Table of Contents

 

 

 

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 
| **x** | ** ** | **Quarterly report pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934.** |
|-------|------------|---------------------------------------------------------------------------------------------------------|

 
|            | ** ** | **For the quarterly period ended June 30,  2008.**                                                                                                                                                                                                           |
|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                        |
| **o**      | ** ** | **Transition report pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934.**                                                                                                                                                          |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                        |
| ** ** | ** ** | **For the transition period from                    to                    .** |

 

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

 

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

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

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act). Yes oNo x

 

As of August 1,2008, there were 81,039,485 shares of the registrant’s Common Stock, par value$0.001 per share, outstanding.

 

 

 

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**ALLOSTHERAPEUTICS, INC.**

** **

**FORM 10-Q**

** **

**TABLE OF CONTENTS**

 
| PART I.  Financial  Information |                                                                                                                                                                                                  |
|-------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ITEM 1.                                   | Financial Statements (unaudited)                                                                                                                                                                      | 3 |
|                                      | Balance Sheets — as of  June 30, 2008 and December 31, 2007                                                                                                                            | 3 |
|                                      | Statements of Operations — for the three and six  months ended June 30, 2008 and 2007 and the cumulative period from  September 1, 1992 (date of inception) through June 30, 2008 | 4 |
|                                      | Statements  of Cash Flows — for the six months ended June 30, 2008 and 2007 and the  cumulative period from September 1, 1992 (date of inception) through  June 30, 2008          | 5 |
|                                      | Notes to  Financial Statements                                                                                                                                                                        | 6 |
| ITEM 2.                                   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                                                           | 12 |
| ITEM 3.                                   | Quantitative  and Qualitative Disclosures About Market Risk                                                                                                                                           | 20 |
| ITEM 4.                                   | Controls and  Procedures                                                                                                                                                                              | 21 |
| PART II.   Other Information    | 21                                                                                                                                                                                                    |
| ITEM 1.                                   | Legal Proceedings                                                                                                                                                                                     | 21 |
| ITEM 1A.                                  | Risk Factors                                                                                                                                                                                          | 21 |
| ITEM 2.                                   | Unregistered Sales of Equity  Securities and Use of Proceeds                                                                                                                                          | 37 |
| ITEM 3.                                   | Defaults Upon Senior Securities                                                                                                                                                                       | 37 |
| ITEM 4.                                   | Submission of Matters to a Vote of  Security Holders                                                                                                                                                  | 37 |
| ITEM 5.                                   | Other Information                                                                                                                                                                                     | 37 |
| ITEM 6.                                   | Exhibits                                                                                                                                                                                              | 37 |
| SIGNATURES                                |                                                                                                                                                                                                  | 39 |

 

NOTE:

 

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

 

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**PART I. FINANCIAL INFORMATION**

** **

**ITEM 1.  FINANCIAL STATEMENTS**

** **

**ALLOS THERAPEUTICS, INC.**

**BALANCE SHEETS**

**(unaudited)**

 
| ** **                                                                                                                                                                                                                                           | ** ** | **June 30,** | ** **  | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|-------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                           | ** ** | **2008**          | ** **  | **2007**              | ** ** |
| **ASSETS**                                                                                                                                                                                                                                           | ** ** | ** **        | ** **  | ** **            | ** ** |
| Current assets:                                                                                                                                                                                                                                      |       |              |        |                  |       |
| Cash and cash  equivalents                                                                                                                                                                                                                           |       | $                 | 46,610,533  |                  | $          | 15,919,664 |   |
| Restricted cash                                                                                                                                                                                                                                      |       | 183,334           |        | 183,334               |       |
| Investments in  marketable securities                                                                                                                                                                                                                |       | 49,487,845        |        | 41,836,566            |       |
| Prepaid research  and development expenses                                                                                                                                                                                                           |       | 722,645           |        | 524,704               |       |
| Prepaid expenses  and other assets                                                                                                                                                                                                                   |       | 2,843,503         |        | 2,374,471             |       |
| Total current  assets                                                                                                                                                                                                                                |       | 99,847,860        |        | 60,838,739            |       |
| Investments in  marketable securities                                                                                                                                                                                                                |       | 10,367,602        |        | —                |       |
| Property and  equipment, net                                                                                                                                                                                                                         |       | 649,633           |        | 621,451               |       |
| Total assets                                                                                                                                                                                                                                         |       | $                 | 110,865,095 |                  | $          | 61,460,190 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                        | ** ** | ** **        | ** **  | ** **            | ** ** |
| Current  liabilities:                                                                                                                                                                                                                                |       |              |        |                  |       |
| Trade accounts  payable                                                                                                                                                                                                                              |       | $                 | 1,687,608   |                  | $          | 1,191,849 |   |
| Accrued  liabilities                                                                                                                                                                                                                                 |       | 7,954,605         |        | 7,689,338             |       |
| Total current  liabilities                                                                                                                                                                                                                           |       | 9,642,213         |        | 8,881,187             |       |
| Commitments and  contingencies (See Note 7)                                                                                                                                                                                                          |       |              |        |                  |       |
|                                                                                                                                                                                                                                                 |       |              |        |                  |       |
| Stockholders’  equity:                                                                                                                                                                                                                          |       |              |        |                  |       |
| Preferred stock,  $0.001 par value; 10,000,000 shares authorized at June 30, 2008 and  December 31, 2007; no shares issued or outstanding                                                                                             |       | —            |        | —                |       |
| Series A  Junior Participating Preferred Stock, $0.001 par value; 1,000,000 shares  designated from authorized preferred stock at June 30, 2008 and  December 31, 2007; no shares issued or outstanding                          |       | —            |        | —                |       |
| Common stock,  $0.001 par value; 150,000,000 shares authorized at June 30, 2008 and  December 31, 2007; 80,756,964 and 67,641,943 shares issued and  outstanding at June 30, 2008 and December 31, 2007,  respectively |       | 80,757            |        | 67,642                |       |
| Additional  paid-in capital                                                                                                                                                                                                                          |       | 372,901,414       |        | 300,440,336           |       |
| Deficit  accumulated during the development stage                                                                                                                                                                                                    |       | (271,759,289      | )           | (247,928,975          | )          |
| Total  stockholders’ equity                                                                                                                                                                                                                     |       | 101,222,882       |        | 52,579,003            |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                                                     |       | $                 | 110,865,095 |                  | $          | 61,460,190 |   |

 

