**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

** **

**FORM10-Q**
| **x**      | ** ** | **Quarterly report pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934.**                                                                                                                                                                                                    |
|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                            |
| ** ** | ** ** | **For the quarterly period ended September 30, 2006.**                                                                                                                                                                                                                                                |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                            |
| **o**      | ** ** | **Transition report pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934.**                                                                                                                                                                                                   |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                            |
| ** ** | ** ** | **For the transition period from                        to                      .** |

 

**CommissionFile Number**

**000-29815**

 

**AllosTherapeutics, Inc.**

(Exact name ofRegistrant as specified in its charter)

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

 

**11080CirclePoint Road, Suite 200**

**Westminster,Colorado 80020**

**(303)426-6262**

(Address,including zip code, and telephone number,

including areacode, of principal executive offices)

 

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 (orfor such shorter period that the Registrant was required to file such reports),and (2) has been subject to such filing requirements for the past90 days.Yes x  No o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer (as defined by Rule 12b-2 ofthe Exchange Act).
| Large Accelerated Filer o |   | Accelerated  Filer x |   | Non-Accelerated Filer o |
|---------------------------|--------|---------------------------|--------|-------------------------|

 

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

As of October 31, 2006, there were 55,873,699 sharesof the registrant’s Common Stock, par value $0.001 per share, outstanding.

This quarterly report on Form 10-Q consists of 38pages.

 

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**ALLOS THERAPEUTICS, INC.**

**FORM 10-Q**

**TABLE OF CONTENTS**

 
| PART I.  Financial  Information |   |                                                                                                                                                                                                    |
|--------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ITEM 1.                              |   | Financial Statements  (unaudited)                                                                                                                                                                       |   |   |
|                                 |   | Balance  Sheets — as of December 31, 2005 and September 30, 2006                                                                                                                              |   |   |
|                                 |   |                                                                                                                                                                                                    |   |   |
|                                 |   | Statements of Operations  — for the three and nine months ended September 30, 2005 and 2006 and the  cumulative period from September 1, 1992 (date of inception) through  September 30, 2006 |   |   |
|                                 |   |                                                                                                                                                                                                    |   |   |
|                                 |   | Statements  of Cash Flows — for the nine months ended September 30, 2005 and 2006 and the  cumulative period from September 1, 1992 (date of inception) through  September 30, 2006           |   |   |
|                                 |   |                                                                                                                                                                                                    |   |   |
|                                 |   | Notes to Financial Statements  (unaudited)                                                                                                                                                              |   |   |
| ITEM 2.                              |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                                                             |   |   |
| ITEM 3.                              |   | Quantitative  and Qualitative Disclosures About Market Risk                                                                                                                                             |   |   |
| ITEM 4.                              |   | Controls and Procedures                                                                                                                                                                                 |   |   |
| PART II.  Other Information     |   |                                                                                                                                                                                                    |
| ITEM 1.                              |   | Legal Proceedings                                                                                                                                                                                       |   |   |
| ITEM 1A.                             |   | Risk  Factors                                                                                                                                                                                           |   |   |
| ITEM 6.                              |   | Exhibits                                                                                                                                                                                                |   |   |
| SIGNATURES                           |   |                                                                                                                                                                                                    |

 

NOTE:

*AllosTherapeutics, Inc., the Allos Therapeutics, Inc. logo, EFAPROXYNTM(efaproxiral), and all other Allos names are trademarks of Allos Therapeutics,Inc. in the United States and in other selected countries. All other brandnames or trademarks appearing in this report are the property of their respectiveholders. Unless the context requires otherwise, references in this report to“Allos,” the “Company,” “we,” “us,” and “our” refer to AllosTherapeutics, Inc.*

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**PART I. FINANCIAL INFORMATION**

**ITEM 1.  FINANCIALSTATEMENTS**

**ALLOS THERAPEUTICS, INC.**

**BALANCESHEETS**

**(unaudited)**
| ** **                                                                                                                                                                               | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                                                                                                                                                                               | ** ** | **2005**              | ** ** | **2006**               | ** ** |
| **ASSETS**                                                                                                                                                                               | ** ** | ** **            | ** ** | ** **             | ** ** |
| Current assets:                                                                                                                                                                          |       |                  |       |                   |       |
| Cash and cash  equivalents                                                                                                                                                               |       | $                     | 4,224,634  |                   | $          | 4,229,874 |   |
| Restricted cash                                                                                                                                                                          |       | 550,000               |       | 366,667                |       |
| Short-term  investments in marketable securities                                                                                                                                         |       | 50,931,466            |       | 33,600,443             |       |
| Prepaid research  and development expenses                                                                                                                                               |       | 222,473               |       | 776,213                |       |
| Prepaid expenses  and other assets                                                                                                                                                       |       | 338,393               |       | 493,504                |       |
| Total current  assets                                                                                                                                                                    |       | 56,266,966            |       | 39,466,701             |       |
| Long-term investments  in marketable securities                                                                                                                                          |       | 125,872               |       | —                 |       |
| Property and equipment,  net                                                                                                                                                             |       | 687,728               |       | 657,580                |       |
| Other assets                                                                                                                                                                             |       | —                |       | 49,247                 |       |
| Total assets                                                                                                                                                                             |       | $                     | 57,080,566 |                   | $          | 40,173,528 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                           | ** ** | ** **            | ** ** | ** **             | ** ** |
| Current liabilities:                                                                                                                                                                     |       |                  |       |                   |       |
| Accounts payable                                                                                                                                                                         |       | $                     | 365,212    |                   | $          | 455,557 |   |
| Accrued  liabilities                                                                                                                                                                     |       | 3,424,904             |       | 5,715,831              |       |
| Total current  liabilities                                                                                                                                                               |       | 3,790,116             |       | 6,171,388              |       |
| Commitments and  contingencies (See Note 6)                                                                                                                                              |       |                  |       |                   |       |
|                                                                                                                                                                                     |       |                  |       |                   |       |
| Stockholders’ equity:                                                                                                                                                               |       |                  |       |                   |       |
| Preferred stock,  $0.001 par value; 10,000,000 shares authorized; no shares issued or  outstanding                                                                                       |       | —                |       | —                 |       |
| Series A Junior  Participating Preferred Stock, $0.001 par value; 1,000,000 shares designated  from authorized preferred stock; no shares issued or outstanding                          |       | —                |       | —                 |       |
| Common stock,  $0.001 par value; 150,000,000 shares authorized; 55,078,969 and 55,649,146  shares issued and outstanding at December 31, 2005 and September 30,  2006, respectively |       | 55,079                |       | 55,649                 |       |
| Additional  paid-in capital                                                                                                                                                              |       | 231,582,277           |       | 234,435,980            |       |
| Deficit  accumulated during the development stage                                                                                                                                        |       | (178,346,906          | )          | (200,489,489           | )          |
| Total  stockholders’ equity                                                                                                                                                         |       | 53,290,450            |       | 34,002,140             |       |
| Total liabilities and  stockholders’ equity                                                                                                                                         |       | $                     | 57,080,566 |                   | $          | 40,173,528 |   |

 

***The accompanyingnotes are an integral part of these financial statements.***

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**ALLOSTHERAPEUTICS, INC.STATEMENTS OF OPERATIONS**

**(unaudited)**

 
| ** **                                                            | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** | **Cumulative  Period from  September 1, 1992  (date of inception)  through  September 30,** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                            | ** ** | **2005**                                             | ** ** | **2006**                                            | ** ** | **2005**                                                                                                                  | ** ** | **2006** | ** ** | **2006** | ** ** |
|                                                                  |       |                                                 |       |                                                |       |                                                                                                                      |       |   |   |   |   |
| Operating  expenses:                                                  |       |                                                 |       |                                                |       |                                                                                                                      |       |   |   |   |   |
| Research and  development                                             |       | $                                                    | 3,000,993  |                                                | $          | 4,210,051                                                                                                                 |       | $ | 7,969,922 |   | $ | 10,970,548 |   | $ | 104,503,499 |   |
| Clinical  manufacturing                                               |       | 306,508                                              |       | 485,855                                             |       | 934,246                                                                                                                   |       | 1,438,294 |   | 28,219,082 |   |
| Marketing,  general and administrative                                |       | 2,005,397                                            |       | 3,895,094                                           |       | 6,813,021                                                                                                                 |       | 10,559,612 |   | 78,841,866 |   |
| Restructuring  and separation costs                                   |       | —                                               |       | —                                              |       | 380,086                                                                                                                   |       | 645,666 |   | 1,663,821 |   |
|                                                                  |       |                                                 |       |                                                |       |                                                                                                                      |       |   |   |   |   |
| Total operating  expenses                                             |       | 5,312,898                                            |       | 8,591,000                                           |       | 16,097,275                                                                                                                |       | 23,614,120 |   | 213,228,268 |   |
|                                                                  |       |                                                 |       |                                                |       |                                                                                                                      |       |   |   |   |   |
| Loss from  operations                                                 |       | (5,312,898                                           | )          | (8,591,000                                          | )          | (16,097,275                                                                                                               | )          | (23,614,120 | ) | (213,228,268 | ) |
| Gain on  settlement claims                                            |       | —                                               |       | —                                              |       | —                                                                                                                    |       | — |   | 5,110,083 |   |
| Interest and  other income, net                                       |       | 521,637                                              |       | 479,685                                             |       | 1,238,214                                                                                                                 |       | 1,471,537 |   | 17,865,160 |   |
|                                                                  |       |                                                 |       |                                                |       |                                                                                                                      |       |   |   |   |   |
| Net loss                                                              |       | (4,791,261                                           | )          | (8,111,315                                          | )          | (14,859,061                                                                                                               | )          | (22,142,583 | ) | (190,253,025 | ) |
|                                                                  |       |                                                 |       |                                                |       |                                                                                                                      |       |   |   |   |   |
| Dividend related  to beneficial conversion feature of preferred stock |       | —                                               |       | —                                              |       | (623,489                                                                                                                  | )          | — |   | (10,236,464 | ) |
|                                                                  |       |                                                 |       |                                                |       |                                                                                                                      |       |   |   |   |   |
| Net loss  attributable to common stockholders                         |       | $                                                    | (4,791,261 | )                                                   | $          | (8,111,315                                                                                                                | )          | $ | (15,482,550 | ) | $ | (22,142,583 | ) | $ | (200,489,489 | ) |
|                                                                  |       |                                                 |       |                                                |       |                                                                                                                      |       |   |   |   |   |
| Basic and  diluted net loss per share                                 |       | $                                                    | (0.09      | )                                                   | $          | (0.15                                                                                                                     | )          | $ | (0.36 | ) | $ | (0.40 | ) |   |   |
|                                                                  |       |                                                 |       |                                                |       |                                                                                                                      |       |   |   |   |   |
| Weighted average shares  outstanding:  basic and diluted         |       | 55,015,757                                           |       | 55,196,369                                          |       | 43,045,637                                                                                                                |       | 55,126,488 |   |   |   |

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

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**ALLOS THERAPEUTICS, INC.**

**STATEMENTSOF CASH FLOWS**

**(unaudited)**

** **
| ** **                                                                                             | ** ** | **Nine Months Ended  September 30,** | ** **  | **Cumulative Period  From September 1,  1992  (date of inception)  through** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|-------------|-------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                             | ** ** | **2005**                                            | ** **  | **2006**                                                                                              | ** ** | **September  30, 2006** | ** ** |
| Cash Flows From  Operating Activities:                                                                 |       |                                                |        |                                                                                                  |       |   |   |
| Net loss                                                                                               |       | $                                                   | (14,859,061 | )                                                                                                     | $          | (22,142,583 | ) | $ | (190,253,025 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities:                           |       |                                                |        |                                                                                                  |       |   |   |
| Depreciation and amortization                                                                          |       | 318,918                                             |        | 232,381                                                                                               |       | 3,007,394 |   |
| Stock-based compensation expense                                                                       |       | 474,071                                             |        | 2,659,884                                                                                             |       | 24,703,977 |   |
| Write-off of long-term investment                                                                      |       | —                                              |        | —                                                                                                |       | 1,000,000 |   |
| Other                                                                                                  |       | —                                              |        | —                                                                                                |       | 99,121 |   |
| Changes in operating assets and liabilities:                                                           |       |                                                |        |                                                                                                  |       |   |   |
| Prepaid expenses and other assets                                                                      |       | (167,043                                            | )           | (758,098                                                                                              | )          | (1,308,964 | ) |
| Interest receivable on investments                                                                     |       | (446,212                                            | )           | 203,686                                                                                               |       | (409,748 | ) |
| Accounts payable                                                                                       |       | (147,922                                            | )           | 90,345                                                                                                |       | 455,557 |   |
| Accrued liabilities                                                                                    |       | 1,048,849                                           |        | 2,290,927                                                                                             |       | 5,715,831 |   |
| Net cash used in operating activities                                                                  |       | (13,778,400                                         | )           | (17,423,458                                                                                           | )          | (156,989,857 | ) |
| Cash Flows From  Investing Activities:                                                                 |       |                                                |        |                                                                                                  |       |   |   |
| Acquisition of property and equipment                                                                  |       | (86,569                                             | )           | (202,233                                                                                              | )          | (3,410,968 | ) |
| Purchases of marketable securities                                                                     |       | (63,111,282                                         | )           | (26,746,791                                                                                           | )          | (419,543,472 | ) |
| Proceeds from sales of marketable securities                                                           |       | 29,804,925                                          |        | 44,000,000                                                                                            |       | 386,352,777 |   |
| Purchase of long-term investment                                                                       |       | —                                              |        | —                                                                                                |       | (1,000,000 | ) |
| Payments received on notes receivable                                                                  |       | —                                              |        | —                                                                                                |       | 49,687 |   |
| Net cash provided by (used in) investing activities                                                    |       | (33,392,926                                         | )           | 17,050,976                                                                                            |       | (37,551,976 | ) |
| Cash Flows From  Financing Activities:                                                                 |       |                                                |        |                                                                                                  |       |   |   |
| Principal payments under capital leases                                                                |       | —                                              |        | —                                                                                                |       | (422,088 | ) |
| Proceeds from sales leaseback                                                                          |       | —                                              |        | —                                                                                                |       | 120,492 |   |
| Release (pledge) of restricted cash                                                                    |       | —                                              |        | 183,333                                                                                               |       | (366,667 | ) |
| Proceeds from issuance of convertible preferred  stock, net of issuance costs                          |       | 48,839,831                                          |        | —                                                                                                |       | 89,125,640 |   |
| Proceeds from issuance of common stock associated  with stock options and employee stock purchase plan |       | 156,531                                             |        | 194,389                                                                                               |       | 1,419,718 |   |
| Proceeds from issuance of common stock, net of  issuance costs                                         |       | —                                              |        | —                                                                                                |       | 108,894,612 |   |
| Net cash provided by financing activities                                                              |       | 48,996,362                                          |        | 377,722                                                                                               |       | 198,771,707 |   |
| Net increase in  cash and cash equivalents                                                             |       | 1,825,036                                           |        | 5,240                                                                                                 |       | 4,229,874 |   |
| Cash and cash  equivalents, beginning of period                                                        |       | 1,108,726                                           |        | 4,224,634                                                                                             |       | — |   |
| Cash and cash  equivalents, end of period                                                              |       | $                                                   | 2,933,762   |                                                                                                  | $          | 4,229,874 |   | $ | 4,229,874 |   |
| Supplemental  Schedule of Cash and Non-cash Operating and Financing Activities:                   |       |                                                |        |                                                                                                  |       |   |   |
| Cash paid for interest                                                                                 |       | $                                                   | —      |                                                                                                  | $          | — |   | $ | 1,033,375 |   |
| Issuance of stock in exchange for license agreement                                                    |       | —                                              |        | —                                                                                                |       | 40,000 |   |
| Capital lease obligations incurred for acquisition  of property and equipment                          |       | —                                              |        | —                                                                                                |       | 422,088 |   |
| Issuance of stock in exchange for notes receivable                                                     |       | —                                              |        | —                                                                                                |       | 139,687 |   |
| Conversion of  preferred stock to common stock                                                         |       | $                                                   | 48,839,831  |                                                                                                  | $          | — |   | $ | 89,125,640 |   |

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

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**ALLOSTHERAPEUTICS, INC. NOTES TO FINANCIAL STATEMENTS(unaudited)**

**1.             Basis of Presentation**

The unauditedfinancial statements of Allos Therapeutics, Inc. (referred to herein as the“Company,” “we,” “us” or “our”) included herein reflect all adjustments, consistingonly of normal recurring adjustments, which in the opinion of management arenecessary to fairly state our financial position, results of operations andcash flows for the periods presented.  Certaininformation and footnote disclosures normally included in audited financialinformation prepared in accordance with accounting principles generallyaccepted in the United States of America have been condensed or omittedpursuant to the Securities and Exchange Commission’s rules and regulations.  Operating results for the three and ninemonths ended September 30, 2006 are not necessarily indicative of the resultsthat may be expected for the year ending December 31, 2006. These financialstatements should be read in conjunction with the audited financial statementsand notes thereto which are included in our Annual Report on Form 10-K for theyear ended December 31, 2005 for a broader discussion of our business andthe opportunities and risks inherent in such business.

