** **

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 
| **x**      | **Quarterly report pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934.**                                                                                                                                                                                               |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                                                                                                                                                                            |
| ** ** | **For the quarterly period ended March 31,  2008.**                                                                                                                                                                                                                                              |
| ** ** | ** **                                                                                                                                                                                                                                                                                            |
| **o**      | **Transition report pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934.**                                                                                                                                                                                              |
| ** ** | ** **                                                                                                                                                                                                                                                                                            |
| ** ** | **For the transition period from                        to                      .** |

 

**CommissionFile Number000-29815**

 

**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 200Westminster, Colorado  80020(303) 426-6262**(Address, including zip code, and telephone number,including area code, of principal executive offices)

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past90 days.  Yes x    No o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See the definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act. (Check one):

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

 

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

 

As of May 1, 2008,there were 68,115,616 shares of the registrant’s Common Stock, par value$0.001 per share, outstanding.

 

 

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**ALLOSTHERAPEUTICS, INC.**

** **

**FORM 10-Q**

** **

**TABLEOF CONTENTS**

 
| PART I.  Financial  Information | 3                                                                                                                                                                                                |
|-------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ITEM 1.                                   | Financial Statements (unaudited)                                                                                                                                                                 | 3 |
|                                      | Balance Sheets — as of March 31,  2008 and December 31, 2007                                                                                                                      | 3 |
|                                      | Statements of Operations —  for the three months ended March 31, 2008 and 2007 and the cumulative  period from September 1, 1992 (date of inception) through March 31,  2008 | 4 |
|                                      | Statements of Cash Flows —  for the three months ended March 31, 2008 and 2007 and the cumulative  period from September 1, 1992 (date of inception) through March 31,  2008 | 5 |
|                                      | Notes to Financial  Statements                                                                                                                                                                   | 6 |
| ITEM 2.                                   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                                                      | 12 |
| ITEM 3.                                   | Quantitative  and Qualitative Disclosures About Market Risk                                                                                                                                      | 19 |
| ITEM 4.                                   | Controls and  Procedures                                                                                                                                                                         | 19 |
| PART II.   Other Information    | 20                                                                                                                                                                                               |
| ITEM 1.                                   | Legal Proceedings                                                                                                                                                                                | 20 |
| ITEM  1A.                                 | Risk  Factors                                                                                                                                                                                    | 20 |
| ITEM 2.                                   | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                                                                     | 35 |
| ITEM 3.                                   | Defaults Upon  Senior Securities                                                                                                                                                                 | 35 |
| ITEM 4.                                   | Submission of  Matters to a Vote of Security Holders                                                                                                                                             | 35 |
| ITEM  5.                                  | Other  Information                                                                                                                                                                               | 35 |
| ITEM 6.                                   | Exhibits                                                                                                                                                                                         | 35 |
| SIGNATURES                                |                                                                                                                                                                                             | 36 |

 

NOTE:

 

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

 

2

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**PART I. FINANCIAL INFORMATION**

** **

**ITEM 1.  FINANCIAL STATEMENTS**

** **

**ALLOS THERAPEUTICS, INC.BALANCE SHEETS**

**(unaudited)**

** **
| ** **                                                                                                                                                                                                                                             | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                             | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| **ASSETS**                                                                                                                                                                                                                                             | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current  assets:                                                                                                                                                                                                                                       |       |               |       |                  |       |
| Cash  and cash equivalents                                                                                                                                                                                                                             |       | $                  | 12,932,317 |                  | $          | 15,919,664 |   |
| Restricted  cash                                                                                                                                                                                                                                       |       | 183,334            |       | 183,334               |       |
| Investments  in marketable securities                                                                                                                                                                                                                  |       | 37,581,559         |       | 41,836,566            |       |
| Prepaid  research and development expenses                                                                                                                                                                                                             |       | 807,350            |       | 524,704               |       |
| Prepaid  expenses and other assets                                                                                                                                                                                                                     |       | 2,430,936          |       | 2,374,471             |       |
| Total  current assets                                                                                                                                                                                                                                  |       | 53,935,496         |       | 60,838,739            |       |
| Property  and equipment, net                                                                                                                                                                                                                           |       | 604,639            |       | 621,451               |       |
| Total  assets                                                                                                                                                                                                                                          |       | $                  | 54,540,135 |                  | $          | 61,460,190 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                          | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current  liabilities:                                                                                                                                                                                                                                  |       |               |       |                  |       |
| Trade  accounts payable                                                                                                                                                                                                                                |       | $                  | 1,658,110  |                  | $          | 1,191,849 |   |
| Accrued  liabilities                                                                                                                                                                                                                                   |       | 7,914,012          |       | 7,689,338             |       |
| Total  current liabilities                                                                                                                                                                                                                             |       | 9,572,122          |       | 8,881,187             |       |
| Commitments  and contingencies (See Note 6)                                                                                                                                                                                                            |       |               |       |                  |       |
|                                                                                                                                                                                                                                                   |       |               |       |                  |       |
| Stockholders’  equity:                                                                                                                                                                                                                            |       |               |       |                  |       |
| Preferred  stock, $0.001 par value; 10,000,000 shares authorized at March 31, 2008  and December 31, 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 March 31, 2008 and  December 31, 2007; no shares issued or outstanding                           |       | —             |       | —                |       |
| Common  stock, $0.001 par value; 150,000,000 shares authorized at March 31, 2008  and December 31, 2007; 68,075,978 and 67,641,943 shares issued and  outstanding at March 31, 2008 and December 31, 2007,  respectively |       | 68,076             |       | 67,642                |       |
| Additional  paid-in capital                                                                                                                                                                                                                            |       | 304,835,511        |       | 300,440,336           |       |
| Deficit  accumulated during the development stage                                                                                                                                                                                                      |       | (259,935,574       | )          | (247,928,975          | )          |
| Total  stockholders’ equity                                                                                                                                                                                                                       |       | 44,968,013         |       | 52,579,003            |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                                                       |       | $                  | 54,540,135 |                  | $          | 61,460,190 |   |

 

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

 

3

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**ALLOS THERAPEUTICS, INC.STATEMENTS OF OPERATIONS**

**(unaudited)**

 
| ** **                                                            | ** ** | **Three Months Ended  March 31,** | ** **  | **Cumulative  Period from  September 1, 1992  (date of inception)  through March 31,** | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------------------------------|-------------|---------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                            | ** ** | **2008**                                         | ** **  | **2007**                                                                                                                  | ** ** | **2008** | ** ** |
|                                                                  |       |                                             |        |                                                                                                                      |       |   |   |
| Operating  expenses:                                                  |       |                                             |        |                                                                                                                      |       |   |   |
| Research  and development                                             |       | $                                                | 5,973,612   |                                                                                                                      | $          | 3,289,428 |   | $ | 131,273,484 |   |
| Clinical  manufacturing                                               |       | 1,586,558                                        |        | 1,147,304                                                                                                                 |       | 36,198,664 |   |
| Marketing,  general and administrative                                |       | 5,011,364                                        |        | 4,747,596                                                                                                                 |       | 107,841,905 |   |
| Restructuring  and separation costs                                   |       | —                                           |        | —                                                                                                                    |       | 1,663,821 |   |
| Total  operating expenses                                             |       | 12,571,534                                       |        | 9,184,328                                                                                                                 |       | 276,977,874 |   |
| Loss  from operations                                                 |       | (12,571,534                                      | )           | (9,184,328                                                                                                                | )          | (276,977,874 | ) |
| Gain  on settlement claims                                            |       | —                                           |        | —                                                                                                                    |       | 5,110,083 |   |
| Interest  and other income, net                                       |       | 564,935                                          |        | 773,464                                                                                                                   |       | 22,168,681 |   |
| Net  loss                                                             |       | (12,006,599                                      | )           | (8,410,864                                                                                                                | )          | (249,699,110 | ) |
| Dividend  related to beneficial conversion feature of preferred stock |       | —                                           |        | —                                                                                                                    |       | (10,236,464 | ) |
| Net  loss attributable to common stockholders                         |       | $                                                | (12,006,599 | )                                                                                                                         | $          | (8,410,864 | ) | $ | (259,935,574 | ) |
| Net  loss per share: basic and diluted                                |       | $                                                | (0.18       | )                                                                                                                         | $          | (0.14 | ) |   |   |
| Weighted  average shares outstanding: basic and diluted               |       | 67,266,819                                       |        | 62,151,400                                                                                                                |       |   |   |

 

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

 

4

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** **

**ALLOS THERAPEUTICS, INC.STATEMENTS OF CASH FLOWS**

**(unaudited)**

 
| ** **                                                                                                              | ** ** | **Three Months Ended  March 31,** | ** **  | **Cumulative  Period from  September 1, 1992  (date of inception)  through** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|-------------|-------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                              | ** ** | **2008**                                         | ** **  | **2007**                                                                                              | ** ** | **March 31, 2008** | ** ** |
| Cash  Flows From Operating Activities:                                                                                  |       |                                             |        |                                                                                                  |       |   |   |
| Net  loss                                                                                                               |       | $                                                | (12,006,599 | )                                                                                                     | $          | (8,410,864 | ) | $ | (249,699,110 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities:                                            |       |                                             |        |                                                                                                  |       |   |   |
| Depreciation  and amortization                                                                                          |       | 103,336                                          |        | 84,037                                                                                                |       | 3,551,645 |   |
| Stock-based  compensation expense                                                                                       |       | 2,114,511                                        |        | 1,303,380                                                                                             |       | 34,396,230 |   |
| Write-off  of long-term investment                                                                                      |       | —                                           |        | —                                                                                                |       | 1,000,000 |   |
| Other                                                                                                                   |       | —                                           |        | —                                                                                                |       | 99,121 |   |
| Changes  in operating assets and liabilities:                                                                           |       |                                             |        |                                                                                                  |       |   |   |
| Prepaid  expenses and other assets                                                                                      |       | (339,110                                         | )           | 65,683                                                                                                |       | (3,228,285 | ) |
| Interest  receivable on investments                                                                                     |       | 105,879                                          |        | (123,605                                                                                              | )          | (559,430 | ) |
| Accounts  payable                                                                                                       |       | 466,261                                          |        | 460,709                                                                                               |       | 1,658,110 |   |
| Accrued  liabilities                                                                                                    |       | 224,674                                          |        | (1,254,337                                                                                            | )          | 7,914,012 |   |
| Net  cash used in operating activities                                                                                  |       | (9,331,048                                       | )           | (7,874,997                                                                                            | )          | (204,867,707 | ) |
| Cash  Flows From Investing Activities:                                                                                  |       |                                             |        |                                                                                                  |       |   |   |
| Acquisition  of property and equipment                                                                                  |       | (86,524                                          | )           | (82,740                                                                                               | )          | (3,902,278 | ) |
| Purchases  of marketable securities                                                                                     |       | (27,050,872                                      | )           | (39,928,440                                                                                           | )          | (542,709,098 | ) |
| Proceeds  from sales of marketable securities                                                                           |       | 31,200,000                                       |        | 19,600,000                                                                                            |       | 505,686,969 |   |
| Purchase  of long-term investment                                                                                       |       | —                                           |        | —                                                                                                |       | (1,000,000 | ) |
| Payments  received on notes receivable                                                                                  |       | —                                           |        | —                                                                                                |       | 49,687 |   |
| Net  cash provided by (used in) investing activities                                                                    |       | 4,062,604                                        |        | (20,411,180                                                                                           | )          | (41,874,720 | ) |
| Cash  Flows From Financing Activities:                                                                                  |       |                                             |        |                                                                                                  |       |   |   |
| Principal  payments under capital leases                                                                                |       | —                                           |        | —                                                                                                |       | (422,088 | ) |
| Proceeds  from sales leaseback                                                                                          |       | —                                           |        | —                                                                                                |       | 120,492 |   |
| Pledge  of restricted cash                                                                                              |       | —                                           |        | —                                                                                                |       | (183,334 | ) |
| 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 |       | 2,281,097                                        |        | 235,028                                                                                               |       | 11,882,215 |   |
| Proceeds  from issuance of common stock, net of issuance costs                                                          |       | —                                           |        | 50,322,214                                                                                            |       | 159,151,819 |   |
| Net  cash provided by financing activities                                                                              |       | 2,281,097                                        |        | 50,557,242                                                                                            |       | 259,674,744 |   |
| Net  (decrease) increase in cash and cash equivalents                                                                   |       | (2,987,347                                       | )           | 22,271,065                                                                                            |       | 12,932,317 |   |
| Cash  and cash equivalents, beginning of period                                                                         |       | 15,919,664                                       |        | 10,070,526                                                                                            |       | — |   |
| Cash  and cash equivalents, end of period                                                                               |       | $                                                | 12,932,317  |                                                                                                  | $          | 32,341,591 |   | $ | 12,932,317 |   |
| 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.***

 

5

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** **

**ALLOS THERAPEUTICS, INC.NOTES TO FINANCIAL STATEMENTS**

**(unaudited)**

** **

**1.**                 Basis ofPresentation

** **

The unaudited financialstatements 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 rules and regulations of the Securities andExchange Commission, or SEC.  Operatingresults for the three months ended March 31, 2008 are not necessarilyindicative of the results that may be expected for the year ending December 31,2008.  These financial statements shouldbe read in conjunction with the audited financial statements and notes theretowhich are included in our Annual Report on Form 10-K for the year ended December 31,2007 for a broader discussion of our business and the opportunities and risksinherent in such business.