***The accompanying notes are an integral part of thesefinancial 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,** | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------------------------------|-------------|-----------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                            | ** ** | **2008**                                        | ** **  | **2007**                                      | ** ** | **2008**                                                                                                                 | ** ** | **2007** | ** ** | **2008** | ** ** |
|                                                                  |       |                                            |        |                                          |       |                                                                                                                     |       |   |   |   |   |
| Operating  expenses:                                                  |       |                                            |        |                                          |       |                                                                                                                     |       |   |   |   |   |
| Research and  development                                             |       | $                                               | 5,403,924   |                                          | $          | 4,360,787                                                                                                                |       | $ | 11,377,536 |   | $ | 7,650,215 |   | $ | 136,677,408 |   |
| Clinical  manufacturing                                               |       | 1,485,052                                       |        | 1,384,804                                     |       | 3,071,610                                                                                                                |       | 2,532,108 |   | 37,683,716 |   |
| Marketing,  general and administrative                                |       | 5,438,764                                       |        | 5,514,923                                     |       | 10,450,128                                                                                                               |       | 10,262,519 |   | 113,280,669 |   |
| Restructuring  and separation costs                                   |       | —                                          |        | —                                        |       | —                                                                                                                   |       | — |   | 1,663,821 |   |
|                                                                  |       |                                            |        |                                          |       |                                                                                                                     |       |   |   |   |   |
| Total operating  expenses                                             |       | 12,327,740                                      |        | 11,260,514                                    |       | 24,899,274                                                                                                               |       | 20,444,842 |   | 289,305,614 |   |
|                                                                  |       |                                            |        |                                          |       |                                                                                                                     |       |   |   |   |   |
| Loss from  operations                                                 |       | (12,327,740                                     | )           | (11,260,514                                   | )          | (24,899,274                                                                                                              | )          | (20,444,842 | ) | (289,305,614 | ) |
| Gain on  settlement claims                                            |       | —                                          |        | —                                        |       | —                                                                                                                   |       | — |   | 5,110,083 |   |
| Interest and  other income, net                                       |       | 504,025                                         |        | 909,140                                       |       | 1,068,960                                                                                                                |       | 1,682,604 |   | 22,672,706 |   |
|                                                                  |       |                                            |        |                                          |       |                                                                                                                     |       |   |   |   |   |
| Net loss                                                              |       | (11,823,715                                     | )           | (10,351,374                                   | )          | (23,830,314                                                                                                              | )          | (18,762,238 | ) | (261,522,825 | ) |
|                                                                  |       |                                            |        |                                          |       |                                                                                                                     |       |   |   |   |   |
| Dividend related  to beneficial conversion feature of preferred stock |       | —                                          |        | —                                        |       | —                                                                                                                   |       | — |   | (10,236,464 | ) |
|                                                                  |       |                                            |        |                                          |       |                                                                                                                     |       |   |   |   |   |
| Net loss  attributable to common stockholders                         |       | $                                               | (11,823,715 | )                                             | $          | (10,351,374                                                                                                              | )          | $ | (23,830,314 | ) | $ | (18,762,238 | ) | $ | (271,759,289 | ) |
|                                                                  |       |                                            |        |                                          |       |                                                                                                                     |       |   |   |   |   |
| Basic and  diluted net loss per share                                 |       | $                                               | (0.16       | )                                             | $          | (0.16                                                                                                                    | )          | $ | (0.34 | ) | $ | (0.29 | ) |   |   |
|                                                                  |       |                                            |        |                                          |       |                                                                                                                     |       |   |   |   |   |
| Weighted average  shares outstanding:  basic and diluted         |       | 72,382,487                                      |        | 65,645,678                                    |       | 69,916,800                                                                                                               |       | 63,908,192 |   |   |   |

 

***The accompanying notes are an integral partof these financial 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** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|-------------|-------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                              | ** ** | **2008**                                      | ** **  | **2007**                                                                                              | ** ** | **June 30, 2008** | ** ** |
| Cash Flows From  Operating Activities:                                                                                  |       |                                          |        |                                                                                                  |       |   |   |
| Net loss                                                                                                                |       | $                                             | (23,830,314 | )                                                                                                     | $          | (18,762,238 | ) | $ | (261,522,825 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities:                                       |       |                                          |        |                                                                                                  |       |   |   |
| Depreciation and  amortization                                                                                          |       | 207,088                                       |        | 170,545                                                                                               |       | 3,655,397 |   |
| Stock-based  compensation expense                                                                                       |       | 4,103,659                                     |        | 3,117,296                                                                                             |       | 36,385,378 |   |
| Write-off of  long-term investment                                                                                      |       | —                                        |        | —                                                                                                |       | 1,000,000 |   |
| Other                                                                                                                   |       | —                                        |        | —                                                                                                |       | 99,121 |   |
| Changes in  operating assets and liabilities:                                                                           |       |                                          |        |                                                                                                  |       |   |   |
| Prepaid expenses  and other assets                                                                                      |       | (666,973                                      | )           | (579,325                                                                                              | )          | (3,556,148 | ) |
| Interest  receivable on investments                                                                                     |       | (106,730                                      | )           | (418,790                                                                                              | )          | (772,039 | ) |
| Accounts payable                                                                                                        |       | 495,759                                       |        | 363,982                                                                                               |       | 1,687,608 |   |
| Accrued  liabilities                                                                                                    |       | 265,267                                       |        | 607,168                                                                                               |       | 7,954,605 |   |
| Net cash used in  operating activities                                                                                  |       | (19,532,244                                   | )           | (15,501,362                                                                                           | )          | (215,068,903 | ) |
| Cash Flows From  Investing Activities:                                                                                  |       |                                          |        |                                                                                                  |       |   |   |
| Acquisition of  property and equipment                                                                                  |       | (235,269                                      | )           | (134,264                                                                                              | )          | (4,051,023 | ) |
| Pledge of  restricted cash                                                                                              |       | —                                        |        | —                                                                                                |       | (183,334 | ) |
| Purchases of  marketable securities                                                                                     |       | (59,112,151                                   | )           | (57,348,702                                                                                           | )          | (574,770,377 | ) |
| Proceeds from  sales of marketable securities                                                                           |       | 41,200,000                                    |        | 28,660,000                                                                                            |       | 515,686,969 |   |
| Purchase of  long-term investment                                                                                       |       | —                                        |        | —                                                                                                |       | (1,000,000 | ) |
| Payments  received on notes receivable                                                                                  |       | —                                        |        | —                                                                                                |       | 49,687 |   |
| Net cash used in  investing activities                                                                                  |       | (18,147,420                                   | )           | (28,822,966                                                                                           | )          | (64,268,078 | ) |
| Cash Flows From  Financing Activities:                                                                                  |       |                                          |        |                                                                                                  |       |   |   |
| Principal  payments under capital leases                                                                                |       | —                                        |        | —                                                                                                |       | (422,088 | ) |
| Proceeds from  sales leaseback                                                                                          |       | —                                        |        | —                                                                                                |       | 120,492 |   |
| 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 |       | 3,215,274                                     |        | 884,014                                                                                               |       | 12,816,392 |   |
| Proceeds from  issuance of common stock, net of issuance costs                                                          |       | 65,155,259                                    |        | 50,257,207                                                                                            |       | 224,307,078 |   |
| Net cash  provided by financing activities                                                                              |       | 68,370,533                                    |        | 51,141,221                                                                                            |       | 325,947,514 |   |
| Net increase in  cash and cash equivalents                                                                              |       | 30,690,869                                    |        | 6,816,893                                                                                             |       | 46,610,533 |   |
| Cash and cash  equivalents, beginning of period                                                                         |       | 15,919,664                                    |        | 10,070,526                                                                                            |       | — |   |
| Cash and cash  equivalents, end of period                                                                               |       | $                                             | 46,610,533  |                                                                                                  | $          | 16,887,419 |   | $ | 46,610,533 |   |
| 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 unaudited financialstatements of Allos Therapeutics, Inc. (referred to herein as the “Company,”“we,” “us” or “our”) included herein reflect all adjustments, consisting onlyof normal recurring adjustments, which in the opinion of management arenecessary to fairly state our financial position, results of operations andcash flows for the periods presented. Certain information and footnote disclosures normally included in auditedfinancial information prepared in accordance with accounting principlesgenerally accepted in the United States of America have been condensed oromitted pursuant to the rules and regulations of the Securities andExchange Commission, or SEC.  Operatingresults for the three and six months ended June 30, 2008 are notnecessarily indicative of the results that may be expected for the year ending December 31,2008.  These financial statements shouldbe read in conjunction with the audited financial statements and notes theretowhich are included in our Annual Report on Form 10-K for the year ended December 31,2007 for a broader discussion of our business and the opportunities and risksinherent in such business.