Sinceour inception in 1992, we have not generated any revenue and our activitieshave consisted primarily of developing products, licensing products, raisingcapital and recruiting personnel. Accordingly, we are considered to be in thedevelopment stage as of September 30, 2006 as defined in Statement of FinancialAccounting Standards (“SFAS”) No. 7, *Accountingand Reporting by Development Stage Enterprises.*

We haveexperienced significant net losses and negative cash flows since our inception.We have incurred these net losses principally from costs incurred in ourresearch and development programs and from our general and administrativeexpenses. We expect to continue incurring net losses and negative cash flowsfor the foreseeable future.  Our abilityto generate revenue and achieve profitability is dependent on our ability,alone or with partners, to successfully complete the development of our productcandidates, conduct clinical trials, obtain the necessary regulatory approvals,and manufacture and market our product candidates.

Based upon thecurrent status of our product development plans, we believe that our existingcash, cash equivalents, and investments in marketable securities will beadequate to satisfy our capital needs through at least the third quarter of2007.  However, our forecast of theperiod of time through which our financial resources will be adequate tosupport our operations is a forward-looking statement that involves risks anduncertainties, and actual results could vary materially.  We anticipate continuing our currentdevelopment programs and beginning other long-term development projectsinvolving our product candidates. These projects may require many years andsubstantial expenditures to complete and may ultimately be unsuccessful.Therefore, we may need to obtain additional funds from outside sources tocontinue research and development activities, fund operating expenses, pursueregulatory approvals and build sales and marketing capabilities, asnecessary.  Our actual capitalrequirements will depend on many factors, including:

·                  thestatus of our product development programs;

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

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

·                  competingtechnological and market developments; and

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

We will berequired to raise additional capital to support our future operations,including the potential commercialization of any of our product candidates,including EFAPROXYN and PDX.  We may seekto obtain this additional capital through 

6

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arrangements withcorporate partners, equity or debt financings, or from other sources.  Such arrangements, if successfullyconsummated, may be dilutive to our existing stockholders.  However, there is no assurance that we willbe successful in consummating any such arrangements. In addition, in the eventthat additional funds are obtained through arrangements with collaborativepartners or other sources, such arrangements may require us to relinquishrights to some of our technologies, product candidates or products underdevelopment that we would otherwise seek to develop or commercialize ourselves.If we are unable to generate meaningful amounts of revenue from future productsales, if any, or cannot otherwise raise sufficient additional funds to supportour operations, we may be required to delay, reduce the scope of or eliminateone or more of our development programs and our business and future prospectsfor revenue and profitability may be harmed.

**2.             Accounts Payable and AccruedLiabilities**

Accounts payableare comprised of the following:
| ** **              | ** ** | **December 31,  2005** | ** ** | **September  30, 2006** | ** ** |
|-------------------------|------------|-----------------------------|------------|------------------------------|------------|
| Trade accounts  payable |       | $                           | 352,266    |                         | $          | 368,057 |   |
| Related parties         |       | 12,946                      |       | 87,500                       |       |
|                    |       | $                           | 365,212    |                         | $          | 455,557 |   |

 

Accruedliabilities are comprised of the following:
| ** **                                  | ** ** | **December 31,  2005** | ** ** | **September   30, 2006** | ** ** |
|---------------------------------------------|------------|-----------------------------|------------|------------------------------------|------------|
| Accrued research  and development expenses  |       | $                           | 1,570,534  |                               | $          | 2,758,335 |   |
| Accrued restructuring  and separation costs |       | 208,786                     |       | 558,672                            |       |
| Accrued  personnel costs                    |       | 1,201,821                   |       | 1,344,185                          |       |
| Accrued clinical  manufacturing expenses    |       | 165,479                     |       | 402,709                            |       |
| Accrued expenses  — other              |       | 278,284                     |       | 651,930                            |       |
|                                        |       | $                           | 3,424,904  |                               | $          | 5,715,831 |   |

 

**3.             Stock-Based Compensation**

We adopted SFAS No. 123 (Revised 2004), *Share-Based Payment* (“SFAS 123R”) effective January 1, 2006.Under the provisions of SFAS 123R, stock-based compensation is measured at thegrant date based on the fair value of the award and is recognized as expenseover the required service period of the award. Prior to the adoption of SFAS123R, we accounted for grants of stock-based awards according to AccountingPrinciples Board (“APB”) Opinion No. 25,*Accounting for Stock Issued to Employees* (“APB 25”) and relatedInterpretations.

In March 2005, the Securities and ExchangeCommission issued Staff Accounting Bulletin No. 107 (“SAB 107”) relatingto SFAS 123R. We applied the provisions of SAB 107 in connection with ouradoption of SFAS 123R. We adopted SFAS 123R using the modified prospectivetransition method, which requires the application of the accounting standard asof January 1, 2006, the first day of our fiscal year 2006. Our financialstatements as of and for the three and nine months ended September 30, 2006reflect the impact of SFAS 123R. In accordance with the modified prospectivetransition method, our financial statements for prior periods have not beenrestated to reflect, and do not include, the impact of SFAS 123R.

**Prior tothe Adoption of SFAS 123R**

Prior to the adoption of SFAS 123R, we provided thedisclosures required under SFAS No. 123, *Accounting for Stock-BasedCompensation* (“SFAS 123”), as amended by SFAS No. 148, *Accounting for Stock-Based Compensation — Transition and Disclosures*.The following table illustrates the pro forma effect on net loss attributableto common stockholders and net loss per share if we had applied the fair valuerecognition provisions of SFAS 123 to stock-based compensation for the three andnine months ended September 30, 2005:

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|                                                                                                                   | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                        | ** ** | **September 30, 2005** | ** ** | **September 30, 2005** | ** ** |
|                                                                                                              |       |                             |       |                             |       |
| Net loss  attributable to common stockholders, as reported                                                        |       | $                                | (4,791,261 | )                                | $          | (15,482,550 | ) |
| Add: Stock-based employee compensation expense  included in reported net loss                                     |       | 3,789                            |       | 471,741                          |       |
| Deduct: Stock-based employee compensation expense as  determined under the fair value based method for all awards |       | (279,139                         | )          | (1,475,303                       | )          |
| Pro forma net  loss attributable to common stockholders                                                           |       | $                                | (5,066,611 | )                                | $          | (16,486,112 | ) |
| Net loss per  share: basic and diluted — as reported                                                         |       | $                                | (0.09      | )                                | $          | (0.36 | ) |
| Net loss per share:  basic and diluted — pro forma                                                           |       | $                                | (0.09      | )                                | $          | (0.38 | ) |

 

The followingweighted-average assumptions were used in estimating the pro forma stock-basedcompensation expense under SFAS 123 for the three and nine months endedSeptember 30, 2005: an expected dividend yield of 0%; an expected stock pricevolatility of 82% and 84%, respectively; an expected life of 5.0 and 4.2 years,respectively; and a risk free interest rate of 4.1 and 3.8%, respectively.

**Impactof the adoption of SFAS 123R**

In accordance with the modified prospective transitionmethod of SFAS 123R, we recognized total stock-based compensation expense of $974,712and $2,659,884 during the three and nine months ended September 30, 2006,respectively.  We did not recognize arelated tax benefit during the three and nine months ended September 30, 2006 aswe maintain net operating loss carryforwards and we have established a valuationallowance against the entire tax benefit as of September 30, 2006.  Hadwe recognized equity-based compensation in accordance with the provisions ofAPB 25 and related Interpretations instead of SFAS 123R for the three and ninemonths ended September 30, 2006, stock-based compensation expense would havebeen reduced by $941,379 and $2,218,754, respectively, and our net loss pershare would have been reduced by $0.02 and $0.04, respectively, on a basic andfully-diluted basis.  The followingtable summarizes the components of stock-based compensation expense for thenine months ended September 30, 2006, and our unrecognized compensation expenseas of September 30, 2006, net of estimated forfeitures, including theweighted-average years over which the compensation expense will be recognized:
| ** **                                                                          | ** ** | **Outstanding  and unvested**          | ** ** | **Stock-based awards during the nine months ended  September 30, 2006:** | ** ** | ** **                               | ** ** |
|-------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                          | ** ** | **awards at  December 31,  2005** | ** ** | **Stock Options**                                                                                           | ** ** | **Modification  of Stock  Options** | ** ** | **Restricted  Stock** | ** ** | **Employee  Stock  Purchase Plan** | ** ** | **Total** | ** ** |
| Total Fair Value  of Awards                                                         |       | $                                           | 805,652    |                                                                                                             | $          | 4,764,812                                |       | $ | 441,129 |   | $ | 1,286,300 |   | $ | 53,946 |   | $ | 7,351,839 |   |
| Less: Estimated  Forfeitures over Expected Life of Award                            |       | (129,710                                    | )          | (419,060                                                                                                         | )          | —                                   |       | — |   | — |   | (548,770 | ) |
| Compensation  Expense of Awards, net of estimated forfeitures                       |       | 675,942                                     |       | 4,345,752                                                                                                        |       | 441,129                                  |       | 1,286,300 |   | 53,946 |   | 6,803,069 |   |
| Less:  Compensation Expense recognized for the nine months ended September 30, 2006 |       | (388,672                                    | )          | (1,469,047                                                                                                       | )          | (441,129                                 | )          | (334,062 | ) | (26,974 | ) | (2,659,884 | ) |
| Unrecognized  Compensation Expense as of September 30, 2006                         |       | $                                           | 287,270    |                                                                                                             | $          | 2,876,705                                |       | $ | — |   | $ | 952,238 |   | $ | 26,972 |   | $ | 4,143,185 |   |
| Weighted-Average  Remaining Amortization Period (Years)                             |       | 1.3                                         |       | 1.5                                                                                                              |       | —                                   |       | 1.7 |   | 1.0 |   | 1.5 |   |

 

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*Outstanding and Unvested Stock-Based Awards as ofDecember 31, 2005*

For stock-based awards that were outstanding andunvested as of December 31, 2005, we had an unrecorded deferred stock-based compensationbalance of $805,652, as calculated under the provisions of SFAS 123 forpurposes of pro forma disclosures. In our pro forma disclosures prior to theadoption of SFAS 123R, we accounted for forfeitures upon occurrence. SFAS 123Rrequires forfeitures to be estimated at the time of grant and revised ifnecessary in subsequent periods if actual forfeitures differ from thoseestimates.  Accordingly, as of January 1, 2006, we estimated that thestock-based compensation for the awards not expected to vest was $129,710, andtherefore, the unrecorded deferred stock-based compensation balance related tostock options outstanding and unvested as of December 31, 2005 was adjusted to$675,942 after estimated forfeitures. During the three and nine months endedSeptember 30, 2006, we recorded stock-based compensation related to theseawards of $108,392 and $388,672, respectively.  As of September 30, 2006,the unrecorded deferred stock-based compensation balance related to outstandingand unvested stock options as of December 31, 2005 was $287,270 and will berecognized over an estimated weighted-average amortization period of 1.3 years.

*Stock-Based Awards granted and modified during thenine months ended September 30, 2006*

During the nine months ended September 30, 2006, wegranted 2,657,343 stock options with an estimated total grant-date fair valueof $4,764,812.  Of this amount, we estimated that the stock-basedcompensation for the awards not expected to vest was $419,060.  During the three and nine months ended September 30, 2006, we recordedstock-based compensation related to these awards of $657,116 and $1,469,047,respectively.  As of September 30, 2006,the unrecorded deferred stock-based compensation balance related to stockoptions was $2,876,705 and will be recognized over an estimated weighted-averageamortization period of 1.5 years.

During the nine months ended September 30, 2006, weentered into a Separation Agreement with our former President and ChiefExecutive Officer, Michael E. Hart, and we entered into a consulting agreementwith a former member of our Board of Directors, Dr. Marvin E. Jaffe (these arrangementsare described in more detail in Note 7 below). Pursuant to these arrangements, the exercise periods of certain stockoptions held by Mr. Hart and Dr. Jaffe were extended as a result of theirconsulting relationships and were deemed modified for accounting purposes.  We have accounted for the modifications tothese options in accordance with SFAS 123R and Financial Accounting StandardsBoard (“FASB”) Interpretation No. 44,*Accounting for Certain Transactions Involving Stock Compensation*,and recorded a one-time stock-based compensation charge of $441,129 during thenine months ended September 30, 2006.

*ValuationAssumptions*

For stock optionsgranted during the nine months ended September 30, 2006, the majority vestaccording to the following schedule: 25% of the shares subject to the awardvest one year after the date of grant, and the remaining 75% of the sharessubject to the award vest in equal monthly installments thereafter over thenext three years, until all such shares are vested and exercisable. Anyunearned stock-based compensation calculated according to SFAS 123R is expensedover the vesting period of the individual options in accordance with FASBInterpretation No. 28,*Accounting forStock Appreciation Rights and Other Variable Stock Option and Award Plans*(“FIN 28”). The weighted-average grant-date fair value of stock options,as determined under SFAS 123R, granted during the three and nine months endedSeptember 30, 2006 was $2.48 and $1.79 per share, respectively.  The fair value of stock options granted toour employees during the three and nine months ended September 30, 2006 wasestimated on the date of each grant using the Black-Scholes option pricingmodel using the following weighted-average assumptions:

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

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

·                  Anexpected life of 4.0 and 3.9 years, respectively, determined by factoring thedifferent vesting periods of each award in combination with our employees’expected exercise behavior; and

·                  Arisk-free interest rate of 4.7% based on U.S. Treasury zero-coupon issues witha remaining term equal to the expected life of each award.

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**StockOptions**

During 1995, ourBoard of Directors terminated the 1992 Stock Plan (the “1992 Plan”) and adoptedthe 1995 Stock Option Plan (the “1995 Plan”). The 1995 Plan was amended andrestated in 1997. Termination of the 1992 Plan had no effect on the optionsoutstanding under that plan, as they were assumed under the 1995 Plan. Underthe 1995 Plan, we could grant fixed and performance-based stock options, andstock appreciation rights to officers, employees, consultants and directors.The stock options were intended to qualify as “incentive stock options” underSection 422 of the Internal Revenue Code, unless specifically designatedas non-qualifying stock options or unless exceeding the applicable statutorylimit.

