**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549**

**FORM10-Q**

| **x**      | ** ** | **Quarterly report pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934.**                                                                                                                                                                |
|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                        |
| ** ** | ** ** | **For the quarterly period ended June 30, 2007.**                                                                                                                                                                                                                 |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                        |
| **o**      | ** ** | **Transition report pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934.**                                                                                                                                                               |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                        |
| ** ** | ** ** | **For the transition period from                    to                    .** |

 

**CommissionFile Number**

**000-29815**

**AllosTherapeutics, Inc.**

(Exact name ofRegistrant as specified in its charter)

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

 

**11080CirclePoint Road, Suite 200**

**Westminster,Colorado  80020**

**(303)426-6262**

(Address,including zip code, and telephone number,including area code, of principal executive offices)

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

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated  filer o |   | Accelerated  filer x |   | Non-accelerated  filer o |
|---------------------------------|--------|---------------------------|--------|-------------------------------|

 

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

As of August 2, 2007, there were 66,272,722 shares of the registrant’sCommon Stock, par value $0.001 per share, outstanding.

 

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**ALLOS THERAPEUTICS, INC.**

**FORM 10-Q**

**TABLE OF CONTENTS**
| PART I.   Financial Information |   |                                                                                                                                                                                         |
|-------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ITEM 1.                                   |   | Financial Statements  (unaudited)                                                                                                                                                            |   |   |
|                                      |   | Balance Sheets  — as of December 31, 2006 and June 30, 2007                                                                                                                        |   |   |
|                                      |   | Statements  of Operations — for the three and six months ended June 30, 2006 and 2007 and  the cumulative period from September 1, 1992 (date of inception) through  June 30, 2007 |   |   |
|                                      |   | Statements of Cash  Flows — for the six months ended June 30, 2006 and 2007 and the cumulative  period from September 1, 1992 (date of inception) through June 30, 2007            |   |   |
|                                      |   | Notes to  Financial Statements                                                                                                                                                               |   |   |
| ITEM 2.                                   |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                                                  |   |   |
| ITEM 3.                                   |   | Quantitative  and Qualitative Disclosures About Market Risk                                                                                                                                  |   |   |
| ITEM 4.                                   |   | Controls and  Procedures                                                                                                                                                                     |   |   |
| PART II.   Other Information    |   |                                                                                                                                                                                         |
| ITEM 1.                                   |   | Legal Proceedings                                                                                                                                                                            |   |   |
| ITEM 1A.                                  |   | Risk Factors                                                                                                                                                                                 |   |   |
| ITEM 2.                                   |   | Unregistered Sales  of Equity Securities and Use of Proceeds                                                                                                                                 |   |   |
| ITEM 3.                                   |   | Defaults Upon  Senior Securities                                                                                                                                                             |   |   |
| ITEM 4.                                   |   | Submission of  Matters to a Vote of Security Holders                                                                                                                                         |   |   |
| ITEM 5.                                   |   | Other Information                                                                                                                                                                            |   |   |
| ITEM 6.                                   |   | Exhibits                                                                                                                                                                                     |   |   |
| SIGNATURES                                |   |                                                                                                                                                                                         |

 

NOTE:

*Allos Therapeutics, Inc., the AllosTherapeutics, Inc. logo, EFAPROXYNTM (efaproxiral), and all other Allosnames are trademarks of Allos Therapeutics, Inc. in the United States andin other selected countries. All other brand names or trademarks appearing inthis report are the property of their respective holders. Unless the contextrequires otherwise, references in this report to “Allos,” the “Company,” “we,” “us,”and “our” refer to Allos Therapeutics, Inc.*

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**PART I. FINANCIALINFORMATION**

**ITEM1.  FINANCIAL STATEMENTS**

**ALLOS THERAPEUTICS, INC.BALANCE SHEETS**

**(unaudited)**
| ** **                                                                                                                                                                                                                      | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                                                                                                                                                                                                      | ** ** | **2006**              | ** ** | **2007**          | ** ** |
| **ASSETS**                                                                                                                                                                                                                      | ** ** | ** **            | ** ** | ** **        | ** ** |
| Current assets:                                                                                                                                                                                                                 |       |                  |       |              |       |
| Cash  and cash equivalents                                                                                                                                                                                                      |       | $                     | 10,070,526 |              | $          | 16,887,419 |   |
| Restricted  cash                                                                                                                                                                                                                |       | 366,667               |       | 366,667           |       |
| Investments  in marketable securities                                                                                                                                                                                           |       | 22,725,525            |       | 51,833,017        |       |
| Prepaid  research and development expenses                                                                                                                                                                                      |       | 496,265               |       | 659,353           |       |
| Prepaid  expenses and other assets                                                                                                                                                                                              |       | 2,069,840             |       | 2,486,077         |       |
| Total  current assets                                                                                                                                                                                                           |       | 35,728,823            |       | 72,232,533        |       |
| Property and equipment,  net                                                                                                                                                                                                    |       | 603,520               |       | 567,239           |       |
| Other assets                                                                                                                                                                                                                    |       | 49,247                |       | 49,247            |       |
| Total  assets                                                                                                                                                                                                                   |       | $                     | 36,381,590 |              | $          | 72,849,019 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                   | ** ** | ** **            | ** ** | ** **        | ** ** |
| Current liabilities:                                                                                                                                                                                                            |       |                  |       |              |       |
| Accounts  payable                                                                                                                                                                                                               |       | $                     | 400,133    |              | $          | 764,116 |   |
| Accrued  liabilities                                                                                                                                                                                                            |       | 6,431,521             |       | 7,038,688         |       |
| Total  current liabilities                                                                                                                                                                                                      |       | 6,831,654             |       | 7,802,804         |       |
| Commitments and  contingencies (See Note 9)                                                                                                                                                                                     |       |                  |       |              |       |
|                                                                                                                                                                                                                            |       |                  |       |              |       |
| Stockholders’ equity:                                                                                                                                                                                                      |       |                  |       |              |       |
| Preferred  stock, $0.001 par value; 10,000,000 shares authorized at December 31,  2006 and June 30, 2007; no shares issued or outstanding                                                                                  |       | —                |       | —            |       |
| Series  A Junior Participating Preferred Stock, $0.001 par value; 1,000,000 shares  designated from authorized preferred stock at December 31, 2006 and June  30, 2007; no shares issued or outstanding                    |       | —                |       | —            |       |
| Common  stock, $0.001 par value; 150,000,000 shares authorized at December 31,  2006 and June 30, 2007; 56,695,633 and 66,166,955 shares issued and  outstanding at December 31, 2006 and June 30, 2007, respectively |       | 56,695                |       | 66,167            |       |
| Additional paid-in  capital                                                                                                                                                                                                     |       | 238,052,617           |       | 292,301,662       |       |
| Deficit accumulated  during the development stage                                                                                                                                                                               |       | (208,559,376          | )          | (227,321,614      | )          |
| Total  stockholders’ equity                                                                                                                                                                                                |       | 29,549,936            |       | 65,046,215        |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                                |       | $                     | 36,381,590 |              | $          | 72,849,019 |   |

 

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

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

**(unaudited)**
| ** **                                                            | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** | **Cumulative  Period from  September 1, 1992  (date of inception)  through June 30,** | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                            | ** ** | **2006**                                        | ** ** | **2007**                                      | ** ** | **2006**                                                                                                                 | ** ** | **2007** | ** ** | **2007** | ** ** |
|                                                                  |       |                                            |       |                                          |       |                                                                                                                     |       |   |   |   |   |
| Operating expenses:                                                   |       |                                            |       |                                          |       |                                                                                                                     |       |   |   |   |   |
| Research and development                                              |       | $                                               | 3,320,667  |                                          | $          | 4,360,787                                                                                                                |       | $ | 6,760,497 |   | $ | 7,650,215 |   | $ | 115,505,767 |   |
| Clinical manufacturing                                                |       | 390,866                                         |       | 1,384,804                                     |       | 952,439                                                                                                                  |       | 2,532,108 |   | 31,596,803 |   |
| Marketing, general and administrative                                 |       | 3,738,720                                       |       | 5,514,923                                     |       | 6,664,518                                                                                                                |       | 10,262,519 |   | 93,421,046 |   |
| Restructuring and separation costs                                    |       | —                                          |       | —                                        |       | 645,666                                                                                                                  |       | — |   | 1,663,821 |   |
|                                                                  |       |                                            |       |                                          |       |                                                                                                                     |       |   |   |   |   |
| Total operating expenses                                              |       | 7,450,253                                       |       | 11,260,514                                    |       | 15,023,120                                                                                                               |       | 20,444,842 |   | 242,187,437 |   |
|                                                                  |       |                                            |       |                                          |       |                                                                                                                     |       |   |   |   |   |
| Loss from operations                                                  |       | (7,450,253                                      | )          | (11,260,514                                   | )          | (15,023,120                                                                                                              | )          | (20,444,842 | ) | (242,187,437 | ) |
| Gain on settlement claims                                             |       | —                                          |       | —                                        |       | —                                                                                                                   |       | — |   | 5,110,083 |   |
| Interest and other income, net                                        |       | 487,900                                         |       | 909,140                                       |       | 991,852                                                                                                                  |       | 1,682,604 |   | 19,992,204 |   |
|                                                                  |       |                                            |       |                                          |       |                                                                                                                     |       |   |   |   |   |
| Net loss                                                              |       | (6,962,353                                      | )          | (10,351,374                                   | )          | (14,031,268                                                                                                              | )          | (18,762,238 | ) | (217,085,150 | ) |
|                                                                  |       |                                            |       |                                          |       |                                                                                                                     |       |   |   |   |   |
| Dividend related to beneficial conversion feature of  preferred stock |       | —                                          |       | —                                        |       | —                                                                                                                   |       | — |   | (10,236,464 | ) |
|                                                                  |       |                                            |       |                                          |       |                                                                                                                     |       |   |   |   |   |
| Net loss attributable to common stockholders                          |       | $                                               | (6,962,353 | )                                             | $          | (10,351,374                                                                                                              | )          | $ | (14,031,268 | ) | $ | (18,762,238 | ) | $ | (227,321,614 | ) |
|                                                                  |       |                                            |       |                                          |       |                                                                                                                     |       |   |   |   |   |
| Basic and diluted net loss per share                                  |       | $                                               | (0.13      | )                                             | $          | (0.16                                                                                                                    | )          | $ | (0.25 | ) | $ | (0.29 | ) |   |   |
|                                                                  |       |                                            |       |                                          |       |                                                                                                                     |       |   |   |   |   |
| Weighted average shares outstanding:  basic and  diluted         |       | 55,102,627                                      |       | 65,645,678                                    |       | 55,090,968                                                                                                               |       | 63,908,192 |   |   |   |

 

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

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**ALLOS THERAPEUTICS, INC.**

