** **

**UNITED STATESSECURITIES AND 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,  2007.**                                                                                                                                                                                                           |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                        |
| **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 |       | (I.R.S. Employer    |
| incorporation or  organization)  |       | Identification No.) |

 

**11080CirclePoint Road, Suite 200**

**Westminster,Colorado  80020**

**(303)426-6262**

(Address, including zipcode, and telephone number,

including area code, ofprincipal executive offices)

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days.  Yes x    No o

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
| 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 ExchangeAct).  Yes o    No x

As of November 1, 2007, there were 66,957,332 shares of the registrant’sCommon Stock, par value $0.001 per share, outstanding.

 

 

** **

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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, 2006 and September 30, 2007 |
|                                   | Statements of Operations — for the three  and nine months ended September 30, 2006 and 2007 and the cumulative period  from September 1, 1992 (date of inception) through September 30, 2007 |
|                                   | Statements of Cash Flows — for the nine  months ended September 30, 2006 and 2007 and the cumulative period from  September 1, 1992 (date of inception) through September 30, 2007 |
|                                   | Notes to Financial  Statements |
| 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 2.                                | Unregistered  Sales of Equity Securities and Use of Proceeds |
| ITEM 3.                                | Defaults Upon  Senior Securities |
| ITEM 4.                                | Submission of  Matters to a Vote of Security Holders |
| ITEM 5.                                | Other Information |
| ITEM 6.                                | Exhibits |
| SIGNATURES                             |   |

 

NOTE:

*Allos Therapeutics, Inc., the Allos Therapeutics, Inc.logo, EFAPROXYNTM (efaproxiral), and all other Allos names are trademarks ofAllos Therapeutics, Inc. in the United States and in other selectedcountries. All other brand names or trademarks appearing in this report are theproperty of their respective holders. Unless the context requires otherwise,references in this report to “Allos,” the “Company,” “we,” “us,” and “our”refer to Allos Therapeutics, Inc.*

2

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**PART I. FINANCIALINFORMATION**

**ITEM 1.  FINANCIALSTATEMENTS**

**ALLOS THERAPEUTICS, INC.**

**BALANCE SHEETS**

**(unaudited)**
| ** **                                                                                                                                                                                                                                | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                                                                                                                                                                                                                                | ** ** | **2006**              | ** ** | **2007**               | ** ** |
| **ASSETS**                                                                                                                                                                                                                                | ** ** | ** **            | ** ** | ** **             | ** ** |
| Current assets:                                                                                                                                                                                                                           |       |                  |       |                   |       |
| Cash and cash  equivalents                                                                                                                                                                                                                |       | $                     | 10,070,526 |                   | $          | 7,005,136 |   |
| Restricted cash                                                                                                                                                                                                                           |       | 366,667               |       | 366,667                |       |
| Investments in  marketable securities                                                                                                                                                                                                     |       | 22,725,525            |       | 56,364,435             |       |
| Prepaid research  and development expenses                                                                                                                                                                                                |       | 496,265               |       | 564,332                |       |
| Prepaid expenses  and other assets                                                                                                                                                                                                        |       | 2,069,840             |       | 2,545,304              |       |
| Total current  assets                                                                                                                                                                                                                     |       | 35,728,823            |       | 66,845,874             |       |
| Property and  equipment, net                                                                                                                                                                                                              |       | 603,520               |       | 543,252                |       |
| Other assets                                                                                                                                                                                                                              |       | 49,247                |       | 49,247                 |       |
| Total assets                                                                                                                                                                                                                              |       | $                     | 36,381,590 |                   | $          | 67,438,373 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                             | ** ** | ** **            | ** ** | ** **             | ** ** |
| Current  liabilities:                                                                                                                                                                                                                     |       |                  |       |                   |       |
| Accounts payable                                                                                                                                                                                                                          |       | $                     | 400,133    |                   | $          | 721,089 |   |
| Accrued  liabilities                                                                                                                                                                                                                      |       | 6,431,521             |       | 7,448,796              |       |
| Total current  liabilities                                                                                                                                                                                                                |       | 6,831,654             |       | 8,169,885              |       |
| Commitments and  contingencies (See Note 9)                                                                                                                                                                                               |       |                  |       |                   |       |
|                                                                                                                                                                                                                                      |       |                  |       |                   |       |
| Stockholders’  equity:                                                                                                                                                                                                               |       |                  |       |                   |       |
| Preferred stock,  $0.001 par value; 10,000,000 shares authorized at December 31, 2006 and  September 30, 2007; no shares issued or outstanding                                                                                       |       | —                |       | —                 |       |
| Series A Junior  Participating Preferred Stock, $0.001 par value; 1,000,000 shares designated  from authorized preferred stock at December 31, 2006 and September 30,  2007; no shares issued or outstanding                         |       | —                |       | —                 |       |
| Common stock,  $0.001 par value; 150,000,000 shares authorized at December 31, 2006 and  September 30, 2007; 56,695,633 and 66,761,276 shares issued and outstanding  at December 31, 2006 and September 30, 2007, respectively |       | 56,695                |       | 66,761                 |       |
| Additional  paid-in capital                                                                                                                                                                                                               |       | 238,052,617           |       | 295,821,484            |       |
| Deficit  accumulated during the development stage                                                                                                                                                                                         |       | (208,559,376          | )          | (236,619,757           | )          |
| Total  stockholders’ equity                                                                                                                                                                                                          |       | 29,549,936            |       | 59,268,488             |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                                          |       | $                     | 36,381,590 |                   | $          | 67,438,373 |   |
|                                                                                                                                                                                                                                           |            |                       |            |                        |            |  |  |  |

 

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

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**ALLOS THERAPEUTICS, 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,** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                            | ** ** | **2006**                                             | ** ** | **2007**                                            | ** ** | **2006**                                                                                                                      | ** ** | **2007** | ** ** | **2007** | ** ** |
|                                                                  |       |                                                 |       |                                                |       |                                                                                                                          |       |   |   |   |   |
| Operating  expenses:                                                  |       |                                                 |       |                                                |       |                                                                                                                          |       |   |   |   |   |
| Research and  development                                             |       | $                                                    | 4,210,051  |                                                | $          | 4,394,726                                                                                                                     |       | $ | 10,970,548 |   | $ | 12,044,941 |   | $ | 119,900,493 |   |
| Clinical  manufacturing                                               |       | 485,855                                              |       | 1,506,255                                           |       | 1,438,294                                                                                                                     |       | 4,038,363 |   | 33,103,058 |   |
| Marketing,  general and administrative                                |       | 3,895,094                                            |       | 4,240,704                                           |       | 10,559,612                                                                                                                    |       | 14,503,223 |   | 97,661,750 |   |
| Restructuring  and separation costs                                   |       | —                                               |       | —                                              |       | 645,666                                                                                                                       |       | — |   | 1,663,821 |   |
|                                                                  |       |                                                 |       |                                                |       |                                                                                                                          |       |   |   |   |   |
| Total operating  expenses                                             |       | 8,591,000                                            |       | 10,141,685                                          |       | 23,614,120                                                                                                                    |       | 30,586,527 |   | 252,329,122 |   |
|                                                                  |       |                                                 |       |                                                |       |                                                                                                                          |       |   |   |   |   |
| Loss from  operations                                                 |       | (8,591,000                                           | )          | (10,141,685                                         | )          | (23,614,120                                                                                                                   | )          | (30,586,527 | ) | (252,329,122 | ) |
| Gain on  settlement claims                                            |       | —                                               |       | —                                              |       | —                                                                                                                        |       | — |   | 5,110,083 |   |
| Interest and  other income, net                                       |       | 479,685                                              |       | 843,542                                             |       | 1,471,537                                                                                                                     |       | 2,526,146 |   | 20,835,746 |   |
|                                                                  |       |                                                 |       |                                                |       |                                                                                                                          |       |   |   |   |   |
| Net loss                                                              |       | (8,111,315                                           | )          | (9,298,143                                          | )          | (22,142,583                                                                                                                   | )          | (28,060,381 | ) | (226,383,293 | ) |
|                                                                  |       |                                                 |       |                                                |       |                                                                                                                          |       |   |   |   |   |
| Dividend related  to beneficial conversion feature of preferred stock |       | —                                               |       | —                                              |       | —                                                                                                                        |       | — |   | (10,236,464 | ) |
|                                                                  |       |                                                 |       |                                                |       |                                                                                                                          |       |   |   |   |   |
| Net loss  attributable to common stockholders                         |       | $                                                    | (8,111,315 | )                                                   | $          | (9,298,143                                                                                                                    | )          | $ | (22,142,583 | ) | $ | (28,060,381 | ) | $ | (236,619,757 | ) |
|                                                                  |       |                                                 |       |                                                |       |                                                                                                                          |       |   |   |   |   |
| Basic and  diluted net loss per share                                 |       | $                                                    | (0.15      | )                                                   | $          | (0.14                                                                                                                         | )          | $ | (0.40 | ) | $ | (0.43 | ) |   |   |
|                                                                  |       |                                                 |       |                                                |       |                                                                                                                          |       |   |   |   |   |
| Weighted average  shares outstanding:  basic and diluted         |       | 55,196,369                                           |       | 66,042,023                                          |       | 55,126,488                                                                                                                    |       | 64,627,285 |   |   |   |

 

***The accompanying notes are an integral part of thesefinancial statements.***

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**ALLOS THERAPEUTICS, INC.**

**STATEMENTS OF CASH FLOWS**

**(unaudited)**
| ** **                                                                                                              | ** ** | **Nine Months Ended  September 30,** | ** **  | **Cumulative  Period From  September 1, 1992  (date of inception)  through** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|-------------|-------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                              | ** ** | **2006**                                            | ** **  | **2007**                                                                                              | ** ** | **September 30, 2007** | ** ** |
| Cash Flows From  Operating Activities:                                                                                  |       |                                                |        |                                                                                                  |       |   |   |
| Net loss                                                                                                                |       | $                                                   | (22,142,583 | )                                                                                                     | $          | (28,060,381 | ) | $ | (226,383,293 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities:                                       |       |                                                |        |                                                                                                  |       |   |   |
| Depreciation and  amortization                                                                                          |       | 232,381                                             |        | 258,323                                                                                               |       | 3,345,587 |   |
| Stock-based  compensation expense                                                                                       |       | 2,659,884                                           |        | 4,775,997                                                                                             |       | 30,407,091 |   |
| Write-off of  long-term investment                                                                                      |       | —                                              |        | —                                                                                                |       | 1,000,000 |   |
| Other                                                                                                                   |       | —                                              |        | —                                                                                                |       | 99,121 |   |
| Changes in  operating assets and liabilities:                                                                           |       |                                                |        |                                                                                                  |       |   |   |
| Prepaid expenses  and other assets                                                                                      |       | (758,098                                            | )           | (543,529                                                                                              | )          | (3,148,881 | ) |
| Interest  receivable on investments                                                                                     |       | 203,686                                             |        | (299,118                                                                                              | )          | (733,226 | ) |
| Accounts payable                                                                                                        |       | 90,345                                              |        | 320,956                                                                                               |       | 721,089 |   |
| Accrued  liabilities                                                                                                    |       | 2,290,927                                           |        | 1,017,275                                                                                             |       | 7,448,796 |   |
| Net cash used in  operating activities                                                                                  |       | (17,423,458                                         | )           | (22,530,477                                                                                           | )          | (187,243,716 | ) |
| Cash Flows From  Investing Activities:                                                                                  |       |                                                |        |                                                                                                  |       |   |   |
| Acquisition of  property and equipment                                                                                  |       | (202,233                                            | )           | (198,056                                                                                              | )          | (3,634,834 | ) |
| Purchases of  marketable securities                                                                                     |       | (26,746,791                                         | )           | (86,562,254                                                                                           | )          | (513,206,448 | ) |
| Proceeds from  sales of marketable securities                                                                           |       | 44,000,000                                          |        | 53,222,462                                                                                            |       | 457,575,239 |   |
| Purchase of  long-term investment                                                                                       |       | —                                              |        | —                                                                                                |       | (1,000,000 | ) |
| Payments  received on notes receivable                                                                                  |       | —                                              |        | —                                                                                                |       | 49,687 |   |
| Net cash  provided by (used in) investing activities                                                                    |       | 17,050,976                                          |        | (33,537,848                                                                                           | )          | (60,216,356 | ) |
| 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                                           |       | —                                              |        | —                                                                                                |       | 89,125,640 |   |
| Proceeds from  issuance of common stock associated with stock options, stock warrants and  employee stock purchase plan |       | 194,389                                             |        | 2,745,728                                                                                             |       | 6,856,012 |   |
| Proceeds from  issuance of common stock, net of issuance costs                                                          |       | —                                              |        | 50,257,207                                                                                            |       | 159,151,819 |   |
| Net cash  provided by financing activities                                                                              |       | 377,722                                             |        | 53,002,935                                                                                            |       | 254,465,208 |   |
| Net increase  (decrease) in cash and cash equivalents                                                                   |       | 5,240                                               |        | (3,065,390                                                                                            | )          | 7,005,136 |   |
| Cash and cash  equivalents, beginning of period                                                                         |       | 4,224,634                                           |        | 10,070,526                                                                                            |       | — |   |
| Cash and cash  equivalents, end of period                                                                               |       | $                                                   | 4,229,874   |                                                                                                  | $          | 7,005,136 |   | $ | 7,005,136 |   |
| 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                                                                          |       | —                                              |        | —                                                                                                |       | 89,125,640 |   |

 

***The accompanying notes are an integral part of thesefinancial statements.***

 

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**ALLOS THERAPEUTICS, INC.**

**NOTESTO FINANCIAL STATEMENTS**

**(unaudited)**

** **

**1.**                 Basis ofPresentation

The unauditedfinancial statements of Allos Therapeutics, Inc. (referred to herein as the “Company,”“we,” “us” or “our”) included herein reflect all adjustments, consisting onlyof 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. Certain information and footnote disclosures normally included inaudited financial information prepared in accordance with accounting principlesgenerally accepted in the United States of America have been condensed oromitted pursuant to the Securities and Exchange Commission’s rules andregulations.  Operating results for thethree and nine months ended September 30, 2007 are not necessarily indicativeof the results that may be expected for the year ending December 31, 2007.  These financial statements should be read inconjunction with the audited financial statements and notes thereto which areincluded in our Annual Report on Form 10-K for the year ended December 31,2006 for a broader discussion of our business and the opportunities and risksinherent in such business.