During 2000,concurrent with our initial public offering, the Board of Directors suspendedthe 1995 Plan and adopted the Allos Therapeutics, Inc. 2000 StockIncentive Compensation Plan (the “2000 Plan”). The 2000 Plan provides for thegranting of stock options similar to the terms of the 1995 Plan as describedabove. Any shares remaining for future option grants and any futurecancellations of options from our 1995 Plan will be available for future grantunder the 2000 Plan. Suspension of the 1995 Plan had no effect on the optionsoutstanding under the 1995 Plan. Under the 2000 Plan, we are authorized toincrease the number of shares of common stock that shall be available annuallyon the first day of each fiscal year beginning in 2001 in an amount equal tothe lesser of 440,000 shares or 2% of the adjusted average common sharesoutstanding used to calculate fully diluted earning per share as reported inour Annual Report to Stockholders for the preceding year, or alternatively, byany lesser amount determined by our Board of Directors. On December 21,2005, our stockholders approved an amendment and restatement of the 2000 Planto: (i) increase the aggregate number of shares of common stock authorizedfor issuance under the 2000 Plan by 3,500,000 shares and (ii) provide thatthe number of shares of common stock that may be granted under the 2000 Plan toany one employee during any calendar year cannot exceed 2,000,000 shares.  The 2000 Plan will terminate on March 21,2010.

In January 2002,our Board of Directors approved the Allos Therapeutics, Inc. 2002 BroadBased Equity Incentive Plan (the “2002 Plan”). Under the 2002 Plan, we areauthorized to issue up to 1.0 million shares of common stock to employees,consultants and members of the Board of Directors. Under the terms of the 2002Plan, the aggregate number of shares underlying stock awards to officers anddirectors once employed by us cannot exceed 49 percent of the number ofshares underlying all stock awards granted, as determined on certain specificdates. The 2002 Plan will terminate on January 7, 2012.

In June2006, our Board of Directors approved the Allos Therapeutics, Inc. 2006Inducement Award Plan (the “2006 Plan”). Under the 2006 Plan, we may issue an aggregate of up to 1.5 millionshares of our common stock pursuant to equity awards, including the grant ofnonstatutory stock options, stock grant awards, stock purchase awards, stockunit awards and other forms of equity compensation.  We may grant awards under the 2006 Plan onlyto persons not previously an employee or director of the Company, or followinga *bona fide* period ofnon-employment, as an inducement material to such individual’s entering intoemployment with the Company and to provide incentives for such persons to exertmaximum efforts for the Company’s success.

As of September30, 2006, we had a total of 3,819,620 shares of common stock available forgrant under the 2000, 2002 and 2006 Plans. The 1995, 2000, 2002 and 2006 Plans provide for appropriate adjustmentsin the number of shares reserved and outstanding options in the event ofcertain changes to our outstanding common stock by reason of merger,recapitalization, stock split or other similar events. Options granted underthe Plans may be exercised for a period of not more than 10 years from thedate of grant or any shorter period as determined by our Board of Directors.Options vest as determined by the Board of Directors, generally over a periodof two to four years, subject to acceleration under certain events. Theexercise price of any incentive stock option granted under the Plans must equalor exceed the fair market value of our common stock on the date of grant, or110% of the fair market value per share in the case of a 10% or greaterstockholder.

The followingtable summarizes our stock option activity and related information for the1995, 2000, 2002 and 2006 Plans as of and for the nine months ended September30, 2006:

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| ** **                             | ** ** | **Options Outstanding** | ** ** |
|----------------------------------------|------------|------------------------------|------------|
| ** **                             | ** ** | **Number of  Shares**   | ** ** | **Weighted  Average  Exercise Price** | ** ** |
| **Outstanding  at December 31, 2005**  |       | 3,944,375                    |       | $ | 3.87 |   |
| Granted                                |       | 2,657,343                    |       | 2.93 |   |
| Exercised                              |       | (107,372                     | )          | 1.55 |   |
| Canceled                               |       | (288,839                     | )          | 4.46 |   |
| **Outstanding at September 30,  2006** |       | 6,205,507                    |       | $ | 3.48 |   |

 

The followingtable summarizes information about outstanding stock options that are fullyvested and currently exercisable, and outstanding stock options that areexpected to vest in the future:
| ** **                                                           | ** ** | **Number  Outstanding** | ** ** | **Weighted Average  Remaining  Contractual Term** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|----------------------------------------------------------------------|------------|-------------------------|------------|-------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------|------------|
| **As of  September 30, 2006:**                                       | ** ** | ** **              | ** ** | ** **                                                  | ** ** | ** **                                 | ** ** | ** **                          | ** ** |
| Options fully vested and exercisable                                 |       | 3,137,929               |       | 5.7                                                         |       | $                                          | 4.03       |                                | $          | 2,455,779 |   |
| Options expected to vest, including effects of  expected forfeitures |       | 2,742,748               |       | 9.2                                                         |       | $                                          | 2.93       |                                | 2,530,105  |   |
| Options fully  vested and expected to vest                           |       | 5,880,677               |       | 7.3                                                         |       | $                                          | 3.52       |                                | $          | 4,985,884 |   |

 

The aggregateintrinsic value in the tables above represents the total pretax intrinsicvalue, based on our closing stock price of $3.77 as of September 30, 2006,which would have been received by the option holders had all option holderswith in-the-money options exercised their options as of that date.  The total number of in-the-money optionsexercisable as of September 30, 2006 was 1,742,001.  The total fair value of options vested duringthe three months ended September 30, 2006 was approximately $149,000.

The totalintrinsic value of options exercised during the three and nine months endedSeptember 30, 2006 was $27,019 and $200,678, respectively.  The total cash received from employees as aresult of employee stock option exercises during the three and nine monthsended September 30, 2006 was $83,824 and $166,155, respectively.  We settle employee stock option exerciseswith newly issued common shares.  No taxbenefits were realized by us in connection with these exercises during the threeand nine months ended September 30, 2006 as we maintain net operating losscarryforwards and we have established a valuation allowance against the entiretax benefit as of September 30, 2006.  Nostock compensation expense was capitalized on the Balance Sheet as of September30, 2006.

**RestrictedStock**

During the three and nine months ended September 30, 2006, we granted 0and 410,000 shares of restricted stock, respectively.  The shares of restricted stock will vest infour equal annual installments.  As ofSeptember 30, 2006, 410,000 shares of restricted stock were outstanding and noshares were vested.  The weighted-averagegrant-date fair value per share for restricted stock awards granted during thenine months ended September 30, 2006 was equal to $3.14 per share and was basedon the closing market price of the Company’s common stock on the grant dates ofthe awards.

**EmployeeStock Purchase Plan**

OnFebruary 28, 2001, our Board of Directors approved the Allos Therapeutics, Inc.2001 Employee Stock Purchase Plan (“Purchase Plan”), which was also approved byour stockholders on April 17, 2001. Under the Purchase Plan, we areauthorized to issue up to 2,500,000 shares of common stock to qualifiedemployees. Qualified employees can choose to have up to 10 percent oftheir annual base earnings withheld to purchase shares of our common stockduring each offering period. The purchase price of the common stock is 85% ofthe lower of the fair market value of a share of common stock on the first dayof the offering or the fair market value of a share of common stock on the lastday of the purchase period. We sold 32,189, 36,393, 26,675 and 15,346 shares ofcommon stock to employees in 2003, 2004, 2005, and during the nine months endedSeptember 30, 2006, respectively.  Therewere 2,352,726 shares available for sale under the Purchase Plan at 

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September 30,2006. The Purchase Plan will terminate on February 27, 2011.  We recognized stock-based compensationexpense in connection with the Purchase Plan for the three and nine monthsended September 30, 2006 of $12,939 and $26,974 respectively. Theweighted-average estimated grant date fair value of purchase awards under thePurchase Plan during the three and nine months ended September 30, 2006 was$0.96 per share, and was determined using the following weighted-averageassumptions: an expected dividend yield of 0%; an expected stock pricevolatility of 46%; an expected life of 1.0 year; and a risk-free interest rateof 4.7%.

**4.             Net Loss Per Share**

Basic net loss pershare is computed by dividing the net loss attributable to common stockholdersfor the period by the weighted average number of common shares outstandingduring the period and diluted net loss per share is computed by giving effectto all dilutive potential common stock, including options, restricted stock,shares to be issued under our employee stock purchase plan, and warrants.

Diluted net lossper share for all periods presented is the same as basic net loss per sharebecause the potential common shares were anti-dilutive due to our net loss.Anti-dilutive common shares not included in the calculation of diluted sharesoutstanding, using the treasury stock method, are as follows:
| ** **                    | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                    | ** ** | **2005**                                             | ** ** | **2006**                                            | ** ** | **2005** | ** ** | **2006** | ** ** |
| Common stock  options         |       | 271,479                                              |       | 1,399,269                                           |       | 263,008 |   | 924,457 |   |
| Restricted stock              |       | —                                               |       | 410,000                                             |       | — |   | 410,000 |   |
| Employee stock  purchase plan |       | 1,973                                                |       | 7,950                                               |       | 1,869 |   | 6,320 |   |
| Common stock  warrants        |       | —                                               |       | 249,845                                             |       | — |   | 72,775 |   |
|                          |       | 273,452                                              |       | 2,067,064                                           |       | 264,877 |   | 1,413,552 |   |

 

**5.             Restructuring and Separation Costs**

InJanuary 2005, we executed agreements to sublease approximatelythree-quarters of the 12,708 square feet of excess space in our corporateoffices located in Westminster, Colorado. The term of each sublease agreementis through the term of our office lease, or October 31, 2008. The totalrental payments to us under the sublease agreements are approximately $230,000.Because our obligations under our primary lease were in excess of the sum ofthe actual and expected sublease rental payments for this excess space, werecorded a lease abandonment charge of $380,086 during the nine months ended September30, 2005. As of September 30, 2006, the remaining liability of $134,685relating to this lease abandonment charge is recorded in accrued restructuringand separation costs.

In January 2006, Michael E. Hart notified ourBoard of Directors of his intent to resign from his positions as President,Chief Executive Officer and Chief Financial Officer of the Company once asuccessor Chief Executive Officer was appointed.  On March 3, 2006,we entered into a separation agreement with Mr. Hart to provide certainincentives for his continued employment with the Company while we conducted oursearch for his successor. On March 9, 2006, we appointed Paul L. Berns as ourPresident, Chief Executive Officer and a member of the Board of Directors andMr. Hart resigned from his positions in accordance with the terms of theseparation agreement. The separation agreement with Mr. Hart was amended onMarch 9, 2006 and on May 10, 2006 (as so amended, the “Separation Agreement”).

Pursuant to the Separation Agreement, Mr. Hart is entitledto certain payments and benefits from the Company, including but not limited tothe following:

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

·                  anamount equal to $362,500 payable over the twelve month period from September11, 2006 to September 11, 2007, minus applicable deductions and withholdings;

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

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

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

·                  continuedvesting of his stock options granted prior to March 3, 2006 for a period of oneyear following his termination of employment, which options will remainexercisable, subject to the terms of his consulting agreement with the Company(as described in Note 7 below), until ninety days following the termination ofhis consulting relationship with the Company; *providedthat* in no event will Mr. Hart’s options issued under the Company’s1995 Stock Option Plan remain exercisable beyond December 31, 2006; and

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

We recorded separation costs of $645,666 during the ninemonths ended September 30, 2006 relating to our estimate of our totalobligations under the Separation Agreement with Mr. Hart.  During the nine months ended September 30,2006, the Company has made payments to Mr. Hart under the Separation Agreementof $221,679.  As of September 30, 2006,the remaining liability of $423,987 relating to the Separation Agreement withMr. Hart is recorded in accrued restructuring and separation costs.

**6.             Commitments and Contingencies**

*Commitments*

In June 2005, weentered into a manufacturing agreement with Hovione Inter Limited (“Hovione”)covering the supply of EFAPROXYN bulk drug substance, or efaproxiralsodium.  Under the terms of the agreement, we are required to purchase anegotiated percentage of our annual requirements for efaproxiral sodium fromHovione.  We must also meet annual minimum purchase requirements ofefaproxiral sodium from Hovione equal to $2,000,000 in 2006, $3,500,000 in2007, $5,000,000 in 2008, and $5,000,000 in each year thereafter through theend of the term of the agreement.  In the event that we do not meet theseannual minimum purchase requirements, we have the option to pay extension feesto move the annual requirements out by a total of three years.  Theseextension fees are equal to $100,000 for a first extension, $150,000 for asecond extension, and $200,000 for a third and final extension, if necessary. Purchasesunder this agreement are subject to fluctuations in foreign currency exchangerates. The agreement has a term of seven years following our receipt ofapproval, if any, from the United States Food and Drug Administration to marketEFAPROXYN in the United States.  The Company and Hovione each havecustomary termination rights, including termination for material breach orother events relating to insolvency or bankruptcy.  In addition, we mayterminate the agreement at any time if we decide to discontinue development or,if approved, marketing of EFAPROXYN.

InDecember 2002, we entered into a license agreement with MemorialSloan-Kettering Cancer Center, SRI International and Southern ResearchInstitute, under which we obtained exclusive worldwide rights to several patentsand equivalent foreign patent applications to develop and market any productderived from PDX in connection with all diagnostic and therapeutic uses,including human and veterinary diseases. Under the terms of the agreement, we paid an up-front license fee of$2.0 million upon execution of the agreement and are also required to makecertain additional cash payments based upon the achievement of certain clinicaldevelopment or regulatory milestones or the passage of certain time periods.  To date, we have made aggregate milestonepayments of $1.0 million based on the passage of time.  In the future, we could make aggregatemilestone payments of $2.0 million upon the earlier of achievement of aclinical development milestone or the passage of certain time periods (the“Clinical Milestone”), and up to $10 million upon achievement of certainregulatory milestones, including regulatory approval to market PDX in theUnited States or Europe.  The nextscheduled payment of $500,000 toward the Clinical Milestone is due inDecember 2006.  This and subsequentpayments will be expensed as incurred. Under the terms of the agreement, we are required to fund alldevelopment programs and will have sole responsibility for allcommercialization activities.  Inaddition, we will pay the licensors a royalty based on a percentage of 

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net revenuesarising from sales of the product or sublicense revenues arising fromsublicensing the product, if and when such sales or sublicenses occur.  As of September 30, 2006, no royalty paymentshave been made or accrued.

In December 2004, we entered into an agreement withthe University of Colorado Health Sciences Center, the University of Salfordand Cancer Research Technology, under which we obtained exclusive worldwiderights to certain intellectual property surrounding a proprietary moleculeknown as RH1. Under the terms of the agreement, we paid an up-front license feeof $190,500 upon execution of the agreement and are also required to makecertain additional cash payments based upon the achievement of certain clinicaldevelopment, regulatory and commercialization milestones.  To date, we have not made any milestonepayments under the agreement.  In the future,we could make aggregate milestone payments of up to $9.2 million upon theachievement of the clinical development, regulatory and commercializationmilestones set forth in the agreement. The up-front license fee and all milestone payments under the agreement,as well as the one-time data option fee discussed below, have been or will berecorded to research and development expense when incurred.  Under the terms of the agreement and relateddata option agreement, Cancer Research UK, CRT’s parent institution, willcontinue to support an ongoing Phase 1 dose escalation study, and we will havethe right to obtain an exclusive license to the results of the study, for usein subsequent development and regulatory activities, upon payment of a one-timedata option fee of $360,000.  Uponcompletion of the Phase 1 study, we will assume responsibility for all futuredevelopment costs and activities and will have sole responsibility for allcommercialization activities.  Inaddition, we will pay the licensors a royalty based on a percentage of net revenuesarising from sales of the product or sublicense revenues arising fromsublicensing the product, if and when such sales or sublicenses occur.  As of September 30, 2006, no royalty paymentshave been made or accrued.