 

Since our inception in1992, we have not generated any revenue from product sales and have experiencedsignificant net losses and negative cash flows from operations.  Our activities have consisted primarily ofin-licensing and developing product candidates, raising capital and recruitingpersonnel.  Accordingly, we areconsidered to be in the development stage as of June 30, 2008, as definedin Statement of Financial Accounting Standards (“SFAS”) No. 7, *Accounting and Reporting by Development StageEnterprises.*

 

*Liquidity*

 

Our ability to generate revenue and achieveprofitability is dependent on our ability, alone or with partners, tosuccessfully complete the development of our product candidates, conductclinical trials, obtain the necessary regulatory approvals, and manufacture andmarket our product candidates. The timing and costs to complete the successfuldevelopment of any of our product candidates are highly uncertain, andtherefore difficult to estimate. The lengthy process of seeking regulatoryapprovals for our product candidates, and the subsequent compliance withapplicable regulations, require the expenditure of substantial resources.Clinical development timelines, likelihood of success and total costs varywidely and are impacted by a variety of risks and uncertainties. Because ofthese risks and uncertainties, we cannot predict when or whether we willsuccessfully complete the development of any of our product candidates or theultimate costs of such efforts. Due to these same factors, we cannot be certainwhen, or if, we will generate any revenue or net cash inflow from any of ourcurrent product candidates.

 

Even if our clinical trials demonstrate the safety andeffectiveness of our product candidates in their target indications, we do notexpect to be able to generate commercial sales for any of our productcandidates until the second half of 2009 at the earliest.  We expect to incur significant and growingnet losses for the foreseeable future as a result of our research anddevelopment programs and the costs of preparing for the potential commerciallaunch of PDX.  Although the size andtiming of our future net losses are subject to significant uncertainty, weexpect them to increase over the next several years as we continue to fund ourdevelopment programs and prepare for the potential commercial launch of PDX.

 

As of June 30, 2008, we had $106.5 million incash, cash equivalents and investments in marketable securities.  Based upon the current status of our productdevelopment plans, we believe that our cash, cash equivalents, and investmentsin marketable securities as of June 30, 2008 should be adequate to supportour operations for at least 12 months, although there can be no assurance thatthis can, in fact, be accomplished. Our forecast of the period of time throughwhich our financial resources will be adequate to support our operations is aforward-looking statement that involves risks and uncertainties, and actualresults could vary materially.

 

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We anticipatecontinuing our current development programs and/or beginning other long-termdevelopment projects involving our product candidates. These projects mayrequire many years and substantial expenditures to complete and may ultimatelybe unsuccessful. Therefore, we will need to obtain additional funds fromoutside sources to continue research and development activities, fund operatingexpenses, pursue regulatory approvals and build sales and marketingcapabilities, as necessary. If we are unable to 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. However, our actualcapital requirements will depend on many factors, including:

 

·       the timing and outcome of our ongoing PROPELtrial;

 

·       costs associated with the commercialization ofour product candidates, if approved for marketing;

 

·       our evaluation of, and decisions with respectto, additional therapeutic indications for which we may develop PDX;

 

·       our evaluation of, and decisions with respectto, our strategic alternatives; and

 

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

 

**2.**                 Prepaid Expensesand Other Assets

** **

Prepaid expensesand other assets are comprised of the following:

 
| ** **                                                             | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Prepaid expenses  and other assets                                     |       | $                       | 1,080,503  |                        | $          | 615,471 |   |
| Receivable  related to pending litigation settlement (see Note 7) |       | 1,763,000               |       | 1,759,000                   |       |
|                                                                   |       | $                       | 2,843,503  |                        | $          | 2,374,471 |   |

 

**3.**                 AccruedLiabilities

** **

Accrued liabilities arecomprised of the following:

 
| ** **                                        | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|---------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Accrued research  and development expenses        |       | $                       | 2,342,024  |                        | $          | 1,571,975 |   |
| Accrued  litigation settlement costs (see Note 7) |       | 2,000,000               |       | 2,000,000                   |       |
| Accrued  personnel costs                          |       | 1,597,304               |       | 2,122,805                   |       |
| Accrued clinical  manufacturing expenses          |       | 1,330,749               |       | 1,259,799                   |       |
| Accrued expenses—other                       |       | 669,266                 |       | 696,027                     |       |
| Accrued  restructuring and separation costs       |       | 15,262                  |       | 38,732                      |       |
|                                              |       | $                       | 7,954,605  |                        | $          | 7,689,338 |   |

 

**4.**                 Stockholders’Equity

** **

On May 29, 2008, wesold 12,420,000 shares of our common stock in an underwritten public offeringat a price of $5.64 per share.  The number of shares issued includes1,620,000 shares purchased by the underwriters pursuant to their exercise infull of their overallotment option.  Wereceived net proceeds from the offering of approximately $65.2 million, afterdeducting $4.2 million of underwriting commissions and $691,000 of estimatedoffering expenses. The shares of common stock were sold under our shelfRegistration Statement on Form S-3, declared effective by the SEC on June 5,2007.