Sinceour inception in 1992, we have not generated any revenue from product sales andhave experienced significant net losses and negative cash flows fromoperations.  Our activities haveconsisted primarily of licensing and developing product candidates.  Accordingly, we are considered to be in thedevelopment stage as of September 30, 2007 as defined in Statement of FinancialAccounting Standards (“SFAS”) No. 7, *Accountingand Reporting by Development Stage Enterprises.*

*Liquidity*

Ourability to generate revenue and achieve profitability is dependent on ourability, alone or with partners, to successfully complete the development ofour product candidates, conduct clinical trials, obtain the necessaryregulatory approvals, and manufacture and market our product candidates.  The timing and costs to complete thesuccessful development of any of our product candidates are highly uncertain,and therefore difficult to estimate. The lengthy process of seeking regulatoryapprovals for our product candidates, and the subsequent compliance with applicableregulations, require the expenditure of substantial resources.  Clinical development timelines, likelihood ofsuccess and total costs vary widely and are impacted by a variety of risks anduncertainties.  Because of these risksand uncertainties, we cannot predict when or whether we will successfullycomplete the development of any of our product candidates or the ultimate costsof such efforts.  Due to these samefactors, we cannot be certain when, or if, we will generate any revenue or netcash inflow from any of our current product candidates.

Evenif our clinical trials demonstrate the safety and effectiveness of our productcandidates in their target indications, we do not expect to be able to recordcommercial sales for any of our product candidates until 2009 at theearliest.  We expect to incur significantand growing net losses for the foreseeable future as a result of our researchand development programs and the costs of preparing for the potential commerciallaunch of PDX.  Although the size andtiming of our future net losses are subject to significant uncertainty, weexpect them to increase over the next several years as we continue to fund ourdevelopment programs and prepare for the potential commercial launch of PDX.

Basedupon the current status of our product development and commercialization plans,we believe that our cash, cash equivalents, and investments in marketablesecurities as of September 30, 2007 should be adequate to support ouroperations through the first quarter of 2009, although there can be noassurance that this can, in fact, be accomplished.

Ourforecast of the period of time through which our financial resources will beadequate to support our operations is a forward-looking statement thatinvolves risks and uncertainties, and actual results could vary materially. Weanticipate continuing our current development programs and/or beginning otherlong-term development projects involving our product candidates. These projectsmay require many years and substantial expenditures to complete and mayultimately be unsuccessful. Therefore, we may need to obtain additional fundsfrom outside sources to continue research and development activities, fundoperating expenses, pursue regulatory approvals and build sales and marketingcapabilities, as necessary. However, our actual capital requirements willdepend on many factors, including:

·       the status of our productdevelopment programs;

·       the time and cost involvedin conducting clinical trials and obtaining regulatory approvals;

6

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

·       competing technological andmarket developments; and

·       our ability to market anddistribute our future products and establish new collaborative and licensingarrangements.

**2.**                 Prepaid Expensesand Other Assets

Prepaidexpenses and other assets are comprised of the following:
| ** **                                                             | ** ** | **December 31,  2006** | ** ** | **September 30,  2007** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| Prepaid expenses  and other assets                                     |       | $                           | 151,538    |                         | $          | 375,492 |   |
| Prepaid  insurance                                                     |       | 169,302                     |       | 415,812                      |       |
| Receivable  related to pending litigation settlement (see Note 9) |       | 1,749,000                   |       | 1,754,000                    |       |
|                                                                   |       | $                           | 2,069,840  |                         | $          | 2,545,304 |   |

 

**3.**                 Accounts Payableand Accrued Liabilities

Accounts payableare comprised of the following:
| ** **              | ** ** | **December 31,  2006** | ** ** | **September 30,  2007** | ** ** |
|-------------------------|------------|-----------------------------|------------|------------------------------|------------|
| Trade accounts  payable |       | $                           | 388,133    |                         | $          | 721,089 |   |
| Related parties         |       | 12,000                      |       | —                       |       |
|                    |       | $                           | 400,133    |                         | $          | 721,089 |   |
|                         |            |                             |            |                              |            |  |  |  |

 

Accruedliabilities are comprised of the following:
| ** **                                        | ** ** | **December 31,  2006** | ** ** | **September 30,  2007** | ** ** |
|---------------------------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| Accrued research  and development expenses        |       | $                           | 1,430,417  |                         | $          | 1,845,755 |   |
| Accrued  restructuring and separation costs       |       | 427,266                     |       | 50,734                       |       |
| Accrued  personnel costs                          |       | 1,481,849                   |       | 1,761,127                    |       |
| Accrued  litigation settlement costs (see Note 9) |       | 2,000,000                   |       | 2,000,000                    |       |
| Accrued clinical  manufacturing expenses          |       | 655,552                     |       | 1,332,326                    |       |
| Accrued expenses  — other                    |       | 436,437                     |       | 458,854                      |       |
|                                              |       | $                           | 6,431,521  |                         | $          | 7,448,796 |   |

 

*Duringthe nine months ended September 30, 2007, we recorded approximately $308,000 inresearch and development expenses and $117,000 in clinical manufacturingexpenses related to the discontinuation of the EFAPROXYN developmentprogram.  These expenses representestimated costs to be incurred by contract research organizations in connectionwith closing out our EFAPROXYN clinical trials and estimated costs for thedestruction and storage of EFAPROXYN bulk drug substance and formulated drugproduct.  Approximately $285,000 remainsaccrued at September 30, 2007, with approximately $140,000 in payments madesince the program was discontinued.*

**4.**                 Stockholders’Equity

OnFebruary 2, 2007, we sold 9,000,000 shares of our common stock in anunderwritten offering at a price of $6.00 per share (the “February 2007Financing”). We received net proceeds from the offering of approximately $50.3million, after deducting underwriting commissions of approximately$3.2 million and other offering expenses of approximately $503,000. Theshares of common stock were sold under our shelf Registration Statement onForm S-3 (File No. 333-134965), declared effective by theSecurities and Exchange Commission (“SEC”) on July 10, 2006. We retiredthe unused portion of this shelf registration statement in June 2007.

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**5.**                 Stock-BasedCompensation

Inaccordance with the modified prospective transition method of SFAS No. 123(Revised 2004), *Share-Based Payment* (“SFAS 123R”),stock-based compensation expense for the three and nine months ended September30, 2006 and 2007 has been recognized in the accompanying Statements ofOperations as follows:  
| ** **                              | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                              | ** ** | **2006**                                                 | ** ** | **2007**                                                | ** ** | **2006** | ** ** | **2007** | ** ** |
| Research and  development               |       | $                                                        | 180,904    |                                                    | $          | 473,090 |   | $ | 482,432 |   | $ | 1,281,501 |   |
| Clinical  manufacturing                 |       | 30,449                                                   |       | 44,221                                                  |       | 83,470 |   | 127,170 |   |
| Marketing,  general and administrative  |       | 763,359                                                  |       | 1,141,390                                               |       | 2,093,982 |   | 3,367,326 |   |
| Total  stock-based compensation expense |       | $                                                        | 974,712    |                                                    | $          | 1,658,701 |   | $ | 2,659,884 |   | $ | 4,775,997 |   |

 

We didnot recognize a related tax benefit during the three or nine months endedSeptember 30, 2006 and 2007 as we maintain net operating loss carryforwards andwe have established a valuation allowance against the entire tax benefit as ofSeptember 30, 2007.   No stock-basedcompensation expense was capitalized on our Balance Sheet as ofDecember 31, 2006 and September 30, 2007.

Thefollowing table summarizes activity and related information for our stockoption awards:
| ** **                                    | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**               | ** ** |
|-----------------------------------------------|------------|------------------------------|------------|--------------------------------------------|------------|
| ** **                                    | ** ** | **Number of  Shares**   | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
| **Outstanding  as of December 31, 2006** |       | 5,778,571                    |       | $                                          | 3.60       |   | 2,900,556 |   | $ | 4.27 |   |
| Granted                                       |       | 2,489,574                    |       | 6.59                                       |       |   |   |   |   |
| Exercised                                     |       | (867,429                     | )          | 3.13                                       |       |   |   |   |   |
| Canceled                                      |       | (838,643                     | )          | 5.06                                       |       |   |   |   |   |
| **Outstanding  as of September 30, 2007**     |       | 6,562,073                    |       | $                                          | 4.61       |   | 2,986,213 |   | $ | 3.91 |   |

 

Duringthe nine months ended September 30, 2007, we granted 2,489,574 stock optionswith a weighted-average grant-date fairvalue of $4.15 per share.  As ofSeptember 30, 2007, the unrecorded stock-based compensation balance related tostock option awards was $6,941,931 and will be recognized over an estimatedweighted-average amortization period of 1.5 years.

Thefollowing table summarizes information about outstanding stock options that arefully vested 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, 2007:**                                            | ** ** | ** **              | ** ** | ** **                                                  | ** ** | ** **                                 | ** ** | ** **                          | ** ** |
| Options fully  vested and exercisable                                     |       | 2,986,213               |       | 4.8                                                         |       | $                                          | 3.91       |                                | $          | 3,948,012 |   |
| Options expected  to vest, including effects of expected forfeitures |       | 3,123,932               |       | 9.0                                                         |       | $                                          | 5.19       |                                | 2,130,313  |   |
| Options fully  vested and expected to vest                                |       | 6,110,145               |       | 7.0                                                         |       | $                                          | 4.56       |                                | $          | 6,078,325 |   |

 

Theaggregate intrinsic value in the tables above represents the total pretaxintrinsic value, based on our closing stock price of $4.75 as of September 28,2007, the last trading day prior to September 30, 2007, which would have beenreceived by the option holders had all option holders with in-the-money optionsexercised their options as of that date. The total number of in-the-money options exercisable as of September 30,2007 was 1,988,105.

Thetotal intrinsic value of options exercised during the three months endedSeptember 30, 2006 and 2007 was $27,019 and $994,500, respectively, determinedas of the date of option exercise.  Thetotal intrinsic value of options exercised during the nine months ended September30, 2006 and 2007 was $200,678 and $1,945,941, respectively, determined as ofthe date of option exercise. We settle employee stock option exercises withnewly issued common shares.  No taxbenefits were realized by us in connection with these exercises during thethree or nine months ended September 30, 2006 and 2007 as we maintain netoperating loss carryforwards and we have established a valuation allowanceagainst the entire tax benefit as of September 30, 2007.

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Thefollowing table summarizes activity and related information for our restrictedstock awards:
| ** **                                  | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Grant-Date  Fair Value** | ** ** |
|---------------------------------------------|------------|----------------------------|------------|----------------------------------------------------|------------|
| **Nonvested  as of December 31, 2006** |       | 410,000                    |       | $                                                  | 3.14       |   |
| Granted                                     |       | 105,000                    |       | 6.08                                               |       |
| Vested                                      |       | (102,500                   | )          | 3.14                                               |       |
| **Nonvested  as of September 30, 2007**     |       | 412,500                    |       | $                                                  | 3.89       |   |

 

The shares of restricted stock vest in four equalannual installments from the date of grant. During the three months ended September 30, 2006 and 2007, werecorded stock-based compensation related to restricted stock awards of$168,455 and $164,217, respectively.  During the nine months ended September30, 2006 and 2007, we recorded stock-based compensation related to restrictedstock awards of $334,062 and $523,405, respectively.  As of September 30, 2007, the unrecordedstock-based compensation balance related to restricted stock awards was$862,127 and will be recognized over an estimated weighted-average amortizationperiod of 1.6 years.

**6.**                 Net Loss PerShare

Netloss per share is calculated in accordance with SFAS No. 128, *Earnings Per Share* (“SFAS 128”).Under the provisions of SFAS 128, basic net loss per share is computed bydividing the net loss attributable to common stockholders for the period by theweighted average number of common shares outstanding during the period.  Diluted earnings per share is computed bygiving effect to all dilutive potential common stock outstanding during theperiod, including stock options, restricted stock, stock warrants and shares tobe issued under our employee stock purchase plan.

Dilutednet loss per share is the same as basic net loss per share for all periodspresented because any potential dilutive common shares were anti-dilutive dueto our net loss (as including such shares would decrease our basic net loss pershare). Potential dilutive common shares that would have been included in thecalculation of diluted earnings per share if we had net income are as follows:
| ** **             | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **             | ** ** | **2006**                                                 | ** ** | **2007**                                                | ** ** | **2006** | ** ** | **2007** | ** ** |
| Common stock  options  |       | 1,476,250                                                |       | 1,342,540                                               |       | 1,006,605 |   | 1,773,673 |   |
| Restricted stock       |       | 410,000                                                  |       | 412,500                                                 |       | 410,000 |   | 412,500 |   |
| Common stock  warrants |       | 277,912                                                  |       | 206,427                                                 |       | 103,786 |   | 278,267 |   |
|                   |       | 2,164,162                                                |       | 1,961,467                                               |       | 1,520,391 |   | 2,464,440 |   |

 

**7.**                 Restructuring andSeparation Costs

InJanuary 2006, Michael E. Hart notified our Board of Directors of hisintent to resign from his positions as President, Chief Executive Officer andChief Financial Officer of the Company once a successor Chief Executive Officerwas appointed. On March 3, 2006, we entered into a separation agreementwith Mr. Hart to provide certain incentives for his continued employmentwith the Company while we conducted our search for his successor.  On March 9, 2006, we appointed Paul L.Berns as our President, Chief Executive Officer and a member of the Board ofDirectors and Mr. Hart resigned from his positions in accordance with theterms of the separation agreement. The separation agreement with Mr. Hartwas amended on March 9, 2006 and on May 10, 2006 (as so amended, the “SeparationAgreement”).

Werecorded separation costs of $645,666 during the nine months ended September30, 2006 relating to our estimate of our total obligations under the SeparationAgreement with Mr. Hart.  During theyear ended December 31, 2006 and the nine months ended September 30, 2007,we made payments to Mr. Hart under the Separation Agreement of $325,208and $320,458, respectively.  As ofSeptember 30, 2007, there was no remaining liability relating to the SeparationAgreement with Mr. Hart.