*Contingencies*

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

On November 20, 2005, the plaintiff appealed theDistrict Court’s decision to the U.S. Court of Appeals for the Tenth Circuit(the “Court of Appeals”).    In October 2006, theparties held discussions to settle the matter, although the terms of any suchpotential settlement remain subject to negotiation and no binding agreement hasbeen reached.  A settlement would besubject to various conditions, including approval of the District Court.  We expect that any settlement in excess ofour deductible would be covered by our insurance carrier. As with anylitigation proceeding, we cannot predict with certainty the eventual outcome ofour settlement discussions or the legal proceedings.  In the event a settlement is not concluded,we intend to vigorously defend against the plaintiff’s appeal.  If the Court of Appeals reverses the DistrictCourt’s decision and we are not successful in our defense of such claims, wecould be forced to make significant payments to the plaintiffs, and suchpayments could have a material adverse effect on our business, financialcondition, results of operations and cash flows to the extent such payments arenot covered by our insurance carriers. Even if our defense against such claims is successful, the litigationcould result in substantial costs and divert management’s attention andresources, which could adversely affect our business.  As of September 30, 2006, we have recorded$270,000 in accrued liabilities, which represents the remaining unpaid deductibleunder our insurance policy. 

We enter into indemnificationprovisions under our agreements with other companies in our ordinary course ofbusiness, typically with business partners, contractors, clinical sites andsuppliers. Under these provisions we generally indemnify and hold harmless theindemnified party for losses suffered or incurred by the indemnified party as aresult of our activities or the use of our product candidates. Theseindemnification provisions generally survive termination of the underlyingagreement. The maximum potential amount of future payments we could be requiredto make under these indemnification provisions is unlimited. We have notincurred material costs to defend lawsuits or settle claims related to theseindemnification agreements. The estimated fair value of the indemnificationprovisions of these agreements is minimal as of September 30, 2006, andaccordingly, we have no corresponding liabilities recorded as of September 30,2006.

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**7.****                                      RelatedParty Transaction**

*Marvin E.Jaffe, M.D.*

Dr. Jaffe servedas a member of our Board of Directors from 1994 to May 10, 2006.  On March 11, 2006, Dr. Jaffe tendered hisresignation as a director of the Company effective immediately prior to our2006 annual meeting of stockholders and notified the Board that he did notintend to stand for reelection. As a result of Dr. Jaffe’s resignation as adirector, on May 10, 2006, we entered into a consulting agreement with Dr.Jaffe in order to allow us to retain the benefit of Dr. Jaffe’s knowledge andexpertise regarding the Company’s business and the potential clinicaldevelopment and commercialization strategies for our products (the “JaffeConsulting Agreement”). Pursuant to the Jaffe Consulting Agreement, Dr. Jaffehas agreed to provide up to 10 hours of consulting service per month as and whenrequested from time to time by the Company. In connection with the performanceof his consulting services, we granted Dr. Jaffe a nonqualified stock optionunder the Company’s 2000 Stock Incentive Compensation Plan to purchase 20,000shares of common stock at an exercise price equal to $2.94 per share, whichequals the closing sale price of a share of our common stock on the effectivedate of the Jaffe Consulting Agreement (as reported by the Nasdaq NationalMarket).  This option is subject to theterms and conditions of the 2000 Stock Incentive Compensation Plan and vests ineighteen equal monthly installments commencing July 1, 2006.  Dr. Jaffe is not entitled to any additionalcompensation or benefits in connection with the performance of his consultingservices. The term of the Jaffe Consulting Agreement is from May 10, 2006 toDecember 31, 2007; *provided that*itwill automatically terminate upon the occurrence of one or more eventsconstituting just cause (as defined in the agreement).

*MichaelE. Hart*

Pursuant to the Separation Agreement with Mr. Hart (asdiscussed in Note 5) and as a result of Mr. Hart’s resignation as a director,on May 10, 2006, we entered into a consulting agreement with Mr. Hart in orderto allow us to retain the benefit of Mr. Hart’s historical knowledge regardingthe Company’s operations and corporate development strategies (the “HartConsulting Agreement”). Pursuant to the Hart Consulting Agreement, Mr. Hart hasagreed to provide an average of at least 10 hours of consulting services permonth as and when requested from time to time by the Company. Mr. Hart is notentitled to any compensation or benefits in connection with the performance ofhis consulting services, except for those payments and benefits being providedto him under the Separation Agreement. The term of the Hart ConsultingAgreement is from May 10, 2006 to December 31, 2007; *providedthat*it will automatically terminate upon the occurrence of one ormore events constituting just cause (as defined in the agreement).

**8.             Recently Issued AccountingPronouncements**

In February 2006,the Financial Accounting Standards Board (“FASB”) issued SFAS No. 155, *Accounting for Certain Hybrid Financial Instruments* (“SFAS155”), which amends SFAS No. 133 and SFAS No. 140.  SFAS 155 will be effective for the Companybeginning in the first quarter of 2007. SFAS 155 permits interests in hybrid financial instruments that containan embedded derivative that would otherwise require bifurcation, to be accountedfor as a single financial instrument at fair value, with changes in fair valuerecognized in earnings. This election is permitted on aninstrument-by-instrument basis for all hybrid financial instruments held,obtained, or issued as of the adoption date. We are currently assessing the impact of the adoption of SFAS 155 on ourfinancial statements.

In June 2006, theFASB issued Interpretation No. 48, “*Accounting for Uncertaintyin Income Taxes*” (“FIN 48”), which clarifies the accounting foruncertainty in income taxes recognized in the financial statements inaccordance with SFAS No. 109, “Accounting for Income Taxes”.  FIN 48 prescribes a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return.  FIN 48 is effective for fiscal yearsbeginning after December 15, 2006.  Weare currently assessing the impact of the adoption of FIN 48 on our financialstatements.

In September 2006, theFASB issued SFAS No. 157, “*Fair Value Measurements*”(“SFAS 157”), which is effective for fiscal years beginning afterNovember 15, 2007 and for interim periods within those years.  SFAS 157 defines fair value, establishes aframework for measuring fair value and expands the related disclosure requirements.  We are currently assessing the impact of theadoption of SFAS 157 on our financial statements.

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**ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

*Thefollowing Management’s Discussion and Analysis of Financial Condition andResults of Operations, as well as information contained elsewhere in thisreport, contains statements that constitute “forward-looking statements” withinthe meaning of Section 27A of the Securities Act of 1933, as amended, andSection 21E of the Securities Exchange Act of 1934, as amended. Theseforward-looking statements include, but are not limited to, statementsconcerning our projected timelines for the completion of enrollment andannouncement of results from our ongoing clinical trials, including ourPhase 3 ENRICH trial and our Phase 2 PROPEL  trial of PDX in patients with relapsed orrefractory peripheral T-cell lymphoma; the potential for the results of ourPhase 3 ENRICH trial or Phase 2 PROPEL trial to support marketing approvalof EFAPROXYN or PDX, respectively; other statements regarding our futureproduct development and regulatory strategies, including our intent to developor seek regulatory approval for our product candidates in specific indications;the ability of our third-party manufacturing parties to support ourrequirements for drug supply; any statements regarding our future financialperformance, results of operations or sufficiency of capital resources to fundour operating requirements; and any other statements which are other thanstatements of historical fact.  In somecases, these statements may be identified by terminology such as “may,”“will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,”“predicts,” “potential” or “continue,” or the negative of such terms and othercomparable terminology. Although we believe that the expectations reflected inthe forward-looking statements contained herein are reasonable, we cannotguarantee future results, levels of activity, performance or achievements.These statements involve known and unknown risks and uncertainties thatmay cause our, or our industry’s results, levels of activity, performanceor achievements to be materially different from those expressed or implied bythe forward-looking statements. Factors that may cause or contribute tosuch differences include, among other things, those discussed under the caption“Risk Factors” in Part II, Item 1A of this quarterly report.  All forward-looking statements included inthis report are based on information available to us as of the date hereof andwe undertake no obligation to revise any forward-looking statements in order toreflect any subsequent events or circumstances.*

**Overview**

AllosTherapeutics, Inc. is a biopharmaceutical company focused on developingand commercializing innovative small molecule drugs for improving the treatmentof cancer. Small molecule drugs, in general, are non-protein products producedby chemical synthesis rather than biological methods. We strive to developdrugs that improve the treatment of cancer and enhance the power of currenttherapies. Our goal is to build a profitable company by generating income fromproducts we develop and commercialize, either alone or together with one ormore potential strategic partners. Our focus is on product opportunities thatleverage our internal clinical development and regulatory expertise and addressimportant medical markets. We may also endeavor from time to time to growour existing portfolio of product candidates through product acquisition andin-licensing efforts.

Since ourinception in 1992, we have not generated any revenue from product sales and wehave experienced significant net losses and negative cash flows. We haveincurred these losses principally from costs incurred in our research anddevelopment programs and from our general and administrative expenses. Weexpect to continue incurring net losses and negative cash flows for theforeseeable future.  Our ability togenerate revenue and achieve profitability is dependent on our ability, aloneor with partners, to successfully complete the development of our productcandidates, conduct clinical trials, obtain the necessary regulatory approvals,and manufacture and market our product candidates.

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

·                  EFAPROXYNis the first synthetic small molecule designed to sensitize hypoxic, oroxygen-deprived, areas of tumors during radiation therapy by facilitating therelease of oxygen from hemoglobin, the oxygen-carrying protein contained withinred blood cells, and increasing the level of oxygen in tumors. The presence ofoxygen in tumors is an essential element for the effectiveness of radiationtherapy. By increasing tumor oxygenation, we believe EFAPROXYN has thepotential to enhance the efficacy of standard radiation therapy.

In December 2003, we submitted a New DrugApplication, or NDA, to the United States Food and Drug Administration, or FDA,for approval to market EFAPROXYN in the United States as an adjunct to wholebrain radiation therapy, or WBRT, for the treatment of patients with brainmetastases originating from breast cancer. The 

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NDA was based on the findings from our randomized,open label Phase 3 clinical trial of EFAPROXYN in patients with brainmetastases, called REACH, which demonstrated a statistically significantsurvival benefit in patients with brain metastases originating from breastcancer, a subgroup of patients that was not prospectively defined as anintent-to-treat subgroup. The results from the REACH trial were announced inApril 2003. In May 2004, the FDA’s Oncologic Drug Advisory Committeereviewed the NDA and voted not to recommend approval of EFAPROXYN for thisindication based on the data from the REACH trial. However, in June 2004,the FDA issued an “approvable letter” in which it indicated that the NDAmay be approved if we successfully complete our ongoing Phase 3clinical trial of EFAPROXYN in patients with brain metastases originating frombreast cancer and submit the results as a NDA amendment for the FDA’s review.In the letter, the FDA stated, “if the study shows effectiveness in thispopulation (increased survival) using the pre specified analysis, and the studyis otherwise satisfactory, we believe it would, together with the subset resultin the [REACH trial], support approval.”

The ongoing Phase 3 trial referenced in the FDA’sapprovable letter was initiated in February 2004.  In August 2006, we completed enrollment of 368patients in this pivotal Phase 3 trial, which is called ENRICH (ENhancingwhole brain Radiation therapy In patients with breast Cancer and Hypoxic brainmetastases).  Patients were enrolled at78 cancer centers across North America, Europe and South America.  The primary endpoint of the trial willmeasure the difference in survival between patients receiving WBRT plussupplemental oxygen, with or without EFAPROXYN. In March 2006, an independent Data Monitoring Committee, or DMC, completedthe first planned interim analysis of the primary endpoint, and recommendedthat the trial continue per the protocol. This first interim review wastriggered by the occurrence of 94 patient deaths and was based upon anevaluation of patients randomized through February 14, 2006.  In October 2006, the DMC completed the secondplanned interim analysis of the primary endpoint, and recommended that thetrial continue per the protocol.  Thesecond interim analysis was triggered by the occurrence of 188 patient deathsand was based upon an evaluation of patients randomized through July 31,2006.  In order to protect the integrityof the trial, the results of the efficacy analyses at the first and secondinterim analyses were not made available to the Company; however, no major patientsafety concerns were identified by the DMC. We will perform the final analysis of both the primary andsecondary endpoints following the occurrence of 281 patient deaths, which wecurrently expect to occur in mid-2007.  Theactual timing of the final analysis may vary based on patient survival rates.

In June 2004, we filed a Marketing AuthorizationApplication, or MAA, with the European Medicines Agency, or EMEA, for approvalto market EFAPROXYN in Europe as an adjunct to WBRT for the treatment of patientswith brain metastases originating from breast cancer. As with our NDA, the MAAwas based on the findings from the REACH trial. On October 11, 2005, wewithdrew the MAA as a result of the Rapporteurs’ Day 180 Joint AssessmentReport, which concluded that the existing data package was not sufficient tosupport approval. Although we can provide no assurances, we believe that ourongoing ENRICH trial, if positive, together with other supporting data, shouldallow us to address the EMEA’s concerns regarding EFAPROXYN and provide theadditional data necessary to support the filing of a new MAA and the futureapproval of EFAPROXYN in Europe for the treatment of patients with brainmetastases originating from breast cancer.

In August 2004, the FDA awarded orphan drugstatus to EFAPROXYN for use as an adjunct to WBRT for the treatment of patientswith brain metastases originating from breast cancer. The FDA may awardorphan drug designation to drugs that target conditions affecting 200,000 orfewer patients per year in the United States and provide a significanttherapeutic advantage over existing treatments. The orphan drug designationprovides for marketing exclusivity in the United States for seven yearsfollowing marketing approval by the FDA.

In addition to the Phase 3 ENRICH trial, we arecurrently enrolling patients in the following clinical trials involvingEFAPROXYN:

·                  aPhase 1 clinical trial in patients with locally advanced non-small celllung cancer, or NSCLC, receiving concurrent chemoradiotherapy (chemotherapy andradiation therapy administered at the same time) in combination with EFAPROXYN;and

·                  aPhase 1b/2 clinical trial of EFAPROXYN in patients with locally advancedcancer of the cervix receiving concurrent chemoradiotherapy.

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·                  **PDX** is a small molecule chemotherapeutic agent that inhibitsdihydrofolate reductase, or DHFR, a folic acid (folate)-dependent enzymeinvolved in the building of nucleic acid, or DNA, and other processes. Certainpreclinical data suggests that PDX has an enhanced potency and toxicity profilerelative to methotrexate and other related DHFR inhibitors. Drugs that inhibitDHFR, such as methotrexate, were among the first antifolate chemotherapeuticagents discovered. Methotrexate remains one of the most widely appliedantifolate chemotherapeutics and has been used to treat leukemia, breast,bladder, gastric, esophageal, head, and neck cancers. We believe PDX has thepotential to be delivered as a single agent or in combination therapy regimens.

In December 2005, we announced the presentationof interim results from our ongoing Phase 1/2 single-agent study of PDX inpatients with relapsed or refractory non-Hodgkin’s lymphoma and Hodgkin’sdisease, which is currently being conducted at Memorial Sloan Kettering CancerCenter. The interim results, which were presented at the 2005 American Societyof Hematology Annual Meeting, demonstrated preliminary evidence of PDX activityin patients with various subtypes of T-cell lymphoma. Notably, four of sevenevaluable patients with T-cell lymphoma achieved a complete response followingtreatment with PDX, despite having failed multiple prior therapies. Moreover,the addition of vitamins to the treatment regimen also appeared to successfullymitigate the previously established dose limiting toxicity of stomatitis, ormouth ulcers.