 

At our Annual Meeting ofStockholders held on June 24, 2008, the stockholders of Allos Therapeutics, Inc.approved the Allos Therapeutics, Inc. 2008 Equity Incentive Plan (the “2008Plan”).  The 2008 Plan authorizes theissuance of incentive stock options, nonstatutory stock options, restrictedstock awards, restricted stock unit awards, stock appreciation rights,performance stock awards and forms of equity compensation, which may be grantedto employees, directors and consultants. Only employees may receive incentivestock options. The 2008 Plan succeeds and continues the Company’s 2006Inducement Award Plan, 2002 Broad Based Equity Incentive Plan, and 2000 StockIncentive Compensation Plan (the “Prior 

 

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Plans”).  As of June 24,2008, no additional stock awards will be granted under the Prior Plans and alloutstanding stock awards granted under the Prior Plans are deemed to be stockawards granted under the 2008 Plan (but remain subject to the terms of thePrior Plans with respect to which they were originally granted).

 

12,550,843 shares of theCompany’s common stock may be issued pursuant to stock awards granted under the2008 Plan, provided that all stock awards granted after the June 24, 2008effective date of the 2008 Plan, other than stock options and stockappreciation rights granted with an exercise price of at least 100% of suchstock award’s fair market value on the date of grant, will reduce the number ofshares available for issuance under the 2008 Plan by 1.35 shares per sharegranted pursuant to the stock award.  If a stock award under the 2008 Planexpires or otherwise terminates without being exercised in full, the shares ofcommon stock of the Company not acquired pursuant to the stock award will againbecome available for issuance under the 2008 Plan.  In addition, sharesissued pursuant to a stock award that are forfeited to or repurchased by theCompany prior to becoming fully vested and shares that are cancelled pursuantto an exchange or repricing program will become available for the grant of newstock awards under the 2008 Plan.  Shares of common stock that revert toand again become available for issuance under the 2008 Plan and that prior tosuch reversion were granted pursuant to a stock award that reduced the numberof shares available under the 2008 Plan by 1.35 shares per share grantedpursuant to such stock award, shall cause the number of shares of common stockof the Company available for issuance under the 2008 Plan to increase by 1.35shares upon such reversion.

 

**5.**                 Stock-BasedCompensation

** **

In accordance with themodified prospective transition method of SFAS No. 123 (Revised 2004), *Share-Based Payment* (“SFAS 123R”), stock-based compensationexpense for the three and six months ended June 30, 2008 and 2007 has beenrecognized in the accompanying Statements of Operations as follows:

 
| ** **                              | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                              | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Research and  development               |       | $                                                   | 661,830    |                                              | $          | 544,111 |   | $ | 1,337,617 |   | $ | 808,411 |   |
| Clinical  manufacturing                 |       | 103,782                                             |       | 46,931                                            |       | 207,012 |   | 82,949 |   |
| Marketing,  general and administrative  |       | 1,223,536                                           |       | 1,222,874                                         |       | 2,559,030 |   | 2,225,936 |   |
| Total  stock-based compensation expense |       | $                                                   | 1,989,148  |                                              | $          | 1,813,916 |   | $ | 4,103,659 |   | $ | 3,117,296 |   |

 

We did not recognize arelated tax benefit during the three or six months ended June 30, 2008 and2007 as we maintain net operating loss carryforwards and we have established avaluation allowance against the entire tax benefit as of June 30,2008.   No stock-based compensationexpense was capitalized on our Balance Sheets as of June 30, 2008 and December 31,2007.

 

The following tablesummarizes activity and related information for our stock option awards:

 
| ** **                                 | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**               | ** ** |
|--------------------------------------------|------------|------------------------------|------------|--------------------------------------------|------------|
| ** **                                 | ** ** | **Number of  Shares**   | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Number of  Shares** | ** ** | **Weighted  Average   Exercise Price** | ** ** |
| **Outstanding  at December 31, 2007** |       | 6,405,430                    |       | $                                          | 4.68       |   | 2,754,274 |   | $ | 3.80 |   |
| Granted                                    |       | 2,087,812                    |       | 6.25                                       |       |   |   |   |   |
| Exercised                                  |       | (683,963                     | )          | 4.62                                       |       |   |   |   |   |
| Canceled                                   |       | (365,873                     | )          | 5.84                                       |       |   |   |   |   |
| **Outstanding  at June 30, 2008**     |       | 7,443,406                    |       | $                                          | 5.07       |   | 3,047,671 |   | $ | 4.12 |   |

 

During the six months ended June 30, 2008, wegranted 2,087,812 stock options with a weighted-averagegrant-date fair value of $3.95 per share. As of June 30, 2008, the unrecorded stock-based compensationbalance related to stock option awards was $9,420,280 and will be recognizedover an estimated weighted-average amortization period of 1.5 years.

 

The following tablesummarizes information about outstanding stock options that are fully vestedand currently exercisable, and outstanding stock options that are expected tovest in the future:

 

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| ** **                                                                | ** ** | **Number  Outstanding** | ** ** | **Weighted Average  Remaining  Contractual Term** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|---------------------------------------------------------------------------|------------|-------------------------|------------|-------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------|------------|
| **As of  June 30, 2008:**                                            | ** ** | ** **              | ** ** | ** **                                                  | ** ** | ** **                                 | ** ** | ** **                          | ** ** |
| Options fully  vested and exercisable                                     |       | 3,047,671               |       | 6.3                                                         |       | $                                          | 4.12       |                                | $          | 8,863,531 |   |
| Options expected  to vest, including effects of expected forfeitures |       | 3,824,046               |       | 9.0                                                         |       | $                                          | 5.71       |                                | 4,916,011  |   |
| Options fully  vested and expected to vest                                |       | 6,871,717               |       | 7.8                                                         |       | $                                          | 5.00       |                                | $          | 13,779,542 |   |

 

The aggregate intrinsicvalue in the table above represents the total pretax intrinsic value, based onour closing stock price of $6.91 as of June 30, 2008, which would havebeen received by the option holders had all option holders with in-the-moneyoptions exercised their options as of that date.  The total number of in-the-money optionsexercisable as of June 30, 2008 was 2,663,033.