**8.**                 Income Taxes

We adopted theprovisions of Financial Accounting Standards Board (“FASB”) Interpretation No.48, *Accounting for Uncertainty in Income Taxes-aninterpretation of FASB Statement No. 109* (“FIN 48”), onJanuary 1, 2007. FIN 48 clarifies 

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the accounting foruncertainty in income taxes recognized in an enterprise’s financial statementsin accordance with SFAS No. 109, *Accounting for IncomeTaxes*, and prescribes a recognition threshold and measurementprocess for financial statement recognition and measurement of a tax positiontaken or expected to be taken in a tax return. FIN 48 also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure and transition. Based on our evaluation, we have concludedthat there are no significant uncertain tax positions requiring recognition inour financial statements. Our evaluation was performed for the periods fromDecember 31, 1993 through September 30, 2007, the tax periods whichremain subject to examination by major tax jurisdictions as of September 30,2007.

We have netoperating loss (“NOL”) carryforwards, research and development (“R&D”)credit carryforwards and orphan drug credit carryforwards and other deferredtax assets that represent an unrecognized future tax benefit.  A valuation allowance has been establishedfor the entire tax benefit as of September 30, 2007 as we believe that it ismore likely than not that such assets will not be realized.  The utilization of these carryforwards toreduce future income taxes will depend on our ability to generate sufficienttaxable income prior to the expiration of the carryforwards, which beginexpiring in 2009. Further, the Internal Revenue Code of 1986, as amended,contains provisions in Section 382 that limit the NOL, R&D credit, andorphan drug credit carryforwards available for use in any given year upon theoccurrence of certain events, including significant changes in ownershipinterest and are subject to review and possible adjustment by the InternalRevenue Service. A greater than 50% change in ownership of a company within athree-year period results in an annual limitation on the ability to utilizeNOL, R&D credit and orphan drug credit carryforwards from tax periods priorto the ownership change. Our NOL, R&D credit and orphan drug creditcarryforwards as of September 30, 2007 will likely be subject to annuallimitation due to changes in ownership resulting from our previous financings.While the amount of these limitations has not been determined, managementbelieves that the amount subject to limitation could be significant, and ourNOL, R&D credit and orphan drug credit carryforwards may expire unused.Additionally, future ownership changes could further limit the utilization ofour NOL, R&D credit and orphan drug credit carryforwards. Until a fullSection 382 study is completed and the amount of these limitations is known, noamounts are presented as uncertain under FIN 48.

We mayfrom time to time be assessed interest or penalties by major tax jurisdictions,although there have been no such assessments historically, with no materialimpact to our financial results. In the event we receive an assessment forinterest and/or penalties, it would be classified in the financial statementsas income tax expense.

**9.**                 Commitments and Contingencies

*Royalty and License FeeCommitments*

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 issuedUnited States patents and equivalent foreign patent applications to develop andmarket any product derived from any formulation of PDX in connection with alldiagnostic and therapeutic uses, including human and veterinary diseases. Underthe terms of the agreement, we paid an up-front license fee of $2.0 millionupon execution of the agreement and are also required to make certainadditional cash payments based upon the achievement of certain clinicaldevelopment or regulatory milestones or the passage of certain time periods. Todate, we have made aggregate milestone payments of $1.5 million based on thepassage of time. In the future, we could make aggregate milestone payments of$1.5 million upon the earlier of achievement of a clinical developmentmilestone or the passage of certain time periods (the “Clinical Milestone”),and up to $10 million upon achievement of certain regulatory milestones,including regulatory approval to market PDX in the United States or Europe. Thenext scheduled payments toward the Clinical Milestone of $500,000 each arecurrently due on December 23, 2007, 2008 and 2009. The up-front license fee and all milestone payments under the agreementhave been or will be recorded to research and development expense when incurred.Under the terms of the agreement, we are required to fund all developmentprograms and will have sole responsibility for all commercializationactivities. In addition, we will pay the licensors a royalty based on apercentage of net revenues arising from sales of the product or sublicenserevenues arising from sublicensing the product, if and when such sales orsublicenses occur.

In December 2004, weentered into an agreement with the University of Colorado Health SciencesCenter, the University of Salford and Cancer Research Technology (“CRT”), underwhich we obtained exclusive worldwide rights to certain intellectual propertysurrounding a proprietary molecule known as RH1. Under the terms of theagreement, we paid an up-front license fee of $190,500 upon execution of theagreement and are also required to make certain additional cash payments basedupon the achievement of certain clinical development, regulatory andcommercialization milestones. We could make aggregate milestone payments of upto $9.2 million upon the achievement of the clinical development, regulatoryand commercialization milestones set forth in the agreement. The up-frontlicense fee and all milestone payments under the 

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agreement, as well as theone-time data option fee discussed below, have been or will be recorded toresearch and development expense when incurred. Under the terms of theagreement and related data option agreement, Cancer Research UK, CRT’s parentinstitution, will continue to support an ongoing Phase 1 dose escalation study,and we will have the right to obtain an exclusive license to the results of thestudy, for use in subsequent development and regulatory activities, uponpayment of a one-time data option fee of $360,000, which is included in accruedresearch and development expenses as of September 30, 2007. Upon completion ofthe Phase 1 study, we will assume responsibility for all future developmentcosts and activities and will have sole responsibility for allcommercialization activities. In addition, we will pay the licensors a royaltybased on a percentage of net revenues arising from sales of the product orsublicense revenues arising from sublicensing the product, if and when suchsales or sublicenses occur.

*Contingencies*

TheCompany and one of its former officers were named as defendants in a purportedsecurities class action lawsuit filed in May 2004 in the United StatesDistrict Court for the District of Colorado (the “District Court”). An amendedcomplaint was filed in August 2004. The lawsuit was brought on behalf of apurported class of purchasers of our securities during the period fromMay 29, 2003 to April 29, 2004, and sought unspecified damagesrelating to the issuance of allegedly false and misleading statements regardingEFAPROXYN during this period and subsequent declines in our stock price. On October 20,2005, the District Court granted the defendants’ motion to dismiss the lawsuitwith prejudice. In an opinion dated October 20, 2005, the District Courtconcluded that the plaintiff’s complaint failed to meet the legal requirementsapplicable to its alleged claims.

OnNovember 20, 2005, the plaintiff appealed the District Court’s decision tothe U.S. Court of Appeals for the Tenth Circuit (the “Court of Appeals”).  In October 2006, the parties held discussions to settle thematter, although the terms of any such potential settlement remain subject tonegotiation and no binding agreement has been reached. A settlement would besubject to various conditions, including approval of the District Court. Weexpect that any settlement in excess of our deductible would be covered by ourinsurance carrier. As with any litigation proceeding, we cannot predict withcertainty the eventual outcome of our settlement discussions or the legalproceedings. In the event a settlement is not concluded, we intend to vigorouslydefend against the plaintiff’s appeal. If the Court of Appeals reverses theDistrict Court’s decision and we are not successful in our defense of suchclaims, we could be forced to make significant payments to the plaintiffs, andsuch payments 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 claimsis successful, the litigation could result in substantial costs and divertmanagement’s attention and resources, which could adversely affect ourbusiness. As of September 30, 2007, we have recorded $2,000,000 in accruedlitigation settlement costs, which represents our best estimate of the potentialgross amount of the settlement costs to be paid to the plaintiffs, and$1,754,000 in prepaid expenses and other assets, which represents the amount weexpect to be reimbursed from our insurance carrier. The net difference of$246,000 between these amounts represents the remaining unpaid deductible underour insurance policy, and this amount was recorded to marketing, general andadministrative expenses during the year ended December 31, 2006.

**10.**          Recent Accounting Pronouncements

InFebruary 2007, the FASB issued SFAS No. 159, *The FairValue Option for Financial Assets and Financial Liabilities — Including anAmendment of FASB Statement No. 115,* which is effective forfiscal years beginning after November 15, 2007. This statement permits anentity to choose to measure many financial instruments and certain other itemsat fair value at specified election dates. Subsequent unrealized gains andlosses on items for which the fair value option has been elected will bereported in earnings. We are currently evaluating the potential impact of thisstatement.

The Emerging Issues Task Force (“EITF”) issued aconsensus, EITF 07-3, *Advance Payments forResearch and Development Activities*, which states thatnon-refundable advance payments for goods that will be used or services thatwill be performed in future research and development activities should bedeferred and capitalized until the goods have been delivered or the relatedservices have been rendered.  EITF 07-3is to be applied prospectively for new contractual arrangements entered into infiscal years beginning after December 15, 2007. We do not expect that this willhave a material change to our current accounting practice.

The EITF has issued a tentative conclusion on EITF07-01, *Accounting for CollaborationArrangements Related to the Development and Commercialization of IntellectualProperty*, which is focused on how the parties to a collaborativeagreement should account for costs incurred and revenue generated on sales tothird parties, how sharing payments pursuant to a collaboration agreementshould be presented in the income statement and certain related disclosurequestions. EITF 07-1 

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is to be applied retrospectively for collaborationarrangements in fiscal years beginning after December 15, 2007.  We currently do not have any sucharrangements.

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

** **

*The following Management’s Discussion and Analysisof Financial Condition and Results of Operations, as well as informationcontained elsewhere in this report, contains statements that constitute “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended.*These forward-looking statements include,but are not limited to, statements concerning our projected timelines for thecompletion of enrollment, performance of interim and final analyses andannouncement of results from our ongoing clinical trials, including ourPhase 2 PROPEL trial; the potential for the results of our Phase 2 PROPELtrial to support marketing approval of PDX; other statements regarding ourfuture product development and regulatory strategies, including our intent todevelop or seek regulatory approval for our product candidates in specificindications; the ability of our third-party manufacturing parties to supportour requirements 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 some cases, these statements may beidentified by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,”“believes,” “estimates,” “predicts,” “potential” or “continue,” or the negativeof such terms and other comparable terminology. Although we believe that theexpectations reflected in the forward-looking statements contained herein arereasonable, we cannot guarantee future results, levels of activity, performanceor achievements. These statements involve known and unknown risks anduncertainties that may cause our 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 to suchdifferences include, among other things, those discussed in Part II, Item 1A ofthis report under the caption “Risk Factors.” All forward-lookingstatements included in this report are based on information available to us asof the date hereof and we undertake no obligation to revise any forward-lookingstatements in order to reflect any subsequent events or circumstances. Forward-lookingstatements not specifically described above also may be found in these andother sections of this report.

**Overview**

We area biopharmaceutical company focused on developing and commercializinginnovative small molecule drugs for the treatment of cancer. We strive todevelop proprietary products that have the potential to improve the standard ofcare in cancer therapy. Our goal is to build a profitable company by generatingincome from products we develop and commercialize, either alone or with one ormore potential strategic partners. Our focus is on product opportunities thatleverage our internal clinical development and regulatory expertise and addressimportant markets with unmet medical need. We may also seek to grow ourexisting portfolio of product candidates through product acquisition and in-licensingefforts.

Wehave two product candidates that are currently under development, PDX(pralatrexate) and RH1.

**PDX**

PDX (pralatrexate) is a novel, small moleculechemotherapeutic agent that inhibits dihydrofolate reductase, or DHFR, a folicacid (folate)-dependent enzyme involved in the building of nucleic acid, orDNA, and other processes. PDX was rationally designed for efficient transportinto tumor cells via the reduced folate carrier, or RFC-1, and effectiveintracellular drug retention. We believe these biochemical features, togetherwith preclinical and clinical data in a variety of tumors, suggest that PDX mayhave a favorable safety and efficacy profile relative to methotrexate and otherrelated DHFR inhibitors. We believe PDX has the potential to be delivered as asingle agent or in combination therapy regimens.

In August 2006, we initiated PROPEL, a Phase 2 clinical trial ofPDX in patients with relapsed or refractory peripheral T-cell lymphoma, orPTCL, that we believe, if positive, will be sufficient to support the filing ofa new drug application, or NDA, to seek marketing approval for PDX in thisindication.   In July 2006, wereached agreement with the United States Food and Drug Administration, or FDA,under its special protocol assessment, or SPA, process on the design of thisPhase 2 trial.  The SPA process allowsfor FDA evaluation of a clinical trial protocol intended to form the primarybasis of an efficacy claim in support of an NDA, and provides an agreement thatthe study design, including trial size, clinical endpoints and/or data analysesare acceptable to the FDA.  The PROPELtrial will seek to enroll a minimum of 100 evaluable patients at approximately35 centers across the United States, Canada and Europe.  The primary endpoint of the study isobjective response rate (complete and partial response).  Secondary endpoints include duration ofresponse, progression-free survival and overall survival.  In September 2007, we announced thecompletion of pre-planned interim analyses of patient response and safety datafrom the PROPEL trial. Results of the interim analysis of patient response dataexceeded the pre-specified threshold for continuation of the trial, whichrequired a minimum of four responses (complete or partial) out of the first 35

 

 

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evaluable patients, as determined by independent oncology review.  In addition, an independent data monitoringcommittee, or DMC, completed an interim analysis of the safety data from thefirst 35 evaluable patients and recommended that the trial continue per theprotocol.  No major safety concerns wereidentified by the DMC.  In accordancewith the trial protocol, the DMC will conduct another interim analysis ofsafety data from the first 65 evaluable patients.  We expect to report the outcome of the65-patient safety analysis by the end of 2007. We currently expect to complete patient enrollment in the trial in thesecond quarter of 2008, although the actual timing of the interim analysis andcompletion of enrollment may vary based on a number of factors, including siteinitiation and patient enrollment rates.

 

In July 2006,the FDA awarded orphan drug status to PDX for the treatment of patients withT-cell lymphoma. Under the Orphan Drug Act, if we are the first company toreceive FDA approval for PDX for this orphan drug indication, we will obtainseven years of marketing exclusivity during which the FDA may not approveanother company’s application for the same drug for the same orphan indication.  In October 2006, the FDA granted fasttrack designation to PDX for the treatment of patients with T-cell lymphoma.The fast track program is designed to facilitate the development and expeditethe review of new drugs that are intended to treat serious or life-threateningconditions and that demonstrate the potential to address unmet medicalneeds.  In April 2007, the Commission ofthe European Communities, with a favorable opinion of the Committee for OrphanMedicinal Products of the European Medicines Agency, or EMEA, granted orphandrug designation to PDX for the treatment of patients with PTCL.  The EMEA Orphan Medicinal ProductDesignation, or OMPD, is intended to promote the development of drugs that mayprovide significant benefit to patients suffering from rare diseases identifiedas life-threatening or very serious. Under EMEA guidelines, OMPD provides tenyears of potential market exclusivity once the product candidate is approvedfor marketing for the designated indication in the European Union.  OMPD also provides potential protocolassistance, advice on the conduct of clinical trials, a reduced MarketingAuthorization Application filing fee for the drug’s sponsor and the potentialfor grant funding.