Based on the interim results from the Phase 1/2study of PDX in patients with non-Hodgkin’s lymphoma, in August 2006 weinitiated and enrolled the first patient in a Phase 2, non-randomized,open-label study of PDX in patients with relapsed or refractory peripheralT-cell lymphoma, or PTCL.  This trial iscalled PROPEL (Pralatrexate in patients with **R**elapsed**O**r refractory **PE**ripheralT-cell **L**ymphoma), and will seek to enroll 100evaluable patients at approximately 35 cancer centers across the United States,Canada and Europe.  We currently expectto complete patient enrollment in this trial by the third quarter of 2008.  In July 2006, we reached agreement with theFDA under the special protocol assessment, or SPA, process on the design ofthis pivotal Phase 2 trial.  The SPAprocess allows for FDA evaluation of a clinical trial protocol intended to formthe primary basis of an efficacy claim in support of a new drug application,and provides a binding agreement that the study design, including trial size,clinical endpoints and/or data analyses are acceptable to the FDA.  However, the SPA agreement is not a guaranteeof approval, and we cannot assure you that the design of, or data collectedfrom this Phase 2 trial, will be adequate to demonstrate the safety andefficacy of PDX for the treatment of PTCL, or otherwise be sufficient tosupport FDA or any foreign regulatory approval.

In July 2006, the FDA awarded orphan drug status toPDX for the treatment of patients with T-cell lymphoma.  The orphan drug designation provides formarketing exclusivity in the United States for seven years following marketingapproval by the FDA.

In October 2006, the FDAgranted fast track designation to PDX for the treatment of patients with T-celllymphoma. The fast track program is designed to facilitate the development andexpedite the review of new drugs that are intended to treat serious orlife-threatening conditions and that demonstrate the potential to address unmetmedical needs.

We are also currently enrolling patients in a Phase 1dose escalation study of PDX with vitamin B12 and folic acid supplementation inpatients with previously treated advanced NSCLC. The determination of themaximum tolerated dose of PDX in combination with vitamin supplementation willbe essential for further development in this indication.

·                  **RH1** is a small molecule chemotherapeutic agent that webelieve is bioactivated by the enzyme DT-diaphorase, or DTD, which isover-expressed in many tumors relative to normal tissue, including lung, colon,breast and liver tumors. Because RH1 is bioactivated in the presence of DTD, webelieve it has the potential to provide targeted drug delivery to these tumortypes while limiting the toxicity to normal tissue. RH1 has undergone in vivoefficacy testing by the Developmental Therapeutics Program of the NationalCancer Institute and has demonstrated significant activity in both NSCLC andovarian xenograft models.

RH1 is currently being evaluated in patients withadvanced solid tumors refractory to other chemotherapy regimens in an openlabel, Phase 1 dose escalation study to test the safety, tolerability andpharmacokinetics of escalating doses of RH1. During the second quarter of 2006, we completed patient enrollment inthis study.  Once the last 

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patient has completed treatment, the Company willevaluate results from the study to determine future development plans.

**Resultsof Operations**

*Researchand Development.* Research and development expensesinclude the costs of certain personnel, basic research, nonclinical studies,clinical trials, regulatory affairs, biostatistical data analysis, patents andlicensing fees for new products.

Research anddevelopment expenses for the three months ended September 30, 2005 and 2006were $3.0 million and $4.2 million, respectively.  The $1.2 million increase in research anddevelopment expenses for the three months ended September 30, 2006 as comparedto the same period in 2005 was primarily due to the following:

·                  $427,000 increase in nonclinicalstudy costs related to PDX;

·                  $267,000increase in clinical trial costs, primarily due to costs incurred for ourPROPEL trial that initiated in the third quarter of 2006;

·                  $223,000 increase in personnel costs,mainly attributable to additional headcount and increases in compensation costsyear over year; 

·                  $206,000increase in patent costs for PDX and EFAPROXYN; and

·                  $167,000increase in non-cash stock-based compensation expense due to the adoption ofaccounting rules related to stock-based compensation on January 1,2006.

 

Research and developmentexpenses for the nine months ended September 30, 2005 and 2006 were $8.0milllion and $11.0 million, respectively. The $3.0 million increase in research and development expenses for the ninemonths ended September 30, 2006 as compared to the same period in 2005 wasprimarily due to the following:

 

·                  $1.3 million increase in our clinicaltrial costs, primarily due to increased patient enrollment in our Phase 3ENRICH trial and costs incurred for our PROPEL trial;

·                  $615,000 increase in nonclinicalstudy costs related to PDX; 

·                  $480,000increase in non-cash stock-based compensation expense due to the adoption ofaccounting rules related to stock-based compensation on January 1,2006; and

·                  $462,000 increase in personnel costs,mainly attributable to additional headcount and increases in compensation costsyear over year.

 

For the fourthquarter of 2006, we expect our research and development expenses to remainrelatively stable to the amount recorded for the three months ended September30, 2006, as an increase in licensing fees relating to a $500,000 milestonepayment due in December 2006 under our license agreement for PDX is expected tobe offset by a decrease in clinical trial costs for our Phase 3 ENRICH trialdue to the completion of patient enrollment in this trial during the thirdquarter of 2006.

*ClinicalManufacturing.* Clinical manufacturing expenses includethe costs of certain personnel, third party manufacturing costs for EFAPROXYNfor use in clinical trials, costs associated with pre-commercial scale-up ofmanufacturing to support anticipated commercial requirements, and developmentactivities for clinical trial and nonclinical study material for PDX.

Clinicalmanufacturing expenses for the three months ended September 30, 2005 and 2006were $307,000 and $486,000, respectively. The $179,000 increase in clinical manufacturing expenses for the threemonths ended September 30, 2006 as compared to the same period in 2005 wasprimarily due to the following:

·                  $138,000 increase in third-partymanufacturing costs, primarily due to increases in our supply of PDX bulk drugsubstance and formulated drug product to support our requirements for futurePDX clinical trials and nonclinical studies; and

·                  $30,000increase in non-cash stock-based compensation expense due to the adoption ofaccounting rules related to stock-based compensation on January 1,2006.

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Clinicalmanufacturing expenses for the nine months ended September 30, 2005 and 2006 were$934,000 and $1.4 million, respectively. The $504,000 increase in clinical manufacturing expenses for the ninemonths ended September 30, 2006 as compared to the same period in 2005 wasprimarily due to the following:

·                  $400,000 increase in third-partymanufacturing costs, primarily due to increases in our supply of PDX bulk drugsubstance and formulated drug product to support our requirements for futurePDX clinical trials and nonclinical studies; and

·                  $83,000increase in non-cash stock-based compensation expense due to the adoption ofaccounting rules related to stock-based compensation on January 1,2006.

For the fourthquarter of 2006, we expect our clinical manufacturing expenses to increasemoderately relative to the amount recorded for the three months ended September30, 2006 primarily due to increases in third-party manufacturing costs for PDX.

*Marketing,General and Administrative.* Marketing, general andadministrative expenses include costs for pre-marketing activities, corporatedevelopment, executive administration, and corporate offices and relatedinfrastructure.

Marketing, generaland administrative expenses for the three months ended September 30, 2005 and2006 were $2.0 million and $3.9 million, respectively.  The $1.9 million increase in marketing,general and administrative expenses for the three months ended September 30,2006 as compared to the same period in 2005 was primarily due to the following:

·                  $760,000 increase in non-cashstock-based compensation expense due to the adoption of accountingrules related to stock-based compensation on January 1, 2006; 

·                  $446,000 increase in personnel costs,mainly attributable to additional headcount and increases in compensation costsyear over year; 

·                  $305,000 increase in market researchexpenses related to our preparations for the potential commercialization ofEFAPROXYN; and 

·                 $270,000increase in costs related to the securities class action lawsuit, as furtherdescribed in “Legal Proceedings” included in Part II, Item 1 of this quarterlyreport.

Marketing, generaland administrative expenses for the nine months ended September 30, 2005 and2006 were $6.8 million and $10.6 million, respectively.  The $3.8 million increase in marketing,general and administrative expenses for the nine months ended September 30,2006 as compared to the same period in 2005 was primarily due to the following:

·                  $1.6 million increase in non-cashstock-based compensation expense due to the adoption of accountingrules related to stock-based compensation on January 1, 2006;

·                  $1.1 million increase in personnelcosts, mainly attributable to additional headcount, increases in compensationcosts year over year, and recruiting costs for our new President and ChiefExecutive Officer;

·                  $413,000 increase in market researchexpenses related to our preparations for the potential commercialization ofEFAPROXYN; and

·                  $270,000increase in costs related to the securities class action lawsuit, as furtherdescribed in “Legal Proceedings” included in Part II, Item 1 of this quarterlyreport.

 

For the fourthquarter of 2006, we expect our marketing, general and administrative expensesto remain relatively stable to the amount recorded for the three months ended September30, 2006.

*Restructuringand Separation Costs.*Restructuring and separation costs forthe nine months ended September 30, 2005 and 2006 were $380,000 and $646,000,respectively.

InJanuary 2005, we executed agreements to sublease approximatelythree-quarters of the 12,708 square feet of excess space in our corporateoffices located in Westminster, Colorado. The term of each sublease agreementis through the term of our office lease, or October 31, 2008.  The total rental payments to us under thesublease agreements are approximately $230,000. Because our obligations under our primary lease were in excess of thesum of the actual and expected sublease rental payments for this excess space,we recorded a lease abandonment charge of $380,086 in restructuring andseparation 

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costs during the ninemonths ended September 30, 2005. As of September 30, 2006, the remainingliability of $134,685 relating to this lease abandonment charge is recorded inaccrued restructuring and separation costs.

In January 2006, Michael E. Hart notified ourBoard of Directors of his intent to resign from his positions as President,Chief Executive Officer and Chief Financial Officer of the Company once asuccessor Chief Executive Officer was appointed. On March 3, 2006, weentered into a separation agreement with Mr. Hart to provide certain incentivesfor his continued employment with the Company while we conducted our search forhis successor.  On March 9, 2006, weappointed Paul L. Berns as our President, Chief Executive Officer and a memberof the Board of Directors and Mr. Hart resigned from his positions inaccordance with the terms of the separation agreement. The separation agreementwith Mr. Hart was amended on March 9, 2006, and on May 10, 2006(as so amended, the “Separation Agreement”). Pursuant to the Separation Agreement,Mr. Hart is entitled to certain payments and benefits from the Company, asfurther described in Note 5 to our Financial Statements included in PartI, Item 1 of this quarterly report.

We recorded separation costs of $645,666 during the ninemonths ended September 30, 2006 relating to our estimate of our totalobligations under the Separation Agreement with Mr. Hart. During the ninemonths ended September 30, 2006, the Company has made payments to Mr. Hartunder the Separation Agreement of $221,679. As of September 30, 2006, the remaining liability of $423,987 relatingto the Separation Agreement with Mr. Hart is recorded in accruedrestructuring and separation costs.

*Interestand Other Income, Net*. Interest income, net of interestexpense, for the three months ended September 30, 2005 and 2006 was $522,000and $480,000, respectively.  Interestincome, net of interest expense, for the nine months ended September 30, 2005and 2006 was $1.2 million and $1.5 million, respectively.  The $233,000 increase in net interest incomein the nine months ended September 30, 2006 as compared to the same period in2005 was primarily due to higher yields on United States government securities,high-grade commercial paper and corporate notes, and money market funds.

**Liquidityand Capital Resources**

Our cash, cashequivalents, and short-term investments in marketable securities amounted to$37.8 million at September 30, 2006. Since our inception, we have financedour operations primarily through the private and public sale of securities, whichhave resulted in net proceeds to us of $199.4 million through September 30,2006. We have also generated approximately $17.9 million of net interestincome since our inception from investing the net proceeds of these financings.

We have used$157.0 million of cash for operating activities from our inception through September30, 2006. Net cash used to fund our operating activities for the nine monthsended September 30, 2005 and 2006 was $13.8 million and $17.4 million,respectively.

Net cash used ininvesting activities for the nine months ended September 30, 2005 was $33.4 millionand consisted primarily of purchases of investments in marketable securities,partially offset by the proceeds from maturities of investments in marketablesecurities.  Net cash provided byinvesting activities for the nine months ended September 30, 2006 was $17.1 millionand consisted primarily of proceeds from maturities of investments inmarketable securities, partially offset by the purchase of investments inmarketable securities.

Net cash provided by financing activities for the ninemonths ended September 30, 2005 was $49.0 million and consisted primarily ofthe net proceeds of the March 2005 sale of Series A Exchangeable PreferredStock, which was exchanged for common stock in May 2005.  Net cash provided by financing activities forthe nine months ended September 30, 2006 was $378,000 and consisted of: (i) proceedsfrom sales of common stock associated with stock option exercises by ouremployees and sales of common stock under our employee stock purchase plan, and(ii) the transfer of restricted cash to cash and cash equivalents as the letterof credit related to our building lease was reduced during the nine monthsended September 30, 2006. 

Based upon thecurrent status of our product development plans, we believe that our existingcash, cash equivalents, and investments in marketable securities will beadequate to satisfy our capital needs through at least the third quarter of2007.  However, our forecast of the periodof time through which our financial resources will be adequate to support ouroperations is a forward-looking statement that involves risks anduncertainties, and actual results could vary materially.  We anticipate continuing our currentdevelopment programs and beginning other long-term development projectsinvolving our product candidates. These projects may require many yearsand substantial expenditures to complete and may ultimately be 

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unsuccessful.Therefore, we may need to obtain additional funds from outside sources tocontinue research and development activities, fund operating expenses, pursueregulatory approvals and build sales and marketing capabilities, as necessary.However, our actual capital requirements will depend on many factors, including:

·                  the status of our product developmentprograms;

·                  the time and cost involved inconducting clinical trials and obtaining regulatory approvals;

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

·                  competing technological and marketdevelopments; and

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

We will berequired to raise additional capital to support our future operations,including the potential commercialization of any of our product candidates,including EFAPROXYN and PDX.  Wemay seek to obtain this additional capital through arrangements withcorporate partners, equity or debt financings, or from other sources. Sucharrangements, if successfully consummated, may be dilutive to our existingstockholders. However, there is no assurance that we will be successful inconsummating any such arrangements. In addition, in the event that additionalfunds are obtained through arrangements with collaborative partners or othersources, such arrangements may require us to relinquish rights to some ofour technologies, product candidates or products under development that wewould otherwise seek to develop or commercialize ourselves. If we are unable togenerate meaningful amounts of revenue from future product sales, if any, orcannot otherwise raise sufficient additional funds to support our operations,we may be required to delay, reduce the scope of or eliminate one or moreof our development programs and our business and future prospects for revenueand profitability may be harmed.

**Obligationsand Commitments**

The following table shows our contractual obligations and commitmentsas of September 30, 2006.
| ** **                     | ** ** | **October 1,  2006 to  September  30, 2007** | ** ** | **October 1,  2007 to  September  30, 2009** | ** ** | **October 1,  2009 to  September  30, 2011** | ** ** | **After  October 1,  2011** | ** ** | **Total**  | ** ** |
|--------------------------------|------------|-------------------------------------------------------------|------------|-------------------------------------------------------------|------------|-------------------------------------------------------------|------------|----------------------------------|------------|------------|------------|
| Operating lease  obligations   |       | $                                                           | 774,607    |                                                        | $          | 901,511                                                     |       | $                                | 22,602     |       | $          | — |   | $ | 1,698,720 |   |
| License  agreement obligations |       | 500,000                                                     |       | 1,000,000                                                   |       | 500,000                                                     |       | —                           |       | 2,000,000  |       |
| Purchase  obligations          |       | 2,000,000                                                   |       | 8,500,000                                                   |       | 10,000,000                                                  |       | 20,000,000                       |       | 40,500,000 |       |
| Total obligations              |       | $                                                           | 3,274,607  |                                                        | $          | 10,401,511                                                  |       | $                                | 10,522,602 |       | $          | 20,000,000 |   | $ | 44,198,720 |   |

 

Operating leaseobligations represent future minimum rental commitments for non-cancelableoperating leases for our facilities and certain office equipment, net of $152,000of remaining sublease payments that we will receive on excess space in ourcorporate offices.