**STATEMENTS OF CASH FLOWS**

**(unaudited)**
| ** **                                                                                                             | ** ** | **Six Months Ended  June 30,** | ** **  | **Cumulative  Period From  September 1, 1992  (date of inception)  through** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|-------------|-------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                             | ** ** | **2006**                                      | ** **  | **2007**                                                                                              | ** ** | **June 30, 2007** | ** ** |
| Cash Flows From Operating Activities:                                                                                  |       |                                          |        |                                                                                                  |       |   |   |
| Net loss                                                                                                               |       | $                                             | (14,031,268 | )                                                                                                     | $          | (18,762,238 | ) | $ | (217,085,150 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities:                                           |       |                                          |        |                                                                                                  |       |   |   |
| Depreciation and amortization                                                                                          |       | 152,796                                       |        | 170,545                                                                                               |       | 3,257,809 |   |
| Stock-based compensation expense                                                                                       |       | 1,685,172                                     |        | 3,117,296                                                                                             |       | 28,748,390 |   |
| Write-off of long-term investment                                                                                      |       | —                                        |        | —                                                                                                |       | 1,000,000 |   |
| Other                                                                                                                  |       | —                                        |        | —                                                                                                |       | 99,121 |   |
| Changes in operating assets and liabilities:                                                                           |       |                                          |        |                                                                                                  |       |   |   |
| Prepaid expenses and other assets                                                                                      |       | (614,232                                      | )           | (579,325                                                                                              | )          | (3,184,677 | ) |
| Interest receivable on investments                                                                                     |       | 147,601                                       |        | (418,790                                                                                              | )          | (852,898 | ) |
| Accounts payable                                                                                                       |       | 285,255                                       |        | 363,982                                                                                               |       | 764,116 |   |
| Accrued liabilities                                                                                                    |       | 769,791                                       |        | 607,168                                                                                               |       | 7,038,688 |   |
| Net cash used in operating activities                                                                                  |       | (11,604,885                                   | )           | (15,501,362                                                                                           | )          | (180,214,601 | ) |
| Cash Flows From Investing Activities:                                                                                  |       |                                          |        |                                                                                                  |       |   |   |
| Acquisition of property and equipment                                                                                  |       | (133,453                                      | )           | (134,264                                                                                              | )          | (3,571,042 | ) |
| Purchases of marketable securities                                                                                     |       | (11,684,401                                   | )           | (57,348,702                                                                                           | )          | (483,992,896 | ) |
| Proceeds from sales of marketable securities                                                                           |       | 26,000,000                                    |        | 28,660,000                                                                                            |       | 433,012,777 |   |
| Purchase of long-term investment                                                                                       |       | —                                        |        | —                                                                                                |       | (1,000,000 | ) |
| Payments received on notes receivable                                                                                  |       | —                                        |        | —                                                                                                |       | 49,687 |   |
| Net cash provided by (used in) investing activities                                                                    |       | 14,182,146                                    |        | (28,822,966                                                                                           | )          | (55,501,474 | ) |
| Cash Flows From Financing Activities:                                                                                  |       |                                          |        |                                                                                                  |       |   |   |
| Principal payments under capital leases                                                                                |       | —                                        |        | —                                                                                                |       | (422,088 | ) |
| Proceeds from sales leaseback                                                                                          |       | —                                        |        | —                                                                                                |       | 120,492 |   |
| Pledge of restricted cash                                                                                              |       | —                                        |        | —                                                                                                |       | (366,667 | ) |
| Proceeds from issuance of convertible preferred stock,  net of issuance costs                                          |       | —                                        |        | —                                                                                                |       | 89,125,640 |   |
| Proceeds from issuance of common stock associated  with stock options, stock warrants and employee stock purchase plan |       | 110,565                                       |        | 884,014                                                                                               |       | 4,994,298 |   |
| Proceeds from issuance of common stock, net of  issuance costs                                                         |       | —                                        |        | 50,257,207                                                                                            |       | 159,151,819 |   |
| Net cash provided by financing activities                                                                              |       | 110,565                                       |        | 51,141,221                                                                                            |       | 252,603,494 |   |
| Net increase in cash and cash equivalents                                                                              |       | 2,687,826                                     |        | 6,816,893                                                                                             |       | 16,887,419 |   |
| Cash and cash equivalents, beginning of period                                                                         |       | 4,224,634                                     |        | 10,070,526                                                                                            |       | — |   |
| Cash and cash equivalents, end of period                                                                               |       | $                                             | 6,912,460   |                                                                                                  | $          | 16,887,419 |   | $ | 16,887,419 |   |
| 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 accompanyingnotes are an integral part of these financial statements.***

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

**(unaudited)**

**1.**                 Basis ofPresentation

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

Sinceour inception in 1992, we have not generated any revenue and have experiencedsignificant net losses and negative cash flows from operations.  Our activities have consisted primarily oflicensing and developing product candidates. Accordingly, we are considered to be in the development stage as of June30, 2007 as defined in Statement of Financial Accounting Standards (“SFAS”)No. 7, *Accounting and Reporting byDevelopment Stage Enterprises.*

OnJune 19, 2007, we announced top line results from ENRICH, our pivotal Phase 3study of EFAPROXYNTM (efaproxiral)plus whole brain radiation therapy, or WBRT, in women with brain metastasesoriginating from breast cancer.  The study failed to achieve its primaryendpoint of demonstrating a statistically significant improvement in overallsurvival in patients receiving EFAPROXYN plus WBRT, compared to patientsreceiving WBRT alone.  Based on these results, we discontinued our EFAPROXYNdevelopment program during the second quarter of 2007.

*Liquidity*

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

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

Basedupon the current status of our product development and commercialization plans,we believe that our cash, cash equivalents, and investments in marketablesecurities as of June 30, 2007 should be adequate to support our operationsthrough the first quarter of 2009, although there can be no assurance that thiscan, in fact, be accomplished.

Ourforecast of the period of time through which our financial resources will beadequate to support our operations is a forward-looking statement thatinvolves risks and uncertainties, and actual results could vary materially. Weanticipate continuing our current development programs and/or beginning otherlong-term development projects involving our product candidates. These projectsmay require many years and substantial expenditures to complete and mayultimately be unsuccessful. Therefore, we may need to obtain additional fundsfrom outside sources to continue research and development 

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activities,fund operating expenses, pursue regulatory approvals and build sales andmarketing capabilities, as necessary. However, our actual capital requirementswill depend on many factors, including:

·       the status of our productdevelopment programs;

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

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

·       competing technological andmarket developments; and

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

**2.**                 Prepaid Expensesand Other Assets

Prepaidexpenses and other assets are comprised of the following:
|                                                                        | ** ** | **December 31,  2006** | ** ** | **June 30,  2007** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------------|------------|-------------------------|------------|
| Prepaid expenses and other assets                                      |       | $                           | 151,538    |                    | $          | 151,172 |   |
| Prepaid insurance                                                      |       | 169,302                     |       | 581,905                 |       |
| Receivable related to pending litigation settlement  (see Note 9) |       | 1,749,000                   |       | 1,753,000               |       |
|                                                                   |       | $                           | 2,069,840  |                    | $          | 2,486,077 |   |

 

**3.**                 Accounts Payableand Accrued Liabilities

Accounts payableare comprised of the following:
|                        | ** ** | **December 31,  2006** | ** ** | **June 30,  2007** | ** ** |
|------------------------|------------|-----------------------------|------------|-------------------------|------------|
| Trade accounts payable |       | $                           | 388,133    |                    | $          | 764,116 |   |
| Related parties        |       | 12,000                      |       | —                  |       |
|                   |       | $                           | 400,133    |                    | $          | 764,116 |   |

 

Accrued liabilitiesare comprised of the following:
|                                                  | ** ** | **December 31,  2006** | ** ** | **June 30,  2007** | ** ** |
|--------------------------------------------------|------------|-----------------------------|------------|-------------------------|------------|
| Accrued research and development expenses        |       | $                           | 1,430,417  |                    | $          | 1,411,935 |   |
| Accrued restructuring and separation costs       |       | 427,266                     |       | 122,293                 |       |
| Accrued personnel costs                          |       | 1,481,849                   |       | 1,574,580               |       |
| Accrued litigation settlement costs (see Note 9) |       | 2,000,000                   |       | 2,000,000               |       |
| Accrued clinical manufacturing expenses          |       | 655,552                     |       | 1,421,482               |       |
| Accrued expenses — other                    |       | 436,437                     |       | 508,398                 |       |
|                                             |       | $                           | 6,431,521  |                    | $          | 7,038,688 |   |

 

*Duringthe three months ended June 30, 2007, we accrued approximately $308,000 inresearch and development expenses and $117,000 in clinical manufacturingexpenses related to the discontinuation of the EFAPROXYN developmentprogram.  These expenses representestimated costs to be incurred by contract research organizations in connectionwith closing out our EFAPROXYN clinical trials and estimated costs for thedestruction and storage of EFAPROXYN bulk drug substance and formulated drug product.*

**4.**                 Stockholders’Equity

On February 2,2007, we sold 9,000,000 shares of our common stock in an underwritten offeringat a price of $6.00 per share (the “February 2007 Financing”). We receivednet proceeds from the offering of approximately $50.3 million, after deductingunderwriting commissions of approximately $3.2 million and other offeringexpenses of approximately $503,000. The shares of common stock were sold underour shelf Registration Statement on Form S-3 (File No. 333-134965),declared effective by the Securities and Exchange Commission (“SEC”) onJuly 10, 2006. We retired the unused portion of this shelf registrationstatement in June 2007.

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BakerBrothers Life Sciences, L.P. and certain other affiliated funds (collectively“Baker”) purchased 3,300,000 shares of common stock in the February 2007Financing.  As a result of such purchase,Baker held in excess of 15% of our outstanding common stock following theclosing of the February 2007 Financing. In connection with the February 2007 Financing, Baker entered intoa standstill agreement, agreeing not to pursue certain activities the purposeor effect of which may be to change or influence control of the Company.

In May2007, we filed a universal shelf Registration Statement on Form S-3 (File No.333-143198) with the SEC that was declared effective on June 5, 2007.  Under the registration statement, we areallowed to sell, from time to time, up to $150 million of our common stock,preferred stock, depository shares, debt securities and/or warrants, eitherindividually or in units, in one or more offerings.  We have no specific plans to offer thesecurities covered by the registration statement and we are not required tooffer the securities in the future pursuant to the registration statement. Theterms of any offering under the registration statement will be established atthe time of the offering. Proceeds from the sale of any securities will be usedfor the purposes described in a prospectus supplement to be filed at the timeof an offering.

**5.**                 Stock-BasedCompensation

Inaccordance with the modified prospective transition method of SFAS No. 123(Revised 2004), *Share-Based Payment* (“SFAS123R”), stock-based compensation expense for the three and six months endedJune 30, 2006 and 2007 has been recognized in the accompanying Statements ofOperations as follows:  
| ** **                             | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                             | ** ** | **2006**                                            | ** ** | **2007**                                          | ** ** | **2006** | ** ** | **2007** | ** ** |
| Research and development               |       | $                                                   | 167,074    |                                              | $          | 544,111 |   | $ | 301,528 |   | $ | 808,411 |   |
| Clinical manufacturing                 |       | 29,376                                              |       | 46,931                                            |       | 53,021 |   | 82,949 |   |
| Marketing, general and administrative  |       | 1,007,380                                           |       | 1,222,874                                         |       | 1,330,623 |   | 2,225,936 |   |
| Total stock-based compensation expense |       | $                                                   | 1,203,830  |                                              | $          | 1,813,916 |   | $ | 1,685,172 |   | $ | 3,117,296 |   |

 

We didnot recognize a related tax benefit during the three or six months ended June30, 2006 and 2007 as we maintain net operating loss carryforwards and we haveestablished a valuation allowance against the entire tax benefit as of June 30,2007.   No stock-based compensationexpense was capitalized on our Balance Sheet as of December 31, 2006 andJune 30, 2007.

Thefollowing table summarizes activity and related information for our stockoption awards:
| ** **                                   | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**               | ** ** |
|----------------------------------------------|------------|------------------------------|------------|--------------------------------------------|------------|
| ** **                                   | ** ** | **Number of  Shares**   | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
| **Outstanding as of December 31, 2006** |       | 5,778,571                    |       | $                                          | 3.60       |   | 2,900,556 |   | $ | 4.27 |   |
| Granted                                      |       | 2,361,574                    |       | 6.68                                       |       |   |   |   |   |
| Exercised                                    |       | (273,108                     | )          | 3.11                                       |       |   |   |   |   |
| Canceled                                     |       | (392,853                     | )          | 4.99                                       |       |   |   |   |   |
| **Outstanding as of June 30, 2007**          |       | 7,474,184                    |       | $                                          | 4.52       |   | 3,493,787 |   | $ | 3.86 |   |

 

Duringthe six months ended June 30, 2007, we granted 2,361,574 stock options with a weighted-average grant-date fair value of$4.20 per share.  As of June 30,2007, the unrecorded stock-based compensation balance related to stock optionawards was $8,542,002 and will be recognized over an estimated weighted-averageamortization period of 1.5 years.