Inaddition to the PROPEL trial, the following clinical trials involving PDX arealso open for enrollment:

•                  a Phase 1/2study of PDX with vitamin B12 and folic acid supplementation inpatients with non-Hodgkin’s lymphoma, or NHL, and Hodgkin’s disease;

•                  a Phase 1 doseescalation study of PDX with vitamin B12 and folic acidsupplementation in patients with previously treated advanced non-small celllung cancer, or NSCLC;

•                  a Phase 1/2study of PDX with vitamin B12 and folic acid supplementation inpatients with relapsed or persistent cutaneous T-cell lymphoma, or CTCL; and

•                  a Phase 1/2astudy of sequential PDX and gemcitabine with vitamin B12 andfolic acid supplementation in patients with relapsed or refractory NHL orHodgkin’s disease.

Patient enrollment in the Phase 1/2 study of PDX with vitamin B12and folic acid supplementation in patients with relapsed or persistent CTCL wasinitiated in August 2007. Up to 56 evaluable patients will be enrolled in thestudy with the objective of determining the optimal dose and safety profile ofPDX in this population. A total of 20 of these patients will be enrolled at whatwe believe to be the optimal dose and schedule.

 

In October 2007, data from the Phase 1 dose ranging study of PDX withvitamin B12 and folic acid supplementation in patients withpreviously treated advanced NSCLC were presented at the 2007 AACR-NCI-EORTCconference. In this study, a total of 22 patients with relapsed or refractoryNSCLC were treated at doses of 150 to 325 mg/m2 of PDX. The maximumtolerated dose was determined to be 270 mg/m2, which is nearly twicethat observed in a previous Phase 1 study in which PDX was administered withoutvitamin supplementation. Clinically significant radiologic responses wereobserved. Greater than 50% of patients (13/22) received two or more prior treatmentregimens. Based on PDX clinical experience to date, we plan to initiate arandomized Phase 2 study of PDX in patients with NSCLC.

 

**RH1**

 

RH1 is a small molecule chemotherapeutic agent that webelieve is bioactivated by the enzyme DT-diaphorase, or DTD, also known asNAD(P)H quinone oxidoreductase, or NQ01. We believe DTD is over-expressed in many tumors, including lung, colon,breast and liver tumors. We believe that because RH1 is bioactivated in thepresence of DTD, it has the potential to provide targeted drug delivery tothese tumor types while limiting the amount of toxicity to normal tissue.  We intend to initiate a Phase 1 study of RH1in patients with advanced solid tumors during the fourth quarter of 2007.

 

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**Resultsof Operations**

Sinceour inception in 1992, we have not generated any revenue from product sales andhave experienced significant net losses and negative cash flows fromoperations. We have incurred these losses principally from costs incurred inour research and development programs and from our clinical manufacturing andmarketing, general and administrative expenses. Our ability to generate revenueand achieve profitability is dependent on our ability, alone or with partners,to successfully complete the development of our product candidates, conductclinical trials, obtain the necessary regulatory approvals, and manufacture andmarket our product candidates. The timing and costs to complete the successfuldevelopment of any of our product candidates are highly uncertain, andtherefore difficult to estimate. The lengthy process of seeking regulatoryapprovals for our product candidates, and the subsequent compliance withapplicable regulations, require the expenditure of substantial resources.  Clinical development timelines, likelihood ofsuccess and total costs vary widely and are impacted by a variety of risks anduncertainties discussed in the “Risk Factors” section of Part II, Item 1Abelow.  Because of these risks anduncertainties, we cannot predict when or whether we will successfully completethe development of any of our product candidates or the ultimate costs of suchefforts. Due to these same factors, we cannot be certain when, or if, we willgenerate any revenue or net cash inflow from any of our current productcandidates.

Evenif our clinical trials demonstrate the safety and effectiveness of our productcandidates in their target indications, we do not expect to be able to recordcommercial sales of any our product candidates until 2009 at the earliest. Weexpect to incur significant and growing net losses for the foreseeable futureas a result of our research and development programs and the costs of preparingfor the potential commercial launch of PDX. Although the size and timing of our future net losses are subject tosignificant uncertainty, we expect them to increase over the next several yearsas we continue to fund our development programs and prepare for the potentialcommercial launch of PDX.****

| ** **                             | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                             | ** ** | **2006**                                             | ** ** | **2007**                                            | ** ** | **2006** | ** ** | **2007** | ** ** |
|                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Operating  expenses:                   |       |                                                 |       |                                                |       |   |   |   |   |
| Research and  development              |       | $                                                    | 4,210,051  |                                                | $          | 4,394,726 |   | $ | 10,970,548 |   | $ | 12,044,941 |   |
| Clinical  manufacturing                |       | 485,855                                              |       | 1,506,255                                           |       | 1,438,294 |   | 4,038,363 |   |
| Marketing,  general and administrative |       | 3,895,094                                            |       | 4,240,704                                           |       | 10,559,612 |   | 14,503,223 |   |
| Restructuring  and separation costs    |       | —                                               |       | —                                              |       | 645,666 |   | — |   |
|                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Total operating  expenses              |       | $                                                    | 8,591,000  |                                                | $          | 10,141,685 |   | $ | 23,614,120 |   | $ | 30,586,527 |   |

 

*Researchand Development.* Researchand development expenses include the costs of certain personnel, basicresearch, preclinical studies, clinical trials, regulatory affairs,biostatistical data analysis, patents and licensing fees for our productcandidates.

Research anddevelopment expenses for the three months ended September 30, 2006 and 2007were $4.2 million and $4.4 million, respectively.  The $185,000 increase in research anddevelopment expenses in the three months ended September 30, 2007 as comparedto the same period in 2006 was primarily due to the following:

•                  a $497,000 increase in clinical trial and preclinical study costsinvolving PDX;

•                  a $379,000 increase related to key personnel changes;

•                  a $360,000 increase related to incurring a non-recurring data optionfee for RH1; and

•                  a $292,000 increase in non-cash stock-based compensation expense.

Theseincreases were partially offset by a $1.1 million decrease in clinical trialcosts resulting from the completion of patient enrollment in our Phase 3 ENRICHtrial of EFAPROXYNTM plus whole brain radiation therapy in women withbrain metastases originating from breast cancer in September 2006 and a$147,000 decrease in patent costs.

Research anddevelopment expenses for the nine months ended September 30, 2006 and 2007 were$11.0 million and $12.0

 

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million,respectively.  The $1.1 million increasein research and development expenses in the nine months ended September 30, 2007as compared to the same period in 2006 was primarily due to the following:

•                  a $2.2 million increase in clinical trial and preclinical study costsinvolving PDX;

•                  a $1.2 million increase related to key personnel changes;

•                  a $799,000 increase in non-cash stock-based compensation expense; and

•                  a $360,000 increase related to incurring a non-recurring data optionfee for RH1.

Theseincreases were partially offset by a $3.4 million decrease in clinical trialcosts for EFAPROXYN, primarily resulting from the completion of patientenrollment in our Phase 3 ENRICH trial in September 2006.

For the lastquarter of 2007, we expect our research and development expenses to increaserelative to the quarterly average for the nine months ended September 30, 2007primarily due to increases in clinical trial costs for PDX and licensing costsfor PDX, as the $500,000 milestone payment under the license agreement for PDXis due in December 2007.  The amount andtiming of the costs related to our clinical trials are difficult to predict dueto the uncertainty inherent in the timing of clinical trial initiations, therate of patient enrollment and the detailed design of future trials.

*ClinicalManufacturing.* Clinicalmanufacturing expenses include the costs of certain personnel, third-partymanufacturing costs for development of drug materials for use in clinicaltrials and preclinical studies, and costs associated with pre-commercialscale-up of manufacturing to support anticipated regulatory and commercialrequirements.

Clinicalmanufacturing expenses for the three months ended September 30, 2006 and 2007were $486,000 and $1.5 million, respectively. The $1.0 million increase in clinical manufacturing expenses in thethree months ended September 30, 2007 as compared to the same period in 2006was primarily due to the following:

•                  a $540,000 increase in third-party manufacturing costs for clinicaltrial material and pre-commercial scale-up activities for PDX; and

•                  a $448,000 increase in third-party manufacturing costs for clinicaltrial material for RH1.

Clinicalmanufacturing expenses for the nine months ended September 30, 2006 and 2007were $1.4 million and $4.0 million, respectively.  The $2.6 million increase in clinicalmanufacturing expenses in the nine months ended September 30, 2007 as comparedto the same period in 2006 was primarily due to the following:

•                  a $1.8 million increase in third-party manufacturing costs for clinicaltrial material and pre-commercial scale-up activities for PDX; and

•                  a $760,000 increase in third-party manufacturing costs for clinicaltrial material for RH1.

For the lastquarter of 2007, we expect our clinical manufacturing expenses to increaserelative to the quarterly average for the nine months ended September 30, 2007due to third-party manufacturing costs for PDX to support ongoing and plannedclinical trials and pre-commercial scale-up.

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

Marketing, generaland administrative expenses for the three months ended September 30, 2006 and2007 were $3.9 million and $4.2 million, respectively.  The $346,000 increase in marketing, generaland administrative expenses in the three months ended September 30, 2007 ascompared to the same period in 2006 was primarily due to the following:

•                  a $378,000 increase in non-cash stock-based compensation expense; and

•                  a $328,000 increase in personnel and travel costs, mainly attributableto additional headcount and increases in

 

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compensation costs yearover year.

Theseincreases were partially offset by a $419,000 decrease in consulting andprofessional fees.

Marketing, generaland administrative expenses for the nine months ended September 30, 2006 and2007 were $10.6 million and $14.5 million, respectively.  The $3.9 million increase in marketing,general and administrative expenses in the nine months ended September 30, 2007as compared to the same period in 2006 was primarily due to the following:

•                  a $1.6 million increase in personnel and travel costs, mainlyattributable to additional headcount and increases in compensation costs yearover year;

•                  a $1.3 million increase in non-cash stock-based compensation expense;and

•                  a $1.1 million increase in market research and consulting expensesrelated to our product development and commercialization planning for EFAPROXYNand PDX.

Forthe last quarter of 2007, we expect our marketing, general and administrativeexpenses to be similar to the quarterly average for the nine months endedSeptember 30, 2007.

*Stock-based Compensation Expense.* In accordancewith the modified prospective transition method of SFAS 123R, stock-basedcompensation expense for the three and nine months ended September 30, 2006 and2007 has been recognized in the Statements of Operations as follows:
| ** **                              | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                              | ** ** | **2006**                                                 | ** ** | **2007**                                                | ** ** | **2006** | ** ** | **2007** | ** ** |
| Research and  development               |       | $                                                        | 180,904    |                                                    | $          | 473,090 |   | $ | 482,432 |   | $ | 1,281,501 |   |   |
| Clinical  manufacturing                 |       | 30,449                                                   |       | 44,221                                                  |       | 83,470 |   | 127,170 |   |   |
| Marketing,  general and administrative  |       | 763,359                                                  |       | 1,141,390                                               |       | 2,093,982 |   | 3,367,326 |   |   |
| Total stock-based  compensation expense |       | $                                                        | 974,712    |                                                    | $          | 1,658,701 |   | $ | 2,659,884 |   | $ | 4,775,997 |   |   |
|                                         |            |                                                          |            |                                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The $975,000 ofstock-based compensation recognized in the three months ended September 30,2006 was primarily related to our stock option plans.  Of the $1.7 million of stock-basedcompensation recognized in the three months ended September 30, 2007,$1.5 million was related to our stock option plans and $164,000 related torestricted stock. The $684,000 increase in stock-based compensation expense inthe three months ended September 30, 2007 as compared to the same period in2006 was primarily due to a higher fair-value for options granted in 2007compared to the options granted in 2006 due to our stock price being higherduring the three months ended September 30, 2007 as compared to the same periodin 2006.

The $2.7 millionof stock-based compensation recognized in the nine months ended September 30,2006 was primarily related to our stock option plans.  Of the $4.8 million of stock-basedcompensation recognized in the nine months ended September 30, 2007,$4.2 million was related to our stock option plans and $523,000 related torestricted stock. The $2.1 million increase in stock-based compensation expensein the nine months ended September 30, 2007 as compared to the same period in2006 was primarily due to a higher fair-value for options granted in 2007compared to the options granted in 2006 due to our stock price being higherduring the nine months ended September 30, 2007 as compared to the same periodin 2006.

As of September30, 2007, the unrecorded stock-based compensation balance related to stockoption awards was $6,941,931 and will be recognized over an estimatedweighted-average amortization period of 1.5 years. As of September 30, 2007,the unrecorded stock-based compensation balance related to restricted stockawards was $862,127 and will be recognized over an estimated weighted-averageamortization period of 1.6 years.

*Restructuringand Separation Costs. *Restructuring and separation costs forthe nine months ended September 30, 2006 and 2007 were $646,000 and $0,respectively.  For a discussion of theseparation costs recorded for the nine months ended September 30, 2006, pleasesee Note 7 of Part I, Item 1 in this quarterly report.

*Interestand Other Income, Net*.  Interest income, net ofinterest expense, for the three months ended September 30, 2006 and 2007 was$480,000 and $844,000, respectively. Interest income, net of interest expense, for the nine months endedSeptember 30, 2006 and 2007 was $1.5 million and $2.5 million,respectively.  The $364,000 and $1.1million increases in

 

 

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net interest income in the three and nine months ended September 30,2007 as compared to the same periods in 2006 were primarily due to higheraverage investment balances resulting from a financing completed in February2007 and higher yields on our cash, cash equivalents and investments inmarketable securities.

 

**Liquidityand Capital Resources**

 

Ourcash, cash equivalents, and investments in marketable securities amounted to$63.4 million at September 30, 2007. Since our inception, we have financed our operations primarily throughpublic and private sales of our equity securities, which have resulted in netproceeds to us of $255.1 million through September 30, 2007.  We have also generated $20.8 million ofnet interest income since our inception from investing the net proceeds ofthese financings.

We have used$187.2 million of cash for operating activities from our inception throughSeptember 30, 2007.  Net cash used tofund our operating activities for the nine months ended September 30, 2006 and2007 was $17.4 million and $22.5 million, respectively.

Net cash providedby investing activities for the nine months ended September 30, 2006 was $17.1million and consisted primarily of proceeds from maturities of investments inmarketable securities, partially offset by the purchase of investments inmarketable securities.  Net cash used ininvesting activities for the nine months ended September 30, 2007 was $33.5million and consisted primarily of the purchase of investments in marketablesecurities, partially offset by the proceeds from maturities of investments inmarketable securities.