License agreementobligations represent future milestone payments under our license agreement forPDX, due upon the passage of certain time periods after the effective date ofthe agreement, which could be paid earlier depending on the timing of achievinga clinical development milestone.

Purchaseobligations represent annual minimum purchase requirements for efaproxiralsodium from Hovione Inter Limited under our June 2005 ManufacturingAgreement, equal to $2,000,000 in 2006, $3,500,000 in 2007, $5,000,000 in 2008,and $5,000,000 in each year thereafter through the end of the term of theagreement (equal to the 7th anniversary ofthe date we obtain approval from the FDA to market EFAPROXYN). In the eventthat we do not meet these annual minimum purchase requirements, we have theoption to pay extension fees to move the annual requirements out by a total ofthree years. These extension fees are equal to $100,000 for a first extension,$150,000 for a second extension, and $200,000 for a third and final extension,if necessary. Purchases under this agreement are subject to fluctuations inforeign currency exchange rates. The Company and Hovione each have customarytermination rights, including termination for material breach or other eventsrelating to insolvency or bankruptcy. In addition, we may terminate theagreement at any time if we decide to discontinue development or, if approved,marketing of EFAPROXYN.

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**CriticalAccounting Policies**

Our discussion and analysis of our financial conditionand results of operations are based upon our financial statements, which havebeen prepared in accordance with accounting principles generally accepted inthe United States of America. The preparation of these financial statementsrequires us to make estimates and assumptions that affect the reported amountsof assets, liabilities, and expenses. We base our estimates on historicalexperience, available information and assumptions that we believe to bereasonable under the circumstances. We apply estimation methodologiesconsistently from period to period. Our actual results may differ fromthese estimates under different assumptions or conditions.  Our critical accounting policies arediscussed in Item 7. Management’s Discussion and Analysis of FinancialCondition and Results of Operations included in our Annual Report onForm 10-K for the year ended December 31, 2005. These criticalaccounting policies are subject to judgments and uncertainties, which affectthe application of these policies. We have not made any changes in any of thesecritical accounting polices during the three months ended September 30, 2006.

*Stock-BasedCompensation*

We adoptedStatement of Financial Accounting Standards (“SFAS”) No. 123 (Revised2004), *Share-Based Payment* (“SFAS 123R”)effective January 1, 2006. SFAS 123R establishes accounting forstock-based awards exchanged for employee services.  Under SFAS 123R, stock-based compensation ismeasured at the grant date, based on the fair value of the award computed usingthe Black-Scholes option valuation model, and is recognized as expense over anemployee’s required service period. Prior to January 1, 2006, we appliedAccounting Principles Board (“APB”) Opinion No. 25, *Accountingfor Stock Issued to Employees*, and related Interpretations andprovided the required pro forma disclosures of SFAS No. 123, *Accounting for Stock-Based Compensation*.

We elected to adopt the modified prospective transitionmethod as provided by SFAS 123R. Accordingly, during the three and nine monthsended September 30, 2006, we recorded stock-based compensation cost totalingthe amount that would have been recognized had the fair value method beenapplied since January 1, 1996, the effective date of SFAS 123.  In accordance with the modified prospective transitionmethod, our financial statements for prior periods have not been restated toreflect, and do not include, the impact of SFAS 123R.

During the threeand nine months ended September 30, 2006, we recorded stock-based compensationexpense of $1.0 million and $2.7 million, respectively, related to stockoptions, restricted stock and our Employee Stock Purchase Plan.  As of September 30, 2006, the unrecordeddeferred stock-based compensation expense balance related to these stock-basedawards was $4.1 million and will be recognized over an estimated weightedaverage amortization period of 1.5 years.

Judgments andestimates must be made and used in determining the factors used in calculatingthe fair value of stock-based awards, including the expected forfeiture rate ofour stock-based awards, the expected life of our stock-based awards, and theexpected volatility of our stock price. For more information on stock-based compensation expense during thethree and nine months ended September 30, 2006, refer to Note 3 “Stock-BasedCompensation” of the Notes to our Financial Statements included in Part I, Item1 of this quarterly report.

The adoption ofSFAS 123R on January 1, 2006 had a material impact on our net loss and netloss per share for the three and nine months ended September 30, 2006.  We expect that our adoption of SFAS 123Rwill have a material impact on our future financial statements and results ofoperations.

*Recently Issued AccountingPronouncements*

In February 2006,the Financial Accounting Standards Board issued SFAS No. 155, *Accounting for Certain Hybrid Financial Instruments* (“SFAS155”), which amends SFAS No. 133 and SFAS No. 140.  SFAS 155 will be effective for the Companybeginning in the first quarter of 2007. SFAS 155 permits interests in hybrid financial instruments that containan embedded derivative that would otherwise require bifurcation, to beaccounted for as a single financial instrument at fair value, with changes infair value recognized in earnings. This election is permitted on aninstrument-by-instrument basis for all hybrid financial instruments held,obtained, or issued as of the adoption date. We are assessing the impact of the adoption of SFAS 155.

In June 2006, theFASB issued Interpretation No. 48, “*Accounting for Uncertaintyin Income Taxes*” (“FIN 48”), which clarifies the accounting foruncertainty in income taxes recognized in the financial statements inaccordance with SFAS No. 109, “Accounting for Income Taxes”.  FIN 48 prescribes a recognition threshold andmeasurement attribute for the 

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financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return.  FIN 48 is effective forfiscal years beginning after December 15, 2006.  We are currently assessing the impact of theadoption of FIN 48 on our financial statements.

In September 2006, theFASB issued SFAS No. 157, “*Fair Value Measurements*”(“SFAS 157”), which is effective for fiscal years beginning afterNovember 15, 2007 and for interim periods within those years.  SFAS 157 defines fair value, establishes aframework for measuring fair value and expands the related disclosurerequirements.  We are currently assessingthe impact of the adoption of SFAS 157 on our financial statements.

**ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

We do not use derivative financial instruments in ourinvestment portfolio and have no foreign exchange contracts. Our financialinstruments consist of cash, cash equivalents, short-term and long-terminvestments in marketable securities, and accounts payable. All highly liquidinvestments with original maturities of three months or less are considered tobe cash equivalents.

We invest in marketable securities in accordance withour investment policy. The primary objectives of our investment policy are topreserve principal, maintain proper liquidity to meet operating needs andmaximize yields. Our investment policy specifies credit quality standards forour investments and limits the amount of credit exposure to any single issue,issuer or type of investment. The average duration of the issues in ourportfolio as of September 30, 2006 is less than three months.  As of September 30, 2006, our investments inmarketable securities of $33.6 million are all classified asheld-to-maturity and were held in a variety of interest-bearing instruments,consisting mainly of high-grade corporate notes.

Investments infixed-rate interest-earning instruments carry varying degrees of interest raterisk. The fair market value of our fixed-rate securities may be adverselyimpacted due to a rise in interest rates. In general, securities with longermaturities are subject to greater interest-rate risk than those with shortermaturities. Due in part to this factor, our interest income may fallshort of expectations or we may suffer losses in principal if securitiesare sold that have declined in market value due to changes in interestrates.  Due to the short duration of ourinvestment portfolio, we believe an immediate 10% change in interest rateswould not be material to our financial condition or results of operations.

**ITEM 4. CONTROLSAND PROCEDURES**

As of the end ofthe period covered by this report, an evaluation was carried out under thesupervision and with the participation of our management, including ourprincipal executive officer and principal financial officer (the “EvaluatingOfficers”), of the effectiveness of our disclosure controls and procedures, asdefined in Rule 13a-15(e) of the Securities Exchange Act of 1934, asamended (“Exchange Act”). Based on that evaluation, our management, includingthe Evaluating Officers, concluded that our disclosure controls and procedureswere effective as of September 30, 2006 to ensure that information required tobe disclosed by us in reports that we file or submit under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin Securities and Exchange Commission’s rules and forms, and that suchinformation is accumulated and communicated to our management, including theEvaluating Officers, as appropriate, to allow timely decisions regardingrequired disclosure.

**NoChanges in Internal Control over Financial Reporting**

There were nochanges in our internal controls over financial reporting during the threemonths ended September 30, 2006 that have materially affected, or arereasonably likely to materially affect, our internal controls over financialreporting.

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**PART II. OTHER INFORMATION**

**ITEM 1.  LEGALPROCEEDINGS**

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

On November 20, 2005, the plaintiff appealed theDistrict Court’s decision to the U.S. Court of Appeals for the Tenth Circuit(the “Court of Appeals”).    In October 2006, theparties held discussions to settle the matter, although the terms of any suchpotential settlement remain subject to negotiation and no binding agreement hasbeen reached.  A settlement would be subjectto various conditions, including approval of the District Court.  We expect that any settlement in excess ofour deductible would be covered by our insurance carrier. As with anylitigation proceeding, we cannot predict with certainty the eventual outcome ofour settlement discussions or the legal proceedings.  In the event a settlement is not concluded,we intend to vigorously defend against the plaintiff’s appeal.  If the Court of Appeals reverses the DistrictCourt’s decision and we are not successful in our defense of such claims, wecould be forced to make significant payments to the plaintiffs, and suchpayments could have a material adverse effect on our business, financialcondition, results of operations and cash flows to the extent such payments arenot covered by our insurance carriers. Even if our defense against such claims is successful, the litigationcould result in substantial costs and divert management’s attention andresources, which could adversely affect our business.  As of September 30, 2006, we have recorded$270,000 in accrued liabilities, which represents the remaining unpaiddeductible under our insurance policy. 

**ITEM 1A.****                                            RISKFACTORS**

*Aninvestment in our common stock is risky. Stockholders and potential investorsin shares of our stock should carefully consider the following risk factors,which hereby update those risks contained in the “Risk Factors” section ofour Annual Report on Form 10-K for the year ended December 31, 2005,in addition to other information and risk factors in this Report. We areidentifying these risk factors as important factors that could cause our actualresults to differ materially from those contained in any written or oralforward-looking statements made by or on behalf of the Company. We are relyingupon the safe harbor for all forward-looking statements in this Report, and anysuch statements made by or on behalf of the Company are qualified by referenceto the following cautionary statements, as well as to those set forth elsewherein this Report.*

**Wehave a history of net losses and an accumulated deficit, and we may neverachieve or maintain revenue or profitability in the future.**

We have nevergenerated revenue from product sales and have experienced significant netlosses since our inception in 1992. To date, we have financed our operationsprimarily through the private and public sale of securities. For the three and ninemonths ended September 30, 2006, we had a net loss of $8.1 million and $22.1 million,respectively.  As of September 30, 2006,we had accumulated a deficit of $200.5 million during our developmentstage. We have incurred these net losses principally from costs incurred in ourresearch and development programs and from our general and administrativeexpenses. We expect to continue incurring net losses for the foreseeablefuture. Our ability to generate revenue and achieve profitability is dependenton our ability, alone or with partners, to successfully complete thedevelopment of our product candidates, conduct clinical trials, obtain thenecessary regulatory approvals, and manufacture and market our productcandidates. We may never generate revenue from product sales or becomeprofitable. We expect to continue to spend substantial amounts on research anddevelopment, including amounts spent on conducting clinical trials for ourproduct candidates. We may not be able to continue as a going concern ifwe are unable to generate meaningful amounts of revenue to support ouroperations or cannot otherwise raise the necessary funds to support ouroperations.

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**Ourproduct candidates are in various stages of development and may never befully developed in a manner suitable for commercialization. If we do notdevelop commercially successful products, our ability to generate revenue willbe limited.**

We currently haveno products that are approved for commercial sale. All of our productcandidates are in various stages of development, and significant research anddevelopment, financial resources and personnel will be required to developcommercially viable products and obtain regulatory approvals. We do not expectto be able to market any of our product candidates, including EFAPROXYN and PDX,until at least 2008.  Further, certain ofthe indications that we are pursuing have relatively low incidence rates, whichmay make it difficult for us to enroll a sufficient number of patients inour clinical trials on a timely basis, or at all, and may limit therevenue potential of our product candidates. If we are unable to develop,receive approval for, or successfully commercialize any of our productcandidates, we may be unable to generate meaningful revenue from productsales and will incur continued net losses.

**Wecannot predict when or if we will obtain regulatory approval to commercializeour product candidates.**

A pharmaceuticalproduct cannot be marketed in the United States or most other countries untilit has completed a rigorous and extensive regulatory approval process. If wefail to obtain regulatory approval to market our product candidates, we will beunable to sell our products and generate revenue, which would jeopardize ourability to continue operating our business. Satisfaction of regulatoryrequirements typically takes many years, is dependent upon the type, complexityand novelty of the product and requires the expenditure of substantialresources. Of particular significance are the requirements covering researchand development, testing, manufacturing, quality control, labeling andpromotion of drugs for human use. We may not obtain regulatory approvalfor any product candidates we develop, including EFAPROXYN and PDX, or wemay not obtain regulatory review of such product candidates in a timelymanner. For a more complete description of the regulatory approval process andrelated risks, please refer to the “Government Regulation” section ofItem 1 of our Annual Report on Form 10-K for the year endedDecember 31, 2005.

**Ifour product candidates do not meet safety and efficacy endpoints in clinicaltrials, they will not receive regulatory approval, and we will be unable tomarket them.**

Our productcandidates may not prove to be safe and efficacious in clinical trials andmay not meet all of the applicable regulatory requirements needed toreceive regulatory approval. The clinical development and regulatory approvalprocess is extremely expensive and takes many years. Failure can occur at anystage of development, and the timing of any regulatory approval cannot beaccurately predicted. If we fail to obtain regulatory approval for our currentor future product candidates, we will be unable to market and sell them andtherefore may never generate meaningful amounts of revenue or becomeprofitable.

As part ofthe regulatory process, we must conduct clinical trials for each productcandidate to demonstrate safety and efficacy to the satisfaction of the FDA andother regulatory authorities abroad.  Thenumber and design of clinical trials that will be required varies depending onthe product candidate, the condition being evaluated, the trial results andregulations applicable to any particular product candidate.  The design of our clinical trials is based onmany assumptions about the expected effect of our product candidates, and ifthose assumptions prove incorrect, the clinical trials may not producestatistically significant results. Preliminary results may not beconfirmed upon full analysis of the detailed results of a trial, and priorclinical trial program designs and results may not be predictive of futureclinical trial designs or results. Product candidates in later stage clinicaltrials may fail to show the desired safety and efficacy despite havingprogressed through initial clinical trials with acceptable endpoints. If ourproduct candidates fail to show clinically significant benefits, they will notbe approved for marketing.

**Wemay experience delays in our clinical trials that could adversely affectour financial position and our commercial prospects.**

We do not knowwhen our current clinical trials, including our ENRICH and PROPEL trials, willbe completed, if at all. We also cannot accurately predict when other plannedclinical trials will begin or be completed. Many factors affect patient enrollment, including the size of thepatient population, the proximity of patients to clinical sites, theeligibility criteria for the trial, competing clinical trials and new drugsapproved for the conditions we are investigating. Other companies areconducting clinical trials and have announced plans for future trials that areseeking or likely to seek patients with the same

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diseases as thosewe are studying. Competition for patients in some cancer trials is particularlyintense because of the limited number of leading specialist physicians and thegeographic concentration of major clinical centers.

