | -------- | -
|                                                              |  | 2005                         |          |   | 2004 |  
|                                                              |  | (in millions, except ratios) |         
|September 30:                                                 |  |                              |          |   |      |   |          |  
|Cash, cash equivalents, investments and restricted cash       |  | $                            | 219.1    |   |      | $ | 155.0    |  
|Working capital                                               |  | $                            | 203.6    |   |      | $ | 123.2    |  
|Current ratio                                                 |  |                              | 13.4 : 1 |   |      |   | 10.1 : 1 |  
|                                                              |  |                             
|Nine months ended September 30:                               |  |                              |          |   |      |   |          |  
|Cash (used in) / provided by:                                 |  |                              |          |   |      |   |          |  
|Operating activities                                          |  | $                            | (60.9    | ) |      | $ | (46.7    | )
|Investing activities                                          |  | $                            | (27.4    | ) |      | $ | 41.9     |  
|Financing activities                                          |  | $                            | 142.7    |   |      | $ | 1.8      |  
|Capital expenditures (included in investing activities above) |  | $                            | (1.2     | ) |      | $ | (1.0     | )



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##### Table of Contents

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 September 30, 2005, we had available cash, cash equivalents, investments and restricted investments of $219.1 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, commercial paper, auction rate securities and money market accounts. Cash
in excess of immediate requirements is invested with regard to liquidity and capital preservation. Wherever possible, we seek to minimize the potential effects of concentration and degrees of risk.



Cash Flows from Operating Activities. Cash used in operations for the
nine months ended September 30, 2005 was $60.9 million compared with $46.7 million for the same period in 2004. Net loss of $59.3 million in 2005 included non-cash charges of $1.1 million for depreciation and amortization. Cash used in
operations was further impacted by an increase of $425,000 in prepaid expenses mainly due to annual insurance premiums paid in the quarter ending September 30, 2005, approximately $3.0 million decrease in accounts payable primarily due to
payment of clinical development activities and $1.5 million repayments to our landlord for leasehold improvements financed by them. Cash outflows in 2005 were offset by increases of $1.8 million in accrued clinical trial expenses related primarily
to our Phase 3 clinical trials. Operating cash outflows for the same period in 2004 resulted primarily from net loss of $49.1 million including non-cash charges of $1.0 million for depreciation and amortization, $93,000 for the amortization of
deferred stock compensation and $197,000 related to non-cash stock based compensation to non-employees. Cash used in operations in 2004 was further impacted by a decrease of $785,000 in accrued compensation due to bonus payouts at the beginning of
the year, $288,000 in interest and other receivables and $379,000 in prepaid expenses related to annual insurance premiums. Cash usage in 2004 was offset by an increase of approximately $1.6 million in accounts payable and accrued liabilities
primarily due to Phase 3 and Phase 2 clinical trials activities.



Cash Flows from Investing Activities. Cash used in investing activities for the nine months ended September 30, 2005 was $27.4 million compared with cash provided by investing activities of $41.9 million for the same period in
2004. Cash used for the nine months ended September 30, 2005 was primarily for $130.9 million in purchases of short-term available-for-sale investments offset by $104.7 million in sales and maturities of investments. Capital expenditures for
the same period in 2005 were $1.2 million primarily for laboratory equipment, computer equipment and software purchases. Investing activities for the same period in 2004 were primarily related to the $42.9 million provided by net purchases, sales
and maturities of investments and $1.0 million of equipment purchases.



Cash Flows from Financing Activities. Cash provided by financing activities for the nine months ended September 30, 2005 was approximately $142.7 million compared with $1.8 million for the same period in 2004. Financing
activities for the nine months ended September 30, 2005 included approximately $142.2 million in net proceeds from our follow-on public offering of common stock completed in February offset by $997,000 in pay down of capital leases and
equipment loans. Financing activities for the same period in 2004 included approximately $1.1 million in proceeds obtained through equipment loans and $1.5 million in proceeds from stock option exercises and our employee stock purchase plan, offset
in part by $805,000 in payments under capital leases and an equipment loan.