 

The total intrinsic valueof options exercised during the three months ended June 30, 2008 and 2007was $715,597 and $502,894, respectively, determined as of the date of optionexercise.  The total intrinsic value ofoptions exercised during the six months ended June 30, 2008 and 2007 was$1,443,857 and $951,441, respectively, determined as of the date of optionexercise. We settle employee stock option exercises with newly issued commonshares.  No tax benefits were realized byus in connection with these exercises during the three or six months ended June 30,2008 and 2007 as we maintain net operating loss carryforwards and we haveestablished a valuation allowance against the entire tax benefit.

 

The following tablesummarizes activity and related information for restricted stock awards grantedunder our equity incentive plans:

 
| ** **                               | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Grant-Date  Fair Value** | ** ** |
|------------------------------------------|------------|----------------------------|------------|----------------------------------------------------|------------|
| **Nonvested  at December 31, 2007** |       | 412,500                    |       | $                                                  | 3.89       |   |
| Granted                                  |       | —                     |       | —                                             |       |
| Vested                                   |       | (128,750                   | )          | 3.74                                               |       |
| **Nonvested  at June 30, 2008**     |       | 283,750                    |       | $                                                  | 3.95       |   |

 

Theshares of restricted stock vest in four equal annual installments from the dateof grant.  During the three monthsended June 30, 2008 and 2007, we recorded stock-based compensation relatedto restricted stock awards of $93,480 and $181,131, respectively.  Duringthe six months ended June 30, 2008 and 2007, we recorded stock-basedcompensation related to restricted stock awards of $240,979 and $359,188,respectively.  As of June 30, 2008,the unrecorded stock-based compensation balance related to restricted stockawards was $456,093 and will be recognized over an estimated weighted-averageamortization period of 1.4 years.

 

**6.**                 Net Loss PerShare

** **

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

 

Diluted net loss pershare is the same as basic net loss per share for all periods presented becauseany potential dilutive common shares were anti-dilutive due to our net loss (asincluding such shares would decrease our basic net loss per share). Potentialdilutive common shares that would have been included in the calculation ofdiluted earnings per share if we had net income are as follows:

 
| ** **             | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **             | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Common stock  options  |       | 1,665,841                                           |       | 2,142,589                                         |       | 1,727,920 |   | 2,331,681 |   |
| Restricted stock       |       | 303,695                                             |       | 515,000                                           |       | 344,087 |   | 515,000 |   |
| Common stock  warrants |       | —                                              |       | 279,088                                           |       | — |   | 297,696 |   |
|                   |       | 1,969,536                                           |       | 2,936,677                                         |       | 2,072,007 |   | 3,144,377 |   |

 

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**7.**                 Commitments andContingencies

 

*Royalty and License Fee Commitments for PDX*

* *

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

 

*Contingencies*

* *

The Company and one of its former officers were namedas defendants in a purported securities class action lawsuit filed in May 2004in the United States District Court for the District of Colorado (the “DistrictCourt”). An amended complaint was filed in August 2004. The lawsuit wasbrought on behalf of a purported class of purchasers of our securities duringthe period from May 29, 2003 to April 29, 2004, and soughtunspecified damages relating to the issuance of allegedly false and misleadingstatements regarding EFAPROXYN, one of our former product candidates, duringthis period and subsequent declines in our stock price. On October 20,2005, the District Court granted the defendants’ motion to dismiss the lawsuitwith prejudice. In an opinion dated October 20, 2005, the District Courtconcluded that the plaintiff’s complaint failed to meet the legal requirementsapplicable to its alleged claims.

 

On November 20,2005, the plaintiff appealed the District Court’s decision to the U.S. Court ofAppeals for the Tenth Circuit (the “Court of Appeals”).   On February 6,2008, the parties signed a stipulation of settlement, settling the case for$2,000,000. Neither we nor our former officer admits any liability inconnection with the settlement. The Court of Appeals accordingly has remandedthe case to the District Court for consideration of the settlement. The settlement is subject to various conditions, including withoutlimitation approval of the District Court. We expect that the amount of the settlement in excess of our deductiblewill be covered by our insurance carrier. In the event the settlement does not become final, we intend tovigorously defend against the plaintiff’s appeal. If the Court of Appeals thenwere to reverse the District Court’s decision and we were not successful in ourdefense of such claims, we could be forced to make significant payments to theplaintiffs, and such payments could have a material adverse effect on ourbusiness, financial condition, results of operations and cash flows to theextent such payments are not covered by our insurance carriers. Even if ourdefense against such claims were successful, the litigation could result insubstantial costs and divert management’s attention and resources, which couldadversely affect our business. As of June 30, 2008, we have recorded$2,000,000 in accrued litigation settlement costs, which represents our bestestimate of the potential gross amount of the settlement costs to be paid tothe plaintiffs, and $1,763,000 in prepaid expenses and other assets, whichrepresents the amount we expect to be reimbursed from our insurance carrier.The net difference of $237,000 between these amounts represents the remainingunpaid deductible under our insurance policy, and this amount was recorded tomarketing, general and administrative expenses during the year ended December 31,2006.

 

*LeaseCommitments*

 

On June 16, 2008, weentered into an amendment to the lease agreement for our corporate headquartersfacility.  As part of the amendment weextended the term of the lease from November 1, 2008 for a period of 39months to expire January 31, 2012.  We also will have the right,subject to the terms of the amendment, to extend the term of the leaseagreement for one additional period of three years thereafter. We reduced thenumber of rentable square feet included in the leased premises to approximately34,536 square feet.