 

Since our inception in1992, we have not generated any revenue from product sales and have experiencedsignificant net losses and negative cash flows from operations.  Our activities have consisted primarily ofdeveloping products, licensing products, raising capital and recruitingpersonnel.  Accordingly, we areconsidered to be in the development stage as of March 31, 2008, as definedin Statement of Financial Accounting Standards (“SFAS”) No. 7, *Accounting and Reporting by Development StageEnterprises.*

 

*Liquidity*

 

Our ability to generate revenue and achieveprofitability is dependent on our ability, alone or with partners, tosuccessfully 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 of success and total costs varywidely and are impacted by a variety of risks and uncertainties. Because of theserisks and 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 same factors, we cannot be certain when, or if,we will generate any revenue or net cash inflow from any of our current productcandidates.

 

Even if our clinical trials demonstrate the safety andeffectiveness of our product candidates in their target indications, we do notexpect to be able to record commercial sales for any of our product candidatesuntil 2009 at the earliest.  We expect toincur significant and growing net losses for the foreseeable future as a resultof our research and development programs and the costs of preparing for thepotential 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.

 

As of March 31, 2008, we had $50.5 million incash, cash equivalents and investments in marketable securities.  Based upon the current status of our productdevelopment plans, we believe that our cash, cash equivalents, and investmentsin marketable securities as of March 31, 2008 should be adequate tosupport our operations through at least the first quarter of 2009, althoughthere can be no assurance that this can, in fact, be accomplished. Our forecastof the period of time through which our financial resources will be adequate tosupport our operations is a forward-looking statement that involves risks anduncertainties, and actual results could vary materially.

 

6

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We anticipate continuing our current developmentprograms and/or beginning other long-term development projects involving ourproduct candidates. These projects may require many years and substantialexpenditures to complete and may ultimately be unsuccessful. Therefore, we willneed to obtain additional funds from outside sources to continue research anddevelopment activities, fund operating expenses, pursue regulatory approvalsand build sales and marketing capabilities, as necessary. If we are unable toraise sufficient additional funds to support our operations, we may be requiredto delay, reduce the scope of or eliminate one or more of our developmentprograms. However, our actual capital requirements will depend on many factors,including:

 

·       thetiming and outcome of our ongoing PROPEL trial;

 

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

 

·       ourevaluation of, and decisions with respect to, additional therapeuticindications for which we may develop PDX;

 

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

 

·       costs associated withsecuring potential in-license opportunities and additional product candidatesand conducting preclinical research and clinical development for our productcandidates.

 

**2.**                 Prepaid Expensesand Other Assets

** **

Prepaid expenses and other assets are comprised of thefollowing:

 
| ** **                                                             | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Prepaid  expenses and other assets                                     |       | $                        | 665,936    |                        | $          | 615,471 |   |
| Receivable  related to pending litigation settlement (see Note 6) |       | 1,765,000                |       | 1,759,000                   |       |
|                                                                   |       | $                        | 2,430,936  |                        | $          | 2,374,471 |   |

 

**3.**                 AccruedLiabilities

** **

Accrued liabilities arecomprised of the following:

 
| ** **                                        | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|---------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Accrued  research and development expenses        |       | $                        | 2,270,273  |                        | $          | 1,571,975 |   |
| Accrued  litigation settlement costs (see Note 6) |       | 2,000,000                |       | 2,000,000                   |       |
| Accrued  personnel costs                          |       | 1,335,356                |       | 2,122,805                   |       |
| Accrued  clinical manufacturing expenses          |       | 1,250,049                |       | 1,259,799                   |       |
| Accrued  expenses—other                      |       | 1,031,425                |       | 696,027                     |       |
| Accrued  restructuring and separation costs       |       | 26,909                   |       | 38,732                      |       |
|                                              |       | $                        | 7,914,012  |                        | $          | 7,689,338 |   |

 

**4.**                 Stock-BasedCompensation

** **

In accordance with the modified prospective transitionmethod of SFAS No. 123 (Revised 2004), *Share-Based Payment*(“SFAS 123R”), stock-based compensation expense for the three months ended March  31,2008 and 2007 has been recognized in the accompanying Statements of Operationsas follows:

 
| ** **                              | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------|------------|------------------------------------------------------|------------|
| ** **                              | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| Research  and development               |       | $                                                    | 675,787    |   | $ | 264,300 |   |
| Clinical  manufacturing                 |       | 103,230                                              |       | 36,018 |   |
| Marketing,  general and administrative  |       | 1,335,494                                            |       | 1,003,062 |   |
| Total  stock-based compensation expense |       | $                                                    | 2,114,511  |   | $ | 1,303,380 |   |

 

7

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We did not recognize a related tax benefit during thethree months ended March 31, 2008 and 2007, as we maintain net operatingloss carryforwards and we have established a valuation allowance against theentire tax benefit as of March 31, 2008. SFAS 123R did not impact our net cash flows from operating, investing orfinancing activities for the three months ended March 31, 2008 and2007.  No stock-based compensationexpense was capitalized on our Balance Sheet as of March 31, 2008 and December 31,2007.

 

The following table summarizes activity and relatedinformation for stock option awards granted under our equity incentive plans:

 
| ** **                                | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**               | ** ** |
|-------------------------------------------|------------|------------------------------|------------|--------------------------------------------|------------|
| ** **                                | ** ** | **Number of  Shares**   | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
| **Outstanding at December 31, 2007** |       | 6,405,430                    |       | $                                          | 4.68       |   | 2,754,274 |   | $ | 3.80 |   |
| Granted                                   |       | 1,693,812                    |       | 6.17                                       |       |   |   |   |   |
| Exercised                                 |       | (434,035                     | )          | 5.26                                       |       |   |   |   |   |
| Canceled                                  |       | (142,684                     | )          | 6.60                                       |       |   |   |   |   |
| **Outstanding at March 31, 2008**    |       | 7,522,523                    |       | $                                          | 4.95       |   | 2,829,721 |   | $ | 3.89 |   |

 

During the three months ended March 31, 2008, wegranted 1,693,812 stock options with a weighted-averagegrant-date fair value of $3.94 per share. As of March 31, 2008, the unrecorded stock-basedcompensation balance related to stock option awards was $10,165,904 and will berecognized over an estimated weighted-average amortization period of 1.5 years.

 

The following table summarizes information aboutoutstanding stock options that are fully vested and currently exercisable, andoutstanding stock options that are expected to vest in the future:

 
| ** **                                                                | ** ** | **Number  Outstanding** | ** ** | **Weighted Average  Remaining  Contractual Term** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|---------------------------------------------------------------------------|------------|-------------------------|------------|-------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------|------------|
| **As of March 31, 2008:**                                            | ** ** | ** **              | ** ** | ** **                                                  | ** ** | ** **                                 | ** ** | ** **                          | ** ** |
| Options  fully vested and exercisable                                     |       | 2,829,721               |       | 6.5                                                         |       | $                                          | 3.89       |                                | $          | 6,845,585 |   |
| Options  expected to vest, including effects of expected forfeitures |       | 4,061,309               |       | 9.1                                                         |       | $                                          | 5.56       |                                | 3,175,640  |   |
| Options  fully vested and expected to vest                                |       | 6,891,030               |       | 8.0                                                         |       | $                                          | 4.88       |                                | $          | 10,021,225 |   |

 

The aggregate intrinsic value in the tables aboverepresents the total pretax intrinsic value, based on our closing stock priceof $6.08 as of March 31, 2008, which would have been received by theoption holders had all option holders with in-the-money options exercised theiroptions as of that date.  The totalnumber of in-the-money options exercisable as of March 31, 2008 was2,309,020.

 

The total intrinsic value of options exercised duringthe three months ended March 31, 2008 and 2007 was $728,260 and $448,547,respectively, determined as of the date of option exercise.  We settle employee stock option exerciseswith newly issued common shares.  No taxbenefits were realized by us in connection with these exercises during thethree months ended March 31, 2008 and 2007 as we maintain net operatingloss carryforwards and we have established a valuation allowance against theentire tax benefit as of March 31, 2008.

 

The following table summarizes activity and relatedinformation for restricted stock awards granted under our equity incentiveplans:

 
| ** **                              | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Grant-Date  Fair Value** | ** ** |
|-----------------------------------------|------------|----------------------------|------------|----------------------------------------------------|------------|
| **Nonvested at December 31, 2007** |       | 412,500                    |       | $                                                  | 3.89       |   |
| Granted                                 |       | —                     |       | —                                             |       |
| Vested                                  |       | (101,250                   | )          | 3.90                                               |       |
| **Nonvested at March 31, 2008**    |       | 311,250                    |       | $                                                  | 3.88       |   |

 

8

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The shares of restrictedstock vest in four equal annual installments from the date of grant.  During the three months ended March 31,2008 and 2007, we recorded stock-based compensation related to restricted stockawards of $147,499 and $178,057, respectively. As of March 31, 2008, the unrecorded stock-based compensationbalance related to restricted stock awards was $552,310 and will be recognizedover an estimated weighted-average amortization period of 1.4 years.

 

**5.**                 Net Loss PerShare

** **

Net loss per share is calculated in accordance withSFAS No. 128, *Earnings Per Share*(“SFAS 128”). Under the provisions of SFAS 128, basic net loss pershare is computed by dividing the net loss attributable to common stockholdersfor the period by the weighted average number of common shares outstandingduring the period.  Diluted earnings pershare is computed by giving effect to all dilutive potential common stockoutstanding during the period, including stock options, restricted stock, stockwarrants and shares to be issued under our employee stock purchase plan.

 

Diluted net loss per share is the same as basic netloss per share for all periods presented because any potential dilutive commonshares were anti-dilutive due to our net loss (as including such shares woulddecrease our basic net loss per share). Potential dilutive common shares thatwould have been included in the calculation of diluted earnings per share if wehad net income are as follows:

 
| ** **             | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------|------------|------------------------------------------------------|------------|
| ** **             | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| Common  stock options  |       | 1,953,517                                            |       | 2,543,049 |   |
| Restricted  stock      |       | 384,478                                              |       | 440,000 |   |
| Common  stock warrants |       | —                                               |       | 382,877 |   |
|                   |       | 2,337,995                                            |       | 3,365,926 |   |

 

**6.**                 Commitments andContingencies

** **

*Royaltyand License Fee Commitments for PDX*

* *

In December 2002, we entered into a licenseagreement with Memorial Sloan-Kettering Cancer Center, SRI International andSouthern Research Institute, as amended, under which we obtained exclusiveworldwide rights to a portfolio of patents and patent applications related toPDX (pralatrexate) and its uses. Under the terms of the agreement, we paid anup-front license fee of $2.0 million upon execution of the agreement and arealso required to make certain additional cash payments based upon theachievement of certain clinical development or regulatory milestones or thepassage of certain time periods. To date, we have made aggregate milestonepayments of $2.0 million based on the passage of time. In the future, we couldmake aggregate milestone payments of $1.0 million upon the earlier ofachievement of a clinical development milestone or the passage of certain timeperiods (the “Clinical Milestone”), and up to $10.3 million upon achievement ofcertain regulatory milestones, including regulatory approval to market PDX inthe United States or Europe. The next scheduled payments toward the ClinicalMilestone of $500,000 each are currently due on December 23, 2008 and2009. The up-front license fee and allmilestone payments under the agreement have been or will be recorded toresearch and development expense when incurred. Under the terms of theagreement, we are required to fund all development programs and will have soleresponsibility for all commercialization activities. In addition, we will paythe 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.