Working Capital. Working capital increased to $203.6 million at September 30, 2005 from $123.2 million at September 30, 2004. The increase in working capital was primarily due to proceeds from our
follow-on public offering offset in part by our use of cash in operations due to the expansion of our clinical development programs and costs associated with headcount growth.



In February 2005, we completed a follow-on public offering of 8,050,000 shares of common stock, including shares issued in
connection with the underwriters exercise in full of their over-allotment option, at a public offering price of $18.75 per share, raising net proceeds of approximately $142.2 million after deducting underwriters discounts and
commissions, and related offering expenses.



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We believe our existing cash and investment securities will be sufficient to support our current
operating plan at least until the end of 2006. We expect the clinical development expenses as a result of our Phase 2 and Phase 3 clinical trials to consume a large portion of our existing cash resources. Changes in our research and development
plans or other changes affecting our operating expenses may affect actual future consumption of existing cash resources as well. In any event, we will require substantial additional financing to fund our operations in the future. We may seek to
raise any necessary additional funds through equity or debt financings, collaborative arrangements with corporate partners or other sources. To the extent that we raise additional capital by issuing equity securities, our stockholders may experience
dilution. Debt financing may subject us to restrictive covenants that may adversely affect our operations. To the extent that we raise additional capital through licensing arrangements or arrangements with collaborative partners, we may be required
to relinquish, on terms that are not favorable to us, rights to some of our technologies or product candidates that we would otherwise seek to develop or commercialize ourselves. Our future capital uses and requirements depend on numerous factors,
including the following:



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



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



| |  |  | the costs associated with conducting Phase 2 and Phase 3 clinical trials;
| | - |  | -------------------------------------------------------------------------



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



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



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



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



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



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



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



Our future contractual obligations at September 30, 2005 were as follows:



|                                   |  |                |        |      |   |           |  |           |       |           |   |       |  |   |       
|---------------------------------- |  | -------------- | ------ | ---- | - | --------- |  | --------- | ----- | --------- | - | ----- |  | - | ------
|                                   |  | Total          |        | 2005 |   | 2006-2007 |  | 2008-2009 |       | After2009
|                                   |  | (in thousands)
|Capital lease obligations          |  | $              | 339    |      | $ | 75        |  | $         | 264   |           | $ |      |  | $ |      
|Equipment loans                    |  |                | 1,094  |      |   | 273       |  |           | 821   |           |   |      |  |   |      
|Operating leases                   |  |                | 31,630 |      |   | 1,324     |  |           | 6,725 |           |   | 7,075 |  |   | 16,506
|                                   |  |                |        |      |   |           |  |           |       |           |   |       |  |   |       
|Total contractual cash obligations |  | $              | 33,063 |      | $ | 1,672     |  | $         | 7,810 |           | $ | 7,075 |  | $ | 16,506
|                                   |  |                |        |      |   |           |  |           |       |           |   |       |  |   |       



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



Recent Accounting Pronouncements



In December 2004, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards 123R (SFAS 123R),
Share-Based Payment, effective beginning after June 15, 2005. FAS 123R supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and will require companies to recognize compensation expense, using a
fair-value based method, for costs related to share-based payments including stock options and stock issued under our employee stock purchase plans. In April 2005, the Securities and Exchange Commission issued a rule allowing companies to implement
SFAS 123R as of the beginning of their next fiscal year that begins after June 15, 2005. We will be required to implement SFAS 123R beginning January 1, 2006. Our adoption will be applied on a modified prospective basis and



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measured and recognized on January 1, 2006. We are currently evaluating option valuation methodologies and assumptions in light of SFAS 123R, and
therefore cannot estimate the impact of our adoption at this time. These methodologies and assumptions may be different than those currently employed by us in applying SFAS 123 as outlined in our Stock-based Compensation section of our
Notes to Condensed Financial Statements. We expect that our adoption of SFAS 123R will have a material impact on our financial statements and results of operations.