Thefollowing table summarizes information about outstanding stock options that arefully vested and currently exercisable, and outstanding stock options that areexpected to vest in the future:
| ** **                                                                | ** ** | **Number  Outstanding** | ** ** | **Weighted Average  Remaining  Contractual Term** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|---------------------------------------------------------------------------|------------|-------------------------|------------|-------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------|------------|
| **As of June 30, 2007:**                                                  | ** ** | ** **              | ** ** | ** **                                                  | ** ** | ** **                                 | ** ** | ** **                          | ** ** |
| Options fully vested and exercisable                                      |       | 3,493,787               |       | 5.6                                                         |       | $                                          | 3.86       |                                | $          | 3,848,737 |   |
| Options expected to vest, including effects  of expected forfeitures |       | 3,576,022               |       | 9.2                                                         |       | $                                          | 3.12       |                                | 2,361,886  |   |
| Options fully vested and expected to vest                                 |       | 7,069,809               |       | 7.4                                                         |       | $                                          | 3.49       |                                | $          | 6,210,623 |   |

 

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Theaggregate intrinsic value in the tables above represents the total pretaxintrinsic value, based on our closing stock price of $4.42 as of June 29, 2007,which would have been received by the option holders had all option holderswith in-the-money options exercised their options as of that date.  The total number of in-the-money optionsexercisable as of June 30, 2007 was 2,247,199.

Thetotal intrinsic value of options exercised during the three months ended June30, 2006 and 2007 was $172,559 and $502,894, respectively, determined as of thedate of option exercise.  The totalintrinsic value of options exercised during the six months ended June 30, 2006and 2007 was $173,659 and $951,441, respectively, determined as of the date ofoption exercise. We settle employee stock option exercises with newly issuedcommon shares.  No tax benefits wererealized by us in connection with these exercises during the three or sixmonths ended June 30, 2006 and 2007 as we maintain net operating losscarryforwards and we have established a valuation allowance against the entiretax benefit as of June 30, 2007.

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

 

The shares of restricted stock vest in four equalannual installments from the date of grant. During the three months ended June 30, 2006 and 2007, we recordedstock-based compensation related to restricted stock awards of $134,766 and$181,131, respectively.  During the six months ended June 30,2006 and 2007, we recorded stock-based compensation related to restricted stockawards of $165,607 and $359,188, respectively. As of June 30, 2007, the unrecorded deferred stock-based compensationbalance related to restricted stock awards was $1,034,591 and will berecognized over an estimated weighted-average amortization period of 1.6 years.

**6.**                 Net Loss PerShare

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

Dilutednet loss per share is the same as basic net loss per share for all periodspresented because any potential dilutive common shares were anti-dilutive dueto our net loss (i.e., including such shares would decrease our basic net lossper share). Potential dilutive common shares that would have been included inthe calculation of diluted earnings per share if we had net income are asfollows:
| ** **            | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **            | ** ** | **2006**                                            | ** ** | **2007**                                          | ** ** | **2006** | ** ** | **2007** | ** ** |
| Common stock options  |       | 798,452                                             |       | 2,142,589                                         |       | 683,676 |   | 2,331,681 |   |
| Restricted stock      |       | 410,000                                             |       | 515,000                                           |       | 410,000 |   | 515,000 |   |
| Common stock warrants |       | 24,328                                              |       | 279,088                                           |       | — |   | 297,696 |   |
|                  |       | 1,232,780                                           |       | 2,936,677                                         |       | 1,093,676 |   | 3,144,377 |   |

 

**7.**                 Restructuring andSeparation Costs

InJanuary 2006, Michael E. Hart notified our Board of Directors of hisintent to resign from his positions as President, Chief Executive Officer andChief Financial Officer of the Company once a successor Chief Executive Officerwas appointed. On March 3, 2006, we entered into a separation agreementwith Mr. Hart to provide certain incentives for his continued employmentwith the Company while we conducted our search for his successor.  On March 9, 2006, we appointed Paul L.Berns as our President, Chief Executive Officer and a member of the Board ofDirectors and Mr. Hart resigned from his

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positionsin accordance with the terms of the separation agreement. The separationagreement with Mr. Hart was amended on March 9, 2006 and onMay 10, 2006 (as so amended, the “Separation Agreement”).  Pursuant to the Separation Agreement and as aresult of Mr. Hart’s resignation as a director, on May 10, 2006, weentered into a consulting agreement with Mr. Hart in order to allow us toretain the benefit of Mr. Hart’s historical knowledge regarding theCompany’s operations and corporate development strategies (the “Hart ConsultingAgreement”). Pursuant to the Hart Consulting Agreement, Mr. Hart has agreedto provide an average of at least 10 hours of consulting services per month asand when requested from time to time by the Company.  Mr. Hart is not entitled to anycompensation or benefits in connection with the performance of his consultingservices, except for those payments and benefits being provided to him underthe Separation Agreement. The term of the Hart Consulting Agreement is fromMay 10, 2006 to December 31, 2007; *providedthat*it will automatically terminate upon the occurrence of one ormore events constituting just cause (as defined in the agreement).

Werecorded separation costs of $645,666 during the six months ended June 30, 2006relating to our estimate of our total obligations under the SeparationAgreement with Mr. Hart.  During theyear ended December 31, 2006 and the six months ended June 30, 2007, wemade payments to Mr. Hart under the Separation Agreement of $325,208 and$249,218, respectively.  As of June 30,2007, the remaining liability of $71,239 relating to the Separation Agreementwith Mr. Hart is recorded in accrued restructuring and separation costs.

**8.**                 Income Taxes

We adopted theprovisions of Financial Accounting Standards Board (“FASB”) Interpretation No.48, *Accounting for Uncertainty in Income Taxes-aninterpretation of FASB Statement No. 109* (“FIN 48”), onJanuary 1, 2007. FIN 48 clarifies the accounting for uncertainty in incometaxes recognized in an enterprise’s financial statements in accordance withSFAS No. 109, *Accounting for Income Taxes*, andprescribes a recognition threshold and measurement process for financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return. FIN 48 also provides guidance on derecognition,classification, interest and penalties, accounting in interim periods,disclosure and transition. Based on our evaluation, we have concluded thatthere are no significant uncertain tax positions requiring recognition in ourfinancial statements. Our evaluation was performed for the periods from December 31,1993 through June 30, 2007, the tax periods which remain subject toexamination by major tax jurisdictions as of June 30, 2007.

We have netoperating loss (“NOL”) carryforwards, research and development (“R&D”)credit carryforwards and orphan drug credit carryforwards and other deferredtax assets that represent an unrecognized future tax benefit.  A valuation allowance has been establishedfor the entire tax benefit as of June 30, 2007 as we believe that it is morelikely than not that such assets will not be realized.  The utilization of these carryforwards toreduce future income taxes will depend on our ability to generate sufficienttaxable income prior to the expiration of the carryforwards, which beginexpiring in 2009. Further, the Internal Revenue Code of 1986, as amended,contains provisions in Section 382 that limit the NOL, R&D credit, andorphan drug credit carryforwards available for use in any given year upon theoccurrence of certain events, including significant changes in ownershipinterest and are subject to review and possible adjustment by the InternalRevenue Service. A greater than 50% change in ownership of a company within athree-year period results in an annual limitation on the ability to utilizeNOL, R&D credit and orphan drug credit carryforwards from tax periods priorto the ownership change. Our NOL, R&D credit and orphan drug creditcarryforwards as of June 30, 2007 will likely be subject to annual limitationdue to changes in ownership resulting from our previous financings. While theamount of these limitations has not been determined, management believes thatthe amount subject to limitation could be significant, and our NOL, R&Dcredit and orphan drug credit carryforwards may expire unused. Additionally, futureownership changes could further limit the utilization of our NOL, R&Dcredit and orphan drug credit carryforwards. Until a full Section 382 study isperformed and the amount of limitation is known, no amounts are presented asuncertain under FIN 48.

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

**9.**                 Commitments andContingencies

*Manufacturing Commitments*

InJune 2005, we entered into a manufacturing agreement with Hovione InterLimited (“Hovione”) covering the supply of EFAPROXYN bulk drug substance, orefaproxiral sodium.  Based on the resultsof the ENRICH trial, we have discontinued the development of EFAPROXYN and weretain the right to terminate this agreement, without penalty.

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*Royalty and License FeeCommitments for PDX*

InDecember 2002, we entered into a license agreement with MemorialSloan-Kettering Cancer Center, SRI International and Southern ResearchInstitute, under which we obtained exclusive worldwide rights to several issuedUnited States patents and equivalent foreign patent applications to develop andmarket any product derived from any formulation of PDX in connection with alldiagnostic and therapeutic uses, including human and veterinary diseases. Underthe terms of the agreement, we paid an up-front license fee of $2.0 millionupon execution of the agreement and are also required to make certainadditional cash payments based upon the achievement of certain clinicaldevelopment or regulatory milestones or the passage of certain time periods. Todate, we have made aggregate milestone payments of $1.5 million based on thepassage of time. In the future, we could make aggregate milestone payments of$1.5 million upon the earlier of achievement of a clinical developmentmilestone or the passage of certain time periods (the “Clinical Milestone”),and up to $10 million upon achievement of certain regulatory milestones,including regulatory approval to market PDX in the United States or Europe. Thenext scheduled payments toward the Clinical Milestone of $500,000 each arecurrently due on December 23, 2007, 2008 and 2009. The up-front license fee and all milestone payments under the agreement,have been or will be recorded to research and development expense when incurred.Under the terms of the agreement, we are required to fund all developmentprograms and will have sole responsibility for all commercializationactivities. In addition, we will pay the licensors a royalty based on apercentage of net revenues arising from sales of the product or sublicense revenuesarising from sublicensing the product, if and when such sales or sublicensesoccur. As of June 30, 2007, no royalty payments have been made or accrued.

*Contingencies*

TheCompany and one of its former officers were named as defendants in a purported securitiesclass action lawsuit filed in May 2004 in the United States District Courtfor the District of Colorado (the “District Court”). An amended complaint wasfiled in August 2004. The lawsuit was brought on behalf of a purportedclass of purchasers of our securities during the period from May 29, 2003to April 29, 2004, and sought unspecified damages relating to the issuanceof allegedly false and misleading statements regarding EFAPROXYN during thisperiod and subsequent declines in our stock price. On October 20, 2005,the District Court granted the defendants’ motion to dismiss the lawsuit withprejudice. In an opinion dated October 20, 2005, the District Courtconcluded that the plaintiff’s complaint failed to meet the legal requirementsapplicable to its alleged claims.

OnNovember 20, 2005, the plaintiff appealed the District Court’s decision tothe U.S. Court of Appeals for the Tenth Circuit (the “Court of Appeals”).  In October 2006, the parties held discussions to settle thematter, although the terms of any such potential settlement remain subject tonegotiation and no binding agreement has been reached. A settlement would besubject to various conditions, including approval of the District Court. Weexpect that any settlement in excess of our deductible would be covered by ourinsurance carrier. As with any litigation proceeding, we cannot predict withcertainty the eventual outcome of our settlement discussions or the legalproceedings. In the event a settlement is not concluded, we intend tovigorously defend against the plaintiff’s appeal. If the Court of Appealsreverses the District Court’s decision and we are not successful in our defenseof such claims, we could be forced to make significant payments to theplaintiffs, and such payments could have a material adverse effect on ourbusiness, financial condition, results of operations and cash flows to theextent such payments are not covered by our insurance carriers. Even if ourdefense against such claims is successful, the litigation could result insubstantial costs and divert management’s attention and resources, which couldadversely affect our business. As of June 30, 2007, we have recorded $2,000,000in accrued litigation settlement costs, which represents our best estimate ofthe potential gross amount of the settlement costs to be paid to theplaintiffs, and $1,753,000 in prepaid expenses and other assets, whichrepresents the amount we expect to be reimbursed from our insurance carrier.The net difference of $247,000 between these amounts represents the remainingunpaid deductible under our insurance policy, and this amount was recorded tomarketing, general and administrative expenses during the year endedDecember 31, 2006.