 

*Contingencies*

* *

The Company and one of its former officers were namedas defendants in a purported securities class action lawsuit filed in May 2004in the United States District Court for the District of Colorado (the “DistrictCourt”). An amended complaint was filed in August 2004. The lawsuit wasbrought on behalf of a purported class of purchasers of our securities duringthe period from May 29, 2003 to April 29, 2004, and soughtunspecified damages relating to the issuance of allegedly false and misleadingstatements regarding EFAPROXYN, one of our former product candidates, duringthis 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.

 

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On November 20, 2005, the plaintiff appealed theDistrict Court’s decision to the U.S. Court of Appeals for the Tenth Circuit(the “Court of Appeals”).   On February 6, 2008, the partiessigned a stipulation of settlement, settling the case for$2,000,000. Neither we nor our former officer admits any liability inconnection with the settlement. The Court of Appeals accordingly has remandedthe case to the District Court for consideration of the settlement. The settlement is subject to various conditions, including withoutlimitation approval of the District Court. We expect that the amount of the settlement in excess of our deductiblewill be covered by our insurance carrier. In the event the settlement does not become final, we intend tovigorously defend against the plaintiff’s appeal. If the Court of Appeals thenwere to reverse the District Court’s decision and we were not successful in ourdefense of 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 the extentsuch payments are not covered by our insurance carriers. Even if our defenseagainst such claims were successful, the litigation could result in substantialcosts and divert management’s attention and resources, which could adverselyaffect our business. As of March 31, 2008, we have recorded $2,000,000 inaccrued litigation settlement costs, which represents our best estimate of thepotential gross amount of the settlement costs to be paid to the plaintiffs,and $1,765,000 in prepaid expenses and other assets, which represents theamount we expect to be reimbursed from our insurance carrier. The netdifference of $235,000 between these amounts represents the remaining unpaiddeductible under our insurance policy, and this amount was recorded to marketing,general and administrative expenses during the year ended December 31,2006.

 

**7.**                 Recent AccountingPronouncements

** **

In September 2006,the FASB issued SFAS 157, *Fair Value Measurements*,which defines fair value, provides a framework for measuring fair value, andexpands the disclosures required for fair value measurements. SFAS 157 appliesto other accounting pronouncements that require fair value measurements; itdoes not require any new fair value measurements. SFAS 157 is effective forfiscal years beginning after November 15, 2007 and we adopted it on January 1,2008. The application of SFAS 157 to certain items has been deferred and willbe effective for fiscal years beginning after November 15, 2008 andinterim periods within that year.  Theadoption of this pronouncement did not have a material impact on our results ofoperations or financial position for the three month period ended March 31,2008. We have no assets or liabilities that were measured using significantunobservable inputs (Level 3 assets and liabilities) as of March 31,2008.  Our financial instruments includecash and cash equivalents, investments in marketable securities, prepaidexpenses, accounts payable and accrued liabilities. The carrying amounts offinancial instruments approximate their fair value due to their shortmaturities. The carrying values of our cash equivalents and investments inmarketable securities approximate their market values based on quoted marketprices, or Level 1 inputs. We account for investments in marketable securitiesin accordance with SFAS No. 115, *Accountingfor Certain Investments in Debt and Equity Securities*. Investmentsin marketable securities are classified as held to maturity and are carried atcost plus accrued interest.

 

In February 2007, theFASB issued SFAS No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities — Including an Amendment ofFASB Statement No. 115,* which is effective for fiscal yearsbeginning after November 15, 2007 and we adopted it on January 1, 2008.This statement permits an entity to choose to measure many financialinstruments and certain other items at fair value at specified election dates.Subsequent unrealized gains and losses on items for which the fair value optionhas been elected will be reported in earnings. The adoption of thispronouncement did not have a material impact on our results of operations orfinancial position for the three month period ended March 31, 2008, as wedid not elect to measure any of our financial instruments at fair value.

 

In June 2007, theEmerging Issues Task Force (“EITF”) issued a consensus, EITF 07-3, *Advance Payments for Research and DevelopmentActivities*, which states that non-refundable advance payments forgoods that will be used or services that will be performed in future researchand development activities should be deferred and capitalized until the goodshave been delivered or the related services have been rendered.  EITF 07-3 is to be applied prospectively fornew contractual arrangements entered into in fiscal years beginning after December 15,2007 and we adopted it on January 1, 2008. The adoption did not result ina material change to our current accounting practice.

 

In November 2007, the EITF issued a consensus,EITF 07-01, *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 is to be applied retrospectively for collaborationarrangements in fiscal years beginning after December 15, 2008.  We currently do not have any sucharrangements.

 

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In December 2007,the FASB issued SFAS 141(R), *BusinessCombinations*. This Statement replaces SFAS 141, *Business Combinations,* and requires anacquirer to recognize the assets acquired, the liabilities assumed, includingthose arising from contractual contingencies, any contingent consideration, andany noncontrolling interest in the acquiree at the acquisition date, measuredat their fair values as of that date, with limited exceptions specified in thestatement. SFAS 141(R) also requires the acquirer in a businesscombination achieved in stages (sometimes referred to as a step acquisition) torecognize the identifiable assets and liabilities, as well as thenoncontrolling interest in the acquiree, at the full amounts of their fairvalues (or other amounts determined in accordance with SFAS 141(R)). Inaddition, SFAS 141(R)’s requirement to measure the noncontrolling interest inthe acquiree at fair value will result in recognizing the goodwill attributableto the noncontrolling interest in addition to that attributable to theacquirer. SFAS 141(R) amends SFAS No. 109, *Accounting for Income Taxes*, to require the acquirer torecognize changes in the amount of its deferred tax benefits that arerecognizable because of a business combination either in income from continuingoperations in the period of the combination or directly in contributed capital,depending on the circumstances. It also amends SFAS 142, *Goodwill and Other Intangible Assets*, to,among other things, provide guidance on the impairment testing of acquiredresearch and development intangible assets and assets that the acquirer intendsnot to use. SFAS 141(R) applies prospectively to business combinations forwhich the acquisition date is on or after the beginning of the first annualreporting period beginning on or after December 15, 2008. We are currentlyevaluating the potential impact of this statement.

 

In December 2007,the FASB issued SFAS 160, *NoncontrollingInterests in Consolidated Financial Statements*. SFAS 160 amendsAccounting Research Bulletin 51, *ConsolidatedFinancial Statements*, to establish accounting and reportingstandards for the noncontrolling interest in a subsidiary and for thedeconsolidation of a subsidiary. It also clarifies that a noncontrollinginterest in a subsidiary is an ownership interest in the consolidated entitythat should be reported as equity in the consolidated financial statements.SFAS 160 also changes the way the consolidated income statement is presented byrequiring consolidated net income to be reported at amounts that include theamounts attributable to both the parent and the noncontrolling interest. Italso requires disclosure, on the face of the consolidated statement of income,of the amounts of consolidated net income attributable to the parent and to thenoncontrolling interest. SFAS 160 requires that a parent recognize a gain orloss in net income when a subsidiary is deconsolidated and requires expandeddisclosures in the consolidated financial statements that clearly identify anddistinguish between the interests of the parent owners and the interests of thenoncontrolling owners of a subsidiary. SFAS 160 is effective for fiscalperiods, and interim periods within those fiscal years, beginning on or after December 15,2008. We are currently evaluating the potential impact of this statement.

 

In March 2008, theFASB issued SFAS No. 161, “Disclosures about Derivative Instruments andHedging Activities”. SFAS 161 is intended to improve financial reporting aboutderivative instruments and hedging activities by requiring companies to enhancedisclosure about how these instruments and activities affect their financialposition, performance and cash flows. SFAS 161 also improves the transparencyabout the location and amounts of derivative instruments in a company’sfinancial statements and how they are accounted for under SFAS 133. SFAS 161 iseffective for financial statements issued for fiscal years beginning after November 15,2008, and interim periods within beginning after that date. We are currentlyevaluating the potential impact of this statement.

 

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**ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

*Thefollowing Management’s Discussion and Analysis of Financial Condition andResults of Operations, as well as information contained elsewhere in thisreport,*contains forward-looking statements within themeaning of Section 27A of the Securities Act of 1933, as amended, and Section 21Eof the Securities Exchange Act of 1934, as amended. These forward-lookingstatements include, but are not limited to, statements concerning our projectedtimelines for the initiation of new trials and announcement of results from ourongoing clinical trials, including our Phase 2 PROPEL trial; the potentialfor the results of our Phase 2 PROPEL trial to support marketing approval ofPDX; other statements regarding our future product development and regulatorystrategies, including our intent to develop or seek regulatory approval for ourproduct candidates in specific indications; the ability of our third-partymanufacturing parties to support our requirements for drug supply; anystatements regarding our future financial performance, results of operations orsufficiency of capital resources to fund our operating requirements; and anyother statements which are other than statements of historical fact. In somecases, these statements may be identified by terminology such as “may,” “will,”“should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,”“potential” or “continue,” or the negative of such terms and other comparableterminology. Although we believe that the expectations reflected in theforward-looking statements contained herein are reasonable, we cannot guaranteefuture results, levels of activity, performance or achievements. Thesestatements involve known and unknown risks and uncertainties thatmay cause our, or our industry’s results, levels of activity, performanceor achievements to be materially different from those expressed or implied bythe forward-looking statements. Factors that may cause or contribute to suchdifferences include, among other things, those discussed in Part II, Item1A of this 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-looking statements not specifically described above also may be foundin these and other sections of this report.

* *

**Overview**

 

We are a biopharmaceutical company focused ondeveloping and commercializing innovative small molecule drugs for thetreatment of cancer. 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.  Westrive to develop proprietary products that have the potential to improve thestandard of care in cancer therapy.  Ourfocus is on product opportunities for oncology that leverage our internalclinical development and regulatory expertise and address important marketswith unmet medical need. We may also seek to grow our existing portfolio ofproduct candidates through product acquisition and in-licensing efforts.

 

We currently have two small molecule chemotherapeuticproduct candidates in clinical development, PDX (pralatrexate) and RH1.

 

**PDX**

 

PDX (pralatrexate) isa small molecule chemotherapeutic agent that inhibits dihydrofolate reductase,or DHFR, a folic acid (folate)-dependent enzyme involved in the building ofnucleic acid, or DNA, and other processes. PDX was rationally designed forefficient transport into tumor cells via the reduced folate carrier, or RFC-1,and effective intracellular drug retention. We believe these biochemicalfeatures, together with preclinical and clinical data in a variety of tumors,suggest that PDX may have a favorable safety and efficacy profile relative tomethotrexate and other related DHFR inhibitors. We believe PDX has thepotential to be delivered as a single agent or in combination therapy regimens.

 

In August 2006, we initiated PROPEL, aninternational, multi-center, open-label, single-arm 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 Food and Drug Administration, or FDA, under its specialprotocol assessment, or SPA, process on the design of this Phase 2 trial.  The SPA process allows for FDA evaluation ofa clinical trial protocol intended to form the primary basis of an efficacyclaim in support of an NDA, and provides an agreement that the study design,including trial size, clinical endpoints and/or data analyses are acceptable tothe FDA.  The SPA agreement is not aguarantee of approval, and we cannot assure you that the design of, or datacollected from, the PROPEL trial will be adequate to demonstrate the safety andefficacy of PDX for the treatment of PTCL, or otherwise be sufficient tosupport FDA or any foreign regulatory approval. In addition, the PROPEL trialprotocol does not specify the response rate required to support FDA approvaland the response rate will need to be adequate to support approval.  The primary endpoint of the study isobjective response rate (complete and partial response).  Secondary endpoints include duration ofresponse, progression-free survival and overall survival.  Patients receive 30 mg/m(2) of PDX onceevery 

 

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week for six weeks followed by one week of rest percycle of treatment.  The treatmentregimen also includes vitamin B12 and folic acidsupplementation.