 

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**8.**                 Recent AccountingPronouncements

** **

In September 2006,the Financial Accounting Standards Board, or FASB, issued SFAS 157, *Fair Value Measurements*, which defines fair value, providesa framework for measuring fair value, and expands the disclosures required forfair value measurements. SFAS 157 applies to other accounting pronouncementsthat require fair value measurements; it does not require any new fair valuemeasurements. SFAS 157 is effective for fiscal years beginning after November 15,2007 and we adopted it on January 1, 2008. The application of SFAS 157 tocertain items has been deferred and will be effective for fiscal yearsbeginning after November 15, 2008 and interim periods within thatyear.  The adoption of this pronouncementdid not have a material impact on our results of operations or financialposition for the three and six month periods ended June 30, 2008. We haveno assets or liabilities that were measured using significant unobservableinputs (Level 3 assets and liabilities) as of June 30, 2008.  Our financial instruments include cash andcash equivalents, investments in marketable securities, prepaid expenses,accounts payable and accrued liabilities. The carrying amounts of financialinstruments approximate their fair value due to their short maturities. Thecarrying values of our cash equivalents and investments in marketablesecurities approximate their market values based on quoted market prices, orLevel 1 inputs. We account for investments in marketable securities inaccordance with SFAS No. 115, *Accountingfor Certain Investments in Debt and Equity Securities*. Investmentsin marketable securities are classified as held to maturity and are carried atcost plus accrued interest.

 

In February 2007,the FASB issued SFAS No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities — Including an Amendment ofFASB Statement No. 115,* which is effective for fiscal yearsbeginning after November 15, 2007 and we adopted it on January 1,2008. This statement permits an entity to choose to measure many financialinstruments and certain other items at fair value at specified election dates.Subsequent unrealized gains and losses on items for which the fair value optionhas been elected will be reported in earnings. The adoption of thispronouncement did not have a material impact on our results of operations orfinancial position for the three and six month periods ended June 30,2008, as we did not elect to measure any of our financial instruments at fairvalue.

 

In June 2007, the Emerging Issues Task Force,or EITF, issued a consensus, EITF 07-3, *AdvancePayments for Research and Development Activities*, which states thatnon-refundable advance payments for goods that will be used or services thatwill be performed in future research and development activities should bedeferred and capitalized until the goods have been delivered or the relatedservices have been rendered.  EITF 07-3is to be applied prospectively for new contractual arrangements entered into infiscal years beginning after December 15, 2007 and we adopted it on January 1,2008. The adoption did not result in a material change to our currentaccounting practice.

 

In November 2007, the EITF issued a consensus,EITF 07-01, *Accounting for CollaborationArrangements Related to the Development and Commercialization of IntellectualProperty*, which is focused on how the parties to a collaborativeagreement should account for costs incurred and revenue generated on sales tothird parties, how sharing payments pursuant to a collaboration agreementshould be presented in the income statement and certain related disclosurequestions. EITF 07-1 is to be applied retrospectively for collaborationarrangements in fiscal years beginning after December 15, 2008.  We currently do not have any sucharrangements.

 

In December 2007,the FASB issued SFAS 141(R), *BusinessCombinations*. This Statement replaces SFAS 141, *Business Combinations,* and requires anacquirer to recognize the assets acquired, the liabilities assumed, includingthose arising from contractual contingencies, any contingent consideration, andany noncontrolling interest in the acquiree at the acquisition date, measuredat their fair values as of that date, with limited exceptions specified in thestatement. SFAS 141(R) also requires the acquirer in a businesscombination achieved in stages (sometimes referred to as a step acquisition) torecognize the identifiable assets and liabilities, as well as thenoncontrolling interest in the acquiree, at the full amounts of their fairvalues (or other amounts determined in accordance with SFAS 141(R)). Inaddition, SFAS 141(R)’s requirement to measure the noncontrolling interest inthe acquiree at fair value will result in recognizing the goodwill attributableto the noncontrolling interest in addition to that attributable to theacquirer. SFAS 141(R) amends SFAS No. 109, *Accounting for Income Taxes*, to require the acquirer torecognize changes in the amount of its deferred tax benefits that arerecognizable because of a business combination either in income from continuingoperations in the period of the combination or directly in contributed capital,depending on the circumstances. It also amends SFAS 142, *Goodwill and Other Intangible Assets*, to,among other things, provide guidance on the impairment testing of acquiredresearch and development intangible assets and assets that the acquirer intendsnot to use. SFAS 141(R) applies prospectively to business combinations forwhich the acquisition date is on or after the beginning of the first annualreporting period beginning on or after December 15, 2008. We are currentlyevaluating the potential impact of this statement.  We do not expect any impact on our financialstatements.

 

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InDecember 2007, the FASB issued SFAS 160, *NoncontrollingInterests in Consolidated Financial Statements*. SFAS 160 amendsAccounting Research Bulletin 51, *ConsolidatedFinancial Statements*, to establish accounting and reportingstandards for the noncontrolling interest in a subsidiary and for thedeconsolidation of a subsidiary. It also clarifies that a noncontrollinginterest in a subsidiary is an ownership interest in the consolidated entitythat should be reported as equity in the consolidated financial statements.SFAS 160 also changes the way the consolidated income statement is presented byrequiring consolidated net income to be reported at amounts that include theamounts attributable to both the parent and the noncontrolling interest. Italso requires disclosure, on the face of the consolidated statement of income,of the amounts of consolidated net income attributable to the parent and to thenoncontrolling interest. SFAS 160 requires that a parent recognize a gain orloss in net income when a subsidiary is deconsolidated and requires expandeddisclosures in the consolidated financial statements that clearly identify anddistinguish between the interests of the parent owners and the interests of thenoncontrolling owners of a subsidiary. SFAS 160 is effective for fiscalperiods, and interim periods within those fiscal years, beginning on or after December 15,2008. We are currently evaluating the potential impact of this statement. Wedo not expect any impact on our financial statements.

 

In March 2008, the FASB issued SFAS No. 161,*Disclosures about Derivative Instruments andHedging Activities*. SFAS 161 is intended to improve financialreporting about derivative instruments and hedging activities by requiringcompanies to enhance disclosure about how these instruments and activitiesaffect their financial position, performance and cash flows. SFAS 161 alsoimproves the transparency about the location and amounts of derivativeinstruments in a company’s financial statements and how they are accounted forunder SFAS 133. SFAS 161 is effective for financial statements issued forfiscal years beginning after November 15, 2008, and interim periods withinbeginning after that date. We are currently evaluating the potential impact ofthis statement. We do not expect any impact on our financial statements.