**10.**          Recent AccountingPronouncements

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

The Emerging Issues Task Force (“EITF”) issued aconsensus, EITF 07-3, *Advance Payments forResearch and Development Activities*, which states thatnon-refundable advance payments for goods that will be used or services thatwill be performed

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in future research and development activities shouldbe deferred and capitalized until the goods have been delivered or the relatedservices have been rendered.  TheConsensus is to be applied prospectively for new contractual arrangementsentered into in fiscal years beginning after December 15, 2007.

The EITF has an issue currently under considerationthat may impact the Company in the future. EITF 07-01, *Accounting for Collaboration Arrangements Related tothe Development and Commercialization of Intellectual Property*, isfocused on how the parties to a collaborative agreement should account forcosts incurred and revenue generated on sales to third parties, how sharingpayments pursuant to a collaboration agreement should be presented in theincome statement and certain related disclosure questions. We will continue tomonitor the development of this EITF and evaluate the effect on our financialstatements and disclosures.

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**ITEM 2.  MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

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

**Overview**

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

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

**PDX**

PDX (pralatrexate) is a novel, small moleculechemotherapeutic agent that inhibits dihydrofolate reductase, or DHFR, a folicacid (folate)-dependent enzyme involved in the building of nucleic acid,or DNA, and other processes. PDX was rationally designed for efficienttransport into tumor cells via the reduced folate carrier, or RFC-1, andeffective intracellular drug retention. We believe these biochemical features,together with preclinical and clinical data in a variety of tumors, suggestthat 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.

InAugust 2006, we initiated PROPEL, a Phase 2 clinical trial of PDX inpatients with relapsed or refractory peripheral T-cell lymphoma, or PTCL, thatwe believe, if positive, will be sufficient to support the filing of a new drugapplication, or NDA, to seek marketing approval for PDX in thisindication.   In July 2006, wereached agreement with the United States Food and Drug Administration, or FDA,under its special protocol assessment, or SPA, process on the design of thisPhase 2 trial.  The SPA process allowsfor FDA evaluation of a clinical trial protocol intended to form the primarybasis of an efficacy claim in support of an NDA, and provides an agreement thatthe study design, including trial size, clinical endpoints and/or data analysesare acceptable to the FDA.  The PROPELtrial will seek to enroll a minimum of 100 evaluable patients at approximately35 centers across the United States, Canada and Europe.  The primary endpoint of the study isobjective response rate (complete and partial response).  Secondary endpoints include duration ofresponse, progression-free survival and overall survival.  In January 2007, an independent DataMonitoring Committee, or DMC, completed a planned interim analysis of safetydata from the PROPEL trial and recommended that the trial continue per theprotocol. This interim assessment was based upon an evaluation of the first 10patients enrolled to the study who completed at least one cycle of

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treatmentwith PDX.  No major patient safetyconcerns were identified by the DMC. According to the PROPEL trial protocol, we will conduct an interimanalysis of patient response from the PROPEL trial after 35 evaluable patientshave completed at least one cycle of treatment with PDX, and must observe atleast four responses (complete or partial) out of the first 35 patients inorder to continue the trial.  We currently expect to announce the outcome of theinterim analysis prior to the end of October 2007, and complete patientenrollment in the trial by the third quarter of 2008, although the actualtiming of the interim analysis and completion of enrollment may vary based on anumber of factors, including site initiation and patient enrollment rates.

In July 2006,the FDA awarded orphan drug status to PDX for the treatment of patients withT-cell lymphoma. Under the Orphan Drug Act, if we are the first company toreceive FDA approval for PDX for this orphan drug indication, we will obtainseven years of marketing exclusivity during which the FDA may not approveanother company’s application for the same drug for the same orphanindication.  In October 2006, theFDA granted fast track designation to PDX for the treatment of patients withT-cell lymphoma. The fast track program is designed to facilitate thedevelopment and expedite the review of new drugs that are intended to treatserious or life-threatening conditions and that demonstrate the potential toaddress unmet medical needs.  In April2007, the Commission of the European Communities, with a favorable opinion ofthe Committee for Orphan Medicinal Products of the European Medicines Agency,or EMEA, granted orphan drug designation to PDX for the treatment of patientswith PTCL.  The EMEA Orphan MedicinalProduct Designation, or OMPD, is intended to promote the development of drugsthat may provide significant benefit to patients suffering from rare diseasesidentified as life-threatening or very serious. Under EMEA guidelines, OMPDprovides ten years of potential market exclusivity once the product candidateis approved for marketing for the designated indication in the EuropeanUnion.  OMPD also provides potentialprotocol assistance, advice on the conduct of clinical trials, a reducedMarketing Authorization Application filing fee for the drug’s sponsor and thepotential for grant funding.

Inaddition to the PROPEL study, the following clinical trials are also open forenrollment:

·                  a Phase 1/2study of PDX in patients with non-Hodgkin’s lymphoma, or NHL, and Hodgkin’sdisease;

·                  a Phase 1 doseescalation study of PDX with vitamin B12 and folic acid supplementation in patientswith previously treated advanced non-small cell lung cancer, or NSCLC; and

·                  a Phase 1/2aopen-label, multi-center study of sequential PDX and gemcitabine with vitamin B12 and folic acidsupplementation in patients with relapsed or refractory NHL or Hodgkin’sdisease.

Patientenrollment in the Phase 1/2a study of sequential PDX and gemcitabine withvitamin B12 and folic acid supplementation in patents withrelapsed refractory NHL or Hodgkin’s disease was initiated in May 2007.  In the Phase 1 portion of this study,patients with either relapsed or refractory NHL (diffuse large B- or T-celllymphoma, mantle cell lymphoma, transformed large cell lymphomas) or Hodgkin’sdisease will receive PDX followed the next day by gemcitabine as part of aweekly schedule for three or four weeks with concurrent vitamin B12 and folic acid supplementation.  Up to 54 evaluable patients will be enrolledin the Phase 1 portion of the study with the objective of determining themaximum tolerated dose, or MTD, safety, tolerability, and pharmacokineticprofile of escalating doses of sequential PDX and gemcitabine.  In the expanded Phase 2a portion of thetrial, up to 30 additional patients with relapsed or refractory PTCL will beenrolled at the established MTD to assess preliminary efficacy of PDX andgemcitabine.

Duringthe second half of 2007, we plan to initiate a Phase 1/2 study of PDX inpatients with relapsed or persistent cutaneous T-cell lymphoma, or CTCL. Wealso plan to initiate a study of PDX in one or more solid tumors once we havedetermined the MTD for PDX in the ongoing Phase 1 dose escalation study of PDXwith vitamin B12 and folic acid supplementation in patientswith previously-treated advanced NSCLC.

**RH1**

RH1 is a small molecule chemotherapeuticagent that we believe is bioactivated by the enzyme DT-diaphorase, or DTD, alsoknown as NAD(P)H quinone oxidoreductase, or NQ01.  We believe DTD is over-expressed in manytumors, including lung, colon, breast and liver tumors. We believe that becauseRH1 is bioactivated in the presence of DTD, it has the potential to providetargeted drug delivery to these tumor types while limiting the amount oftoxicity to normal tissue.  We expect toinitiate a Phase 1 study of RH1 in patients with advanced solid tumors duringthe second half of 2007.

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**EFAPROXYN Development Discontinued**

InJune 2007, we announced top-line results from ENRICH, our Phase 3 clinicaltrial of EFAPROXYNTM (efaproxiral)plus whole brain radiation therapy, or WBRT, in women with brain metastasesoriginating from breast cancer.  Thestudy failed to achieve its primary endpoint of demonstrating a statisticallysignificant improvement in overall survival in patients receiving EFAPROXYNplus WBRT, compared to patients receiving WBRT alone.  Based on theseresults, we discontinued our EFAPROXYN development program during the secondquarter of 2007.

Inaddition to the ENRICH trial, our other clinical trials involving EFAPROXYNincluded a Phase 1 trial in patients with locally advanced NSCLC receivingconcurrent chemoradiotherapy (chemotherapy and radiation therapy administeredat the same time), and a Phase 1b/2 trial of EFAPROXYN in patients with locallyadvanced cancer of the cervix receiving concurrent chemoradiotherapy.   These trials are currently being closed andwe are working with our investigators to ensure any active patients aretransitioned off study drug appropriately.

**Resultsof Operations**

Sinceour inception in 1992, we have not generated any revenue from product sales andhave experienced significant net losses and negative cash flows fromoperations. We have incurred these losses principally from costs incurred inour research and development programs and from our clinical manufacturing andgeneral and administrative expenses.

Ourability to generate revenue and achieve profitability is dependent on ourability, alone or with partners, to successfully complete the development ofour product candidates, conduct clinical trials, obtain the necessaryregulatory approvals, and manufacture and market our product candidates. Thetiming and costs to complete the successful development of any of our productcandidates are highly uncertain, and therefore difficult to estimate. Thelengthy process of seeking regulatory approvals for our product candidates, andthe subsequent compliance with applicable regulations, require the expenditureof substantial resources.  Clinicaldevelopment timelines, likelihood of success and total costs vary widely andare impacted by a variety of risks and uncertainties discussed in the “RiskFactors” section of Part II, Item 1A below.  Because of these risks and uncertainties, wecannot predict when or whether we will successfully complete the development ofany of our product candidates or the ultimate costs of such efforts. Due tothese same factors, we cannot be certain when, or if, we will generate anyrevenue or net cash inflow from any of our current product candidates.

Evenif our clinical trials demonstrate the safety and effectiveness of our productcandidates in their target indications, we do not expect to be able to recordcommercial sales of any our product candidates until 2009 at the earliest. Weexpect to incur significant and growing net losses for the foreseeable futureas a result of our research and development programs and the costs of preparingfor the potential commercial launch of PDX. Although the size and timing of our future net losses are subject tosignificant uncertainty, we expect them to increase over the next several yearsas we continue to fund our development programs and prepare for the potentialcommercial launch of our product candidates.****
|                                       | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                            | ** ** | **2006**                                        | ** ** | **2007**                                      | ** ** | **2006** | ** ** | **2007** | ** ** |
|                                  |       |                                            |       |                                          |       |   |   |   |   |
| Operating  expenses:                  |       |                                            |       |                                          |       |   |   |   |   |
| Research and development              |       | $                                               | 3,320,667  |                                          | $          | 4,360,787 |   | $ | 6,760,497 |   | $ | 7,650,215 |   |
| Clinical manufacturing                |       | 390,866                                         |       | 1,384,804                                     |       | 952,439 |   | 2,532,108 |   |
| Marketing, general and administrative |       | 3,738,720                                       |       | 5,514,923                                     |       | 6,664,518 |   | 10,262,519 |   |
| Restructuring and separation costs    |       | —                                          |       | —                                        |       | 645,666 |   | — |   |
|                                  |       |                                            |       |                                          |       |   |   |   |   |
| Total operating  expenses             |       | $                                               | 7,450,253  |                                          | $          | 11,260,514 |   | $ | 15,023,120 |   | $ | 20,444,842 |   |

 

*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.

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Research anddevelopment expenses for the three months ended June 30, 2006 and 2007 were$3.3 million and $4.4 million, respectively. The $1.0 million increase in research and development expenses in thethree months ended June 30, 2007 as compared to the same period in 2006 wasprimarily due to the following:

·                  a$965,000 increase in clinical trial and preclinical study costs involving PDX;

·                  a$500,000 increase related to key personnel changes; and

·                  a$377,000 increase in non-cash stock-based compensation expense.