RISK FACTORS



You should carefully consider these risk factors as each of these risks could adversely affect our business, operating results and financial condition.



We have a history of net losses, which we expect to continue for at
least 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 September 30, 2005, we had an accumulated deficit of $297.1 million. We expect to incur losses for at
least the next several years and expect that these losses will increase as we expand our research and development activities and incur significant clinical testing costs. We do not anticipate that we will generate product revenue for several years.
Our losses, among other things, have caused and will cause our stockholders equity and working capital to decrease. To date, we have derived substantially all of our revenues, which have not been significant, from project initiation fees and
research reimbursement paid pursuant to existing collaborative agreements with third parties and achievement of milestones under current collaborations. We expect that this trend will continue until we develop, and obtain regulatory approval and
market acceptance of, our product candidates, if at all. We may never generate product revenue sufficient to become profitable.



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



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



TELCYTA has to date been evaluated in Phase 1 and Phase 2 clinical trials. We
initiated a Phase 3 registration trial of TELCYTA in ovarian cancer in the first quarter of 2003, a Phase 3 registration trial of TELCYTA in non-small cell lung cancer in March 2004 and a Phase 3 registration trial of TELCYTA in combination with
carboplatin versus Doxil as second-line therapy in platinum refractory or resistant ovarian cancer in December 2004. These clinical trials test TELCYTA against a control arm consisting of currently established standard drug treatments for these
cancers. Changes in standards of care during our Phase 3 clinical trials may cause us to, or the FDA may require us to, perform additional clinical testing of TELCYTA against a different control arm prior to filing a New Drug Application, or NDA,
for marketing approval. Our short-term success depends to a significant extent on the outcome of these trials. If the results of one or more of these trials do not demonstrate sufficient efficacy to support our NDA, then our business may suffer.



We are also currently in a Phase 2 clinical trial of TELINTRA
in MDS, a form of pre-leukemia, to evaluate safety, pharmacokinetics, pharmacodynamics and efficacy. Our success also depends, in part, on our ability to complete clinical development of TELINTRA or other preclinical product candidates and take them
through early clinical trials.



Any clinical trial may fail to
produce results satisfactory to the FDA. Preclinical and clinical data can be interpreted in different ways, which could delay, limit or prevent regulatory approval. Negative or inconclusive



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results or adverse medical events during a clinical trial could cause a clinical trial to be repeated or a program to be terminated. We typically rely on
third-party clinical investigators to conduct our clinical trials and, as a result, we may face additional delays outside our control. We have 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. Delays in identifying and engaging a CRO may result in delays in the initiation of other clinical trials. We may not be able to control the amount and timing of resources the
CRO may devote to our clinical trials. Should the CRO fail to administer our Phase 3 clinical trials properly, regulatory approval, development and commercialization of TELCYTA will be delayed.



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



Significant delays in clinical testing could materially impact our clinical trials. We do not know whether planned clinical trials will begin on time,
will need to be revamped or will be completed on schedule, if at all. In addition to the reasons stated above, clinical trials can be delayed for a variety of 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 can also materially impact our
product development costs. If we experience delays in testing or approvals, our product development costs will increase. For example, we may need to make additional payments to third-party investigators and organizations to retain their services or
we may need to pay recruitment incentives. If the delays are significant, our financial results and the commercial prospects for our product candidates will be harmed, and our ability to become profitable will be delayed.



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



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



The process of carrying out the development of our own unpartnered product candidates to later stages of development and developing other research
programs to the stage that they may be partnered will require significant additional expenditures, including the expenses associated with preclinical testing, clinical trials and obtaining regulatory approval. We believe that our existing cash and
investment securities will be sufficient to support our current operating plan at least until the end of 2006. 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 September 30, 2005, our accumulated deficit was $297.1 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 and clinical trials.