 

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

 

*The following Management’s Discussion and Analysis of FinancialCondition and Results of Operations, as well as information contained elsewherein this report,*contains forward-looking statements withinthe meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21Eof the Securities Exchange Act of 1934, as amended. These forward-lookingstatements include, but are not limited to, statements concerning our projectedtimelines for the initiation of new trials and announcement of results from ourongoing clinical trials, including our Phase 2 PROPEL trial; the potentialfor the results of our Phase 2 PROPEL trial to support marketing approval ofPDX; other statements regarding our future product development and regulatorystrategies, including our intent to develop or seek regulatory approval for ourproduct candidates in specific indications; the ability of our third-partymanufacturing parties to support our requirements for drug supply; anystatements regarding our future financial performance, results of operations orsufficiency of capital resources to fund our operating requirements; and anyother statements which are other than statements of historical fact. In somecases, these statements may be identified by terminology such as “may,” “will,”“should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,”“potential” or “continue,” or the negative of such terms and other comparableterminology. Although we believe that the expectations reflected in theforward-looking statements contained herein are reasonable, we cannot guaranteefuture results, levels of activity, performance or achievements. Thesestatements involve known and unknown risks and uncertainties thatmay cause our, or our industry’s results, levels of activity, performanceor achievements to be materially different from those expressed or implied bythe forward-looking statements. Factors that may cause or contribute to suchdifferences include, among other things, those discussed in Part II, Item1A of this report under the caption “Risk Factors.” All forward-lookingstatements included in this report are based on information available to us asof the date hereof and we undertake no obligation to revise any forward-lookingstatements in order to reflect any subsequent events or circumstances.Forward-looking statements not specifically described above also may be foundin these and other sections of this report.

* *

**Overview**

 

We are a biopharmaceutical company focused ondeveloping and commercializing innovative small molecule drugs for thetreatment of cancer. Our goal is to build a profitable company by generatingincome from products we develop and commercialize, either alone or with one ormore potential strategic partners.  We striveto develop proprietary products that have the potential to improve the standardof care in cancer therapy.  Our focus ison product opportunities for oncology that leverage our internal clinicaldevelopment and regulatory expertise and address important markets with unmetmedical need. We may also seek to grow our existing portfolio of productcandidates through product acquisition and in-licensing efforts.

 

We currently have twosmall molecule chemotherapeutic product candidates in clinicaldevelopment,  PDX (pralatrexate) and 

 

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RH1.

 

**PDX**

 

PDX (pralatrexate) isa novel, small molecule chemotherapeutic agent that inhibits dihydrofolatereductase, or DHFR, a folic acid (folate)-dependent enzyme involved in thebuilding of nucleic acid, or DNA, and other processes. PDX was rationallydesigned for efficient transport into tumor cells via the reduced folatecarrier, or RFC-1, and effective intracellular drug retention. We believe thesebiochemical features, together with preclinical and clinical data in a varietyof tumors, suggest that PDX may have a favorable safety and efficacy profilerelative to methotrexate and other related DHFR inhibitors. We believe PDX hasthe potential to be delivered as a single agent or in combination therapyregimens.

 

In August 2006, we initiated PROPEL, aninternational, multi-center, open-label, single-arm Phase 2 clinical trial ofPDX in patients with relapsed or refractory peripheral T-cell lymphoma, orPTCL, that we believe, if positive, will be sufficient to support the filing ofa new drug application, or NDA, to seek marketing approval for PDX in thisindication.   Patients receive 30 mg/m2 of PDX once every weekfor six weeks followed by one week of rest per cycle of treatment.  The treatment regimen also includesvitamin B12 and folic acid supplementation. The primaryendpoint of the study is objective response rate, either complete or partialresponse, which will be assessed by central independent oncology review.  Duration of response is the key secondaryendpoint.  All patients enrolled in thetrial will continue to be followed for long-term survival.

 

In July 2006, we reached agreement with the U.S.Food and Drug Administration, or FDA, under its special protocol assessment, orSPA, process on the design of this Phase 2 trial.  The SPA process allows for FDA evaluation ofa clinical trial protocol intended to form the primary basis of an efficacyclaim in support of an NDA, and provides an agreement that the trial design,including trial size, clinical endpoints and data analyses are acceptable tothe FDA.  The SPA agreement is not aguarantee of approval, and we cannot assure you that the design of, or data collectedfrom, the PROPEL trial will be adequate to demonstrate the safety and efficacyof PDX for the treatment of PTCL, or otherwise be sufficient to support FDA orany foreign regulatory approval.  Inaddition, the response rate, duration of response and safety profile requiredto support FDA approval are not specified in the PROPEL trial protocol and willbe subject to FDA review.

 

In accordance with the PROPEL trial protocol, threepre-planned interim analyses of safety data and one pre-planned interim analysisof response data have been conducted.  InJanuary, September and December 2007, we announced that anindependent data monitoring committee, or DMC, completed interim analyses ofsafety data from the first 10, 35 and 65 evaluable patients who completed atleast one cycle of treatment with PDX, respectively, and recommended that thetrial continue per the protocol at each analysis.  No major safety concerns were identified bythe DMC.  In September 2007, weannounced that the results of the interim analysis of patient response dataexceeded the pre-specified threshold for continuation of the trial, whichrequired a minimum of four responses, either complete or partial responses, outof the first 35 evaluable patients, as determined by central independentoncology review.

 

We completed patient enrollment in the PROPEL trial inApril 2008, with more than 100 evaluable patients enrolled at sites acrossthe United States, Canada and Europe. In May 2008, we reported interim response and safety data from thePROPEL trial. Twenty-nine percent, or 19 of the first 65 evaluablepatients enrolled in the trial, experienced either a complete or partialresponse, as assessed by central independent oncology review. Forty-fivepercent, or 29 of the first 65 evaluable patients, experienced either acomplete or partial response, as assessed by the PROPEL investigators. Patientsare considered evaluable if they received at least one dose of PDX and theirdiagnosis of PTCL has been confirmed by independent review.  The median duration of response for thesepatients could not be estimated due to the current length of follow-up. Themost common drug related grade 3/4 adverse events were mucositis andthrombocytopenia, which were observed in 14% and 23% of patients, respectively.Patients received a median of three prior treatment regimens.

 

We currently expect to report top line results of thePROPEL trial by the end of 2008, although the actual timing may vary based on anumber of factors.  Following our reviewof the trial results, we intend to submit a New Drug Application for PDX forthe treatment of patients with relapsed or refractory PTCL as expeditiously aspossible.