Theseincreases were partially offset by a $920,000 decrease in clinical trial costsresulting from the completion of patient enrollment in our Phase 3 ENRICH trialin September 2006, which is net of $308,000 in expense accrued during the threemonths ended June 30, 2007 for estimated costs to be incurred by contractresearch organizations in connection with closing out our EFAPROXYN trials as aresult of the discontinuation of the EFAPROXYN development program.

Research anddevelopment expenses for the six months ended June 30, 2006 and 2007 were $6.8million and $7.7 million, respectively. The $890,000 increase in research and development expenses in the sixmonths ended June 30, 2007 as compared to the same period in 2006 was primarilydue to the following:

·                  a$1.7 million increase in clinical trial and preclinical study costs involvingPDX;

·                  a$868,000 increase related to key personnel changes; and

·                  a$506,000 increase in non-cash stock-based compensation expense.

Theseincreases were partially offset by a $2.4 million decrease in clinical trialcosts resulting from the completion of patient enrollment in our Phase 3 ENRICHtrial in September 2006, which is net of $308,000 in expense accrued during thesix months ended June 30, 2007 for estimated costs to be incurred by contractresearch organizations in connection with closing out our EFAPROXYN trials as aresult of the discontinuation of the EFAPROXYN development program.

For the secondhalf of 2007, we expect our research and development expenses to increaserelative to the amount recorded for the six months ended June 30, 2007 due toincreases in costs for our preclinical studies and planned clinical trials forPDX, and non-cash stock-based compensation expense.  The amount and timing of the costs related toour clinical trials are difficult to predict due to the uncertainty inherent inthe timing of clinical trial initiations, the rate of patient enrollment andthe detailed design of future trials.

*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 commercial requirements.

Clinicalmanufacturing expenses for the three months ended June 30, 2006 and 2007 were$391,000 and $1.4 million, respectively. The $994,000 increase in clinical manufacturing expenses in the threemonths ended June 30, 2007 as compared to the same period in 2006 was partiallydue to a $117,000 increase related to estimated costs to be incurred for thestorage and destruction of EFAPROXYN bulk drug substance and formulated drug productas a result of the discontinuation of the EFAPROXYN development program. Theremaining $877,000 increase was primarily due to increases in third-partymanufacturing costs for PDX bulk drug substance and formulated drug product.

Clinicalmanufacturing expenses for the six months ended June 30, 2006 and 2007 were$952,000 and $2.5 million, respectively. The $1.6 million increase in clinical manufacturing expenses in the sixmonths ended June 30, 2007 as compared to the same period in 2006 was partiallydue to a $117,000 increase related to estimated costs to be incurred for thestorage and destruction of EFAPROXYN bulk drug substance and formulated drug productas a result of the discontinuation of the EFAPROXYN development program. Theremaining $1.5 million increase was primarily due to increases in third-partymanufacturing costs for PDX bulk drug substance and formulated drug product.

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For the secondhalf of 2007, we expect our clinical manufacturing expenses to increaserelative to the amount recorded for the six months ended June 30, 2007 in orderto support our requirements for ongoing and planned clinical trials andpreclinical studies involving PDX and RH1.

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

Marketing, generaland administrative expenses for the three months ended June 30, 2006 and 2007were $3.7 million and $5.5 million, respectively.  The $1.8 million increase in marketing,general and administrative expenses in the three months ended June 30, 2007 ascompared to the same period in 2006 was primarily due to the following:

·                  a$775,000 increase in market research and consulting expenses related to ourproduct development and commercialization planning for EFAPROXYN and PDX;

·                  a$753,000 increase in personnel and travel costs, mainly attributable toadditional headcount and increases in compensation costs year over year; and

·                  a$215,000 increase in non-cash stock-based compensation expense.

Marketing, generaland administrative expenses for the six months ended June 30, 2006 and 2007were $6.7 million and $10.3 million, respectively.  The $3.6 million increase in marketing,general and administrative expenses in the six months ended June 30, 2007 ascompared to the same period in 2006 was primarily due to the following:

·                  a$1.3 million increase in personnel and travel costs, mainly attributable to additionalheadcount and increases in compensation costs year over year;

·                  a$1.2 million increase in market research and consulting expenses related to ourproduct development and commercialization planning for EFAPROXYN and PDX;

·                  an$895,000 increase in non-cash stock-based compensation expense; and

·                  a$210,000 increase in legal, accounting and other public company costs.

Forthe second half of 2007, we expect our marketing, general and administrativeexpenses to be similar to the amount recorded for the six months ended June 30,2007.

*Stock-based Compensation Expense. *In accordance with the modified prospective transitionmethod of SFAS 123R, stock-based compensation expense for the three and sixmonths ended June 30, 2006 and 2007 has been recognized in the accompanyingStatements of Operations as follows:  
| ** **                              | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                              | ** ** | **2006**                                            | ** ** | **2007**                                          | ** ** | **2006** | ** ** | **2007** | ** ** |
| Research and  development               |       | $                                                   | 167,074    |                                              | $          | 544,111 |   | $ | 301,528 |   | $ | 808,411 |   |
| Clinical  manufacturing                 |       | 29,376                                              |       | 46,931                                            |       | 53,021 |   | 82,949 |   |
| Marketing,  general and administrative  |       | 1,007,380                                           |       | 1,222,874                                         |       | 1,330,623 |   | 2,225,936 |   |
| Total  stock-based compensation expense |       | $                                                   | 1,203,830  |                                              | $          | 1,813,916 |   | $ | 1,685,172 |   | $ | 3,117,296 |   |

 

The $1.2 millionof stock-based compensation recognized in the three months ended June 30, 2006was primarily related to our stock option plans.  Of the $1.8 million of stock-basedcompensation recognized in the three months ended June 30, 2007,$1.6 million was related to our stock option plans, $181,000 related to restrictedstock and $14,000 was related to our employee stock purchase plan. The $610,000increase in stock-based compensation expense in the three months ended June 30,2007 as compared to the same period in 2006 was primarily due to a higherfair-value for options granted in 2007 compared to the options granted in 2006due to our stock price being higher for the 2007 option grants as compared tothe same period in 2006.

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The $1.7 millionof stock-based compensation recognized in the six months ended June 30, 2006was primarily related to our stock option plans.  Of the $3.1 million of stock-basedcompensation recognized in the six months ended June 30, 2007,$2.7 million was related to our stock option plans, $359,000 related torestricted stock and $23,000 was related to our employee stock purchase plan.The $1.4 million increase in stock-based compensation expense in the six monthsended June 30, 2007 as compared to the same period in 2006 was primarily due toa higher fair-value for options granted in 2007 compared to the options grantedin 2006 due to our stock price being higher during the six months ended June30, 2007 as compared to the same period in 2006.

As of June 30,2007, the unrecorded stock-based compensation balance related to stock optionawards was $8,542,002 and will be recognized over an estimated weighted-averageamortization period of 1.5 years. As of June 30, 2007, the unrecorded deferredstock-based compensation balance related to restricted stock awards was $1,034,591and will be recognized over an estimated weighted-average amortization periodof 1.6 years.

*Restructuringand Separation Costs. * Restructuring and separation costs for the sixmonths ended June 30, 2006 and 2007 were $646,000 and $0, respectively.  For a discussion of the separation costsrecorded for the six months ended June 30, 2006, please see Note 7 of Part I,Item 1 in this quarterly report.

*Interestand Other Income, Net*. Interest income, net of interest expense, for the three months endedJune 30, 2006 and 2007 was $488,000 and $909,000, respectively.  Interest income, net of interest expense, forthe six months ended June 30, 2006 and 2007 was $992,000 and $1.7 million,respectively.  The $421,000 and $690,000increases in net interest income in the three and six months ended June 30,2007 as compared to the same periods in 2006 were primarily due to higheraverage investment balances resulting from a financing completed in February2007 and higher yields on our cash, cash equivalents and investments inmarketable securities.

**Liquidityand Capital Resources**

Ourcash, cash equivalents, and investments in marketable securities amounted to$68.7 million at June 30, 2007. Since our inception, we have financed our operations primarily throughpublic and private sales of our equity securities, which have resulted in netproceeds to us of $253.3 million through June 30, 2007.  We have also generated $20.0 million ofnet interest income since our inception from investing the net proceeds ofthese financings.

We have used$180.2 million of cash for operating activities from our inception through June30, 2007.  Net cash used to fund ouroperating activities for the six months ended June 30, 2006 and 2007 was $11.6million and $15.5 million, respectively.

Net cash providedby investing activities for the six months ended June 30, 2006 was $14.2million 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 six months ended June 30, 2007 was $28.8 millionand consisted primarily of the purchase of investments in marketablesecurities, partially offset by the proceeds from maturities of investments inmarketable securities.

Netcash provided by financing activities for the six months ended June 30, 2006was $110,565 and consisted of proceeds from the issuance of common stockassociated with stock options exercised by our employees.  Net cash provided by financing activities forthe six months ended June 30, 2007 was $51.1 million and consisted primarily ofthe net proceeds from the sale of 9,000,000 shares of our common stock in anunderwritten offering at a price of $6.00 per share (the “February 2007 Financing”).  We received net proceeds from the February2007 Financing of approximately $50.3 million, after deducting underwritingcommissions of approximately $3.2 million and other offering expenses ofapproximately $503,000. The shares of common stock were sold under our shelfRegistration Statement on Form S-3 (File No. 333-134965),declared effective by the Securities and Exchange Commission on July 10,2006. We retired the unused portion of this shelf registration statement inJune 2007.

In May2007, we filed a new universal shelf Registration Statement on Form S-3 (FileNo. 333-143198) with the Securities and Exchange Commission (“SEC”) that wasdeclared effective on June 5, 2007. Under the registration statement, we are allowed to sell, from time totime, up to $150 million of our common stock, preferred stock, depositoryshares, debt securities and/or warrants, either individually or in units, inone or more offerings.  We have nospecific plans to offer the securities covered by the registration statementand we are not required to offer the securities in the future pursuant to theregistration statement. The terms of any offering under the registrationstatement will be established at the time of the offering. Proceeds from thesale of any securities will be used for the purposes described in a prospectussupplement filed at the time of an offering. 

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Basedupon the current status of our product development and commercialization plans,we believe that our cash, cash equivalents, and investments in marketablesecurities as of June 30, 2007 should be adequate to support our operationsthrough the first quarter of 2009, although there can be no assurance that thiscan, in fact, be accomplished.

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

·       the status of our productdevelopment programs;

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

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

·       competing technological andmarket developments; and

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

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

**Obligationsand Commitments**

*Manufacturing Commitments*

InJune 2005, we entered into a manufacturing agreement with Hovione InterLimited (“Hovione”) covering the supply of EFAPROXYN bulk drug substance, orefaproxiral sodium.  Based on the resultsof the ENRICH trial, we have discontinued the development of EFAPROXYN and weretain the right to terminate this agreement, without penalty.

*Royalty and License FeeCommitments for PDX*

InDecember 2002, we entered into a license agreement with MemorialSloan-Kettering Cancer Center, SRI International and Southern Research Institute,under which we obtained exclusive worldwide rights to several issued UnitedStates patents and equivalent foreign patent applications to develop and marketany product derived from any formulation of PDX in connection with alldiagnostic and therapeutic uses, including human and veterinary diseases. Underthe terms of the agreement, we paid an up-front license fee of $2.0 millionupon execution of the agreement and are also required to make certainadditional cash payments based upon the achievement of certain clinicaldevelopment or regulatory milestones or the passage of certain time periods. Todate, we have made aggregate milestone payments of $1.5 million based on thepassage of time. In the future, we could make aggregate milestone payments of$1.5 million upon the earlier of achievement of a clinical developmentmilestone or the passage of certain time periods (the “Clinical Milestone”),and up to $10 million upon achievement of certain regulatory milestones,including regulatory approval to market PDX in the United States or Europe. Thenext scheduled payments toward the Clinical Milestone of $500,000 each arecurrently due on December 23, 2007, 2008 and 2009. The up-front license fee and all milestone payments under the agreement,have been or will be recorded to research and

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development expense when incurred. Under the termsof the agreement, we are required to fund all development programs and willhave sole responsibility for all commercialization activities. In addition, wewill pay the licensors a royalty based on a percentage of net revenues arisingfrom sales of the product or sublicense revenues arising from sublicensing theproduct, if and when such sales or sublicenses occur. As of June 30, 2007, noroyalty payments have been made or accrued.