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



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



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



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



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



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



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



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



The pharmaceutical industry is subject to stringent regulation by a wide range of 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;
| | - |  | ---------------------------------------------------------------



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



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



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



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



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



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



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



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



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 and commence additional advanced clinical trials, including Phase 2 and Phase 3, we will 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. None of our key employees have indicated to Telik that they have plans to retire or leave Telik in the near future. 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. 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 very
high compared to other parts of the country, which we expect will 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 as our operations expand and the demand for these professionals increases, and this difficulty could significantly impede the achievement of our research and development objectives.



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



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



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



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



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



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



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



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



Physicians may elect not to recommend products that we may develop even if we 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 the 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, including a pending foreign
application. These patents, and any patent that may issue on the pending application, will expire in 2013 and 2014. For TELINTRA, we hold compound patents in the United States and internationally, including a pending foreign application. These
patents, and any patent that may issue on the pending application, will expire in 2014. We can generally apply for patent term extensions on the patents for TELCYTA and TELINTRA when and if marketing approvals for these compounds are obtained in the
relevant countries.



Our success will also depend, in part, on
our ability to operate without infringing the intellectual property rights of others. We cannot assure you that our activities will not infringe patents owned by others. As of the date of this quarterly report, 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



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damages. In addition, we may be required to obtain licenses to patents or other proprietary rights of third parties. We cannot assure you that any licenses
required under any such patents or proprietary rights would be made available on terms acceptable to us, if at all. Failure to obtain such licenses could negatively affect our business.



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



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



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 collaboration 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 the
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 this 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 the 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.



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



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



We do not currently
operate manufacturing facilities for clinical or commercial production of our product candidates. We expect to continue to rely on third parties for the manufacture of our product candidates and any products that we may develop. We currently lack
the resources and capability to manufacture any of our product candidates on a clinical scale or any products that we may develop on a commercial scale. As a result, we will be dependent on corporate partners, licensees or other third parties for
the manufacturing of clinical and commercial scale quantities of our product candidates and any products that we may develop. Our product candidates and any products that we may develop may be in competition with other product candidates and
products for access to these facilities. For this and other reasons, our collaborators or third parties may not be able to manufacture these product candidates and products in a cost effective or timely manner. While we currently possess sufficient
inventory of TELCYTA and TELINTRA that are stored in multiple locations and an additional, substantial quantity of the active ingredient in TELCYTA, if these inventories are lost or damaged, the clinical development of our product candidates or
their submission for regulatory approval could be delayed, and our ability to deliver any products that we may develop on a timely basis could be impaired or precluded.



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



We currently depend upon two sources of supply for clinical quantities of the
active ingredient in TELINTRA. We depend upon a single source of supply for key excipients used in the manufacture of TELINTRA, Lipoid GmbH. While we are evaluating potential alternative sources of these materials, we have no such alternative
sources that are immediately available. We currently depend upon two sources for the drug product manufacture of TELINTRA. While we have entered into an agreement with, and are working to qualify, an additional drug product manufacturer, there is no
certainty this will occur.



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



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products that we may develop and address other markets. We may not be able to establish in-house sales and distribution capabilities or relationships with
third parties. To the extent that we enter into co-promotion or other licensing arrangements, any product revenues are likely to be lower than if we directly marketed and sold any products that we may develop, and any revenues we receive will depend
upon the efforts of third parties, whose efforts may not be successful.