 

In accordance with the PROPEL trial protocol, weconducted three pre-planned interim analyses of safety data and one pre-plannedinterim analysis of response data.  InJanuary, September and December 2007, we announced that an independentdata monitoring committee, or DMC, completed interim analyses of safety datafrom the first 10, 35 and 65 evaluable patients who completed at least onecycle of treatment with PDX, respectively, and recommended that the trialcontinue per the protocol at each analysis. No major safety concerns were identified by the DMC.  In September 2007, we announced that theresults of the interim analysis of patient response data exceeded thepre-specified threshold for continuation of the trial, which required a minimumof four responses (complete or partial) out of the first 35 evaluable patients,as determined by independent oncology review. In April 2008, we completed patient enrollment in the PROPELtrial.  We enrolled more than 100evaluable patients from sites across the United States, Canada and Europe.   We expect to report top line results of thetrial by year end, although the actual timing may vary based on a number offactors.  Following our review of thetrial results, we intend to submit a New Drug Application for PDX for thetreatment of patients with relapsed or refractory PTCL as expeditiously aspossible.

 

In July 2006, theFDA awarded orphan drug designation to PDX for the treatment of patients withT-cell lymphoma. The FDA may award orphan drug designation to drugs that targetconditions affecting 200,000 or fewer patients per year in the United Statesand provide a significant therapeutic advantage over existing treatments. Underthe Orphan Drug Act, if we are the first company to receive FDA approval forPDX for this orphan drug indication, we will obtain seven years of marketingexclusivity during which the FDA may not approve another company’s applicationfor 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 European Commission,with a favorable opinion of the Committee for Orphan Medicinal Products of theEuropean Medicines Agency, or EMEA, granted orphan medicinal product designationto PDX for the treatment of patients with PTCL. The EMEA orphan medicinal product designation, or OMPD, is intended topromote the development of drugs that may provide significant benefit topatients suffering from rare diseases identified notably as life-threatening, chronicallydebilitating or very serious. Under EU regulation, OMPD provides ten years ofpotential market exclusivity once the product candidate is approved formarketing for the designated indication in the European Union, which can be reducedto six years or terminated in certain circumstances.

 

In addition to the PROPEL trial, the followingclinical trials involving PDX are also open for enrollment:

 

·                  a Phase 1/2a, open-label,multi-center study of PDX and gemcitabine with vitamin B12 andfolic acid supplementation in patients with relapsed or refractory non-Hodgkin’slymphoma, or NHL, and Hodgkin’s disease. We initiated patient enrollment in this study in May 2007.  We plan to enroll up to 54 evaluable patientsin the Phase 1 portion of the study and up to 30 additional patients withrelapsed or refractory PTCL in the expanded Phase 2a portion of the study.

 

·                  a Phase 1, open-label, multi-centerstudy of PDX with vitamin B12 and folic acid supplementation inpatients with relapsed or refractory cutaneous T-cell lymphoma, or CTCL.  We initiated patient enrollment in this studyin August 2007.  We plan to enrollup to 56 evaluable patients in the study, including at least 20 patients atwhat we believe to be the optimal dose and schedule.

 

·                  a Phase 1/2, open-label,single-center study of PDX with vitamin B12 and folic acidsupplementation in patients with relapsed or refractory NHL and Hodgkin’sdisease.  This study is currently focusedon exploring alternate dosing and administration schedules in patients withB-cell lymphoma to further evaluate PDX’s potential clinical utility in thissetting.

 

·                  a Phase 1 dose escalation study ofPDX with vitamin B12 and folic acid supplementation in patients withpreviously treated (Stage IIIB/IV) advanced non-small cell lung cancer, orNSCLC.

 

·                  a Phase 2b, randomized, multi-centerstudy comparing PDX and Tarceva® (erlotinib), both with vitamin B12and folic acid supplementation, in patients with Stage IIIB/IV NSCLC who are,or have been, cigarette smokers who have failed treatment with at least oneprior platinum-based chemotherapy regimen. We initiated patient enrollment in this study in January 2008. Thestudy will seek to enroll approximately 160 patients in up to 50 investigativesites worldwide.

 

In addition to our ongoing NSCLC studies, we intend toinitiate a Phase 2, single-agent study of PDX in another solid tumor 

 

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indication in the second quarter of 2008 andadditional studies with PDX by year-end.

 

In December 2002, we entered into a license agreement with MemorialSloan-Kettering Cancer Center, SRI International and Southern ResearchInstitute, as amended, under which we obtained exclusive worldwide rights to aportfolio of patents and patent applications related to PDX and its uses. Theportfolio currently consists of two issued patents in the U.S., two allowedpatent applications in Europe, and pending patent applications in the U.S.,Canada, Europe, Australia, Japan, China, Brazil, Indonesia, South Korea,Mexico, Norway, New Zealand, the Philippines, Singapore, and South Africa.

 

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**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, relative to normaltissue, including lung, colon, breast and liver tumors.  We believe that because RH1 is bioactivatedin the presence of DTD, it has the potential to provide targeted drug deliveryto these tumor types while limiting the amount of toxicity to normal tissue.

** **

**In November 2007, we initiatedpatient enrollment in a Phase 1, open-label, multi-center dose escalation studyof RH1 in patients with advanced solid tumors or NHL.  We plan to enroll up to 60 evaluable patientsin the study with the objective of determining the maximum tolerated dose, orMTD, recommended Phase 2 dose and safety profile of RH1 in thispopulation.  We plan to enroll three tosix patients per cohort.  Once wedetermine what we believe to be the optimal dose and schedule, we plan torecruit an expanded cohort of up to 24 evaluable patients who have tumor typeswith a high likelihood of DTD over-expression to explore possible markers ofanticancer activity.**

 

In December 2004, we entered into an agreement with the University ofColorado Health Sciences Center, the University of Salford and Cancer ResearchTechnology under which we obtained exclusive worldwide rights to certainintellectual property surrounding RH1.

 

***EFAPROXYNTM (efaproxiral)***** Development Discontinued**

* *

In mid-2007, we discontinued the development ofEFAPROXYN, our former lead product candidate, after announcing top-line resultsfrom ENRICH, a Phase 3 clinical trial of EFAPROXYN plus whole brain radiationtherapy, or WBRT, in women with brain metastases originating from breastcancer.  The study failed to achieve itsprimary endpoint of demonstrating a statistically significant improvement inoverall survival in patients receiving EFAPROXYN plus WBRT, compared topatients receiving WBRT alone.  We arecurrently pursuing the sale of our rights to EFAPROXYN although we may notreceive any material consideration for any sale.   The discontinuation of EFAPROXYN has causedno significant decrease in the results of operations from the three monthsended March 31, 2008 as compared to the same period in 2007.

 

**Resultsof Operations**

 

We are a development stage company. Since ourinception 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, our clinical manufacturing, and from ourmarketing, 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 of success and total costs varywidely and are impacted by a variety of risks and uncertainties discussed inthe “Risk Factors” section of Part II, Item 1A below. Because ofthese risks and uncertainties, we cannot predict when or whether we willsuccessfully complete the development of any of our product candidates or theultimate costs of such efforts. Due to these same factors, we cannot be certainwhen, or if, we will generate any revenue or net cash inflow from any of ourcurrent product candidates.

 

Even if our clinical trials demonstrate the safety andeffectiveness of our product candidates in their target indications, we do notexpect to be able to record commercial sales of any of our product candidatesuntil 2009, at the earliest. We expect to incur significant and growing netlosses for the foreseeable future as a result of our research and developmentprograms and the costs of preparing for the potential commercial launch ofPDX.  Although the size and timing of ourfuture net losses are subject to significant uncertainty, we expect them toincrease over the next several years as we continue to fund our developmentprograms and prepare for the potential commercial launch of PDX.

 

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***Comparisonof three months ended March 31, 2008 and 2007***

 
| ** **                             | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------|------------|--------------------------------------------------|------------|
| ** **                             | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
|                                   |       |                                             |       |   |   |
| Operating  expenses:                   |       |                                             |       |   |   |
| Research  and development              |       | $                                                | 5,973,612  |   | $ | 3,289,428 |   |
| Clinical  manufacturing                |       | 1,586,558                                        |       | 1,147,304 |   |
| Marketing,  general and administrative |       | 5,011,364                                        |       | 4,747,596 |   |
|                                   |       |                                             |       |   |   |
| Total  operating expenses              |       | $                                                | 12,571,534 |   | $ | 9,184,328 |   |

 

*Researchand Development.* Research and development expensesinclude the costs of certain personnel, basic research, preclinical studies,clinical trials, regulatory affairs, biostatistical data analysis, patents andlicensing fees for our product candidates. Research and development expenses for the three months ended March 31,2008 and 2007 were $6.0 million and $3.3 million, respectively.  The $2.7 million increase in research anddevelopment expenses in the three months ended March 31, 2008 as comparedto the same period in 2007 was primarily due to the following:

 

·                  a$2.3 million increase in clinical trial costs involving PDX, includingincreased costs for PROPEL and initiation of patient enrollment in three newtrials involving PDX after the first quarter of 2007;

 

·                  a$411,000 increase in non-cash stock-based compensation expense, as discussed inmore detail below; and

 

·                  a$200,000 increase related to key personnel changes and related travel costs,mainly attributable to additional headcount and increases in compensation costsyear over year.

 

These increases were partially offset by a $466,000decrease in preclinical study costs, primarily related to PDX.

 

For the remainder of 2008, we expect our averagequarterly research and development expenses to increase relative to the amountrecorded for the three months ended March 31, 2008 due to the following:

 

·       increasesin costs for our ongoing and planned clinical trials;

 

·       anincrease in personnel costs, primarily resulting from additional headcount; and

 

·         an increase in non-cashstock-based compensation expense related to grants for new employees and a fullquarter of expense related to our annual grants to existing employees whichoccurred at the end of February 2008.

 

*ClinicalManufacturing.* Clinical manufacturing expenses includethe costs of certain personnel, third-party manufacturing costs for developmentof drug materials for use in clinical trials and preclinical studies, and costsassociated with pre-commercial scale-up of manufacturing to support anticipatedregulatory and potential commercial requirements.  Clinical manufacturing expenses for the threemonths ended March 31, 2008 and 2007 were $1.6 million and $1.1 million,respectively.  The $439,000 increase inclinical manufacturing expenses in the three months ended March 31, 2008as compared to the same period in 2007 was primarily due to increases inthird-party manufacturing costs for clinical trial material and pre-commercialscale-up activities for PDX.

 

For the remainder of 2008, we expect our averagequarterly clinical manufacturing expenses to increase relative to the amountrecorded for the three months ended March 31, 2008 due to the following:

 

·                  anincrease in third-party manufacturing costs for PDX to support ongoing andplanned clinical trials and pre-commercial scale-up;

 

·                  anincrease in personnel costs primarily resulting from additional headcount; and

 

·                  anincrease in non-cash stock-based compensation expense related to grants for newemployees and a full quarter of expense related to our annual grants toexisting employees which occurred at the end of February 2008.

 

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*Marketing, General andAdministrative.*  Marketing, general and administrativeexpenses include costs for pre-marketing activities, corporate development,executive administration, corporate offices and related infrastructure.  Marketing, general and administrativeexpenses for the three months ended March 31, 2008 and 2007 were $5.0million and $4.7 million, respectively. The $264,000 increase in marketing, general and administrative expensesin the three months ended March 31, 2008 as compared to the same period in2007 was primarily due to an increase in non-cash stock-based compensationexpense, as discussed in more detail below.

 

For the remainder of 2008, we expect our averagequarterly marketing, general and administrative expenses to increase relativeto the amount recorded for the three months ended March 31, 2008 due tothe following:

 

·       anincrease in non-cash stock-based compensation expense related to grants for newemployees and a full quarter of expense related to our annual grants toexisting employees which occurred at the end of February 2008;

 

·       anincrease in costs relating to pre-commercial planning activities for PDX; and

 

·       anincrease in personnel costs, primarily resulting from additional headcount.