**CriticalAccounting Policies**

Ourdiscussion and analysis of our financial condition and results of operationsare based upon our financial statements, which have been prepared in accordancewith accounting principles generally accepted in the United States.  The preparation of these financial statementsrequires us to make estimates and judgments that affect the reported amounts ofassets, liabilities, and expenses.  For adescription of our critical accounting policies, please see our Annual Reporton Form 10-K for the fiscal year ended December 31, 2006.

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

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

We investin marketable securities in accordance with our investment policy.  The primary objectives of our investmentpolicy are to preserve principal, maintain proper liquidity to meet operatingneeds and maximize yields.  Ourinvestment policy specifies credit quality standards for our investments andlimits the amount of credit exposure to any single issue, issuer or type ofinvestment.  The average duration of theissues in our portfolio of investments in marketable securities as of June 30,2007 is approximately four months.  As ofJune 30, 2007, our investments in marketable securities of $51.8 millionare all classified as held-to-maturity and were held in a variety of interest-bearinginstruments, consisting mainly of high-grade corporate notes.

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

**ITEM 4.  CONTROLS AND PROCEDURES**

As of the end ofthe period covered by this report, an evaluation was carried out under thesupervision and with the participation of our management, including ourprincipal executive officer and principal financial officer (the “EvaluatingOfficers”), of the effectiveness of our disclosure controls and procedures, asdefined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (“ExchangeAct”).  Based on that evaluation, ourmanagement, including the Evaluating Officers, concluded that our disclosurecontrols and procedures were effective as of June 30, 2007 to ensure thatinformation required to be disclosed by us in reports that we file or submitunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in Securities and Exchange Commission’s rules andforms, and that such information is accumulated and communicated to ourmanagement, including the Evaluating Officers, as appropriate, to allow timelydecisions regarding required disclosure.

**NoChanges in Internal Control over Financial Reporting**

There were nochanges in our internal controls over financial reporting during the threemonths ended June 30, 2007 that have materially affected, or are reasonablylikely to materially affect, our internal controls over financial reporting.

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**PART II. OTHER INFORMATION**

**ITEM 1.  LEGALPROCEEDINGS**

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

OnNovember 20, 2005, the plaintiff appealed the District Court’s decision tothe U.S. Court of Appeals for the Tenth Circuit (the “Court of Appeals”).  In October 2006, the parties held discussions to settle thematter, although the terms of any such potential settlement remain subject tonegotiation and no binding agreement has been reached. A settlement would besubject to various conditions, including approval of the District Court. Weexpect that any settlement in excess of our deductible would be covered by ourinsurance carrier. As with any litigation proceeding, we cannot predict withcertainty the eventual outcome of our settlement discussions or the legalproceedings. In the event a settlement is not concluded, we intend tovigorously defend against the plaintiff’s appeal. If the Court of Appealsreverses the District Court’s decision and we are not successful in our defenseof such claims, we could be forced to make significant payments to theplaintiffs, and such payments could have a material adverse effect on ourbusiness, financial condition, results of operations and cash flows to theextent such payments are not covered by our insurance carriers. Even if ourdefense against such claims is successful, the litigation could result insubstantial costs and divert management’s attention and resources, which couldadversely affect our business. As of June 30, 2007, we have recorded $2,000,000in accrued litigation settlement costs, which represents our best estimate ofthe potential gross amount of the settlement costs to be paid to theplaintiffs, and $1,753,000 in prepaid expenses and other assets, whichrepresents the amount we expect to be reimbursed from our insurance carrier.The net difference of $247,000 between these amounts represents the remainingunpaid deductible under our insurance policy, and this amount was recorded tomarketing, general and administrative expenses during the year endedDecember 31, 2006.

**ITEM 1A.  RISK FACTORS**

*Ourbusiness faces significant risks. These risks include those described below andmay include additional risks of which we are not currently aware or which wecurrently do not believe are material. If any of the events or circumstancesdescribed in the following risk factors actually occurs, they may materiallyharm our business, financial condition, operating results and cash flow. As aresult, the market price of our common stock could decline. Additional risksand uncertainties that are not yet identified or that we think are immaterialmay also materially harm our business, operating results and financialcondition.  Stockholders and potential investors inshares of our common stock should carefully consider the following riskfactors, which hereby update those risks contained in the “Risk Factors”section of our Annual Report on Form 10-K for the year ended December 31, 2006, in addition to other informationand risk factors in this report.  We areidentifying these risk factors as important factors that could cause our actualresults to differ materially from those contained in any written or oralforward-looking statements made by or on behalf of the Company.  We are relying upon the safe harbor for allforward-looking statements in this report, and any such statements made by oron behalf of the Company are qualified by reference to the following cautionarystatements, as well as to those set forth elsewhere in this report. Weconsistently update and include our risk factors in our Quarterly Reports onForm 10-Q. Risk factors which have been substantively changed from those setforth in our Annual Report on Form 10-K for the period ended December 31, 2006have been marked with an asterisk immediately following the heading of suchrisk factor.*

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

Sinceour inception in 1992, we have not generated any revenue from product sales andhave experienced significant net losses and negative cash flows fromoperations.  To date, we have financedour operations primarily through public and private sales of our equitysecurities.  For the six months endedJune 30, 2007, we had a net loss of $18.8 million.  As of June 30, 2007, we had accumulated adeficit during our development stage of $227.3 million.  We have incurred these losses principally fromcosts incurred in our research and development programs and from our clinicalmanufacturing and general and administrative expenses.  We expect to incur significant and growingnet losses for the foreseeable future as a result of

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ourresearch and development programs and the costs of preparing for the potentialcommercial launch of PDX.  Our ability togenerate revenue and achieve profitability is dependent on our ability, aloneor with partners, to successfully complete the development of our product candidates,conduct clinical trials, obtain the necessary regulatory approvals, andmanufacture and market our product candidates. We may never generate revenuefrom product sales or become profitable. We expect to continue to spend substantial amounts on research anddevelopment, including amounts spent on conducting clinical trials for ourproduct candidates, and in preparing for the potential commercial launch of ourproduct candidates. We may not be able to continue as a going concern if we areunable to generate meaningful amounts of revenue to support our operations orcannot otherwise raise the necessary funds to support our operations.

**Our near-term prospects are substantiallydependent on PDX, our lead product candidate.  If we are unable to successfullydevelop and obtain regulatory approval for PDX for the treatment of patientswith relapsed or refractory PTCL, our ability to generate revenue will besignificantly delayed.** *

**Wecurrently have no products that are approved for commercial sale.  Our productcandidates are in various stages of development, and significant research anddevelopment, financial resources and personnel will be required to developcommercially viable products and obtain regulatory approvals.  Most of ourefforts and expenditures over the next few years will be devoted to PDX. Accordingly, our future prospects are substantially dependent on thesuccessful development, regulatory approval and commercialization of PDX forthe treatment of patients with relapsed or refractory PTCL.  PDX is notexpected to be commercially available for this or any other indication until atleast 2009.  RH1 is in an earlier stage of development relative to PDX,and if both PDX and RH1 are approved for marketing, we expect that RH1 would notbe commercially available until after PDX is commercially available. Further, certain of the indications that we are pursuing have relatively lowincidence rates, which may make it difficult for us to enroll a sufficientnumber of patients in our clinical trials on a timely basis, or at all, and maylimit the revenue potential of our product candidates.  If we are unableto successfully develop, obtain regulatory approval for and commercialize PDXfor the treatment of relapsed or refractory PTCL, our ability to generaterevenue from product sales will be significantly delayed and our stock pricewould likely decline.**

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

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

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

Ourproduct candidates may not prove to be safe and efficacious in clinical trialsand may not meet all of the applicable regulatory requirements needed toreceive regulatory approval. The clinical development and regulatory approvalprocess is extremely expensive and takes many years. Failure can occur at anystage of development, and the timing of any regulatory approval cannot beaccurately predicted.

Accordingto the PROPEL trial protocol, we will conduct an interim analysis of patientresponse from the PROPEL trial after 35 evaluable patients have completed atleast one cycle of treatment with PDX, and must observe at least four responses(complete or partial) out of the first 35 patients in order to continue thetrial. We currently expect to announce theoutcome of the interim analysis prior to the end of October 2007, although theactual timing of the interim analysis may vary based on a number offactors, including patient enrollment rates.We cannot assure you that the design of, or data collected from, thePROPEL trial will be adequate to continue the trial beyond the first 35patients or 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.

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If thePROPEL trial fails to achieve its safety and efficacy endpoints, we may beunable to obtain regulatory approval to commercialize PDX, and our business andstock price may be harmed. If we fail to obtain regulatory approval for PDX orany of our other current or future product candidates, we will be unable tomarket and sell them and therefore may never generate meaningful amounts ofrevenue or become profitable.

Aspart of the regulatory process, we must conduct clinical trials for eachproduct candidate to demonstrate safety and efficacy to the satisfaction of theFDA and other regulatory authorities abroad. The number and design of clinicaltrials that will be required varies depending on the product candidate, thecondition being evaluated, the trial results and regulations applicable to anyparticular product candidate. The design of our clinical trials is based onmany assumptions about the expected effect of our product candidates, and ifthose assumptions prove incorrect, the clinical trials may not producestatistically significant results. Preliminary results may not be confirmedupon full analysis of the detailed results of a trial, and prior clinical trialprogram designs and results may not be predictive of future clinical trialdesigns or results. Product candidates in later stage clinical trials may failto show the desired safety and efficacy despite having progressed throughinitial clinical trials with acceptable endpoints. For example, we recentlyterminated the development of EFAPROXYN 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.

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

We do not know when our current clinical trials,including our PROPEL trial, will be completed, if at all. We also cannotaccurately predict when other planned clinical trials will begin or becompleted. Many factors affect patient enrollment, including the size of thepatient population, the proximity of patients to clinical sites, theeligibility criteria for the trial, competing clinical trials and new drugsapproved for the conditions we are investigating. Other companies areconducting clinical trials and have announced plans for future trials that areseeking or likely to seek patients with the same diseases as those we arestudying. Competition for patients in some cancer trials is particularlyintense because of the limited number of leading specialist physicians and the geographicconcentration of major clinical centers.

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

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

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

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

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

Even if we achieve positive interim results inclinical trials, these results do not necessarily predict final results, andacceptable results in early trials may not be repeated in later trials. Dataobtained from preclinical and clinical activities are susceptible to varyinginterpretations that could delay, limit or prevent regulatory clearances, andthe FDA can request that we conduct additional clinical trials. A number ofcompanies in the pharmaceutical industry have suffered significant 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 endpoint. In addition, negative or inconclusive results or adverse medicalevents during a clinical trial could cause a clinical trial to be repeated orterminated. Also, failure to construct clinical trial protocols to screenpatients for risk profile factors relevant to the trial for purposes ofsegregating patients into the patient populations treated with the drug beingtested and the control group could result in either group experiencing adisproportionate number of adverse events and could cause a clinical trial tobe repeated or terminated. If we have to conduct additional clinical trials,whether for PDX or any other product candidate, it would significantly increaseour expenses and delay potential marketing of our product candidates.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

·       the timing and outcome ofour ongoing PROPEL trial;

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

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

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

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

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

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

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

Ourcommercial success will also depend in part on our ability to commercialize ourproduct candidates without infringing patents or other proprietary rights ofothers or breaching the licenses granted to us. We may not be able to obtain alicense to third-party technology that we may require to conduct our businessor, if obtainable, we may not be able to license such technology at areasonable cost. If we fail to obtain a license to any technology that we mayrequire to commercialize our technologies or product candidates, or fail toobtain a license at a reasonable cost, we will be unable to commercialize theaffected product or to commercialize it at a price that will allow us to becomeprofitable.