As a result of thenumerous factors which can affect the pace of progress of clinical trials, ourtrials may take longer to enroll patients than we anticipate, if they canbe completed at all. Delays in patient enrollment in the trials may increaseour costs and slow our product development and approval process. Our productdevelopment costs will also increase if we need to perform more or largerclinical trials than planned. If other companies’ product candidates showfavorable results, we may be required to conduct additional clinicaltrials to address changes in treatment regimens or for our products to becommercially competitive. Any delays in completing our clinical trials willdelay our ability to generate revenue from product sales, and we may haveinsufficient capital resources to support our operations. Even if we do havesufficient capital resources, our ability to become profitable will be delayed.

**While we have negotiated aspecial protocol assessment with the FDA relating to our PROPEL trial, thisagreement does not guarantee any particular outcome from regulatory review ofthe study or the product, including any regulatory approval.**

In July 2006, wereached agreement with the FDA under the special protocol assessment, or SPA,process on the design of our Phase 2 PROPEL trial.  The SPA process allows for FDA evaluation ofa clinical trial protocol intended to form the primary basis of an efficacyclaim in support of a new drug application, and provides a binding agreementthat the study design, including trial size, clinical endpoints and/or dataanalyses are acceptable to the FDA. However, the SPA agreement is not a guarantee of approval, and we cannotassure you that the design of, or data collected from, the PROPEL trial will beadequate to demonstrate the safety and efficacy of PDX for the treatment ofPTCL, or otherwise be sufficient to support FDA or any foreign regulatoryapproval.  Further, the SPA agreement isnot binding on the FDA if public health concerns unrecognized at the time theSPA agreement is entered into become evident, other new scientific concernsregarding product safety or efficacy arise, or if we fail to comply with theagreed upon trial protocols.  Inaddition, the SPA agreement may be changed by us or the FDA on writtenagreement of both parties, and the FDA retains significant latitude anddiscretion in interpreting the terms of the SPA agreement and the data andresults from the Phase 2 trial.  As aresult, we do not know how the FDA will interpret the parties’ respectivecommitments under the SPA agreement, how it will interpret the data and resultsfrom the Phase 2 trial, or whether PDX will receive any regulatory approvals asa result of the SPA agreement or the clinical trial.  Therefore, despite the potential benefits ofthe SPA agreement, significant uncertainty remains regarding the clinicaldevelopment and regulatory approval process for PDX for the treatment of PTCL.

**Wemay be required to suspend, repeat or terminate our clinical trials ifthey are not conducted in accordance with regulatory requirements, the resultsare negative or inconclusive or the trials are not well designed.**

Clinical trialsmust be conducted in accordance with the FDA’s Good Clinical Practices and aresubject to oversight by the FDA and Institutional Review Boards at the medicalinstitutions where the clinical trials are conducted. In addition, clinicaltrials must be conducted with product candidates produced under the FDA’s GoodManufacturing Practices, and may require large numbers of test subjects.Clinical trials may be suspended by the FDA or us at any time if it isbelieved that the subjects participating in these trials are being exposed tounacceptable health risks or if the FDA finds deficiencies in the conduct ofthese trials.

Even if we achievepositive interim results in clinical trials, these results do not necessarilypredict final results, and acceptable results in early trials may not berepeated in later trials. Data obtained from preclinical and clinicalactivities are susceptible to varying interpretations that could delay, limitor prevent regulatory clearances, and the FDA can request that we conductadditional clinical trials. A number of companies in the pharmaceuticalindustry have suffered significant setbacks in advanced clinical trials, evenafter promising results in earlier trials. As a result, there can be noassurance that our ENRICH or PROPEL trials will achieve their primaryendpoints. In addition, negative or inconclusive results or adverse medicalevents during a clinical trial could cause a clinical trial to be repeated orterminated. Also, failure to construct clinical trial protocols to screenpatients for risk profile factors relevant to the trial for purposes ofsegregating patients into the patient populations treated with the drug beingtested and the control group could result in either group experiencing adisproportionate number of adverse events and could cause a clinical trial tobe repeated or terminated. If we have to conduct additional clinical trials,whether for EFAPROXYN, PDX or any other product candidate, it wouldsignificantly increase our expenses and delay marketing of our products.

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**Adverseevents in our clinical trials may force us to stop development of ourproduct candidates or prevent regulatory approval of our product candidates.**

Our productcandidates may produce serious adverse events. These adverse events couldinterrupt, delay or halt clinical trials of our product candidates and couldresult in the FDA or other regulatory authorities denying approval of ourproduct candidates for any or all targeted indications. An independent datasafety monitoring board, the FDA, other regulatory authorities or wemay suspend or terminate clinical trials at any time. We cannot assure youthat any of our product candidates will be safe for human use.

**Dueto our reliance on contract research organizations and other third parties toconduct clinical trials, we are unable to directly control the timing, conductand expense of our clinical trials.**

We rely primarilyon third parties to conduct our clinical trials, including the ENRICH andPROPEL trials. As a result, we have had and will continue to have less controlover the conduct of our clinical trials, the timing and completion of thetrials, the required reporting of adverse events and the management of datadeveloped through the trial than would be the case if we were relying entirelyupon our own staff. Communicating with outside parties can also be challenging,potentially leading to mistakes as well as difficulties in coordinatingactivities. Outside parties may have staffing difficulties,may undergo changes in priorities or may become financiallydistressed, adversely affecting their willingness or ability to conduct ourtrials. We may experience unexpected cost increases that are beyond ourcontrol. Problems with the timeliness or quality of the work of a contractresearch organization may lead us to seek to terminate the relationshipand use an alternative service provider. However, making this changemay be costly and may delay our trials, and contractual restrictionsmay make such a change difficult or impossible. Additionally, itmay be impossible to find a replacement organization that can conduct ourtrials in an acceptable manner and at an acceptable cost.

**Evenif our product candidates meet safety and efficacy endpoints in clinicaltrials, regulatory authorities may not approve them, or we may facepost-approval problems that require withdrawal of our products from the market.**

Our productcandidates may not be approved even if they achieve their endpoints inclinical trials. Regulatory agencies, including the FDA or their advisorsmay disagree with our interpretations of data from preclinical studies andclinical trials. Regulatory agencies also may approve a product candidatefor fewer conditions than requested or may grant approval subject to theperformance of post-marketing studies for a product candidate. In addition,regulatory agencies may not approve the labeling claims that are necessaryor desirable for the successful commercialization of our product candidates.

Even if we receiveregulatory approvals, our product candidates may laterexhibit adverse effects that limit or prevent their widespread use or thatforce us to withdraw those product candidates from the market. In addition, amarketed product continues to be subject to strict regulation after approvaland may be required to undergo post-approval studies. Any unforeseenproblems with an approved product or any violation of regulations could resultin restrictions on the product, including its withdrawal from the market. Anydelay in, or failure to receive or maintain regulatory approval for, any of ourproducts could prevent us from ever generating meaningful revenues or achievingprofitability.

**Evenif we receive regulatory approval for our product candidates, we will besubject to ongoing regulatory obligations and review.**

Following anyregulatory approval of our product candidates, we will be subject to continuingregulatory obligations such as safety reporting requirements and additionalpost-marketing obligations, including regulatory oversight of the promotion andmarketing of our products. In addition, we or our third-party manufacturerswill be required to adhere to regulations setting forth current GoodManufacturing Practices. These regulations cover all aspects of themanufacturing, storage, testing, quality control and record keeping relating toour product candidates. Furthermore, we or our third-party manufacturers mustpass a pre-approval inspection of manufacturing facilities by the FDA andforeign authorities before obtaining marketing approval and will be subject toperiodic inspection by these regulatory authorities. Such inspectionsmay result in compliance issues that could prevent or delay marketingapproval, or require the expenditure of financial or other resources toaddress. If we or our third-party manufacturers fail to comply with applicableregulatory requirements, we may be subject to fines, suspension orwithdrawal of regulatory approvals, product recalls, seizure of products,operating restrictions and criminal prosecution.

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**Budgetconstraints may force us to delay our efforts to develop certain productcandidates in favor of developing others, which may prevent us fromcommercializing all product candidates as quickly as possible.**

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

**Ifwe fail to obtain the capital necessary to fund our operations, we will beunable to successfully develop or commercialize our product candidates.**

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

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

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

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

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

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

**Ifwe are unable to effectively protect our intellectual property, we will beunable to prevent third parties from using our technology, which would impairour competitiveness and ability to commercialize our product candidates. Inaddition, enforcing our proprietary rights may be expensive and result inincreased losses.**

Our success willdepend in part on our ability to obtain and maintain meaningful patentprotection for our products, both in the United States and in other countries.We rely on patents to protect a large part of our intellectual propertyand our competitive position. Any patents issued to or licensed by us could bechallenged, invalidated, infringed, circumvented or held unenforceable. Inaddition, it is possible that no patents will issue on any of our licensedpatent applications. It is possible that the claims in patents that have beenissued or licensed to us or that may be issued or licensed to us in thefuture will not be sufficiently broad to protect our intellectual property or thatthe patents will not provide protection against competitive products orotherwise be commercially valuable. Failure to obtain and maintain adequatepatent protection for our intellectual property would impair our ability to becommercially competitive.

Our commercialsuccess will also depend in part on our ability to commercialize ourproduct candidates without infringing patents or other proprietary rights ofothers or breaching the licenses granted to us. We may not be able toobtain a license to third-party technology that we may require to conductour business or, if obtainable, we may not be able to license suchtechnology at a reasonable cost. If we fail to obtain a license to anytechnology that we may require to commercialize our technologies orproduct candidates, or fail to obtain a license at a reasonable cost, we willbe unable to commercialize the affected product or to commercialize it at aprice that will allow us to become profitable.

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In addition topatent protection, we also rely upon trade secrets, proprietary know-how andtechnological advances which we seek to protect through confidentialityagreements with our collaborators, employees and consultants. Our employees andconsultants are required to enter into confidentiality agreements with us. Wealso have entered into non-disclosure agreements, which are intended to protectour confidential information delivered to third parties for research and otherpurposes. However, these agreements could be breached and we may not haveadequate remedies for any breach, or our trade secrets and proprietary know-howcould otherwise become known or be independently discovered by others.

Furthermore, aswith any pharmaceutical company, our patent and other proprietary rights aresubject to uncertainty. Our patent rights related to our product candidatesmight conflict with current or future patents and other proprietary rights ofothers. For the same reasons, the products of others could infringe our patentsor other proprietary rights. Litigation or patent interference proceedings,either of which could result in substantial costs to us, may be necessaryto enforce any of our patents or other proprietary rights, or to determine thescope and validity or enforceability of other parties’ proprietary rights. The defenseand prosecution of patent and intellectual property infringement claims areboth costly and time consuming, even if the outcome is favorable to us. Anyadverse outcome could subject us to significant liabilities to third parties,require disputed rights to be licensed from third parties, or require us tocease selling our future products. We are not currently a party to any patentor other intellectual property infringement claims.

**Wedo not have manufacturing facilities or capabilities and are dependent on thirdparties to fulfill our manufacturing needs, which could result in the delay ofclinical trials, regulatory approvals, product introductions and commercialsales.**

We are dependenton third parties for the manufacture and storage of our product candidates forclinical trials and, if approved, for commercial sale. If we are unable tocontract for a sufficient supply of our product candidates on acceptable terms,or if we encounter delays or difficulties in the manufacturing process or ourrelationships with our manufacturers, we may not have sufficient productto conduct or complete our clinical trials or support commercial requirementsfor our product candidates, if approved.

We have a contractwith Hovione Inter Limited for the supply of EFAPROXYN bulk drug substance, anda contract with Baxter Healthcare for the supply of EFAPROXYN formulated drugproduct. These manufacturers are currently our only contracted sources for theproduction and formulation of EFAPROXYN.

Even if we obtainapproval to market EFAPROXYN in one or more indications, our current or futuremanufacturers may be unable to accurately and reliably manufacturecommercial quantities of EFAPROXYN at reasonable costs, on a timely basis andin compliance with the FDA’s current Good Manufacturing Practices. If ourcurrent or future contract manufacturers fail in any of these respects, ourability to timely complete our clinical trials, obtain required regulatoryapprovals and successfully commercialize EFAPROXYN will be materially and adverselyaffected.

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

·                  delaysor failure to manufacture sufficient quantities needed for clinical trials inaccordance with our specifications or to deliver such quantities on the dateswe require;

·                  ourcurrent and future manufacturers are subject to ongoing, periodic, unannouncedinspections by the FDA and corresponding state and international regulatoryauthorities for compliance with strictly enforced current Good ManufacturingPractice regulations and similar foreign standards, and we do not have controlover our contract manufacturers’ compliance with these regulations andstandards;

·                  ourcurrent and future manufacturers may not be able to comply with applicableregulatory requirements, which would prohibit them from manufacturing productsfor us;

·                  ifwe need to change to other commercial manufacturing contractors, the FDA andcomparable foreign regulators must approve these contractors prior to our use,which would require new testing and compliance inspections, and the newmanufacturers would have to be educated in, or themselves develop substantiallyequivalent processes necessary for, the production of our products;

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·                  ourmanufacturers might not be able to fulfill our commercial needs, which wouldrequire us to seek new manufacturing arrangements and may result insubstantial delays in meeting market demands; and

·                  wemay not have intellectual property rights, or may have to shareintellectual property rights, to any improvements in the manufacturingprocesses or new manufacturing processes for our products.

Any of thesefactors could result in the delay of clinical trials, regulatory submissions,required approvals or commercialization of our products under development,entail higher costs and result in our being unable to effectively commercializeour products.

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

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

·                  thereceipt of timely regulatory approval for the uses that we are studying;

·                  theestablishment and demonstration in the medical community of the safety andefficacy of our products and their potential advantages over existing and newlydeveloped therapeutic products;

·                  easeof use of our products;

·                  reimbursementand coverage policies of government and private payors such as insurancecompanies, health maintenance organizations and other plan administrators; and

·                  thescope and effectiveness of our sales and marketing efforts.

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

**Thestatus of reimbursement from third-party payors for newly approved health caredrugs is uncertain and failure to obtain adequate reimbursement could limit ourability to generate revenue.**

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

·                  governmentand health administration authorities;

·                  privatehealth insurers;

·                  managedcare programs; and

·                  otherthird-party payors.

Significantuncertainty exists as to the reimbursement status of newly approved health careproducts. Third-party payors, including Medicare, are challenging the pricescharged for medical products and services. Government and other third-partypayors increasingly are attempting to contain health care costs by limitingboth coverage and the level of reimbursement for new drugs and by refusing, insome cases, to provide coverage for uses of approved products for diseaseconditions for which the FDA has not granted labeling approval. Third-partyinsurance coverage may not be available to patients for our products. Ifgovernment and other third-party payors do not provide adequate coverage andreimbursement levels for our product candidates, their market acceptance may bereduced.

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**Healthcare reform measures could adversely affect our business.**

The business andfinancial condition of pharmaceutical and biotechnology companies are affectedby the efforts of governmental and third-party payors to contain or reduce thecosts of health care. In the United States and in foreign jurisdictions therehave been, and we expect that there will continue to be, a number oflegislative and regulatory proposals aimed at changing the health care system.For example, in some countries other than the United States, pricing ofprescription drugs is subject to government control, and we expect proposals toimplement similar controls in the United States to continue. We are unable topredict what additional legislation or regulation, if any, relating to thehealth care industry or third-party coverage and reimbursement may be enactedin the future or what effect such legislation or regulation would have on ourbusiness. The pendency or approval of such proposals or reforms could result ina decrease in our stock price or limit our ability to raise capital or toobtain strategic partnerships or licenses.