 

*Stock-based CompensationExpense. *Stock-based compensation expense for thethree months ended March  31, 2008 and 2007 has been recognized inour Statements of Operations as follows:

 
| ** **                              | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------|------------|------------------------------------------------------|------------|
| ** **                              | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| Research  and development               |       | $                                                    | 675,787    |   | $ | 264,300 |   |
| Clinical  manufacturing                 |       | 103,230                                              |       | 36,018 |   |
| Marketing,  general and administrative  |       | 1,335,494                                            |       | 1,003,062 |   |
| Total  stock-based compensation expense |       | $                                                    | 2,114,511  |   | $ | 1,303,380 |   |

 

Of the $2.1 millionof stock-based compensation recognized in the three months ended March 31,2008, $1.9 million was related to our stock option plans, $147,000 relatedto restricted stock and $20,000 related to our employee stock purchaseplan.  Of the $1.3 million ofstock-based compensation recognized in the three months ended March 31,2007, $1.1 million was related to our stock option plans, $178,000 relatedto restricted stock and $9,000 related to our employee stock purchaseplan.  The $811,000 increase instock-based compensation expense in the three months ended March 31, 2008as compared to the same period in 2007 was primarily due to the increase in thenumber of options outstanding resulting from grants for new employees and ourannual grants to existing employees which occurred in February 2008.

 

As of March 31,2008, the unrecorded stock-based compensation balance related to stock optionawards was $10.2 million and will be recognized over an estimatedweighted-average amortization period of 1.5 years. As of March 31, 2008,the unrecorded stock-based compensation balance related to restricted stockawards was $552,000 and will be recognized over an estimated weighted-averageamortization period of 1.4 years.

 

*Interestand Other Income, Net*. Interest income, net of interest expense, for the three months ended March 31,2008 and 2007 was $565,000 and $773,000, respectively.  The $209,000 decrease in net interest incomein the three months ended March 31, 2008 as compared to the same period in2007 was primarily due to lower averageinvestment balances and lower yields on our cash, cash equivalents andinvestments in marketable securities.

 

**Liquidityand Capital Resources**

 

As of March 31, 2008, we had $50.5 million incash, cash equivalents, and investments in marketable securities.  Since our inception, we have financed ouroperations primarily through public and private sales of our equity securities,which have resulted in net proceeds to us of $260.2 million through March 31,2008.  We have also generated$22.2 million of net interest income since our inception from investingthe net proceeds of these financings.

 

We have used $204.9million of cash for operating activities from our inception through March 31,2008.  Net cash used to fund ouroperating activities for the three months ended March 31, 2008 and 2007was $9.3 million and $7.9 million, respectively.

 

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Net cash provided byinvesting activities for the three months ended March 31, 2008 was $4.1million 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 three months ended March 31, 2007 was $20.4million and consisted primarily of purchases of investments in marketablesecurities, partially offset by the proceeds from maturities of investments inmarketable securities.

 

Net cash provided by financing activities for thethree months ended March 31, 2008 was $2.3 million and consisted ofproceeds associated with the exercise of common stock options.  Net cash provided by financing activities forthe three months ended March 31, 2007 was $50.6 million and consistedprimarily of the net proceeds from the sale of 9,000,000 shares of common stockin February 2007 in an underwritten offering at a price of $6.00 per share(the “February 2007 Financing”).  Wereceived net proceeds from the February 2007 Financing of approximately$50.3 million, after deducting underwriting commissions of approximately$3.2 million and other offering expenses of approximately $503,000.

 

Based upon the current status of our productdevelopment plans, we believe that our cash, cash equivalents, and investmentsin marketable securities as of March 31, 2008 should be adequate tosupport our operations through at least the first quarter of 2009, althoughthere can be no assurance that this can, in fact, be accomplished. Our forecastof the period of time through which our financial resources will be adequate tosupport our operations is a forward-looking statement that involves risks anduncertainties, and actual results could vary materially.

 

We anticipate continuing our current developmentprograms and/or beginning other long-term development projects involving ourproduct candidates. These projects may require many years and substantialexpenditures to complete and may ultimately be unsuccessful. Therefore, we willneed to obtain additional funds from outside sources to continue research anddevelopment activities, fund operating expenses, pursue regulatory approvalsand build sales and marketing capabilities, as necessary. However, our actualcapital requirements will depend on many factors, including:

 

·       thetiming and outcome of our ongoing PROPEL trial;

 

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

 

·       ourevaluation of, and decisions with respect to, additional therapeuticindications for which we may develop PDX;

 

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

 

·       costs associated withsecuring potential in-license opportunities and additional product candidatesand conducting preclinical research and clinical development for our productcandidates.

 

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

 

**Obligations and Commitments**

 

*Royaltyand License Fee Commitments for PDX*

* *

In December 2002, we entered into a licenseagreement with Memorial Sloan-Kettering Cancer Center, SRI International andSouthern Research Institute, as amended, under which we obtained exclusiveworldwide rights to a portfolio of patents and patent applications related toPDX (pralatrexate) and its uses. Under the terms of the agreement, we paid anup-front license fee of $2.0 million upon execution of the agreement and arealso required to make certain additional cash payments based upon theachievement of certain clinical development or regulatory milestones or thepassage of certain time periods. To date, 

 

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we have made aggregate milestone payments of $2.0million based on the passage of time. In the future, we could make aggregatemilestone payments of $1.0 million upon the earlier of achievement of aclinical development milestone or the passage of certain time periods (the “ClinicalMilestone”), and up to $10.3 million upon achievement of certain regulatorymilestones, including regulatory approval to market PDX in the United States orEurope. The next scheduled payments toward the Clinical Milestone of $500,000each are currently due on December 23, 2008 and 2009. The up-front license fee and all milestonepayments under the agreement have been or will be recorded to research anddevelopment expense when incurred. Under the terms of the agreement, weare required to fund all development programs and will have sole responsibilityfor all commercialization activities. In addition, we will pay the licensors aroyalty based on a percentage of net revenues arising from sales of the productor sublicense revenues arising from sublicensing the product, if and when suchsales or sublicenses occur.

 

**CriticalAccounting Policies**

 

Our discussion and analysis of our financial conditionand results of operations are based upon our financial statements, which havebeen prepared in accordance with accounting principles generally accepted inthe United States.  The preparation ofthese financial statements requires us to make estimates and judgments thataffect the reported amounts of assets, liabilities, and expenses.  We base our estimates on historicalexperience available information and assumptions that we believe to bereasonable under the circumstances. Actual results may differ from these estimates under differentassumptions or conditions.  For adescription of our critical accounting policies, please see our Annual Reporton Form 10-K for the fiscal year ended December 31, 2007.

 

**RecentAccounting Pronouncements**

 

For a description of our recent accountingpronouncements, please see Note 7 of the unaudited March 31, 2008financial statements included herein.

 

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

** **

We do not use derivative financial instruments orauction rate securities in our investment portfolio and have no foreignexchange contracts.  Our financial instrumentsas of March 31, 2008 consist of cash, cash equivalents, investments inmarketable securities, and accounts payable. All highly liquid investments with original maturities of three monthsor less are considered to be cash equivalents.

 

We invest in marketable securities in accordance withour investment policy.  The primaryobjectives of our investment policy are to preserve principal, maintain properliquidity to meet operating needs and maximize yields.  Our investment policy specifies credit qualitystandards for our investments and limits the amount of credit exposure to anysingle issue, issuer or type of investment. The average duration of the issues in our portfolio of investments inmarketable securities as of March 31, 2008 is approximately fourmonths.  As of March 31, 2008, ourinvestments in marketable securities of $37.6 million are all classifiedas held-to-maturity and were held in a variety of interest-bearing instruments,consisting mainly of high-grade corporate notes.

 

Investments in fixed-rate interest-earning instrumentscarry varying degrees of interest rate risk. The fair market value of our fixed-rate securities may be adverselyimpacted due to a rise in interest rates. In general, securities with longer maturities are subject to greaterinterest-rate risk than those with shorter maturities.  Due in part to this factor, our interestincome may fall short of expectations or we may suffer losses in principal ifsecurities are sold that have declined in market value due to changes ininterest rates.  Due to the shortduration of our investment portfolio, we believe an immediate 10% change ininterest rates would not be material to our financial condition or results ofoperations.

 

**ITEM 4.  CONTROLS AND PROCEDURES**

** **

**Disclosure Controls andProcedures**

 

As of the end of theperiod covered by this report, an evaluation was carried out under thesupervision and with the participation of our management, including ourprincipal executive officer and principal financial officer (the “EvaluatingOfficers”), of the effectiveness of our disclosure controls and procedures, asdefined in Rule 13a-15(e) of the Securities Exchange Act of 1934, asamended (“Exchange Act”).  Based on thatevaluation, our management, including the Evaluating Officers, concluded thatour disclosure controls and procedures were effective as of March 31, 2008to ensure that 

 

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information required tobe disclosed by us in reports that we file or submit under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin Securities and Exchange Commission’s rules and forms, and that suchinformation is accumulated and communicated to our management, including theEvaluating Officers, as appropriate, to allow timely decisions regardingrequired disclosure.

 

**NoChanges in Internal Control over Financial Reporting**

 

There were no changes inour internal controls over financial reporting during the three months ended March 31,2008 that have materially affected, or are reasonably likely to materiallyaffect, our internal controls over financial reporting.

 

**PART II.  OTHER INFORMATION**

** **

**ITEM 1.  LEGALPROCEEDINGS**

** **

The Company and one of its former officers were namedas defendants in a purported securities class action lawsuit filed in May 2004in the United States District Court for the District of Colorado (the “DistrictCourt”). An amended complaint was filed in August 2004. The lawsuit wasbrought on behalf of a purported class of purchasers of our securities duringthe period from May 29, 2003 to April 29, 2004, and soughtunspecified damages relating to the issuance of allegedly false and misleadingstatements regarding EFAPROXYN, one of our former product candidates, duringthis 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.

 

On November 20, 2005, the plaintiff appealed theDistrict Court’s decision to the U.S. Court of Appeals for the Tenth Circuit(the “Court of Appeals”).   On February 6, 2008, the parties signeda stipulation of settlement, settling the case for $2,000,000. Neither wenor our former officer admits any liability in connection with the settlement.The Court of Appeals accordingly has remanded the case to the DistrictCourt for consideration of the settlement.  The settlement is subject tovarious conditions, including without limitation approval of the DistrictCourt.  We expect that the amount of thesettlement in excess of our deductible will be covered by our insurancecarrier.  In the event the settlementdoes not become final, we intend to vigorously defend against the plaintiff’sappeal. If the Court of Appeals then were to reverse the District Court’sdecision and we were 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 were successful,the litigation could result in substantial costs and divert management’sattention and resources, which could adversely affect our business. As of March 31,2008, 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 $1,765,000 in prepaid expenses andother assets, which represents the amount we expect to be reimbursed from ourinsurance carrier. The net difference of $235,000 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.

 

**ITEM 1A.  RISK FACTORS**

** **

*Our business faces significantrisks. These risks include those described below and may include additionalrisks of which we are not currently aware or which we currently do not believeare material. If any of the events or circumstances described in the followingrisk factors actually occurs, they may materially harm our business, financialcondition, operating results and cash flow. As a result, the market price ofour common stock could decline. Additional risks and uncertainties that are notyet identified or that we think are immaterial may also materially harm ourbusiness, operating results and financial condition.  Stockholdersand potential investors in shares of our common stock should carefully considerthe following 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, 2007, 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 relying uponthe safe harbor for all forward-looking statements in this report, and any suchstatements made by or on behalf of the Company are qualified by reference tothe following cautionary statements, as well as to those set forth elsewhere inthis 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*

 

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*forthin our Annual Report on Form 10-K for the period ended December 31,2007 have been marked with an asterisk immediately following the heading ofsuch risk factor.*

 

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

** **

Since our inception in 1992, we have not generated anyrevenue from product sales and have experienced significant net losses andnegative cash flows from operations. To date, we have financed our operationsprimarily through the private and public sale of securities.  For the three months ended March 31,2008, we had a net loss of $12.0 million. As of March 31, 2008, we had accumulated a deficit during ourdevelopment stage of $259.9 million. We have incurred these losses principally from costs incurred in ourresearch and development programs, our clinical manufacturing, and from ourmarketing, general and administrative expenses. We expect to continue incurringnet losses for the foreseeable future. Our ability to generate revenue andachieve profitability is dependent on our ability, alone or with partners, tosuccessfully complete the development of our product candidates, conductclinical trials, obtain the necessary regulatory approvals, and manufacture andmarket our product candidates. We may never generate revenue from product salesor become profitable. We expect to continue to spend substantial amounts onresearch and development, including amounts spent on conducting clinical trialsfor our product candidates, and in preparing for the potential commerciallaunch of our product candidates. We may not be able to continue as a goingconcern if we are unable to generate meaningful amounts of revenue to supportour operations or cannot otherwise raise the necessary funds to support ouroperations.