Netcash provided by financing activities for the nine months ended September 30,2006 was $377,722 and consisted of proceeds from the issuance of common stockassociated with stock options exercised by our employees and the release of aportion of our restricted cash resulting from a reduction in the letter ofcredit on our lease for our corporate offices. Net cash provided by financing activities for the nine months ended September30, 2007 was $53.0 million and consisted of the net proceeds from the sale of9,000,000 shares of our common stock in an underwritten offering at a price of$6.00 per share (the “February 2007 Financing”) and $2.7 million ofproceeds from the issuance of common stock associated with stock options andthe employee stock purchase plan.  Wereceived net proceeds from the February 2007 Financing of approximately $50.3million, after deducting underwriting commissions of approximately$3.2 million and other offering expenses of approximately $503,000. Theshares of common stock were sold under our shelf Registration Statement onForm S-3 (File No. 333-134965), declared effective by theSecurities and Exchange Commission (“SEC”) on July 10, 2006. We retiredthe unused portion of this shelf registration statement in June 2007.

OnJune 5, 2007, a new universal shelf Registration Statement on Form S-3 (FileNo. 333-143198) was declared effective by the SEC.  Under the registration statement, we areallowed to sell, from time to time, up to $150 million of our common stock,preferred stock, depository shares, debt securities and/or warrants, eitherindividually or in units, in one or more offerings.  We have no specific plans to offer thesecurities covered by the registration statement and we are not required tooffer the securities in the future pursuant to the registration statement. Theterms of any offering under the registration statement will be established atthe time of the offering. Proceeds from the sale of any securities will be usedfor the purposes described in a prospectus supplement filed at the time of anoffering.

Basedupon the current status of our product development and commercialization plans,we believe that our cash, cash equivalents, and investments in marketablesecurities as of September 30, 2007 should be adequate to support ouroperations through the first quarter of 2009, although there can be noassurance that this can, in fact, be accomplished.

Ourforecast of the period of time through which our financial resources will beadequate to support our operations is a forward-looking statement thatinvolves risks and uncertainties, and actual results could vary materially. Weanticipate continuing our current development programs and/or beginning otherlong-term development projects involving our product candidates. These projectsmay require many years and substantial expenditures to complete and mayultimately be unsuccessful. Therefore, we may need to obtain additional fundsfrom outside sources to continue research and development activities, fundoperating expenses, pursue regulatory approvals and build sales and marketingcapabilities, as necessary. However, our actual capital requirements willdepend on many factors, including:

•       thestatus of our product development programs;

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

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•       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.

Wewill be required to raise additional capital to support our future operations,including the potential commercialization of PDX in the event we obtainregulatory approval to market PDX. We may seek to obtain this additionalcapital through arrangements with corporate partners, equity or debtfinancings, or from other sources. Such arrangements, if successfullyconsummated, may be dilutive to our existing stockholders. However, there is noassurance that we will be successful in consummating any such arrangements. Inaddition, in the event that additional funds are obtained through arrangementswith collaborative partners or other sources, such arrangements may require usto relinquish rights to some of our technologies, product candidates orproducts under development that we would otherwise seek to develop or commercializeourselves. If we are unable to generate meaningful amounts of revenue fromfuture product sales, if any, or cannot otherwise raise sufficient additionalfunds to support our operations, we may 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.

**Obligationsand Commitments**

*Royalty and License FeeCommitments*

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 issuedUnited States patents and equivalent foreign patent applications to develop andmarket any product derived from any formulation of PDX in connection with alldiagnostic and therapeutic uses, including human and veterinary diseases. Underthe terms of the agreement, we paid an up-front license fee of $2.0 millionupon execution of the agreement and are also required to make certainadditional cash payments based upon the achievement of certain clinicaldevelopment or regulatory milestones or the passage of certain time periods. Todate, we have made aggregate milestone payments of $1.5 million based on the passageof time. In the future, we could make aggregate milestone payments of $1.5million upon the earlier of achievement of a clinical development milestone orthe passage of certain time periods (the “Clinical Milestone”), and up to $10million upon achievement of certain regulatory milestones, including regulatoryapproval to market PDX in the United States or Europe. The next scheduledpayments toward the Clinical Milestone of $500,000 each are currently due onDecember 23, 2007, 2008 and 2009. Theup-front license fee and all milestone payments under the agreement have beenor will be recorded to research and development expense when incurred.Under the terms of the agreement, we are required to fund all developmentprograms and will have sole responsibility for all commercializationactivities. In addition, we will pay the licensors a royalty based on apercentage of net revenues arising from sales of the product or sublicenserevenues arising from sublicensing the product, if and when such sales or sublicensesoccur.

In December 2004, we entered into an agreementwith the University of Colorado Health Sciences Center, the University ofSalford and Cancer Research Technology (“CRT”), under which we obtainedexclusive worldwide rights to certain intellectual property surrounding aproprietary molecule known as RH1. Under the terms of the agreement, we paid anup-front license fee of $190,500 upon execution of the agreement and are alsorequired to make certain additional cash payments based upon the achievement ofcertain clinical development, regulatory and commercialization milestones. Wecould 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 allmilestone payments under the agreement, as well as the one-time data option feediscussed below, have been or will be recorded to research and developmentexpense when incurred. Under the terms of the agreement and related data optionagreement, Cancer Research UK, CRT’s parent institution, will continue tosupport an ongoing Phase 1 dose escalation study, and we will have the right toobtain an exclusive license to the results of the study, for use in subsequentdevelopment and regulatory activities, upon payment of a one-time data optionfee of $360,000, which is included in accrued research and development expensesas of September 30, 2007. Upon completion of the Phase 1 study, we will assumeresponsibility for all future development costs and activities and will havesole responsibility for all commercialization activities. In addition, we willpay the licensors a royalty based on a percentage of net revenues arising fromsales of the product or sublicense revenues arising from sublicensing theproduct, if and when such sales or sublicenses occur.

 

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**CriticalAccounting Policies**

Ourdiscussion and analysis of our financial condition and results of operationsare based upon our financial statements, which have been prepared in accordancewith accounting principles generally accepted in the United States.  The preparation of these financial statementsrequires us to make estimates and judgments that affect the reported amounts ofassets, liabilities, and expenses.  For adescription of our critical accounting policies, please refer to the “CriticalAccounting Policies” section of Item 7 of our Annual Report on Form 10-K forthe year ended December 31, 2006.

**ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

We donot use derivative financial instruments in our investment portfolio and haveno foreign exchange contracts.  Ourfinancial instruments as of September 30, 2007 consist of cash, cash equivalents,investments in marketable securities and accounts payable.  All highly liquid investments with originalmaturities of three months or less are considered to be cash equivalents.

Weinvest in marketable securities in accordance with our investment policy.  The primary objectives of our investmentpolicy are to preserve principal, maintain proper liquidity to meet operatingneeds and maximize yields.  Ourinvestment policy specifies credit quality standards for our investments andlimits the amount of credit exposure to any single issue, issuer or type ofinvestment.  The average duration of theissues in our portfolio of investments in marketable securities as of September30, 2007 is approximately four months. As of September 30, 2007, our investments in marketable securities of$56.4 million are all classified as held-to-maturity and were held in avariety of interest-bearing instruments, consisting mainly of high-gradecorporate notes.

Investmentsin fixed-rate interest-earning instruments carry varying degrees ofinterest rate risk.  The fair marketvalue of our fixed-rate securities may be adversely impacted due to a rise ininterest rates.  In general, securitieswith longer maturities are subject to greater interest-rate risk than thosewith shorter maturities.  Due in part tothis factor, our interest income may fall short of expectations or we maysuffer losses in principal if securities are sold that have declined in marketvalue due to changes in interest rates. Due to the short duration of our investment portfolio, we believe animmediate 10% change in interest rates would not be material to our financialcondition or results of operations.

**ITEM 4.  CONTROLS AND 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, as amended (“ExchangeAct”).  Based on that evaluation, ourmanagement, including the Evaluating Officers, concluded that our disclosurecontrols and procedures were effective as of September 30, 2007 to ensure thatinformation required to be disclosed by us in reports that we file or submitunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in Securities and Exchange Commission’s rules andforms, and that such information is accumulated and communicated to ourmanagement, including the Evaluating Officers, as appropriate, to allow timelydecisions regarding required disclosure.

**NoChanges in Internal Control over Financial Reporting**

There were no changesin our internal controls over financial reporting during the three months endedSeptember 30, 2007 that have materially affected, or are reasonably likely tomaterially affect, our internal controls over financial reporting.

**PART II. OTHER INFORMATION**

**ITEM 1.  LEGALPROCEEDINGS**

TheCompany and one of its former officers were named as defendants in a purportedsecurities class action lawsuit filed in May 2004 in the United StatesDistrict Court for the District of Colorado (the “District Court”). An amendedcomplaint was filed in August 2004. The lawsuit was brought on behalf of apurported class of purchasers of our securities during the period fromMay 29, 2003 to April 29, 2004, and sought unspecified damagesrelating to the issuance of allegedly false and misleading statements regardingEFAPROXYN during this period and subsequent declines in our stock price. OnOctober 20, 2005, the District Court granted the defendants’ motion todismiss the lawsuit with prejudice. In an opinion dated October 20,

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2005,the District Court concluded that the plaintiff’s complaint failed to meet thelegal requirements applicable to its alleged claims.

OnNovember 20, 2005, the plaintiff appealed the District Court’s decision tothe U.S. Court of Appeals for the Tenth Circuit (the “Court of Appeals”).  In October 2006, the parties held discussions to settle thematter, although the terms of any such potential settlement remain subject tonegotiation and no binding agreement has been reached. A settlement would besubject to various conditions, including approval of the District Court. Weexpect that any settlement in excess of our deductible would be covered by ourinsurance carrier. As with any litigation proceeding, we cannot predict withcertainty the eventual outcome of our settlement discussions or the legalproceedings. In the event a settlement is not concluded, we intend tovigorously defend against the plaintiff’s appeal. If the Court of Appealsreverses the District Court’s decision and we are not successful in our defenseof such claims, we could be forced to make significant payments to theplaintiffs, and such payments could have a material adverse effect on ourbusiness, financial condition, results of operations and cash flows to theextent such payments are not covered by our insurance carriers. Even if ourdefense against such claims is successful, the litigation could result insubstantial costs and divert management’s attention and resources, which couldadversely affect our business. As of September 30, 2007, we have recorded$2,000,000 in accrued litigation settlement costs, which represents our bestestimate of the potential gross amount of the settlement costs to be paid tothe plaintiffs, and $1,754,000 in prepaid expenses and other assets, whichrepresents the amount we expect to be reimbursed from our insurance carrier.The net difference of $246,000 between these amounts represents the remainingunpaid deductible under our insurance policy, and this amount was recorded tomarketing, general and administrative expenses during the year endedDecember 31, 2006.

**ITEM 1A.  RISK FACTORS**

*Ourbusiness faces significant risks. These risks include those described below andmay include additional risks of which we are not currently aware or which wecurrently do not believe are material. If any of the events or circumstancesdescribed in the following risk factors actually occurs, they may materiallyharm our business, financial condition, operating results and cash flow. As aresult, the market price of our common stock could decline. Additional risksand uncertainties that are not yet identified or that we think are immaterialmay also materially harm our business, operating results and financialcondition. **Stockholders andpotential investors in shares of our common stock should carefully consider thefollowing risk factors, which hereby update those risks contained in the “RiskFactors” section of our Annual Report on Form 10-K  for the year ended December 31, 2006, inaddition to other information and risk factors in this report.  We are identifying these risk factors asimportant factors that could cause our actual results to differ materially fromthose contained in any written or oral forward-looking statements made by or onbehalf 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. We consistently update and include our risk factors in ourQuarterly Reports on Form 10-Q. Risk factors which have been substantivelychanged from those set forth in our Annual Report on Form 10-K for the periodended December 31, 2006 have been marked with an asterisk immediately followingthe heading of such risk factor.*

**We have a history of net losses and an accumulateddeficit, and we may never generate revenue or achieve or maintain profitabilityin the future. ***

Sinceour inception in 1992, we have not generated any revenue from product sales andhave experienced significant net losses and negative cash flows fromoperations.  To date, we have financedour operations primarily through public and private sales of our equitysecurities.  For the nine months endedSeptember 30, 2007, we had a net loss of $28.1 million.  As of September 30, 2007, we had accumulateda deficit during our development stage of $236.6 million.  We have incurred these losses principallyfrom costs incurred in our research and development programs and from ourclinical manufacturing and marketing, general and administrative expenses.  We expect to incur significant and growingnet losses for the foreseeable future as a result of our research anddevelopment programs and the costs of preparing for the potential commerciallaunch of PDX.  Our ability to generaterevenue and achieve profitability is dependent on our ability, alone or withpartners, to successfully complete the development of our product candidates,conduct clinical trials, obtain the necessary regulatory approvals, andmanufacture and market our product candidates. We may never generate revenuefrom product sales or become profitable. We expect to continue to spend substantial amounts on research anddevelopment, including amounts spent on conducting clinical trials for ourproduct candidates, and in preparing for the potential commercial launch of ourproduct candidates. We may not be able to continue as a going concern if we areunable to generate meaningful amounts of revenue to support our operations orcannot otherwise raise the necessary funds to support our operations.