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

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

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

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

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

Evenif we obtain approval to market our product candidates in one or moreindications, our current or future manufacturers may be unable to accuratelyand reliably manufacture commercial quantities of our product candidates atreasonable costs, on a timely basis and in compliance with the FDA’s currentGood Manufacturing Practices. If our current or future contract manufacturersfail in any of these respects, our ability to timely complete our clinicaltrials, obtain required regulatory approvals and successfully commercialize ourproduct candidates will be materially and adversely affected. This risk may beheightened with respect to PDX and RH1 as there are a limited number offill/finish manufacturers with the ability to handle cytotoxic products such asPDX and RH1.  Our reliance on contractmanufacturers exposes us to additional risks, including:

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

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

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

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

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

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

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

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

**We may explore newalliances that may never materialize or may fail.**

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

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·                  the issuance ofequity securities that would dilute stockholders’ percentage ownership;

·                  the expenditureof substantial operational, financial, and management resources in integratingnew businesses, technologies, and products;

·                  the assumptionof substantial actual or contingent liabilities;

·                  or a businesscombination transaction featuring terms that stockholders might not deemdesirable.

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

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

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

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

·       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 community in general may be unwilling to accept, utilizeor recommend the use of any of our products.

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

Ourability to successfully commercialize our products will depend, in part, on theextent to which coverage and reimbursement for the products will be availablefrom: government and health administration authorities; private healthinsurers; managed care programs; and other third-party payors.

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

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

Thebusiness and financial condition of pharmaceutical and biotechnology companiesare affected by the efforts of governmental and third-party payors to containor reduce the costs of health care. In the United States and in foreignjurisdictions there have been, and we expect that there will continue to be, anumber of legislative and regulatory proposals aimed at changing the healthcare system. For example, in some countries other than the United States,pricing of prescription drugs is subject to government control, and we expectproposals to implement similar controls in the United States to continue. Weare unable to predict what additional legislation or regulation, if any,relating to the health care industry or third-party coverage and reimbursementmay be enacted in the future or what effect such legislation or regulationwould have on our business. The pendency or approval of such proposals or reformscould result in a decrease in our stock price or limit our ability to raisecapital or to obtain strategic partnerships or licenses.

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

As abiopharmaceutical company, even though we do not and will not control referralsof healthcare services or bill directly to Medicare, Medicaid or otherthird-party payors, certain federal and state healthcare laws and regulationspertaining to fraud and abuse will be applicable to our business. These lawsand regulations, include, among others:

·       the federal Anti-KickbackStatute, which prohibits, among other things, persons from soliciting,receiving or providing remuneration, directly or indirectly, to induce eitherthe referral of an individual, for an item or service or the purchasing orordering of a good or service, for which payment may be made under federalhealthcare programs such as the Medicare and Medicaid programs;

·       federal false claims lawswhich prohibit, among other things, individuals or entities from knowinglypresenting, or causing to be presented, claims for payment from Medicare,Medicaid, or other third-party payors that are false or fraudulent;

·       the federal HealthInsurance Portability and Accountability Act of 1996, or HIPAA, which prohibitsexecuting a scheme to defraud any healthcare benefit program or making falsestatements relating to healthcare matters; and

·       state law equivalents ofeach of the above federal laws, such as anti-kickback and false claims lawswhich may apply to items or services reimbursed by any third-party payor,including commercial insurers.

Althoughthere are a number of statutory exemptions and regulatory safe harborsprotecting certain common activities from prosecution under the federalAnti-Kickback statute, the exemptions and safe harbors are drawn narrowly, andpractices that involve remuneration intended to induce prescribing, purchases,or recommendations may be subject to scrutiny if they do not qualify for anexemption or safe harbor. Our practices may not in all cases meet all of thecriteria for safe harbor protection from anti-kickback liability.

If ouroperations are found to be in violation of any of the laws described above orany other governmental regulations that apply to us, we may be subject topenalties, including civil and criminal penalties, damages, fines and thecurtailment or restructuring of our operations. Any penalties, damages, fines,curtailment or restructuring of our operations could adversely affect ourability to operate our business and our financial results. Although complianceprograms can mitigate the risk of investigation and prosecution for violationsof these laws, the risks cannot be entirely eliminated. Any action against usfor violation of these laws, even if we successfully defend against it, couldcause us to incur significant legal expenses and divert our management’sattention from the operation of our business. Moreover, achieving andsustaining compliance with all applicable federal and state fraud and abuselaws may prove costly.

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

Wehave limited experience in sales, marketing and distribution. To directlymarket and distribute any products, we must build a sales and marketingorganization with appropriate technical expertise and distributioncapabilities. We may attempt to build such a sales and marketing organizationon our own or with the assistance of a contract sales organization. For somemarket opportunities, we may need to enter into co-promotion or other licensingarrangements with larger pharmaceutical or biotechnology firms in order toincrease the likelihood of commercial success for our products. We may not beable to establish sales, marketing and distribution capabilities of our own orenter into such arrangements with third parties in a timely manner or onacceptable terms. To the extent that we enter into co-promotion or otherlicensing arrangements, our product revenues are likely to be lower than if wedirectly marketed and sold our products, and some or all of the revenues wereceive will depend upon the efforts of third parties, and these efforts maynot be successful. Additionally, building marketing and distributioncapabilities may be more expensive than we anticipate, requiring us to divertcapital from other intended purposes or preventing us from building ourmarketing and distribution capabilities to the desired levels.

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

Even if we obtain thenecessary regulatory approvals to market PDX or any other product candidates,our commercial opportunity will be reduced or eliminated if our competitorsdevelop and market products that are more effective, have fewer

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sideeffects or are less expensive than our product candidates. Our potentialcompetitors include large fully integrated pharmaceutical companies and moreestablished biotechnology companies, both of which have significant resourcesand expertise in research and development, manufacturing, testing, obtainingregulatory approvals and marketing. Academic institutions, government agencies,and other public and private research organizations conduct research, seekpatent protection and establish collaborative arrangements for research,development, manufacturing and marketing. It is possible that competitors willsucceed in developing technologies that are more effective than those beingdeveloped by us or that would render our technology obsolete or noncompetitive.

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

Thetesting and marketing of pharmaceutical products entail an inherent risk ofproduct liability. Product liability claims might be brought against us byconsumers, health care providers or by pharmaceutical companies or othersselling our future products. If we cannot successfully defend ourselves againstsuch claims, we may incur substantial liabilities or be required to limit thecommercialization of our product candidates. We have obtained limited productliability insurance coverage for our human clinical trials. However, product liabilityinsurance coverage is becoming increasingly expensive, and we may be unable tomaintain product liability insurance coverage at a reasonable cost or insufficient amounts to protect us against losses due to product liability. Asuccessful product liability claim in excess of our insurance coverage couldhave a material adverse effect on our business, financial condition and resultsof operations. We may not be able to obtain commercially reasonable productliability insurance for any products approved for marketing.

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

Wehave been named as a defendant in an alleged securities class action lawsuitseeking unspecified damages relating to the issuance of allegedly false andmisleading statements regarding EFAPROXYN during the period from May 29,2003 to April 29, 2004 and subsequent declines in our stock price. OnOctober 20, 2005, the District Court granted our motion to dismiss thelawsuit with prejudice and entered judgment in our favor. On November 20,2005, the plaintiff appealed the decision to the United States Court of Appealsfor the Tenth Circuit. In October 2006, the parties held discussions tosettle the matter, although the terms of any such potential settlement remainsubject to negotiation and no binding agreement has been reached. A settlementwould be subject to various conditions, including approval of the DistrictCourt. We expect that any settlement in excess of our deductible would becovered by our insurance carrier. As with any litigation proceeding, we cannotpredict with certainty the eventual outcome of our settlement discussions orthe legal proceedings. In the event a settlement is not concluded, we intend tovigorously defend against the plaintiff’s appeal. If the Court of Appealsreverses the District Court’s decision and we are not successful in our defenseof such claims, we could be forced to make significant payments to theplaintiffs, and such payments could have a material adverse effect on ourbusiness, financial condition, results of operations and cash flows to theextent such payments are not covered by our insurance carriers. Even if ourdefense against such claims is successful, the litigation could result insubstantial costs and divert management’s attention and resources, which couldadversely affect our business. As of June 30, 2007, we have recorded $2,000,000in accrued litigation settlement costs, which represents our best estimate ofthe potential gross amount of the settlement costs to be paid to theplaintiffs, and $1,753,000 in prepaid expenses and other assets, whichrepresents the amount we expect to be reimbursed from our insurance carrier. Thenet difference of $247,000 between these amounts represents the remainingunpaid deductible under our insurance policy, and this amount was recorded tomarketing, general and administrative expenses during the year endedDecember 31, 2006.

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

We area small company with 66 full-time employees, and our success depends on ourcontinued ability to attract, retain and motivate highly qualified managementand scientific personnel and on our ability to develop and maintain importantrelationships with leading academic institutions and scientists. Competitionfor personnel and academic collaborations is intense.  In particular, our product developmentprograms depend on our ability to attract and retain highly skilled clinicaldevelopment personnel.  In addition, wewill need to hire additional personnel and develop additional academiccollaborations as we continue to expand our research and developmentactivities. We do not know if we will be able to attract, retain or motivatepersonnel or maintain our relationships with academic institutions andscientists. If we fail to negotiate additional acceptable collaborations withacademic institutions and scientists, or if our existing academiccollaborations were to be unsuccessful, our product development programs may bedelayed.

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

Thedevelopment, manufacturing, and, if approved, pricing, marketing, sales andreimbursement of our products, together with our general obligations, aresubject to extensive regulation by federal, state and other authorities withinthe United States and numerous entities outside of the United States. We alsohave significantly fewer employees than many other companies that have the sameor fewer product candidates in late stage clinical development and we rely heavilyon third parties to conduct many important functions.

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

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

Section 404of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness ofour internal controls over financial reporting as of the end of each fiscalyear, and to include a management report assessing the effectiveness of ourinternal controls over financial reporting in our annual report on Form 10-Kfor that fiscal year. Section 404 also requires our independent registeredpublic accounting firm to attest to, and report on, management’s assessment ofour internal controls over financial reporting.

Ourmanagement, including our chief executive officer and principal financialofficer, does not expect that our internal controls over financial reportingwill prevent all error and all fraud. A control system, no matter how welldesigned and operated, can provide only reasonable, not absolute, assurancethat the control system’s objectives will be met. Further, the design of acontrol system must reflect the fact that there are resource constraints, andthe benefits of controls must be considered relative to their costs. Because ofthe inherent limitations in all control systems, no evaluation of controls canprovide absolute assurance that all control issues and instances of fraudinvolving a company have been, or will be, detected. The design of any systemof controls is based in part on certain assumptions about the likelihood offuture events, and we cannot assure you that any design will succeed inachieving its stated goals under all potential future conditions. Over time,controls may become ineffective because of changes in conditions ordeterioration in the degree of compliance with policies or procedures. Becauseof the inherent limitations in a cost-effective control system, misstatementsdue to error or fraud may occur and not be detected. We cannot assure you thatwe or our independent registered public accounting firm will not identify amaterial weakness in our internal controls in the future. A material weaknessin our internal controls over financial reporting would require management andour independent registered public accounting firm to consider our internalcontrols as ineffective. If our internal controls over financial reporting arenot considered effective, we may experience a loss of public confidence, whichcould have an adverse effect on our business and on the market price of ourcommon stock.

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

Forplanning purposes, we estimate the timing of a variety of clinical, regulatoryand other milestones, such as when a certain product candidate will enterclinical development, when a clinical trial will be initiated or completed, orwhen an application for regulatory approval will be filed. Some of ourestimates are included in this report. Our estimates are based on informationavailable to us as of the date of this report and a variety of assumptions.Many of the underlying assumptions are outside of our control. If milestonesare not achieved when we estimated that they would be, investors could be disappointed,and our stock price may decrease.