 

**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.**

 

We currently have no products that are approved forcommercial sale.  Our product candidates are in various stages ofdevelopment, and significant research and development, financial resources andpersonnel will be required to develop commercially viable products and obtainregulatory approvals for them.  Most of our efforts and expenditures overthe next few years will be devoted to PDX.  Accordingly, our futureprospects are substantially dependent on the successful development, regulatoryapproval and commercialization of PDX for the treatment of patients withrelapsed or refractory PTCL.  PDX is not expected to be commerciallyavailable for this or any other indication until at least 2009.  RH1 is inan earlier stage of development relative to PDX, and if both PDX and RH1 areapproved for marketing, we expect that RH1 would not be commercially availableuntil after PDX is commercially available.  Further, certain of theindications that we are pursuing have relatively low incidence rates, which maymake it difficult for us to enroll a sufficient number of patients in ourclinical trials on a timely basis, or at all, and may limit the revenuepotential of our product candidates.  If we are unable to successfullydevelop, obtain regulatory approval for and commercialize PDX for the treatmentof relapsed or refractory PTCL, our ability to generate revenue from productsales will be significantly delayed and our stock price would likely decline.

 

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

** **

The research, testing, manufacturing, labeling,approval, selling, marketing and distribution of drug products are subject toextensive regulation by the FDA and other regulatory authorities in the UnitedStates and other countries, which regulations differ from country to country.Our product candidates are in the preclinical and clinical stages ofdevelopment and have not been approved for marketing in the United States. Apharmaceutical product cannot be marketed in the United States or most othercountries until it has completed a rigorous and extensive regulatory review andapproval process. If we fail to obtain regulatory approval to market ourproduct candidates, we will be unable to sell our products and generaterevenue, which would jeopardize our ability to continue operating our business.Satisfaction of regulatory requirements typically takes many years, isdependent upon the type, complexity and novelty of the product and requires theexpenditure of substantial resources. Of particular significance are therequirements covering research and development, testing, manufacturing, qualitycontrol, labeling and promotion of drugs for human use. We may not obtainregulatory approval for any product candidates we develop, including PDX. For acomplete description of the regulatory approval process and related risks,please refer to the “Government Regulation” section of Item 1 of our AnnualReport on Form 10-K for the year ended December 31, 2007.

 

**Ifour product candidates, including PDX, fail to meet safety and efficacyendpoints in clinical trials, they will not receive regulatory approval, and wewill be unable to market them. ***

** **

Our product candidates may not prove to be safe andefficacious in clinical trials and may not meet all of the applicableregulatory requirements needed to receive regulatory approval. The clinicaldevelopment and regulatory approval process is 

 

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extremely expensive and takes many years. Failure canoccur at any stage of development, and the timing of any regulatory approvalcannot be accurately predicted. In addition, failure to comply with the FDA andother applicable United States and foreign regulatory requirements applicableto clinical trials may subject us to administrative or judicially imposedsanctions.

 

We completed patient enrollment in our pivotal Phase 2PROPEL trial in April 2008.  Wecannot assure you that the design of, or data collected from, the PROPEL trialwill be adequate to demonstrate the safety and efficacy of PDX for thetreatment of patients with relapsed or refractory PTCL, or otherwise besufficient to support FDA or any foreign regulatory approval, even thoughPROPEL may be positive and we have a SPA agreement with the FDA for the trial.If the PROPEL trial fails to achieve its safety and efficacy endpoints, we maybe unable to obtain regulatory approval to commercialize PDX, and our businessand stock price would be harmed. Further, even if we believe the data from thetrial are positive, the FDA may disagree with our interpretation and determinethat the data are not sufficient to support approval. If we fail to obtainregulatory approval for PDX or any of our other current or future product candidates,we will be unable to market and sell them and therefore may never generatemeaningful amounts of revenue or become profitable.

 

As part of the regulatory process, we must conductclinical trials for each product candidate to demonstrate safety and efficacyto the satisfaction of the FDA and other regulatory authorities abroad. Thenumber and design of clinical trials that will be required varies depending onthe product candidate, the condition being evaluated, the trial results, andregulations applicable to any particular product candidate. The design of ourclinical trials is based on many assumptions about the expected effect of ourproduct candidates, and if those assumptions prove incorrect, the clinicaltrials may not demonstrate the safety or efficacy of our product candidates.Preliminary results may not be confirmed upon full analysis of the detailedresults of a trial, and prior clinical trial program designs and results maynot be predictive of future clinical trial designs or results. Productcandidates in later stage clinical trials may fail to show the desired safetyand efficacy despite having progressed through initial clinical trials withacceptable endpoints. For example, we terminated the development of EFAPROXYN,one of our former product candidates, when it failed to demonstratestatistically significant improvement in overall survival in the targetedpatients in a Phase 3 clinical trial. If our product candidates fail to showclinically significant benefits, they will not be approved for marketing.

 

**Wemay experience delays in our clinical trials that could adversely affect ourfinancial 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 arestudying. Competition for patients in some cancer trials is particularlyintense because of the limited number of leading specialist physicians and thegeographic concentration of major clinical centers.

 

As a result of 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 product developmentand approval process. Our product development costs will also increase if weneed to perform more or larger clinical trials than planned. If other companies’product candidates show favorable results, we may be required to conductadditional clinical trials to address changes in treatment regimens or for ourproducts to be commercially competitive. Any delays in completing our clinicaltrials will delay our ability to generate revenue from product sales, and wemay have insufficient capital resources to support our operations.  Even if we do have sufficient capitalresources, our ability to become profitable will be delayed.

 

**Whilewe have negotiated a special protocol assessment with the FDA relating to ourPROPEL trial, this agreement does not guarantee any particular outcome fromregulatory review of the trial or the product, including any regulatoryapproval. ***

** **

The protocol for the PROPEL trial was reviewed by theFDA under its 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, the PROPEL trialprotocol does not specify the response rate required to support FDA approvaland the response rate will need to be adequate to support approval.  In addition, even if we believe PROPEL ispositive, a SPA agreement is not a guarantee of approval, and we cannot becertain 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. Further, the 

 

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SPA agreement is not binding on the FDA if publichealth concerns unrecognized at the time the SPA agreement is entered into becomeevident, other new scientific concerns regarding product safety or efficacyarise, or if we fail to comply with the agreed upon trial protocols. Inaddition, the SPA agreement may be changed by us or the FDA on writtenagreement of both parties, and the FDA retains significant latitude anddiscretion in interpreting the terms of the SPA agreement and the data andresults from the PROPEL trial. As a result, we do not know how the FDA willinterpret the parties’ respective commitments under the SPA agreement, how itwill interpret the data and results from the PROPEL trial, or whether PDX willreceive any regulatory approvals as a result of the SPA agreement or theclinical trial. Therefore, despite the potential benefits of the SPA agreement,significant uncertainty remains regarding the clinical development andregulatory approval process for PDX for the treatment of PTCL.

 

**Wemay be required to suspend, repeat or terminate our clinical trials if they arenot conducted in accordance with regulatory requirements, the results arenegative or inconclusive or the trials are not well designed. ***

 

Clinical trials must be conducted in accordance withthe FDA’s Good Clinical Practices or other applicable foreign governmentguidelines and are subject to oversight by the FDA, other foreign governmentalagencies and Institutional Review Boards, or IRBs, at the medical institutionswhere the clinical trials are conducted. In addition, clinical trials must beconducted with product candidates produced under the FDA’s Good ManufacturingPractices, and may require large numbers of test subjects. Clinical trials maybe suspended by the FDA other foreign governmental agencies, or us for variousreasons, including:

 

·      deficienciesin the conduct of the clinical trials, including failure to conduct theclinical trial in accordance with regulatory requirements or clinicalprotocols;

 

·      deficienciesin the clinical trial operations or trial sites resulting in the imposition ofa clinical hold;

 

·      theproduct candidate may have unforeseen adverse side effects; 

 

·      thetime required to determine whether the product candidate is effective may belonger than expected; 

 

·      fatalitiesor other adverse events arising during a clinical trial due to medical problemsthat may not be related to clinical trial treatments; 

 

·      theproduct candidate may not appear to be more effective than current therapies; 

 

·      qualityor stability of the product candidate may fall below acceptable standards; or 

 

·      we maynot be able to produce sufficient quantities of the product candidate tocomplete the trials. 

 

In addition, changes in regulatory requirements andguidance may occur and we may need to amend clinical trial protocols to reflectthese changes. Amendments may require us to resubmit our clinical trialprotocols to IRBs for reexamination, which may impact the costs, timing orsuccessful completion of a clinical trial. Due to these and other factors, ourcurrent product candidates or any of our other future product candidates couldtake a significantly longer time to gain regulatory approval than we expect ormay never gain approval, which could reduce or eliminate our revenue bydelaying or terminating the potential commercialization of our productcandidates. 

 

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 setbacks inadvanced clinical trials, even after promising results in earlier trials. As aresult, there can be no assurance that our PROPEL trial will achieve itsprimary or secondary endpoints. In addition, negative or inconclusive resultsor adverse medical events during a clinical trial could cause a clinical trialto be repeated or terminated. Also, failure to construct clinical trialprotocols to screen patients for risk profile factors relevant to the trial forpurposes of segregating patients into the patient populations treated with thedrug being tested and the control group could result in either groupexperiencing a disproportionate number of adverse events and could cause aclinical 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.

 

**Reportsof adverse events or safety concerns involving our product candidates or inrelated technology fields or other companies’ clinical trials could delay orprevent us from obtaining regulatory approval or negatively impact publicperception 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.

 

**Dueto our reliance on contract research organizations and other third parties toconduct our clinical trials, we are unable to directly 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 

 

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entirely upon our own staff. Communicating withoutside parties can also be challenging, potentially leading to mistakes aswell as difficulties in coordinating activities. Outside parties may havestaffing difficulties, may undergo changes in priorities or may becomefinancially distressed, adversely affecting their willingness or ability toconduct our trials. We may experience unexpected cost increases that are beyondour control. Problems with the timeliness or quality of the work of a contractresearch organization may lead us to seek to terminate the relationship and usean alternative service provider. However, making this change may be costly andmay delay our trials, and contractual restrictions may make such a changedifficult or impossible. Additionally, it may be impossible to find areplacement organization that can conduct our trials in an acceptable mannerand at an acceptable cost.

 

**Evenif our product candidates meet safety and efficacy endpoints in clinical trials,regulatory authorities may not approve them, or we may face post-approvalproblems that require withdrawal of our products 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.The FDA has substantial discretion inthe approval process, and when or whether regulatory approval will be obtainedfor any drug we develop. For example, even though we established a SPA with theFDA for our PROPEL trial, there is no guarantee that the data generated fromthe PROPEL trial will be adequate to support FDA approval. Regulatory agenciesalso may approve a product candidate for fewer conditions than requested or maygrant approval subject to the performance of post-marketing studies for aproduct candidate. In addition, regulatory agencies may not approve the labelingclaims that are necessary or desirable for the successful commercialization ofour product candidates.

 

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 continues to be subject to strictregulation after approval and may be required to undergo post-approval studies.Any unforeseen problems with an approved product or any violation ofregulations could result in restrictions on the product, including itswithdrawal from the market. Any delay in or failure to receive or maintainregulatory approval for any of our products could harm our business and preventus from ever generating meaningful revenues or achieving profitability.