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**Our near-term prospects are substantiallydependent on PDX, our lead product candidate.  If we are unable tosuccessfully develop and obtain regulatory approval for PDX for the treatmentof patients with relapsed or refractory PTCL, our ability to generate revenuewill be significantly delayed.** *

**Wecurrently have no products that are approved for commercial sale.  Ourproduct candidates are in various stages of development, and significantresearch and development, financial resources and personnel will be required todevelop commercially viable products and obtain regulatory approvals. Most of our efforts and expenditures over the next few years will bedevoted to PDX.  Accordingly, our future prospects are substantiallydependent on the successful development, regulatory approval and commercializationof PDX for the treatment of patients with relapsed or refractory PTCL. PDX is not expected to be commercially available for this or any otherindication until at least 2009.  RH1 is in an earlier stage of developmentrelative to PDX, and if both PDX and RH1 are approved for marketing, we expectthat RH1 would not be commercially available until after PDX is commerciallyavailable.  Further, certain of the indications that we are pursuing haverelatively low incidence rates, which may make it difficult for us to enroll asufficient number of patients in our clinical trials on a timely basis, or atall, and may limit the revenue potential of our product candidates.  If weare unable to successfully develop, obtain regulatory approval for and commercializePDX for the treatment of relapsed or refractory PTCL, our ability to generaterevenue from product sales will be significantly delayed and our stock pricewould likely decline.**

**We cannot predict when orif we will obtain regulatory approval to commercialize our product candidates.***

Apharmaceutical product cannot be marketed in the United States or most othercountries until it has completed a rigorous and extensive regulatory approvalprocess. If we fail to obtain regulatory approval to market our productcandidates, we will be unable to sell our products and generate revenue, whichwould jeopardize our ability to continue operating our business. Satisfactionof regulatory requirements typically takes many years, is dependent upon thetype, complexity and novelty of the product and requires the expenditure ofsubstantial resources. Of particular significance are the requirements coveringresearch and development, testing, manufacturing, quality control, labeling andpromotion of drugs for human use. We may not obtain regulatory approval for anyproduct candidates we develop, including PDX, or we may not obtain regulatoryreview of such product candidates in a timely manner. For a completedescription of the regulatory approval process and related risks, please referto the “Government Regulation” section of Item 1 of our Annual Report on Form10-K for the year ended December 31, 2006.

**If our product candidates, including PDX, fail to meetsafety and efficacy endpoints in clinical trials, they will not receiveregulatory approval, and we will be unable to market them. ***

Ourproduct candidates may not prove to be safe and efficacious in clinical trialsand may 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.

Wecurrently expect to complete patient enrollment in our pivotal Phase 2 PROPELtrial in the second quarter of 2008, although the actual timing of completionof enrollment may vary based on a number of factors, including site initiationand patient enrollment rates.  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 ofpatients with relapsed or refractory PTCL, or otherwise be sufficient tosupport FDA or any foreign regulatory approval. If the PROPEL trial fails toachieve its safety and efficacy endpoints, we may be unable to obtainregulatory approval to commercialize PDX, and our business and stock price maybe harmed. If we fail to obtain regulatory approval for PDX or any of our othercurrent or future product candidates, we will be unable to market and sell themand therefore may never generate meaningful amounts of revenue or becomeprofitable.

Aspart of the 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. The number and design of clinical trialsthat will be required varies depending on the product candidate, the conditionbeing evaluated, the trial results and regulations applicable to any particularproduct candidate. The design of our clinical trials is based on manyassumptions about the expected effect of our product candidates, and if thoseassumptions prove incorrect, the clinical trials may not produce statisticallysignificant results. Preliminary results may not be confirmed upon fullanalysis of the detailed results of a trial, and prior clinical trial programdesigns and results may not be predictive of future clinical trial designs orresults. Product candidates in later stage clinical trials may fail to show thedesired safety and efficacy despite having progressed through initial clinicaltrials with acceptable endpoints. For example, we recently terminated thedevelopment of EFAPROXYN when

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itfailed to demonstrate statistically significant improvement in overall survivalin the targeted patients in a Phase 3 clinical trial. If our product candidatesfail to show clinically significant benefits, they will not be approved formarketing.

**We may experience delays in our clinical trials thatcould adversely affect our financial position and our commercial prospects. ***

We do not know when our current clinical trials,including our PROPEL trial, will be completed, if at all. We also cannotaccurately predict when other planned clinical trials will begin or becompleted. 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 diseases as those we are studying.Competition for patients in some cancer trials is particularly intense becauseof the limited number of leading specialist physicians and the geographicconcentration of major clinical centers.

As a result of the numerous factors which can affectthe pace of progress of clinical trials, our trials may take longer to enrollpatients than we anticipate, if they can be completed at all. Delays in patientenrollment in the trials may increase our costs and slow our productdevelopment and approval process. Our product development costs will alsoincrease if we need to perform more or larger clinical trials than planned. Ifother companies’ product candidates show favorable results, we may be requiredto conduct additional clinical trials to address changes in treatment regimensor for our products to be commercially competitive. Any delays in completingour clinical trials will delay our ability to generate revenue from productsales, and we may have insufficient capital resources to support our operations. Even if we do have sufficient capitalresources, our ability to become profitable will be delayed.

**While we have negotiated a special protocol assessmentwith the FDA relating to our PROPEL trial, this agreement does not guaranteeany particular outcome from regulatory review of the trial or the product,including any regulatory approval. ***

The protocol for the PROPEL trial was reviewed by theFDA under the special protocol assessment, or SPA, process, which allows forFDA evaluation of a clinical trial protocol intended to form the primary basisof an efficacy claim in support of a new drug application, and provides anagreement that the study design, including trial size, clinical endpointsand/or data analyses are acceptable to the FDA. However, a SPA agreement is nota guarantee of approval, and we cannot be certain that the design of, or datacollected from, the PROPEL trial will be adequate to demonstrate the safety andefficacy of PDX for the treatment of patients with relapsed or refractory PTCL,or otherwise be sufficient to support FDA or any foreign regulatory approval.Further, the SPA agreement is not binding on the FDA if public health concernsunrecognized at the time the SPA agreement is entered into become evident,other new scientific concerns regarding product safety or efficacy arise, or ifwe fail to comply with the agreed upon trial protocols. In addition, the SPAagreement may be changed by us or the FDA on written agreement of both parties,and the FDA retains significant latitude and discretion in interpreting theterms of the SPA agreement and the data and results from the PROPEL 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 PROPEL trial, or whether PDX will receive any regulatory approvals asa result of the SPA agreement or the clinical trial. Therefore, despite thepotential benefits of the SPA agreement, significant uncertainty remainsregarding the clinical development and regulatory approval process for PDX forthe treatment of PTCL.

**We may be required to suspend, repeat or terminate ourclinical trials if they are not conducted in accordance with regulatoryrequirements, the results are negative or inconclusive or the trials are notwell designed. ***

Clinical trials must be conducted in accordance withthe FDA’s Good Clinical Practices and are subject to oversight by the FDA andInstitutional Review Boards at the medical institutions where the clinical trialsare conducted. In addition, clinical trials must be conducted with productcandidates produced under the FDA’s Good Manufacturing Practices, and mayrequire large numbers of test subjects. Clinical trials may be suspended by theFDA or us at any time if it is believed that the subjects participating inthese trials are being exposed to unacceptable health risks or if the FDA findsdeficiencies in the conduct of these trials.

Even if we achieve positive interim results inclinical trials, these results do not necessarily predict final results, andacceptable results in early trials may not be repeated in later trials. Dataobtained from preclinical and clinical activities are susceptible to varyinginterpretations that could delay, limit or prevent regulatory clearances, andthe FDA can request that we conduct additional clinical trials. A number ofcompanies in the pharmaceutical industry have suffered significant

 

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setbacks in advanced clinical trials, even afterpromising results in earlier trials. As a result, there can be no assurancethat our PROPEL trial will achieve its primary endpoint. In addition, negativeor inconclusive results or adverse medical events during a clinical trial couldcause a clinical trial to be repeated or terminated. Also, failure to constructclinical trial protocols to screen patients for risk profile factors relevantto the trial for purposes of segregating patients into the patient populationstreated with the drug being tested and the control group could result in eithergroup experiencing a disproportionate number of adverse events and could causea clinical trial to be repeated or terminated. If we have to conduct additionalclinical trials, whether for PDX or any other product candidate, it wouldsignificantly increase our expenses and delay potential marketing of ourproduct candidates.

**Reports of adverse events or safety concerns involvingour product candidates or in related technology fields or other companies’ clinicaltrials could delay or prevent us from obtaining regulatory approval ornegatively impact public perception of our product candidates.**

Our product candidates may produce serious adverseevents. These adverse events could interrupt, delay or halt clinical trials ofour product candidates and could result in the FDA or other regulatoryauthorities denying approval of our product candidates for any or all targetedindications. An independent data safety monitoring board, the FDA, otherregulatory authorities or the Company may suspend or terminate clinical trialsat any time. We cannot assure you that any of our product candidates will besafe for human use.

At present, there are a number of clinical trialsbeing conducted by other pharmaceutical companies involving small moleculechemotherapeutic agents. If other pharmaceutical companies announce that theyobserved frequent adverse events or unknown safety issues in their trialsinvolving compounds similar to, or competitive with, our product candidates, wecould encounter delays in the timing of our clinical trials or difficulties inobtaining the approval of our product candidates.  In addition, the public perception of ourproduct candidates might be adversely affected, which could harm our businessand results of operations and cause the market price of our common stock todecline, even if the concern relates to another company’s product or productcandidate.

**Due to our reliance on contract research organizationsand other third parties to conduct our clinical trials, we are unable todirectly control the timing, conduct and expense of our clinical trials. ***

We rely primarily on third parties to conduct ourclinical trials, including the PROPEL trial. As a result, we have had and willcontinue to have less control over the conduct of our clinical trials, thetiming and completion of the trials, the required reporting of adverse eventsand the management of data developed through the trial than would be the caseif we were relying entirely upon our own staff. Communicating with outsideparties can also be challenging, potentially leading to mistakes as well asdifficulties in coordinating activities. Outside parties may have staffingdifficulties, may undergo changes in priorities or may become financially distressed,adversely affecting their willingness or ability to conduct our trials. We mayexperience unexpected cost increases that are beyond our control. Problems withthe timeliness or quality of the work of a contract research organization maylead us to seek to terminate the relationship and use an alternative serviceprovider. However, making this change may be costly and may delay our trials,and contractual restrictions may make such a change difficult or impossible.Additionally, it may be impossible to find a replacement organization that canconduct our trials in an acceptable manner and at an acceptable cost.

**Even if our product candidates meet safety andefficacy endpoints in clinical trials, regulatory authorities may not approvethem, or we may face post-approval problems that require withdrawal of ourproducts from the market.**

We will not be able to commercialize any of ourproduct candidates until we have obtained regulatory approval. We have limitedexperience in filing and pursuing applications necessary to gain regulatoryapprovals, which may place us at risk of delays, overspending and humanresources inefficiencies.

Our product candidates may not be approved even ifthey achieve their endpoints in clinical trials. Regulatory agencies, includingthe FDA or their advisors, may disagree with our interpretations of data frompreclinical studies and clinical trials. Regulatory agencies also may approve aproduct candidate for fewer conditions than requested or may grant approvalsubject to the performance of post-marketing studies for a product candidate.In addition, regulatory agencies may not approve the labeling claims that arenecessary or desirable for the successful commercialization of our productcandidates.

Even if we receive regulatory approvals, our productcandidates may later produce adverse events that limit or prevent theirwidespread use or that force us to withdraw those product candidates from themarket. In addition, a marketed product

 

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continues to be subject to strict regulation afterapproval and 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 harm our business and prevent us from ever generating meaningfulrevenues or achieving profitability.

**Even if we receive regulatory approval for our productcandidates, we will be subject to ongoing regulatory obligations and review.**

Following any regulatory approval of our productcandidates, we will be subject to continuing regulatory obligations such assafety reporting requirements and additional post-marketing obligations,including regulatory oversight of the promotion and marketing of our products.In addition, we or our third-party manufacturers will be required to adhere toregulations setting forth current Good Manufacturing Practices. Theseregulations cover all aspects of the manufacturing, storage, testing, qualitycontrol and record keeping relating to our product candidates. Furthermore, weor our third-party manufacturers must pass a pre-approval inspection ofmanufacturing facilities by the FDA and foreign authorities before obtainingmarketing approval and will be subject to periodic inspection by theseregulatory authorities. Such inspections may result in compliance issues thatcould prevent or delay marketing approval, or require the expenditure offinancial or other resources to address. If we or our third-party manufacturersfail to comply with applicable regulatory requirements, we may be subject tofines, suspension or withdrawal of regulatory approvals, product recalls,seizure of products, operating restrictions and criminal prosecution.

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

Because we have limited resources, and becauseresearch and development is an expensive process, we must regularly assess themost efficient allocation of our research and development budget. As a result,we may have to prioritize development candidates and may not be able to fullyrealize the value of some of our product candidates in a timely manner, if atall.

**If we fail to obtain the capital necessary to fund ouroperations, we will be unable to successfully develop or commercialize ourproduct candidates. ***

Weexpect that significant additional capital will be required in the future tocontinue our research and development efforts and to commercialize our productcandidates, if approved for marketing. Our actual capital requirements willdepend on many factors, including, among other factors:

•       the timing and outcome ofour ongoing PROPEL trial;

•       costs associated with thecommercialization of our product candidates, if approved for marketing;

•       our evaluation of, anddecisions with respect to, additional therapeutic indications for which PDX maybe developed;

•       our evaluation of, anddecisions with respect to, our strategic alternatives; and

•       costs associated withsecuring in-license opportunities, purchasing product candidates and conductingpreclinical research and clinical development for our current and futureproduct candidates.

We will be required to raise additional capital tosupport our future operations, including the potential commercialization of PDXin the event we obtain regulatory approval to market PDX. We may seek to obtainthis additional capital through arrangements with corporate partners, equity ordebt financings, or from other sources. Such arrangements, if successfullyconsummated, may be dilutive to our existing stockholders. However, there is noassurance that we will be successful in consummating any such arrangements. Inaddition, in the event that additional funds are obtained through arrangementswith collaborative partners or other sources, such arrangements may require usto relinquish rights to some of our technologies, product candidates orproducts under development that we would otherwise seek to develop orcommercialize ourselves.  If we areunable to generate meaningful amounts of revenue from future product sales, ifany, or cannot otherwise raise sufficient additional funds to support ouroperations, we may be required to delay, reduce the scope of or eliminate oneor more of our development programs and our business and future prospects forrevenue and profitability may be harmed.

 

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**If we are unable to effectively protect ourintellectual property, we will be unable to prevent third parties from usingour technology, which would impair our competitiveness and ability tocommercialize our product candidates. In addition, enforcing our proprietaryrights may be expensive and result in increased losses.**

Oursuccess will depend in part on our ability to obtain and maintain meaningfulpatent protection for our products, both in the United States and in othercountries. We rely on patents to protect a large part of our intellectualproperty and our competitive position. Any patents issued to or licensed by uscould be challenged, invalidated, infringed, circumvented or heldunenforceable. In addition, it is possible that no patents will issue on any ofour licensed patent applications. It is possible that the claims in patentsthat have been issued or licensed to us or that may be issued or licensed to usin the future will not be sufficiently broad to protect our intellectualproperty or that the patents will not provide protection against competitiveproducts or otherwise be commercially valuable. Failure to obtain and maintainadequate patent protection for our intellectual property would impair ourability to be commercially competitive.