The FDA hasdesignated EFAPROXYN for the treatment of brain metastases from breast cancerand PDX for the treatment of T-cell lymphoma as orphan drugs under the OrphanDrug Act. The Orphan Drug Act provides incentives to pharmaceutical companiesto develop and market drugs for rare diseases, generally by entitling the firstdeveloper that receives FDA marketing approval for an orphan drug to aseven-year exclusive marketing period in the United States for that product. Inrecent years, Congress has considered legislation to change the Orphan Drug Actto shorten the period of automatic market exclusivity and to grant marketingrights to simultaneous developers of a drug. If the Orphan Drug Act is amendedin this manner, any approved drugs for which we have been granted exclusivemarketing rights under the Orphan Drug Act will face increased competition,which may decrease the amount of revenue we may receive from these products.

**Ifwe are unable to develop adequate sales, marketing or distribution capabilitiesor enter into agreements with third parties to perform some of thesefunctions, we will not be able to commercialize our products effectively.**

We have limitedexperience in sales, marketing and distribution. To directly market anddistribute any products, we must build a sales and marketing organization withappropriate technical expertise and distribution capabilities. Wemay attempt to build such a sales and marketing organization on our own orwith the assistance of a contract sales organization. For some marketopportunities, we may need to enter into co-promotion or other licensingarrangements with larger pharmaceutical or biotechnology firms in order toincrease the likelihood of commercial success for our products. We may notbe able to establish sales, marketing and distribution capabilities of our ownor enter into such arrangements with third parties in a timely manner or onacceptable terms. To the extent that we enter into co-promotion or otherlicensing arrangements, our product revenues are likely to be lower than if wedirectly marketed and sold our products, and some or all of the revenues wereceive will depend upon the efforts of third parties, and these effortsmay not be successful. Additionally, building marketing and distributioncapabilities may be more expensive than we anticipate, requiring us to divertcapital from other intended purposes or preventing us from building ourmarketing and distribution capabilities to the desired levels.

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

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

**Ifproduct liability lawsuits are successfully brought against us, wemay incur substantial liabilities and may be required to limitcommercialization of our product candidates.**

The testing andmarketing of pharmaceutical products entail an inherent risk of productliability. Product liability claims might be brought against us by consumers,health care providers or by pharmaceutical companies or others selling ourfuture products. If we cannot successfully defend ourselves against suchclaims, we may incur substantial liabilities or be required

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to limit thecommercialization of our product candidates. We have obtained limited productliability insurance coverage for our human clinical trials. However, productliability insurance coverage is becoming increasingly expensive, and wemay be unable to maintain product liability insurance coverage at areasonable cost or in sufficient amounts to protect us against losses due toproduct liability. A successful product liability claim in excess of our insurancecoverage could have a material adverse effect on our business, financialcondition and results of operations. We may not be able to obtaincommercially reasonable product liability insurance for any products approvedfor marketing.

**Weare currently involved in a securities class action litigation, whichcould harm our business if management attention is diverted or the claims aredecided against us.**

We have been namedas a defendant in an alleged securities class action lawsuit seekingunspecified damages relating to the issuance of allegedly false and misleadingstatements regarding EFAPROXYN during the period from May 29, 2003 toApril 29, 2004 and subsequent declines in our stock price. OnOctober 20, 2005, the District Court granted our motion to dismiss thelawsuit with prejudice and entered judgment in our favor. On November 20,2005, the plaintiff appealed the decision to the United States Court of Appealsfor the Tenth Circuit. We are currently engaged in defending against theseclaims, which, if decided against us, could have a material adverse effect onour business, financial condition and results of operations. The costs incurredin connection with this lawsuit could be significant and may not becovered by our insurance policies. This lawsuit could also result in continueddiversion of our time and attention away from business operations, which couldharm our business.

**Failureto attract, retain and motivate skilled personnel and cultivate key academiccollaborations will delay our product development programs and our research anddevelopment efforts.**

We are a smallcompany with 60 full-time employees, and our success depends on our continuedability to attract, retain and motivate highly qualified management andscientific personnel and on our ability to develop and maintain importantrelationships with leading academic institutions and scientists. Competitionfor personnel and academic collaborations is intense. In particular, ourproduct development programs depend on our ability to attract and retain highlyskilled clinical development personnel. In addition, we will need to hireadditional personnel and develop additional academic collaborations as wecontinue to expand our research and development activities. We do not know ifwe will be able to attract, retain or motivate personnel or maintain ourrelationships with academic institutions and scientists. If we fail tonegotiate additional acceptable collaborations with academic institutions andscientists, or if our existing academic collaborations were to be unsuccessful,our product development programs may be delayed.

**Wecannot guarantee that we will be in compliance with all potentially applicableregulations.**

The development,manufacturing, and, if approved, pricing, marketing, sales and reimbursement ofour products, together with our general obligations, are subject to extensiveregulation by federal, state and other authorities within the United States andnumerous entities outside of the United States. We also have significantly feweremployees than many other companies that have the same or fewer productcandidates in late stage clinical development and we rely heavily on thirdparties to conduct many important functions.

As apublicly-traded company, we are subject to significant regulations, some ofwhich have either only recently been adopted, including the Sarbanes Oxley Actof 2002, or are currently proposals subject to change. We cannot assure that weare or will be in compliance with all potentially applicable regulations. If wefail to comply with the Sarbanes Oxley Act of 2002 or any other regulations wecould be subject to a range of consequences, including restrictions on ourability to sell equity or otherwise raise capital funds, the de-listing of ourcommon stock from the Nasdaq National Market, suspension or termination of ourclinical trials, failure to obtain approval to market our product candidates,restrictions on future products or our manufacturing processes, significantfines, or other sanctions or litigation.

**Ifwe do not progress in our programs as anticipated, our stock price coulddecrease.**

For planningpurposes, we estimate the timing of a variety of clinical, regulatory and othermilestones, such as when a certain product candidate will enter clinical development,when a clinical trial will be completed or when an application for regulatoryapproval will be filed. Some of our estimates are included in this report. Ourestimates are based on information available to us as of the date of thisreport and a variety of assumptions. Many of the underlying assumptions areoutside of

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our control. Ifmilestones are not achieved when we estimated that they would be, investorscould be disappointed, and our stock price may decrease.

**WarburgPincus Private Equity VIII, L.P. (“Warburg”) controls a substantial percentageof the voting power of our outstanding common stock.**

On March 2,2005, we entered into a Securities Purchase Agreement with Warburg PincusPrivate Equity VIII, L.P. (“Warburg”) and certain other investors pursuant towhich we issued and sold an aggregate of 2,352,443 shares of our Series AExchangeable Preferred Stock (the “Exchangeable Preferred”) at a price pershare of $22.10, for aggregate gross proceeds of approximately$52.0 million. On May 18, 2005, at our Annual Meeting ofStockholders, our stockholders voted to approve the issuance of shares of ourcommon stock upon exchange of shares of the Exchangeable Preferred. As a resultof such approval, we issued a total of 23,524,430 shares of common stock uponexchange of 2,352,443 shares of Exchangeable Preferred. As of September 30,2006, we have approximately 55.6 million shares of common stockoutstanding. Warburg owns approximately 22.6 million shares of our commonstock, or 41% of the voting power of our outstanding common stock as of September30, 2006. As a result, Warburg is able to exercise substantial influence overany actions requiring stockholder approval. However, in connection with itspurchase of the Exchangeable Preferred, Warburg entered into a standstillagreement agreeing not to pursue, for four years, certain activities thepurpose or effect of which may be to change or influence the control ofAllos.

**Anti-takeoverprovisions in our charter documents and under Delaware law could discourage,delay or prevent an acquisition of us, even if an acquisition would bebeneficial to our stockholders, and may prevent attempts by our stockholders toreplace or remove our current management.**

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

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

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

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

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

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

In addition, weare subject to Section 203 of the Delaware General Corporation Law, whichgenerally prohibits a Delaware corporation from engaging in any of a broadrange of business combinations with an interested stockholder for a period ofthree years following the date on which the stockholder became an interestedstockholder. This provision could have the effect of delaying or preventing achange of control, whether or not it is desired by or beneficial to ourstockholders. Notwithstanding the foregoing, the three year moratorium imposedon business combinations by Section 203 will not apply to Warburg because,prior to the date on which Warburg became an interested stockholder, our boardof directors approved the transaction which resulted in Warburg becoming aninterested stockholder. However, in connection with its purchase ofExchangeable Preferred, Warburg entered into a standstill agreement agreeingnot to pursue, for four years, certain activities the purpose or effect ofwhich may be to change or influence the control of Allos.

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**Wehave adopted a stockholder rights plan that may discourage, delay or prevent amerger or acquisition that is beneficial to our stockholders.**

In May 2003,our board of directors adopted a stockholder rights plan that may have theeffect of discouraging, delaying or preventing a merger or acquisition of usthat is beneficial to our stockholders by diluting the ability of a potentialacquirer to acquire us. Pursuant to the terms of our plan, when a person orgroup, except under certain circumstances, acquires 15% or more of ouroutstanding common stock or 10 business days after announcement of a tender orexchange offer for 15% or more of our outstanding common stock, the rights(except those rights held by the person or group who has acquired or announcedan offer to acquire 15% or more of our outstanding common stock) would generallybecome exercisable for shares of our common stock at a discount. Because thepotential acquirer’s rights would not become exercisable for our shares ofcommon stock at a discount, the potential acquirer would suffer substantialdilution and may lose its ability to acquire us. In addition, the existence ofthe plan itself may deter a potential acquirer from acquiring us. As a result,either by operation of the plan or by its potential deterrent effect, mergersand acquisitions of us that our stockholders may consider in their bestinterests may not occur.

Because Warburgowns a substantial percentage of our outstanding common stock, we amended thestockholder rights plan in connection with Warburg’s purchase of theExchangeable Preferred to provide that Warburg and its affiliates will beexempt from the stockholder rights plan, unless Warburg and its affiliatesbecome, without our prior consent, the beneficial owner of more than 44% of ourcommon stock. Under the stockholder rights plan, our Board of Directors hasexpress authority to amend the rights plan without stockholder approval.

**Themarket price for our common stock has been and may continue to be highlyvolatile, and an active trading market for our common stock may never exist.**

We cannot be surethat an active trading market for our common stock will exist at any time.Holders of our common stock may not be able to sell shares quickly or atthe market price if trading in our common stock is not active. The tradingprice of our common stock has been and is likely to be highly volatile andcould be subject to wide fluctuations in price in response to various factors,many of which are beyond our control, including:

·                  actualor anticipated results of our clinical trials;

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

·                  changesin laws or regulations applicable to our product candidates;

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

·                  actualor anticipated variations in quarterly operating results;

·                  announcementsof technological innovations by us or our competitors;

·                  changesin financial estimates or recommendations by securities analysts;

·                  conditionsor trends in the biotechnology and pharmaceutical industries;

·                  changesin the market valuations of similar companies;

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

·                  additionsor departures of key personnel;

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

·                  developmentsconcerning any research and development, manufacturing, and marketing collaborations;

·                  salesof large blocks of our common stock;

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

·                  economicand other external factors, including disasters or crises.

In addition, thestock market in general, the Nasdaq National Market and the market fortechnology companies in particular have experienced extreme price and volumefluctuations that have often been unrelated or disproportionate to theoperating performance of those companies. Further, there has been particularvolatility in the market prices of securities of biotechnology and lifesciences companies. These broad market and industry factors may seriouslyharm the market price of our common stock, regardless of our operating performance.In the past, following periods of volatility in the market, securitiesclass-action litigation has often been instituted against companies. Suchlitigation, if instituted against us, could result in substantial costs anddiversion of management’s attention and resources.

**Weare required to recognize stock-based compensation expense relating to employeestock options, restricted stock, and stock purchases under our Employee StockPurchase Plan, and the amount of expense we recognize may not accurately reflectthe value of our share-based payment awards. Further, the recognition ofstock-based compensation expense will cause our net losses to increase and maycause the trading price of our common stock to fluctuate.**

On January 1,2006, we adopted SFAS 123R, which requires the measurement and recognition ofcompensation expense for all stock-based compensation based on estimated fairvalues.  As a result, our operatingresults for the three and nine months ended September 30, 2006 included, andfuture periods will include, a charge for stock-based compensation related toemployee stock options, restricted stock and employee stock purchases. Theapplication of SFAS 123R requires the use of an option-pricing model todetermine the fair value of share-based payment awards. This determination offair value is affected by our stock price as well as assumptions regarding anumber of highly complex and subjective variables. These variables include, butare not limited to, our expected stock price volatility over the term of theawards, and actual and projected employee stock option exercise behaviors.Option-pricing models were developed for use in estimating the value of tradedoptions that have no vesting or hedging restrictions and are fullytransferable. Because our employee stock options have certain characteristicsthat are significantly different from traded options, and because changes inthe subjective assumptions can materially affect the estimated value, inmanagement’s opinion the existing valuation models may not provide an accuratemeasure of the fair value of our employee stock options.

We expect that ouradoption of SFAS 123R will have a material impact on our future financialstatements and results of operations.  Wecannot predict the effect that our stock-based compensation expense will haveon the trading price of our common stock.

**Substantialsales of shares may impact the market price of our common stock.**

If ourstockholders sell substantial amounts of our common stock, the market price ofour common stock may decline. These sales also might make it moredifficult for us to sell equity or equity-related securities in the future at atime and price that we consider appropriate. We are unable to predict theeffect that sales may have on the then prevailing market price of ourcommon stock. Pursuant to a Registration Rights Agreement entered into betweenus and the purchasers of Exchangeable Preferred, beginning on March 4,2007, the purchasers of Exchangeable Preferred will be entitled to certain registrationrights with respect to the shares of common stock that were issued uponexchange of the Exchangeable Preferred.

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**ITEM 6.****  EXHIBITS**
| Exhibit No. | ** ** | **Note** | ** ** | **Description**                                                                                 |
|-------------|------------|----------|------------|-------------------------------------------------------------------------------------------------|
| 31.1        |       |     |       | Certification of principal executive officer  required by Rule 13a-14(a) / 15d-14(a). |
| 31.2        |       |     |       | Certification of principal financial officer  required by Rule 13a-14(a) / 15d-14(a). |
| 32.1        |       |     |       | Section 1350 Certification.                                                                |

 

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.
| Date: November 3, 2006 | ** ** | **ALLOS THERAPEUTICS, INC.**            |
|-----------------------------|------------|----------------------------------------------|
|                        |       |                                         |
|                        |       | /s/ Paul L. Berns                            |
|                        |       | Paul L. Berns                                |
|                        |       | President and Chief Executive Officer        |
|                        |       | (Principal Executive Officer)                |
|                        |       |                                         |
|                        |       | /s/ David C. Clark                           |
|                        |       | David C. Clark                               |
|                        |       | Corporate Controller and Treasurer           |
|                        |       | (Principal Financial and Accounting Officer) |

 

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**EXHIBITINDEX**
| Exhibit No. | ** ** | **Note** | ** ** | **Description**                                                                                 |
|-------------|------------|----------|------------|-------------------------------------------------------------------------------------------------|
| 31.1        |       |     |       | Certification of  principal executive officer required by Rule 13a-14(a) / 15d-14(a). |
| 31.2        |       |     |       | Certification of  principal financial officer required by Rule 13a-14(a) / 15d-14(a). |
| 32.1        |       |     |       | Section 1350 Certification.                                                                |

 

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