 

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

** **

Following any regulatory approval of our product candidates,we will be subject to continuing regulatory obligations such as safetyreporting requirements and additional post-marketing obligations, includingregulatory oversight of the promotion and marketing of our products. Inaddition, we or our third-party manufacturers will be required to adhere toregulations setting forth current Good Manufacturing Practices, or cGMP. 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 these regulatoryauthorities to ensure strict compliance with cGMP or other applicablegovernment regulations and corresponding foreign standards. We do not havecontrol over a third-party manufacturer’s compliance with these regulations andstandards. Such inspections may result in compliance issues that could preventor delay marketing approval, or require the expenditure of financial or otherresources to address. If we or our third-party manufacturers fail to complywith applicable regulatory requirements, we may be subject to fines, suspensionor withdrawal of regulatory approvals, product recalls, seizure of products,operating restrictions and criminal prosecution.

 

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

** **

Because we 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.

 

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

** **

We expect that significant additional capital will berequired in the future to continue our research and development efforts and tocommercialize our product candidates, if approved for marketing. Our actualcapital requirements will depend on many factors, including:

 

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·       thetiming and outcome of our ongoing PROPEL trial;

 

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

 

·       ourevaluation of, and decisions with respect to, additional therapeuticindications for which we may develop PDX or RH1;

 

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

 

·       costsassociated with securing potential in-license opportunities and additionalproduct candidates and conducting preclinical research and clinical developmentfor our product candidates.

 

We will need to raise additional capital to supportour future operations, including the potential commercialization of PDX in theevent the PROPEL trial is positive and we obtain regulatory approval to market PDX.We may seek to obtain this additional capital through arrangements withcorporate partners, equity or debt financings, or from other sources. Sucharrangements, if successfully consummated, may be dilutive to our existingstockholders. However, there is no assurance that additional financing will beavailable when needed, or that, if available, we will obtain such financing onterms that are favorable to our stockholders or us. In addition, in the eventthat additional funds are obtained through arrangements with collaborativepartners or other sources, such arrangements may require us to relinquishrights to some of our technologies, product candidates or products underdevelopment that we would otherwise seek to develop or commercialize ourselves.  If we are unable to generate meaningfulamounts of revenue from future product sales, if any, or cannot otherwise raisesufficient additional funds to support our operations, we may be required todelay, reduce the scope of or eliminate one or more of our development programsand our business and future prospects for revenue and profitability may beharmed.

 

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

** **

Our success will depend in part on our ability toobtain and maintain meaningful patent protection for our products, both in theUnited States and in other countries. We rely on patents to protect a largepart of our intellectual property and our competitive position. Any patentsissued to or licensed by us could be challenged, invalidated, infringed,circumvented or held unenforceable. In addition, it is possible that no patentswill issue on any of our licensed patent applications. It is possible that theclaims in patents that have been issued or licensed to us or that may be issuedor licensed to us in the future will not be sufficiently broad to protect ourintellectual property or that the patents will not provide protection againstcompetitive products or otherwise be commercially valuable. Failure to obtainand maintain adequate patent protection for our intellectual property wouldimpair our ability to be commercially competitive.

 

Our commercial success will also depend in part on ourability to commercialize our product candidates without infringing patents orother proprietary rights of others or breaching the licenses granted to us. Wemay not be able to obtain a license to third-party technology that we mayrequire to conduct our business or, if obtainable, we may not be able tolicense such technology at a reasonable cost. If we fail to obtain a license toany technology that we may require to commercialize our technologies or productcandidates, or fail to obtain a license at a reasonable cost, we will be unableto commercialize the affected product or to commercialize it at a price thatwill allow us to become profitable.

 

In addition to patent protection, we also rely upontrade secrets, proprietary know-how and technological advances which we seek toprotect through confidentiality agreements with our collaborators, employeesand consultants. Our employees and consultants are required to enter intoconfidentiality agreements with us. We also enter into non-disclosureagreements with our collaborators and vendors, which are intended to protectour confidential information delivered to third parties for research and otherpurposes. However, these agreements could be breached and we may not haveadequate remedies for any breach, or our trade secrets and proprietary know-howcould otherwise become known or be independently discovered by others.

 

Furthermore, as with any pharmaceutical company, ourpatent and other proprietary rights are subject to uncertainty. Our patentrights related to our product candidates might conflict with current or futurepatents and other proprietary rights of others. For the same reasons, theproducts of others could infringe our patents or other proprietary rights.Litigation or patent interference proceedings, either of which could result insubstantial costs to us, may be necessary to enforce any of our patents orother proprietary rights, or to determine the scope and validity orenforceability of other parties’ proprietary rights. The defense andprosecution of patent and intellectual property infringement claims are bothcostly and time consuming, 

 

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even if the outcome is favorable to us. Any adverseoutcome could subject us to significant liabilities to third parties, requiredisputed rights to be licensed from third parties, or require us to cease sellingour future products. We are not currently a party to any patent or otherintellectual property infringement claims.

 

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

** **

We are dependent on third parties for the manufactureand storage of our product candidates for clinical trials and, if approved, forcommercial sale. If we are unable to contract for a sufficient supply of ourproduct candidates on acceptable terms, or if we encounter delays ordifficulties in the manufacturing process or our relationships with ourmanufacturers, we may not have sufficient product to conduct or complete ourclinical trials or support commercial requirements for our product candidates,if approved for marketing.

 

Both PDX and RH1 are cytotoxic which requiresmanufacturers of these substances to have specialized equipment and safetysystems to handle such substances. In addition, the starting materials for PDXrequire custom preparations, which will require us to manage an additional setof suppliers to obtain the needed supplies of PDX.

 

Given our lack of formal supply agreements and thefact that in many cases our components are supplied by a single source, ourthird party suppliers may be unable or unwilling to fulfill our potentialcommercial needs or meet our deadlines, or the components they supply to us maynot meet our specifications and quality policies and procedures. If we need tofind an alternative supplier of PDX or other components, we may not be able tocontract for those components on acceptable terms, if at all.  Any such failure to supply or delay caused bysuch suppliers would have an adverse affect on our ability to continue clinicaldevelopment of our product candidates or commercialize any future products.

 

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 future contractmanufacturers fail in any of these respects, our ability to timely complete ourclinical trials, obtain required regulatory approvals and successfullycommercialize our product candidates will be materially and adversely affected.This risk may be heightened with respect to PDX and RH1 as there are a limitednumber of fill/finish manufacturers with the ability to handle 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 manufacturers may notbe able to comply with applicable regulatory requirements, which would prohibitthem from manufacturing products for us;

 

·       ourmanufacturers may have staffing difficulties, may undergo changes in control ormay become financially distressed, adversely affecting their willingness orability to manufacture products for us;

 

·       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;

 

·       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; and

 

·       we may not haveintellectual property rights, or may have to share intellectual propertyrights, to any improvements in 

 

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the manufacturing processes or new manufacturingprocesses for our products.

 

Any of these factors could result in the delay ofclinical trials, regulatory submissions, required approvals orcommercialization of our product candidates. They could also entail higher costs and result in our being unable toeffectively commercialize our product candidates.

 

**We may explore strategic partnerships that maynever materialize or may fail**.

** **

We may, in the future,periodically explore a variety of possible strategic partnerships in an effortto gain access to additional complementary resources. At the current time, wecannot predict what form such a strategic partnership might take. We are likelyto face significant competition in seeking appropriate strategic partners, andthese strategic partnerships can be complicated and time consuming to negotiateand document. We may not be able to negotiate strategic partnerships onacceptable terms, or at all. We are unable to predict when, if ever, we willenter into any additional strategic partnerships because of the numerous risksand uncertainties associated with establishing strategic partnerships.

 

**If we enter into one or more strategicpartnerships, we may be required to relinquish important rights to and controlover the development of our product candidates or otherwise be subject tounfavorable terms.**

 

Any future strategicpartnerships we enter into could subject us to a number of risks, including:

 

·                  wemay be required to undertake the expenditure of substantial operational,financial and management resources in integrating new businesses, technologiesand products;

 

·                  wemay be required to issue equity securities that would dilute our existingstockholders’ percentage ownership;

 

·                  wemay be required to assume substantial actual or contingent liabilities;

 

·                  wemay not be able to control the amount and timing of resources that ourstrategic partners devote to the development or commercialization of productcandidates;

 

·                  strategicpartners may delay clinical trials, provide insufficient funding, terminate aclinical trial or abandon a product candidate, repeat or conduct new clinicaltrials or require a new version of a product candidate for clinical testing;

 

·                  strategicpartners may not pursue further development and commercialization of productsresulting from the strategic partnering arrangement or may elect to discontinueresearch and development programs;

 

·                  strategicpartners may not commit adequate resources to the marketing and distribution ofany future products, limiting our potential revenues from these products;

 

·                  disputesmay arise between us and our strategic partners that result in the delay ortermination of the research, development or commercialization of our productcandidates or that result in costly litigation or arbitration that divertsmanagement’s attention and consumes resources;

 

·                  strategicpartners may experience financial difficulties;

 

·                  strategicpartners may not properly maintain or defend our intellectual property rightsor may use our proprietary information in a manner that could jeopardize orinvalidate our proprietary information or expose us to potential litigation;

 

·                  businesscombinations or significant changes in a strategic partner’s business strategymay also adversely affect a strategic partner’s willingness or ability tocomplete its obligations under any arrangement;

 

·                  strategicpartners could independently move forward with a competing product candidatedeveloped either independently or in collaboration with others, including ourcompetitors; and

 

·                  strategicpartners could terminate the arrangement or allow it to expire, which woulddelay the development and may increase the cost of developing our productcandidates.

 

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

** **

Even if approved for marketing, our products may notachieve market acceptance. The degree of market acceptance will depend upon anumber of factors, including:

 

·       the receipt of timelyregulatory approval for the uses that we are studying;

 

·       the establishment anddemonstration in the medical community of the safety and efficacy of ourproducts and their potential advantages over existing and newly developed therapeuticproducts;

 

·       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.

 

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

** **

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 topatients for our products. If government and other third-party payors do notprovide adequate coverage and reimbursement levels for our product candidates,their market acceptance may be reduced.

 

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

** **

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.

 

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**We may not obtain orphan drug exclusivity or wemay not receive the full benefit of orphan drug exclusivity even if we obtainit. ***

 

The FDA has awarded orphan drug status to PDX for the treatment ofpatients with T-cell lymphoma. Under the Orphan Drug Act, if we are the firstcompany to receive FDA approval for this drug for the designated orphan drugindication, we will obtain seven years of marketing exclusivity during whichFDA may not approve another company’s application for the same drug for the sameorphan indication.  Orphan drugexclusivity would not prevent FDA approval of a different drug for the orphanindication or the same drug for a different indication.  

 

**Ifwe fail to comply with healthcare fraud and abuse laws, we could facesubstantial penalties and our business, operations and financial conditioncould 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 which also imposescertain requirements relating to the privacy, security and transmission ofindividually identifiable health information;

 

·       federalself-referral laws, such as STARK, which prohibits a physician from making areferral to a provider of certain health services with which the physician orthe physician’s family member has a financial interest; and

 

·       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, and state laws governing theprivacy of health information in certain circumstances, many of which differfrom each other in significant ways and often are not preempted by HIPAA.

 

Although there are a number of statutory exemptions andregulatory safe harbors protecting certain common activities from prosecutionunder the federal Anti-Kickback statute, the exemptions and safe harbors aredrawn narrowly, and practices that involve remuneration intended to induceprescribing, purchases or recommendations may be subject to scrutiny if they donot qualify for an exemption or safe harbor. Our practices may not in all casesmeet all of the criteria for safe harbor protection from anti-kickbackliability.

 

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.

 

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

 

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

** **

Even if we obtain the necessary regulatory approvalsto market PDX or any other product candidate, our commercial opportunity willbe reduced or eliminated if our competitors develop and market products thatare more effective, have fewer 

 

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side effects or are less expensive than our productcandidates. 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 establishcollaborative arrangements for research, development, manufacturing andmarketing. It is possible that competitors will succeed in developingtechnologies that are more effective than those being developed by us or thatwould render our technology obsolete or noncompetitive.