Ourcommercial success 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 to obtain alicense to third-party technology that we may require to conduct our businessor, if obtainable, we may not be able to license such technology at areasonable cost. If we fail to obtain a license to any technology that we mayrequire to commercialize our technologies or product candidates, or fail toobtain a license at a reasonable cost, we will be unable to commercialize theaffected product or to commercialize it at a price that will allow us to becomeprofitable.

Inaddition to patent protection, we also rely upon trade secrets, proprietaryknow-how and technological advances which we seek to protect throughconfidentiality agreements with our collaborators, employees and consultants.Our employees and consultants are required to enter into confidentialityagreements with us. We also have entered into non-disclosure agreements, whichare intended to protect our confidential information delivered to third partiesfor research and other purposes. However, these agreements could be breachedand we may not have adequate remedies for any breach, or our trade secrets andproprietary know-how could otherwise become known or be independentlydiscovered by others.

Furthermore,as with 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 necessary toenforce any of our patents or other proprietary rights, or to determine thescope and validity or enforceability of other parties’ proprietary rights. Thedefense and prosecution of patent and intellectual property infringement claimsare both 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.

**We do not have manufacturing facilities orcapabilities and are dependent on third parties to fulfill our manufacturingneeds, which could result in the delay of clinical trials, regulatoryapprovals, product introductions and commercial sales. ***

We aredependent on third parties for the manufacture and storage of our productcandidates for clinical trials and, if approved, for commercial sale. If we areunable to contract for a sufficient supply of our product candidates onacceptable terms, or if we encounter delays or difficulties in themanufacturing process or our relationships with our manufacturers, we may nothave sufficient product to conduct or complete our clinical trials or supportcommercial requirements for our product candidates, if approved for marketing.

BothPDX and RH1 are cytotoxic which requires manufacturers of these substances tohave specialized equipment and safety systems to handle such substances. Inaddition, the starting materials for PDX require custom preparations, whichwill require us to manage an additional set of suppliers to obtain the neededsupplies of PDX.

Even if we obtain approval to market our productcandidates in one or more indications, our current or future manufacturers maybe unable to accurately and reliably manufacture commercial quantities of ourproduct candidates at reasonable costs, on a timely basis and in compliancewith the FDA’s current Good Manufacturing Practices. If our current or futurecontract manufacturers fail in any of these respects, our ability to timelycomplete our clinical trials, obtain required regulatory approvals andsuccessfully commercialize our product candidates will be materially andadversely affected. This risk may be heightened with respect to PDX and RH1 asthere are a limited number of fill/finish manufacturers with the ability tohandle

 

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cytotoxicproducts such as PDX and RH1.  Ourreliance on contract manufacturers exposes us to additional risks, including:

•       delays or failure tomanufacture sufficient quantities needed for clinical trials in accordance withour specifications or to deliver such quantities on the dates we require;

•       our current and futuremanufacturers are subject to ongoing, periodic, unannounced inspections by theFDA and corresponding state and international regulatory authorities forcompliance with strictly enforced current Good Manufacturing Practiceregulations and similar state and foreign standards, and we do not have controlover our contract manufacturers’ compliance with these regulations andstandards;

•       our current and futuremanufacturers may not be able to comply with applicable regulatoryrequirements, which would prohibit them from manufacturing products for us;

•       our manufacturers may havestaffing difficulties, may undergo changes in control or may become financiallydistressed, adversely affecting their willingness or ability to manufactureproducts for us;

•       if we need to change toother commercial manufacturing contractors, the FDA and comparable foreignregulators must approve our use of any new manufacturer, which would requireadditional testing, regulatory filings and compliance inspections, and the newmanufacturers would have to be educated in, or themselves develop substantiallyequivalent processes necessary for, the production of our products;

•       our manufacturers might notbe able to fulfill our commercial needs, which would require us to seek newmanufacturing arrangements and may result in substantial delays in meetingmarket demands; and

•       we may not haveintellectual property rights, or may have to share intellectual propertyrights, to any improvements in the manufacturing processes or new manufacturingprocesses for our products.

Any ofthese factors could result in the delay of clinical trials, regulatorysubmissions, required approvals or commercialization of our productcandidates.  They could also entailhigher costs and result in our being unable to effectively commercialize our productcandidates.

**We may explore new alliances that may nevermaterialize or may fail.**

Wemay, in the future, periodically explore a variety of possible partnerships oralliances in an effort to gain access to additional complimentary resources. Atthe current time, we cannot predict what form such a partnership or alliancemight take. Such strategic business alliances could result in:

•                  the issuance of equity securitiesthat would dilute stockholders’ percentage ownership;

•                  the expenditure of substantialoperational, financial and management resources in integrating new businesses,technologies and products;

•                  the assumption of substantial actualor contingent liabilities;

•                  or a business combination transactionfeaturing terms that stockholders might not deem desirable.

**Acceptance of our products in the marketplace isuncertain, and failure to achieve market acceptance will limit our ability togenerate revenue and become profitable.**

Evenif approved for marketing, our products may not achieve market acceptance. Thedegree of market acceptance will depend upon a number of factors, including:

•       the receipt of timelyregulatory 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;

 

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•       ease of use of ourproducts;

 

•       reimbursement and coveragepolicies of government and private payors such as Medicare, Medicaid, insurancecompanies, health maintenance organizations and other plan administrators; and

 

•       the scope and effectivenessof our sales and marketing efforts.

 

Physicians, patients, payors or the medical communityin general may be unwilling to accept, utilize or recommend the use of any ofour products.

 

**The status of reimbursement from third-party payorsfor newly approved health care drugs is uncertain and failure to obtainadequate coverage and reimbursement could limit our ability to generaterevenue.**

*** ***

Our ability to successfully commercialize our productswill depend, in part, on the extent to which coverage and reimbursement for theproducts will be available from: government and health administrationauthorities; private health insurers; managed care programs; and otherthird-party payors.

 

Significant uncertainty exists as to the reimbursementstatus of newly approved health care products. Third-party payors, includingMedicare, are challenging the prices charged for medical products and services.Government and other third-party payors increasingly are attempting to containhealth care costs by limiting both coverage and the level of reimbursement fornew drugs and by refusing, in some cases, to provide coverage for uses ofapproved products for disease conditions for which the FDA has not grantedlabeling approval. Third-party insurance coverage may not be available to patientsfor our products. If government and other third-party payors do not provideadequate coverage and reimbursement levels for our product candidates, theirmarket acceptance may be reduced.

 

**Health care reform measures could adversely affect ourbusiness.**

*** ***

The business and financial condition of pharmaceuticaland biotechnology companies are affected by the efforts of governmental andthird-party payors to contain or reduce the costs of health care. In the UnitedStates and in foreign jurisdictions there have been, and we expect that therewill continue to be, a number of legislative and regulatory proposals aimed atchanging the health care system. For example, in some countries other than theUnited States, pricing of prescription drugs is subject to government control,and we expect proposals to implement similar controls in the United States tocontinue. We are unable to predict what additional legislation or regulation,if any, relating to the health care industry or third-party coverage andreimbursement may be enacted in the future or what effect such legislation orregulation would have on our business. The pendency or approval of suchproposals or reforms could result in a decrease in our stock price or limit ourability to raise capital or to obtain strategic partnerships or licenses.

 

**If we fail to comply with healthcare fraud and abuselaws, we could face substantial penalties and our business, operations andfinancial condition could be adversely affected*.***

*** ***

As a biopharmaceutical company, even though we do notand will not control referrals of health care services or bill directly toMedicare, Medicaid or other third-party payors, certain federal and statehealthcare laws and regulations pertaining to fraud and abuse will beapplicable to our business. These laws and regulations, include, among others:

 

•       thefederal Anti-Kickback Statute, which prohibits, among other things, personsfrom soliciting, receiving or providing remuneration, directly or indirectly,to induce either the referral of an individual, for an item or service or thepurchasing or ordering of a good or service, for which payment may be madeunder federal health care programs such as the Medicare and Medicaid programs;

 

•       federalfalse claims laws which prohibit, among other things, individuals or entitiesfrom knowingly presenting, or causing to be presented, claims for payment fromMedicare, Medicaid, or other third-party payors that are false or fraudulent;

 

•       thefederal Health Insurance Portability and Accountability Act of 1996, or HIPAA,which prohibits executing a scheme to defraud any healthcare benefit program ormaking false statements relating to healthcare matters; and

 

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•       statelaw equivalents of each of the above federal laws, such as anti-kickback andfalse claims laws which may apply to items or services reimbursed by anythird-party payor, including commercial insurers.

 

Although there are a number of statutory exemptionsand regulatory safe harbors protecting certain common activities fromprosecution under the federal Anti-Kickback statute, the exemptions and safeharbors are drawn narrowly, and practices that involve remuneration intended toinduce prescribing, purchases or recommendations may be subject to scrutiny ifthey do not qualify for an exemption or safe harbor. Our practices may not inall cases meet all of the criteria for safe harbor protection fromanti-kickback liability.

 

If our operations are found to be in violation of anyof the laws described above or any other governmental regulations that apply tous, we may be subject to penalties, including civil and criminal penalties,damages, fines and the curtailment or restructuring of our operations. Anypenalties, damages, fines, curtailment or restructuring of our operations couldadversely affect our ability to operate our business and our financial results.Although compliance programs can mitigate the risk of investigation andprosecution for violations of these laws, the risks cannot be entirelyeliminated. Any action against us for violation of these laws, even if wesuccessfully defend against it, could cause us to incur significant legalexpenses and divert our management’s attention from the operation of ourbusiness. Moreover, achieving and sustaining compliance with all applicablefederal and state fraud and abuse laws may prove costly.

 

**If we are unable to develop adequate sales, marketingor distribution capabilities or enter into agreements with third parties toperform some of these functions, we will not be able to commercialize ourproducts effectively.**

*** ***

We have limited experience in sales, marketing anddistribution. To directly market and distribute any products, we must build asales and marketing organization with appropriate technical expertise anddistribution capabilities. We may attempt to build such a sales and marketingorganization on our own or with the assistance of a contract salesorganization. For some market opportunities, we may need to enter intoco-promotion or other licensing arrangements with larger pharmaceutical orbiotechnology firms in order to increase the likelihood of commercial successfor our products. We may not be able to establish sales, marketing anddistribution capabilities of our own or enter into such arrangements with thirdparties in a timely manner or on acceptable terms. To the extent that we enterinto co-promotion or other licensing arrangements, our product revenues arelikely to be lower than if we directly marketed and sold our products, and someor all of the revenues we receive will depend upon the efforts of thirdparties, and these efforts may not be successful. Additionally, buildingmarketing and distribution capabilities may be more expensive than weanticipate, requiring us to divert capital from other intended purposes orpreventing us from building our marketing and distribution capabilities to thedesired levels.

 

**If our competitors develop and market products thatare more effective than ours, our commercial opportunity will be reduced oreliminated.**

*** ***

Even if we obtain the necessary regulatory approvalsto market PDX or any other product candidates, our commercial opportunity willbe reduced or eliminated if our competitors develop and market products thatare more effective, have fewer side effects or are less expensive than ourproduct candidates. Our potential competitors include large fully integratedpharmaceutical companies and more established biotechnology companies, both ofwhich have significant resources and expertise in research and development,manufacturing, testing, obtaining regulatory approvals and marketing. Academicinstitutions, government agencies, and other public and private researchorganizations conduct research, seek patent protection and establish collaborativearrangements for research, development, manufacturing and marketing. It ispossible that competitors will succeed in developing technologies that are moreeffective than those being developed by us or that would render our technologyobsolete or noncompetitive.

 

**If product liability lawsuits are successfully broughtagainst us, we may incur substantial liabilities and may be required to limitcommercialization of our product candidates.**

*** ***

The testing and marketing of pharmaceutical productsentail an inherent risk of product liability. Product liability claims might bebrought against us by consumers, health care providers or by pharmaceuticalcompanies or others selling our future products. If we cannot successfullydefend ourselves against such claims, we may incur substantial liabilities orbe required to limit the commercialization of our product candidates. We haveobtained limited product liability insurance coverage for our human clinicaltrials. However, product liability insurance coverage is becoming increasinglyexpensive, and we may be unable to maintain product liability insurancecoverage at a reasonable cost or in sufficient amounts to protect us againstlosses due to product liability. A successful product liability claim in excessof our insurance coverage could have a material adverse effect on our business,financial condition and results of operations. We may not be able to obtaincommercially

 

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reasonable product liability insurance for anyproducts approved for marketing.

 

**We are currently involved in a securities class actionlitigation, which could harm our business if management attention is divertedor the claims are decided against us.**

*** ***

We have been named as a defendant in an allegedsecurities class action lawsuit seeking unspecified damages relating to theissuance of allegedly false and misleading statements regarding EFAPROXYNduring the period from May 29, 2003 to April 29, 2004 and subsequentdeclines in our stock price. On October 20, 2005, the District Courtgranted our motion to dismiss the lawsuit with prejudice and entered judgmentin our favor. On November 20, 2005, the plaintiff appealed the decision tothe United States Court of Appeals for the Tenth Circuit. In October 2006,the parties held discussions to settle the matter, although the terms of anysuch potential settlement remain subject to negotiation and no bindingagreement has been reached. A settlement would be subject to variousconditions, including approval of the District Court. We expect that anysettlement in excess of our deductible would be covered by our insurancecarrier. As with any litigation proceeding, we cannot predict with certaintythe eventual outcome of our settlement discussions or the legal proceedings. Inthe event a settlement is not concluded, we intend to vigorously defend againstthe plaintiff’s appeal. If the Court of Appeals reverses the District Court’sdecision and we are not successful in our defense of such claims, we could beforced to make significant payments to the plaintiffs, and such payments couldhave a material adverse effect on our business, financial condition, results ofoperations and cash flows to the extent such payments are not covered by ourinsurance carriers. Even if our defense against such claims is successful, thelitigation could result in substantial costs and divert management’s attentionand resources, which could adversely affect our business. As of September 30,2007, we have recorded $2,000,000 in accrued litigation settlement costs, whichrepresents our best estimate of the potential gross amount of the settlementcosts to be paid to the plaintiffs, and $1,754,000 in prepaid expenses andother assets, which represents the amount we expect to be reimbursed from ourinsurance carrier. The net difference of $246,000 between these amountsrepresents the remaining unpaid deductible under our insurance policy, and thisamount was recorded to marketing, general and administrative expenses duringthe year ended December 31, 2006.