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

On March 2, 2005, weentered into a Securities Purchase Agreement with Warburg Pincus Private EquityVIII, L.P. (“Warburg”) and certain other investors pursuant to which we issuedand sold an aggregate of 2,352,443 shares of our Series A ExchangeablePreferred Stock (the “Exchangeable Preferred”) at a price per share of $22.10,for aggregate gross proceeds of approximately $52.0 million. OnMay 18, 2005, at our Annual Meeting of Stockholders, our stockholdersvoted

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toapprove the issuance of shares of our common stock upon exchange of shares ofthe Exchangeable Preferred. As a result of such approval, we issued a total of23,524,430 shares of common stock upon exchange of 2,352,443 shares ofExchangeable Preferred. In connection with its purchase of the ExchangeablePreferred, Warburg entered into a standstill agreement agreeing not to pursuecertain activities the purpose or effect of which may be to change or influencethe control of the Company.

OnFebruary 2, 2007, we closed an underwritten offering of 9,000,000 shares ofcommon stock, of which Baker Brothers Life Sciences, L.P. and certain otheraffiliated funds (collectively “Baker”) purchased 3,300,000 shares, at a priceper share of $6.00, for aggregate gross proceeds of approximately $54.0 million. 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 ofJune 30, 2007, we had approximately 66.2 million shares of common stockoutstanding, of which Warburg owned 22,624,430 shares, or approximately 34% ofthe voting power of our outstanding common stock, and Baker owned 8,741,480shares, or approximately 13% of the voting power of our outstanding commonstock. Although each of Warburg and Baker have entered into a standstillagreement with us, they are, and will continue to be, able to exercisesubstantial influence over any actions requiring stockholder approval.

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

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

·       authorizing the issuance of“blank check” preferred stock that could be issued by our board of directors toincrease the number of outstanding shares or change the balance of votingcontrol and thwart a takeover attempt;

·       prohibiting cumulativevoting in the election of directors, which would otherwise allow for less thana majority of stockholders to elect director candidates;

·       prohibiting stockholderaction by written consent, thereby requiring all stockholder actions to betaken at a meeting of our stockholders;

·       eliminating the ability ofstockholders to call a special meeting of stockholders; and

·       establishing advance noticerequirements for nominations for election to the board of directors or forproposing matters that can be acted upon at stockholder meetings.

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 bySection 203 will not apply to either Warburg or Baker because, prior tothe dates on which they became interested stockholders, our board of directorsapproved the transactions which resulted in Warburg and Baker becoming interestedstockholders. However, in connection with its purchase of ExchangeablePreferred in March 2005, Warburg entered into a standstill agreementagreeing not to pursue certain activities the purpose or effect of which may beto change or influence the control of the Company.  Similarly, in connection with theFebruary 2007 Financing, Baker entered into a standstill agreementagreeing not to pursue certain activities the purpose or effect of which may beto change or influence the control of the Company.

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

In May 2003, our board of directors adopted astockholder rights plan that may have the effect of discouraging, delaying orpreventing a merger or acquisition of us that is beneficial to our stockholdersby diluting the ability of a potential acquirer to acquire us. Pursuant to theterms of our plan, when a person or group, except under certain circumstances,acquires 15% or more of our outstanding common stock or 10 business days afterannouncement of a tender or exchange offer for 15% or more of our outstandingcommon stock, the rights (except those rights held by the person or group whohas acquired or announced an offer to acquire 15% or more of our outstandingcommon stock) would generally become exercisable for shares of our common stockat a discount. Because the potential acquirer’s rights would not becomeexercisable for our shares of common stock at a discount, the potentialacquirer would suffer substantial dilution and may lose its ability to acquireus. In addition, the existence of the plan itself may deter a potentialacquirer from acquiring or making an offer to acquire the Company.  As a result, either by operation of the planor by its potential deterrent effect, mergers and acquisitions of the Companythat our stockholders may consider in their best interests may not occur.

BecauseWarburg owns a substantial percentage of our outstanding common stock, we amendedthe stockholder rights plan in connection with Warburg’s purchase ofExchangeable Preferred in March 2005 to provide that Warburg and itsaffiliates will be exempt from the stockholder rights plan, unless Warburg andits affiliates become, without the prior consent of our board of directors, thebeneficial owner of more than 44% of our common stock. Likewise, since Bakerowns a substantial percentage of our outstanding common stock, we amended thestockholder rights plan in connection with the February 2007 Financing toprovide that Baker and its affiliates will be exempt from the stockholderrights plan, unless Baker becomes, without the prior consent of our board ofdirectors, the beneficial owner of more than 20% of our common stock. Under thestockholder rights plan, our board of directors has express authority to amendthe rights plan without stockholder approval.

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

Wecannot be sure that an active trading market for our common stock will exist atany time. Holders of our common stock may not be able to sell shares quickly orat the market price if trading in our common stock is not active. The tradingprice of our common stock has been and is likely to be highly volatile andcould be subject to wide fluctuations in price in response to various factors,many of which are beyond our control, including:

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

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

·       changes in laws orregulations applicable to our product candidates;

·       changes in the expected oractual timing of our development programs;

·       actual or anticipatedvariations in quarterly operating results;

·       announcements oftechnological innovations by us or our competitors;

·       changes in financialestimates or recommendations by securities analysts;

·       conditions or trends in thebiotechnology and pharmaceutical industries;

·       changes in the marketvaluations of similar companies;

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

·       additions or departures ofkey personnel;

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

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

·       sales of large blocks ofour common stock;

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

·       economic and other externalfactors, including disasters or crises.

Publiccompanies in general and companies included on the Nasdaq Global Market inparticular have experienced extreme price and volume fluctuations that haveoften been unrelated or disproportionate to the operating performance of thosecompanies. There has been particular volatility in the market prices ofsecurities of biotechnology and other life sciences companies, and the marketprices of these companies have often fluctuated because of problems orsuccesses in a given market segment or because investor interest has shifted toother segments. These broad market and industry factors may cause the marketprice of our common stock to decline, regardless of our operating performance.We have no control over this volatility and can only focus our efforts on ourown operations, and even these may be affected due to the state of the capitalmarkets. In the past, following large price declines in the public market priceof a company’s securities, securities class action litigation has often beeninitiated against that company, including in 2004 against us. Litigation ofthis type could result in substantial costs and diversion of management’sattention and resources, which would hurt our business. Any adversedetermination in litigation could also subject us to significant liabilities.

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

OnJanuary 1, 2006, we adopted SFAS 123R, which requires the measurementand recognition of compensation expense for all stock-based compensation basedon estimated fair values. As a result, our operating results for the three andsix months ended June 30, 2006 and 2007 include, and future periods willinclude, a charge for stock-based compensation related to employee stockoptions, restricted stock and discounted employee stock purchases.  The application of SFAS 123R requiresthe use of an option-pricing model to determine the fair value of share-basedpayment awards.  This determination offair value is affected by our stock price as well as assumptions regarding anumber of highly complex and subjective variables. These variables include, butare not limited to, our expected stock price volatility over the term of theawards, and actual and projected employee stock option exercise behaviors.Option-pricing models were developed for use in estimating the value of tradedoptions that have no vesting or hedging restrictions and are fullytransferable. Because our employee stock options have certain characteristicsthat are significantly different from traded options, and because changes inthe subjective assumptions can materially affect the estimated value, in management’sopinion the existing valuation models may not provide an accurate measure ofthe fair value of our employee stock options.

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

**Substantial sales ofshares may impact the market price of our common stock.**

If ourstockholders sell substantial amounts of our common stock, the market price ofour common stock may decline. These sales also might make it more difficult forus to sell equity or equity-related securities in the future at a time andprice that we consider appropriate. We are unable to predict the effect thatsales may have on the then prevailing market price of our common stock.  We have entered into a Registration RightsAgreement entered into between us with Warburg and the other purchasers of ourExchangeable Preferred, pursuant to which such investors are entitled tocertain registration rights with respect to the shares of common stock that weissued upon exchange of the Exchangeable Preferred.

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

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| **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**         | ** ** | ** ** |

 

We held our 2007 Annual Meeting of Stockholders onJune 19, 2007. At such meeting, the following actions were voted upon:

a.         Election of Directors
|                                 | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|---------------------------------|------------|------------|------------|--------------|------------|
| Stephen J. Hoffman, Ph.D., M.D. |       | 59,723,125 |       | 417,259      |       |
| Paul L. Berns                   |       | 59,766,572 |       | 373,812      |       |
| Michael D. Casey                |       | 58,578,831 |       | 1,561,553    |       |
| Stewart Hen                     |       | 59,744,730 |       | 395,654      |       |
| Jeffrey R. Latts, M.D.          |       | 59,779,248 |       | 361,136      |       |
| Jonathan S. Leff                |       | 58,073,787 |       | 2,066,597    |       |
| Timothy P. Lynch                |       | 58,715,083 |       | 1,425,301    |       |
| William R. Ringo                |       | 59,780,326 |       | 360,058      |       |

 

b.           Ratificationof the selection by the Audit Committee of the Board of Directors ofPricewaterhouseCoopers LLP as the Company’s independent registered publicaccounting firm for the fiscal year ending December 31, 2007.
| For        | ** ** | **Against** | ** ** | **Abstentions** | ** ** |
|------------|------------|-------------|------------|-----------------|------------|
| 60,048,017 |       | 77,759      |       | 14,608          |       |

 
| **ITEM 5.** | ** ** | **OTHER INFORMATION** | ** ** | **None**   |
|-------------|------------|-----------------------|------------|------------|
|        |       |                  |       |       |
| **ITEM 6.** | ** ** | **EXHIBITS**          | ** ** | ** ** |

 
| Exhibit No. | ** ** | **Note** | ** ** | **Description**                                                                                                                                                                                                                               |
|-------------|------------|----------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.04        |       | (1)      |       | Amended and  Restated Bylaws of Allos Therapeutics, Inc.                                                                                                                                                                                      |
| 10.01       |       | (1)      |       | Form of Amended  and Restated Indemnity Agreement between Allos and each of its directors and  officers.                                                                                                                                      |
| 10.12.1     |       | (1)      |       | 2001 Employee  Stock Purchase Plan Offering (Series Beginning July 1, 2007).                                                                                                                                                                  |
| 10.32       |       |     |       | Summary of  Compensation Arrangements for Non-Employee Directors.                                                                                                                                                                             |
| 10.44       |       | (2)      |       | Corporate Bonus  Plan.                                                                                                                                                                                                                        |
| 10.45*      |       |     |       | License  Agreement for 10-Propargyl-10-Deazaaminopterin “PDX” between Allos and SRI  International, Sloan-Kettering Institute for Cancer Research and Southern  Research Institute dated December 23, 2002 and amended May 9, 2006. |
| 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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*                    Confidentialtreatment has been requested with respect to portions of this exhibit. Omitted portions have been filed with the Securities and Exchange Commissionpursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

(1)          Incorporated byreference to the same numbered exhibit filed with our Current Report onForm 8-K filed on June 25, 2007.

(2)          Incorporated byreference to the same numbered exhibit filed with our Current Report onForm 8-K filed on May 1, 2007.

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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: August 7, 2007 | **ALLOS THERAPEUTICS, INC.**                 |
|---------------------------|----------------------------------------------|
|                      |                                         |
|                      | /s/ Paul L. Berns                            |
|                      | Paul L. Berns                                |
|                      | President and Chief Executive Officer        |
|                      | (Principal Executive Officer)                |
|                      |                                         |
|                      |                                         |
|                      | /s/ David C. Clark                           |
|                      | David C. Clark                               |
|                      | Vice President, Finance                      |
|                      | (Principal Financial and Accounting Officer) |

 

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