 

**Ifproduct liability lawsuits are successfully brought against us, we may incursubstantial liabilities and may be required to limit commercialization of ourproduct 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 reasonable product liability insurance for any products approvedfor marketing.

 

**Weare currently involved in a securities class action litigation, which couldharm our business if management attention is diverted or the claims are decidedagainst us.**

** **

We have been named as a defendant in a purportedsecurities 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. In an opinion dated October 20, 2005, theDistrict Court concluded that the plaintiff’s complaint failed to meet thelegal requirements applicable to its alleged claims and dismissed thelawsuit.  On November 20, 2005, theplaintiff appealed the District Court’s decision to the U.S. Court of Appealsfor the Tenth Circuit (the “Court of Appeals”).   On February 6,2008, the parties signed a stipulation of settlement, settling the case for$2,000,000.  The defendants do not admit any liability in connection withthe settlement. The Court of Appeals accordingly has remanded the case tothe District Court for consideration of the settlement.  The settlement issubject to various conditions, including without limitation approval of theDistrict Court.  We expect that theamount of the settlement in excess of our deductible will be covered by ourinsurance carrier.  In the event thesettlement does not become final, we intend to vigorously defend against theplaintiff’s appeal. If the Court of Appeals then were to reverse the DistrictCourt’s decision and we were not successful in our defense of such claims, wecould be forced to make significant payments to the plaintiffs, and suchpayments could have a material adverse effect on our business, financialcondition, results of operations and cash flows to the extent such payments arenot covered by our insurance carriers. Even if our defense against such claimswere successful, the litigation could result in substantial costs and divertmanagement’s attention and resources, which could adversely affect ourbusiness. As of March 31, 2008, we have recorded $2,000,000 in accruedlitigation settlement costs, which represents our best estimate of thepotential gross amount of the settlement costs to be paid to the plaintiffs,and $1,765,000 in prepaid expenses and other assets, which represents theamount we expect to be reimbursed from our insurance carrier. The netdifference of $235,000 between these amounts represents the remaining unpaiddeductible under our insurance policy, and this amount was recorded tomarketing, general and administrative expenses during the year ended December 31,2006.

 

**Our success depends on retention of our Presidentand Chief Executive****Officer, Chief Medical Officer and other keypersonnel.**

 

We are highly dependent on our President and ChiefExecutive Officer, Paul L. Berns, our Chief Medical Officer, Pablo J. Cagnoni,M.D. and other members of our management team. We are named as the beneficiaryon a term life insurance policy covering Mr. Berns in the amount of $10.0million. We also depend on academic collaborators for each of our research anddevelopment programs. The loss of any of our key employees or academiccollaborators could delay our discovery research program and the developmentand commercialization of our product candidates or result in termination ofthem in their entirety. Mr. Berns and Dr. Cagnoni, as well as otherson our executive management team, have severance agreements with us, but the agreementsprovide for “at-will” employment with no specified term. Our future successalso will depend in large part on our continued ability to attract and retainother highly qualified scientific, technical and management personnel, as 

 

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well as personnel with expertise in clinical testing,governmental regulation and commercialization. We face competition forpersonnel from other companies, universities, public and private researchinstitutions, government entities and other organizations. If we areunsuccessful in our recruitment and retention efforts, our business will beharmed.

 

We also rely on consultants, collaborators andadvisors to assist us in formulating and conducting our research. All of ourconsultants, collaborators and advisors are employed by other employers or areself-employed and may have commitments to or consulting contracts with otherentities that may limit their ability to contribute to our company.

 

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

** **

The development, manufacturing, and, if approved,pricing, marketing, sale 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 you 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 securitiesor otherwise raise capital funds, the de-listing of our common stock from theNasdaq Global Market, suspension or termination of our clinical trials, failureto obtain approval to market our product candidates, restrictions on futureproducts or our manufacturing processes, significant fines, or other sanctionsor litigation.

 

**Ifour internal controls over financial reporting are not considered effective,our business and stock price could be adversely affected.**

** **

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 that fiscalyear. 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 control system,no matter how well designed and operated, can provide only reasonable, notabsolute, assurance that the control system’s objectives will be met. Further,the design of a control system must reflect the fact that there are resourceconstraints, and the benefits of controls must be considered relative to theircosts. 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.

 

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

** **

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.

 

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**WarburgPincus Private Equity VIII, L.P. (“Warburg”) and Baker Brothers Life Sciences,L.P. (“Baker”) each control a substantial percentage of the voting power of ouroutstanding 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 (the “February 2007 Financing”). In connectionwith its purchase of shares in the February 2007 Financing, Baker enteredinto a standstill agreement agreeing not to pursue certain activities thepurpose or effect of which might be to change or influence the control of theCompany.

 

As of March 31, 2008, we had 68,075,978 shares ofcommon stock outstanding, of which Warburg owned 22,624,430 shares, orapproximately 33.2% of the voting power of our outstanding common stock, andBaker owned 9,863,065 shares, or approximately 14.5% of the voting power of ouroutstanding common stock. Although each of Warburg and Baker have entered intoa standstill agreement with us, they are, and will continue to be, able toexercise substantial influence over any actions requiring stockholder approval.

 

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

** **

Provisions of 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 are subject to Section 203 of theDelaware General Corporation Law, which generally prohibits a Delawarecorporation from engaging in any of a broad range of business combinations withan interested stockholder for a period of three years following the date onwhich the stockholder became an interested stockholder. This provision couldhave the effect of delaying or preventing a change of control, whether or notit is desired by or beneficial to our stockholders. Notwithstanding theforegoing, the three year moratorium imposed on business combinations by Section 203will not apply to either Warburg or Baker because, prior to the dates on whichthey became interested stockholders, our board of directors approved the transactionswhich resulted in Warburg and Baker becoming interested stockholders. However,in connection 

 

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with its purchase of Exchangeable Preferred in March 2005,Warburg entered into a standstill agreement agreeing not to pursue certainactivities the purpose or effect of which may be to change or influence thecontrol of the Company.  Similarly, inconnection with the February 2007 Financing, Baker entered into astandstill agreement agreeing not to pursue certain activities the purpose oreffect of which may be to change or influence the control of the Company.

 

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

** **

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 ourstockholders may consider beneficial by diluting the ability of a potentialacquirer to acquire us. Pursuant to the terms of the stockholder rights plan,when a person or group, except under certain circumstances, acquires 15% ormore of our outstanding common stock or 10 business days after announcement ofa tender or exchange offer for 15% or more of our outstanding common stock, therights (except those rights held by the person or group who has acquired orannounced an offer to acquire 15% or more of our outstanding common stock)would generally become exercisable for shares of our common stock at adiscount. Because the potential acquirer’s rights would not become exercisablefor our shares of common stock at a discount, the potential acquirer wouldsuffer substantial dilution and may lose its ability to acquire us. Inaddition, the existence of the plan itself may deter a potential acquirer fromacquiring or making an offer to acquire us. As a result, either by operation of the plan or by its potentialdeterrent effect, mergers and acquisitions of the Company that our stockholdersmay consider in their best interests 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 board of directors, the beneficial owner of more than 44% of our commonstock. Likewise, since Baker owns a substantial percentage of our outstandingcommon stock, we amended the stockholder rights plan in connection with the February 2007Financing to provide that Baker and its affiliates will be exempt from thestockholder rights plan, unless Baker becomes, without the prior consent of ourboard of directors, the beneficial owner of more than 20% of our common stock.Under the stockholder rights plan, our board of directors has express authorityto amend the rights plan without stockholder approval.

 

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

** **

We cannot assure you that an active trading market forour common stock will exist at any time. Holders of our common stock may not beable to sell shares quickly or at the market price if trading in our commonstock is not active. The trading price of our common stock has been and islikely to continue to be highly volatile and could be subject to wide fluctuationsin price in response to various factors, many of which are beyond our control,including:

 

·       actualor anticipated results of our clinical trials, including our pivotal Phase 2PROPEL trial;

 

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

 

·       changesin laws or regulations applicable to our product candidates;

 

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

 

·       actualor anticipated variations in quarterly operating results;

 

·       announcementsof technological innovations by us or our competitors;

 

·       changesin financial estimates or recommendations by securities analysts;

 

·       conditionsor trends in the biotechnology and pharmaceutical industries;

 

·       changesin the market valuations of similar companies;

 

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

 

·       additionsor departures of key personnel;

 

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

 

·       developmentsconcerning any of our research and development, manufacturing and marketingcollaborations;

 

·       salesof large blocks of our common stock;

 

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

 

·       economicand other external factors, including disasters or crises.

 

Public companies in general and companies included onthe Nasdaq Global Market in particular have experienced extreme price andvolume fluctuations that have often been unrelated or disproportionate to theoperating performance of those companies. There has been particular volatilityin the market prices of securities of biotechnology and other life sciencescompanies, and the market prices of these companies have often fluctuatedbecause of problems or successes in a given market segment or because investorinterest has shifted to other segments. These broad market and industry factorsmay cause the market price of our common stock to decline, regardless of ouroperating performance. We have no control over this volatility and can onlyfocus our efforts on our own operations, and even these may be affected due tothe state of the capital markets. In the past, following large price declinesin the public market price of a company’s securities, securities class actionlitigation has often been initiated against that company, including in 2004against us. Litigation of this type could result in substantial costs anddiversion of management’s attention and resources, which would hurt ourbusiness. Any adverse determination in litigation could also subject us tosignificant liabilities.

 

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

** **

On January 1, 2006, we adopted SFAS No. 123(Revised 2004), *Share-Based Payment* (“SFAS 123R”),which requires the measurement and recognition of compensation expense for allstock-based compensation based on estimated fair values. As a result, ouroperating results for the three months ended March 31, 2008 and 2007include, and future periods will include, a charge for stock-based compensationrelated to employee stock options, restricted stock and discounted employeestock purchases.  The application ofSFAS 123R requires the use of an option-pricing model to determine thefair value of share-based payment awards. This determination of fair value is affected by our stock price as wellas assumptions regarding a number of highly complex and subjective variables.These variables include, but are not limited to, our expected stock pricevolatility over the term of the awards, and actual and projected employee stockoption exercise behaviors. Option-pricing models were developed for use inestimating the value of traded options that have no vesting or hedgingrestrictions and are fully transferable. Because our employee stock optionshave certain characteristics that are significantly different from tradedoptions, and because changes in the subjective assumptions can materiallyaffect the estimated value, in management’s opinion the existing valuationmodels may not provide an accurate measure of the fair value of our employeestock options.

 

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

 

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

** **

If our stockholders sell substantial amounts of ourcommon stock, the market price of our common stock may decline. These salesalso might make it more difficult for us to sell equity or equity-relatedsecurities in the future at a time and price that we consider appropriate. Weare unable to predict the effect that sales may have on the then prevailingmarket price of our common stock.  Wehave entered into a Registration Rights Agreement with Warburg and the other purchasersof our 

 

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Exchangeable Preferred pursuant to which suchinvestors are entitled to certain registration rights with respect to theshares of common stock that we issued upon exchange of the ExchangeablePreferred.

 

In addition, we will needto 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**                                                                                |
|------------------|------------|----------|------------|------------------------------------------------------------------------------------------------|
| 10.24†      |       | (1)      |       | Letter Agreement, effective January 22, 2008,  between Allos and Bruce K. Bennett.        |
| 10.25†      |       | (2)      |       | Executive Compensation                                                                         |
| 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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†                     Indicatesmanagement contract or compensatory plan or arrangement.

 

#                    Thecertifications attached as Exhibit 32.1 that accompany this QuarterlyReport on Form 10-Q are not deemed filed with the Securities and ExchangeCommission and are not to be incorporated by reference into any filing of AllosTherapeutics, Inc. under the Securities Act of 1933, as amended, or theSecurities Exchange Act of 1934, as amended, whether made before or after thedate of this Form 10-Q, irrespective of any general incorporation languagecontained in such filing.

 

(1)             Incorporatedby reference to the same numbered exhibit filed with our Annual Report on Form 10-Kfor the year ended December 31, 2007.

 

(2)             Incorporatedby reference to exhibit 10.1 filed with our current report on Form 8-Kfiled on February 29, 2008.

 

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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: May 7, 2008 | **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 and Treasurer        |
|                        | (Principal Financial and Accounting Officer) |

 

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