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



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



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



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



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 several coverages applying to various types of biological and pollution exposures for a total amount of $350,000 in insurance, which we believe is a reasonably
adequate amount to insulate us from damage claims arising from our use of hazardous materials. However, in the event of contamination or injury, we could be held liable for damages that result, 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;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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



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



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



In November 2001, our board of directors adopted a stockholder rights plan that may have the effect of discouraging, delaying or preventing a merger or
acquisition that is beneficial to our stockholders by diluting the ability of a potential acquiror to acquire us. Pursuant to the terms of our plan, when a person or group, except under certain circumstances, acquires 20% or more of our outstanding
common stock or 10 business days after commencement or announcement of a tender or exchange offer for 20% or more of our outstanding common stock, 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. Because the potential acquirors rights would not become exercisable for our shares of common stock at a
discount, the potential acquiror would suffer substantial dilution and may lose its ability to acquire us. In addition, the existence of the plan itself may deter a potential acquiror from acquiring us. As a result, either by operation of the plan
or by its potential deterrent effect, mergers and acquisitions of us that our stockholders may consider in their best interests may not occur.



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



Additional equity financings or other share issuances by us, including
shares issued in connection with strategic alliances, could adversely affect the market price of our common stock. Sales by existing stockholders of a large number of shares of our common stock in the public market or the perception that additional
sales could occur could cause the market price of our common stock to drop. As of September 30, 2005, 52,024,633 shares of our common stock were outstanding, of which 51,720,534 shares were freely tradable and 304,099 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. 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, and 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. During the first nine months of 2005,
our common stock traded between $20.12 and $13.19. 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, including TELCYTA 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 may need to implement additional finance and accounting systems, procedures and controls to satisfy recently changed reporting requirements.



As a public reporting company, we are required to comply with the
Sarbanes-Oxley Act of 2002 and the related rules and regulations of the Securities and Exchange Commission, including expanded disclosures and accelerated reporting requirements and more complex accounting rules such as pursuant to Section 404
of the Sarbanes-Oxley Act of 2002. Compliance with Section 404 and other requirements will increase our costs and require additional management resources. We need to continue to implement additional finance and accounting systems, procedures
and controls to satisfy recently changed reporting requirements. While we were able to complete a favorable assessment as to the adequacy of our internal control over financial reporting for our fiscal year ended December 31, 2004, there is no
assurance that we will be able to complete future favorable assessments as to the adequacy of our internal control over financial reporting. If our independent registered public accounting firm is unable to provide us with future unqualified reports
as to the effectiveness of our internal control over financial reporting, investors could lose confidence in the reliability of our internal control over financial reporting, which could adversely affect our stock price.



New and Potential New Accounting Pronouncements May Impact Our Future Financial Position
and Results of Operations.



There may be potential new
accounting pronouncements or regulatory rulings, which may have an impact on our future financial position and results of operations. In particular, on April 14, 2005, the Securities and Exchange Commission issued a rule allowing companies to
implement Statement of Financial Accounting Standard No. 123R, Share Based Payments, (SFAS123R) as of the beginning of their next fiscal year that begins after June 15, 2005. We will be required to implement SFAS 123R beginning
January 1, 2006. Our adoption will be applied on a modified prospective basis and compensation expense related to share base payments measured and recognized on January 1, 2006. We are currently evaluating option valuation methodologies
and assumptions in light of SFAS 123R, and therefore cannot estimate the impact of our adoption at this time. These methodologies and assumptions may be different than those currently employed by us in applying SFAS 123 as outlined in our
Stock-based Compensation section of our Notes to Condensed Financial Statements. We expect that our adoption of SFAS 123R will have a material impact on our financial statements and results of operations.



Item 3. Quantitative and Qualitative Disclosures About Market Risk.



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



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



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



|                              |  |                                    |         |   |      |   |        |                |  |       |   |  |                                |         |   |  |   |        
|----------------------------- |  | ---------------------------------- | ------- | - | ---- | - | ------ | -------------- |  | ----- | - |  | ------------------------------ | ------- | - |  | - | -------
|                              |  | 2005                               |         |   | 2006 |   |        | 2007 andBeyond |  | Total |   |  | Fair Value atSeptember 30,2005
|                              |  | (in thousands, except percentages)
|Available-for-sale securities |  | $                                  | 194,194 |   |      | $ | 14,279 |                |  | $     |  |  | $                              | 208,473 |   |  | $ | 208,101
|Average interest rate         |  |                                    | 3.58    | % |      |   | 3.72   | %              |  |       |  |  |                                | 3.59    | % |  |   |        



Item 4. Controls and Procedures.