 

**Failure to attract, retain and motivate skilledpersonnel and cultivate key academic collaborations will delay our productdevelopment programs and our research and development efforts. ***

*** ***

We are a small company with 65 full-time employees, andour success depends on our continued ability to attract, retain and motivatehighly qualified management and scientific personnel and on our ability todevelop and maintain important relationships with leading academic institutionsand scientists. Competition for personnel and academic collaborations isintense.  In particular, our productdevelopment programs depend on our ability to attract and retain highly skilledclinical development personnel.  Inaddition, we will need to hire additional personnel and develop additionalacademic collaborations as we continue to expand our research and developmentactivities. We do not know if we will be able to attract, retain or motivatepersonnel or maintain our relationships with academic institutions and scientists.If we fail to negotiate additional acceptable collaborations with academicinstitutions and scientists, or if our existing academic collaborations were tobe unsuccessful, our product development programs may be delayed.

 

**We cannot guarantee that we will be in compliance withall potentially applicable regulations.**

*** ***

The development, manufacturing, and, if approved,pricing, marketing, sales and reimbursement of our products, together with ourgeneral obligations, are subject to extensive regulation by federal, state andother authorities within the United States and numerous entities outside of theUnited States. We also have significantly fewer employees than many othercompanies that have the same or fewer product candidates in late stage clinicaldevelopment and we rely heavily on third parties to conduct many importantfunctions.

 

As a publicly-traded company, we are subject tosignificant regulations, some of which have either only recently been adopted,including the Sarbanes Oxley Act of 2002, or are currently proposals subject tochange. We cannot assure that we are or will be in compliance with allpotentially applicable regulations. If we fail to comply with the SarbanesOxley Act of 2002 or any other regulations we could be subject to a range ofconsequences, including restrictions on our ability to sell equity or otherwiseraise capital funds, the de-listing of our common stock from the Nasdaq GlobalMarket, suspension or termination of our clinical trials, failure to obtainapproval to market our product candidates, restrictions on future products orour manufacturing processes, significant fines, or other sanctions orlitigation.

 

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**If our internal controls over financial reporting arenot considered effective, our business and stock price could be adverselyaffected.**

*** ***

Section 404 of the Sarbanes-Oxley Act of 2002requires us to evaluate the effectiveness of our internal controls overfinancial reporting as of the end of each fiscal year, and to include amanagement report assessing the effectiveness of our internal controls overfinancial reporting in our annual report on Form 10-K for thatfiscal year. Section 404 also requires our independent registered publicaccounting firm to attest to, and report on, management’s assessment of ourinternal controls over financial reporting.

 

Our management, including our chief executive officerand principal financial officer, does not expect that our internal controlsover financial reporting will prevent all error and all fraud. A controlsystem, no matter how well designed and operated, can provide only reasonable,not absolute, assurance that the control system’s objectives will be met.Further, the design of a control system must reflect the fact that there areresource constraints, and the benefits of controls must be considered relativeto their costs. Because of the inherent limitations in all control systems, noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud involving a company have been, or will be, detected. Thedesign of any system of controls is based in part on certain assumptions aboutthe likelihood of future events, and we cannot assure you that any design willsucceed in achieving its stated goals under all potential future conditions.Over time, controls may become ineffective because of changes in conditions ordeterioration in the degree of compliance with policies or procedures. Becauseof the inherent limitations in a cost-effective control system, misstatementsdue to error or fraud may occur and not be detected. We cannot assure you thatwe or our independent registered public accounting firm will not identify amaterial weakness in our internal controls in the future. A material weaknessin our internal controls over financial reporting would require management andour independent registered public accounting firm to consider our internalcontrols as ineffective. If our internal controls over financial reporting arenot considered effective, we may experience a loss of public confidence, whichcould have an adverse effect on our business and on the market price of ourcommon stock.

 

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

*** ***

For planning purposes, we estimate the timing of avariety of clinical, regulatory and other milestones, such as when a certainproduct candidate will enter clinical development, when a clinical trial willbe initiated or completed, or when an application for regulatory approval willbe filed. Some of our estimates are included in this report. Our estimates arebased on information available to us as of the date of this report and avariety of assumptions. Many of the underlying assumptions are outside of ourcontrol. If milestones are not achieved when we estimated that they would be,investors could be disappointed, and our stock price may decrease.

 

**Warburg Pincus Private Equity VIII, L.P. (“Warburg”)and Baker Brothers Life Sciences, L.P. (“Baker”) each control a substantialpercentage of the voting power of our outstanding common stock.***

*** ***

On March 2, 2005, we entered into a SecuritiesPurchase Agreement with Warburg Pincus Private Equity VIII, L.P. (“Warburg”)and certain other investors pursuant to which we issued and sold an aggregateof 2,352,443 shares of our Series A Exchangeable Preferred Stock (the “ExchangeablePreferred”) at a price per share of $22.10, for aggregate gross proceeds ofapproximately $52.0 million. On May 18, 2005, at our Annual Meetingof Stockholders, our stockholders voted to approve the issuance of shares ofour common stock upon exchange of shares of the Exchangeable Preferred. As aresult of such approval, we issued a total of 23,524,430 shares of common stockupon exchange of 2,352,443 shares of Exchangeable Preferred. In connection withits purchase of the Exchangeable Preferred, Warburg entered into a standstillagreement agreeing not to pursue certain activities the purpose or effect ofwhich may be to change or influence the control of the Company.

 

On February 2, 2007, we closed an underwrittenoffering of 9,000,000 shares of common stock, of which Baker Brothers LifeSciences, L.P. and certain other affiliated funds (collectively “Baker”)purchased 3,300,000 shares, at a price per share of $6.00, for aggregate grossproceeds of approximately $54.0 million. In connection with its purchase of sharesin the February 2007 Financing, Baker entered into a standstill agreementagreeing not to pursue certain activities the purpose or effect of which mightbe to change or influence the control of the Company.

 

As of September 30, 2007, we had approximately66.8 million shares of common stock outstanding, of which Warburg owned22,624,430 shares, or approximately 34% of the voting power of our outstandingcommon stock, and Baker owned 8,741,480 shares, or approximately 13% of thevoting power of our outstanding common stock. Although each of Warburg andBaker have entered into a standstill agreement with us, they are, and willcontinue to be, able to exercise substantial

 

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influence over any actions requiring stockholderapproval.

** **

**Anti-takeover provisions in our charter documents andunder Delaware law could discourage, delay or prevent an acquisition of us,even if an acquisition would be beneficial to our stockholders, and may preventattempts by our stockholders to replace or remove our current management.**

*** ***

Provisions of our amended and restated certificate ofincorporation and bylaws, as well as provisions of Delaware law, could make itmore difficult for a third party to acquire us, even if doing so would benefitour stockholders. In addition, these provisions may frustrate or prevent anyattempts by our stockholders to replace or remove our current management bymaking it more difficult for stockholders to replace members of our board ofdirectors. Because our board of directors is responsible for appointing themembers of our management team, these provisions could in turn affect anyattempt by our stockholders to replace current members of 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, we aresubject 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 either Warburgor Baker because, prior to the dates on which they became interestedstockholders, our board of directors approved the transactions which resultedin Warburg and Baker becoming interested stockholders. However, in connectionwith its purchase of Exchangeable Preferred in March 2005, Warburg enteredinto a standstill agreement agreeing not to pursue certain activities thepurpose or effect of which may be to change or influence the control of theCompany.  Similarly, in connection withthe February 2007 Financing, Baker entered into a standstill agreementagreeing not to pursue certain activities the purpose or effect of which may beto change or influence the control of the Company.

 

**We have adopted a stockholder rights plan that maydiscourage, delay or prevent a merger or acquisition that is beneficial to ourstockholders.**

*** ***

In May 2003, ourboard of directors adopted a stockholder rights plan that may have the effectof discouraging, delaying or preventing a merger or acquisition of us that isbeneficial to our stockholders by diluting the ability of a potential acquirerto acquire us. Pursuant to the terms of our plan, when a person or group,except under certain circumstances, acquires 15% or more of our outstandingcommon stock or 10 business days after announcement of a tender or exchangeoffer for 15% or more of our outstanding common stock, the rights (except thoserights held by the person or group who has acquired or announced an offer toacquire 15% or more of our outstanding common stock) would generally becomeexercisable for shares of our common stock at a discount. Because the potentialacquirer’s rights would not become exercisable for our shares of common stockat a discount, the potential acquirer would suffer substantial dilution and maylose its ability to acquire us. In addition, the existence of the plan itselfmay deter a potential acquirer from acquiring or making an offer to acquire theCompany.  As a result, either byoperation of the plan or by its potential deterrent effect, mergers andacquisitions of the Company that our stockholders may consider in their bestinterests may not occur.

 

Because Warburg owns a substantial percentage of ouroutstanding common stock, we amended the stockholder rights plan in connectionwith Warburg’s purchase of Exchangeable Preferred in March 2005 to providethat Warburg and its affiliates will be exempt from the stockholder rightsplan, unless Warburg and its affiliates become, without the prior consent ofour

 

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boardof directors, the beneficial owner of more than 44% of our common stock.Likewise, since Baker owns a substantial percentage of our outstanding commonstock, we amended the stockholder rights plan in connection with theFebruary 2007 Financing to provide that Baker and its affiliates will beexempt from the stockholder rights plan, unless Baker becomes, without theprior consent of our board of directors, the beneficial owner of more than 20%of our common stock. Under the stockholder rights plan, our board of directorshas express authority to amend the rights plan without stockholder approval.

**The market price for our common stock has been and maycontinue to be highly volatile, and an active trading market for our commonstock may never exist.**

We cannotassure you that an active trading market for our common stock will exist at anytime. 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 continue to be highlyvolatile and could be subject to wide fluctuations in price in response tovarious factors, many of which are beyond our control, including:

•       actual or anticipatedresults of our clinical trials, including PROPEL;

•       actual or anticipatedregulatory approvals or non-approvals of our product candidates, including PDX,or of competing product candidates;

•       changes in laws orregulations applicable to our product candidates;

•       changes in the expected or actualtiming of our development programs;

•       actual or anticipatedvariations in quarterly operating results;

•       announcements oftechnological innovations by us or our competitors;

•       changes in financialestimates or recommendations by securities analysts;

•       conditions or trends in thebiotechnology and pharmaceutical industries;

•       changes in the marketvaluations of similar companies;

•       announcements by us ofsignificant acquisitions, strategic partnerships, joint ventures or capitalcommitments;

•       additions or departures ofkey personnel;

•       disputes or otherdevelopments relating to proprietary rights, including patents, litigationmatters and our ability to obtain patent protection for our technologies;

•       developments concerning anyof our research and development, manufacturing and marketing collaborations;

•       sales of large blocks ofour common stock;

•       sales of our common stockby our executive officers, directors and five percent stockholders; and

•       economic and other externalfactors, including disasters or crises.

Publiccompanies in general and companies included on the Nasdaq Global Market inparticular have experienced extreme price and volume fluctuations that haveoften been unrelated or disproportionate to the operating performance of thosecompanies. There has been particular volatility in the market prices ofsecurities of biotechnology and other life sciences companies, and the marketprices of these companies have often fluctuated because of problems orsuccesses in a given market segment or because investor interest has shifted toother segments. These broad market and industry factors may cause the marketprice of our common stock to decline, regardless of our operating performance.We have no control over this volatility and can only focus our efforts on ourown operations, and even these may be affected due to the state of the capitalmarkets. In the past, following large price declines in the public market priceof a company’s securities, securities

 

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classaction litigation has often been initiated against that company, including in2004 against us. Litigation of this type could result in substantial costs anddiversion of management’s attention and resources, which would hurt our business.Any adverse determination in litigation could also subject us to significantliabilities.

**We are required to recognize stock-based compensationexpense relating to employee stock options, restricted stock, and stockpurchases under our Employee Stock Purchase Plan, and the amount of expense werecognize may not accurately reflect the value of our share-based paymentawards. Further, the recognition of stock-based compensation expense will causeour net losses to increase and may cause the trading price of our common stockto fluctuate.**

OnJanuary 1, 2006, we adopted SFAS 123R, which requires the measurementand recognition of compensation expense for all stock-based compensation basedon estimated fair values. As a result, our operating results for the three andnine months ended September 30, 2006 and 2007 include, and future periods willinclude, a charge for stock-based compensation related to employee stockoptions, restricted stock and discounted employee stock purchases.  The application of SFAS 123R requiresthe use of an option-pricing model to determine the fair value of share-basedpayment 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.

Ouradoption of SFAS 123R has had a material impact on our financial statementsand results of operations. We also expect that SFAS 123R will have amaterial impact on our future financial statements and results of operations.We cannot predict the effect that our stock-based compensation expense willhave on the trading price of our common stock.

**Substantial sales ofshares 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 more difficult forus to sell equity or equity-related securities in the future at a time andprice that we consider appropriate. We are unable to predict the effect thatsales may have on the then prevailing market price of our common stock.  We have entered into a Registration RightsAgreement with Warburg and the other purchasers of our Exchangeable Preferredpursuant to which such investors are entitled to certain registration rightswith respect to the shares of common stock that we issued upon exchange of theExchangeable Preferred.

In addition, wewill need to raise substantial additional capital in the future to fund ouroperations.  If we raise additional fundsby issuing equity securities, the market price of our common stock may declineand our existing stockholders may experience significant dilution.

 
| **ITEM 2.** | ** ** | **UNREGISTERED  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS** | ** ** | **None**   |
|-------------|------------|------------------------------------------------------------------|------------|------------|
| ** **  | ** ** | ** **                                                       | ** ** | ** ** |
| **ITEM 3.** | ** ** | **DEFAULTS  UPON SENIOR SECURITIES**                             | ** ** | **None**   |
| ** **  | ** ** | ** **                                                       | ** ** | ** ** |
| **ITEM 4.** | ** ** | **SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS**         | ** ** | **None**   |
| ** **  | ** ** | ** **                                                       | ** ** | ** ** |
| **ITEM 5.** | ** ** | **OTHER  INFORMATION**                                           | ** ** | **None**   |
| ** **  | ** ** | ** **                                                       | ** ** | ** ** |
| **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 5, 2007 | **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                               |
|                        | Vice President, Finance                      |
|                        | (Principal Financial and Accounting Officer) |

 

 

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