Evaluation of disclosure controls and procedures. Based on our managements evaluation (with the participation of our chief executive officer and chief financial officer), our chief executive officer and chief financial officer
have concluded that, subject to limitations described below, our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended), were effective as of September 30, 2005 to
ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange
Commissions rules and forms.



Changes in internal control. In July
2005, we implemented a company-wide Enterprise Resource Planning, or ERP, system to replace our then existing financial system. As a result of the ERP system implementation, we have made changes to the design of our internal controls, including the
automation of certain controls, as a complement to our existing overall program of internal control over financial reporting through the quarterly period ended September 30, 2005. There were no other changes in our internal control over
financial reporting during this quarter that have materially affected, or are reasonably likely to materially affect, our internal control 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 6. Exhibits



|     |  |                                                                                                                                                                                                                      
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1  |  | Amended and Restated Certificate of Incorporation. (1)                                                                                                                                                               
|     | 
|3.2  |  | Amended and Restated Bylaws. (1)                                                                                                                                                                                     
|     | 
|4.1  |  | Specimen Stock Certificate. (1)                                                                                                                                                                                      
|     | 
|4.2  |  | Amended and Restated Registration Rights Agreement, dated March 31, 2000, between Telik and holders of Teliks Series B, Series E, Series F, Series G, Series H, Series I, Series J and
Series K preferred stock. (1)
|     | 
|4.3  |  | Right Agreement dated November 2, 2001, by and between Telik and Wells Fargo Bank Minnesota, N.A., replaced by EquiServe Trust Company, N.A., as Rights Agent. (2)                                                   
|     | 
|4.4  |  | Registrants Certificate of Designation of Series A Junior Participating Preferred Stock. (2)                                                                                                                        
|     | 
|10.1 |  | Terms of Employee Bonus Plan for 2005.                                                                                                                                                                               
|     | 
|31.1 |  | Certification required by Rule 13a-14(a) or Rule 15d-14(a).                                                                                                                                                          
|     | 
|31.2 |  | Certification required by Rule 13a-14(a) or Rule 15d-14(a).                                                                                                                                                          
|     | 
|32.1 |  | Certifications required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).                                                                   

---

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

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



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SIGNATURES



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



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




Date: November 8, 2005



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EXHIBIT INDEX



|     |  |                                                                                                                                                                                                                      
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1  |  | Amended and Restated Certificate of Incorporation. (1)                                                                                                                                                               
|     | 
|3.2  |  | Amended and Restated Bylaws. (1)                                                                                                                                                                                     
|     | 
|4.1  |  | Specimen Stock Certificate. (1)                                                                                                                                                                                      
|     | 
|4.2  |  | Amended and Restated Registration Rights Agreement, dated March 31, 2000, between Telik and holders of Teliks Series B, Series E, Series F, Series G, Series H, Series I, Series J and
Series K preferred stock. (1)
|     | 
|4.3  |  | Right Agreement dated November 2. 2001, by and between Telik and Wells Fargo Bank Minnesota, N.A., replaced by EquiServe Trust Company, N.A., as Rights Agent. (2)                                                   
|     | 
|4.4  |  | Registrants Certificate of Designation of Series A Junior Participating Preferred Stock. (2)                                                                                                                        
|     | 
|10.1 |  | Terms of Employee Bonus Plan for 2005.                                                                                                                                                                               
|     | 
|31.1 |  | Certification required by Rule 13a-14(a) or Rule 15d-14(a).                                                                                                                                                          
|     | 
|31.2 |  | Certification required by Rule 13a-14(a) or Rule 15d-14(a).                                                                                                                                                          
|     | 
|32.1 |  | Certifications required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).                                                                   

---

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

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



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