 

Our decision to beginPROPEL was based upon interim data from an ongoing Phase 1/2single-center, open-label, single-arm study of PDX in patients with relapsed orrefractory non-Hodgkin’s lymphoma, or NHL, and Hodgkin’s disease. Interim datafrom this trial, which was most recently presented at the AACR-NCI-EORTCconference in October 2007, demonstrated a high overall response rate inpatients with various subtypes of T-cell lymphoma. Notably, investigator-assessedresponses were observed in 14 of 26 (54%) evaluable patients with T-celllymphoma, including nine complete responses and five partial responses. The 

 

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addition of vitamins tothe treatment regimen appeared to mitigate the occurrence of advanced gradestomatitis, or mouth ulcers, a toxicity commonly associated with PDX.

 

In July 2006, theFDA awarded orphan drug designation to PDX for the treatment of patients withT-cell lymphoma. The FDA may award orphan drug designation to drugs that targetconditions affecting 200,000 or fewer patients per year in the United States.Under the Orphan Drug Act, if we are the first company to receive FDA approvalfor PDX for this orphan drug indication, we will obtain seven years ofmarketing exclusivity during which the FDA may not approve another company’sapplication for the same drug for the same orphan indication. Orphan drugexclusivity would not prevent FDA approval of a different drug for the orphandrug indication or the same drug for a different indication. In October 2006,the FDA granted fast track designation to PDX for the treatment of patientswith T-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 April 2007, the European Commission, witha favorable opinion of the Committee for Orphan Medicinal Products of theEuropean Medicines Agency, or EMEA, granted orphan medicinal productdesignation to PDX for the treatment of patients with PTCL. The EMEA orphanmedicinal product designation, or OMPD, is intended to promote the developmentof drugs that may provide significant benefit to patients suffering from rarediseases identified notably as life-threatening, chronically debilitating orvery serious. Under EU regulation, OMPD provides ten years of potential marketexclusivity once the product candidate is approved for marketing for thedesignated indication in the European Union, which can be reduced to six yearsor terminated in certain circumstances.

 

In addition to the PROPELtrial, the following clinical trials involving PDX are also open forenrollment:

 

·                  a Phase 1/2a,open-label, multi-center study of PDX and gemcitabine with vitamin B12 and folic acid supplementation in patients withrelapsed or refractory non-Hodgkin’s lymphoma, or NHL, and Hodgkin’sdisease.  We initiated patient enrollmentin this study in May 2007.  We planto enroll up to 54 evaluable patients in the Phase 1 portion of the study andup to 30 additional patients with relapsed or refractory PTCL in the expandedPhase 2a portion of the study.

 

·                  a Phase 1,open-label, multi-center study of PDX with vitamin B12 and folic acid supplementation in patientswith relapsed or refractory cutaneous T-cell lymphoma, or CTCL.  We initiated patient enrollment in this studyin August 2007.  We plan to enrollup to 56 evaluable patients in the study, including at least 20 patients atwhat we believe to be the optimal dose and schedule. In June 2008, weannounced interim data from the study. Data were presented on 17 patients,including 14 evaluable patients who completed at least one cycle of treatmentwith PDX at doses ranging from 15 - 30 mg/m2 as part of a weekly schedule for two or three weeksfollowed by one week of rest. Patients received a median of three priorsystemic therapies. Investigator-assessed responses were observed in seven of14 evaluable patients (50%), including two complete responses and five partialresponses.  Responses were observed inall four treatment cohorts.  The mostcommon adverse event was mucositis, with Grade 2 mucositis observed in six of17 patients and Grade 3 mucositis observed in two of 17 patients.  There were no Grade 4 toxicities and nothrombocytopenia above Grade 1.

 

·                  a Phase 1/2,open-label, single-center study of PDX with vitamin B12 and folic acid supplementation in patientswith relapsed or refractory NHL and Hodgkin’s disease.  This study is currently focused on exploringalternate dosing and administration schedules in patients with B-cell lymphomato further evaluate PDX’s potential clinical utility in this setting.

 

·                  a Phase 1 doseescalation study of PDX with vitamin B12 and folic acid supplementation in patientswith previously treated (Stage IIIB/IV) advanced non-small cell lung cancer, orNSCLC.

 

·                  a Phase 2b,randomized, multi-center study comparing PDX and Tarceva® (erlotinib), bothwith vitamin B12 and folic acid supplementation, in patientswith Stage IIIB/IV NSCLC who are, or have been, cigarette smokers who havefailed treatment with at least one prior platinum-based chemotherapy regimen.  We initiated patient enrollment in this studyin January 2008. The study will seek to enroll approximately 160 patientsin up to 50 investigative sites worldwide. Based on current enrollment rates,we expect to complete patient enrollment in this study in the second half of2009.

 

·                  a Phase 2,open-label, single-arm, multi-center study of PDX in patients with advanced ormetastatic relapsed transitional cell carcinoma, or TCC, of the urinarybladder.  We initiated patient enrollmentin this study in July 2008.  Thestudy will seek to enroll approximately 41 patients in up to 20 investigativesites worldwide.  The 

 

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primary endpoint of thestudy is objective response rate (complete and partial response). Secondaryendpoints include duration of response, clinical benefit rate, progression-freesurvival, or PFS, overall survival and the safety and tolerability of PDX.  In this study, patients will receive PDX asan intravenous, or IV, push administered on days 1 and 15 of a 4-week/28 daycycle.  The initial dose of PDX will be190 mg/m2,which may be adjusted based on criteria defined in the protocol.  Patients will receive concurrent vitamin therapyof B12 and folic acid.

 

In addition to our ongoing NSCLC and bladder cancerstudies, we are evaluating the potential future development of PDX for othersolid tumor indications, including Stage III/IV head and neck cancer and StageIII/IV breast cancer, among others. There can be no assurances that we will pursue the development of PDXfor one or more of these indications or that such development efforts will beultimately successful.

 

In December 2002, we entered into a licenseagreement with Memorial Sloan-Kettering Cancer Center, SRI International andSouthern Research Institute, as amended, under which we obtained exclusiveworldwide rights to a portfolio of patents and patent applications related toPDX and its uses. The portfolio currently consists of two issued patents in theU.S., two allowed patent applications in Europe, and pending patentapplications in the U.S., Canada, Europe, Australia, Japan, China, Brazil,Indonesia, India, South Korea, Mexico, Norway, New Zealand, the Philippines, Singapore,and South Africa.

 

**RH1**

 

**RH1** is a small molecule chemotherapeutic agent that webelieve is bioactivated by the enzyme DT-diaphorase, or DTD, also known asNAD(P)H quinone oxidoreductase, or NQ01. We believe DTD is over-expressed in many tumors, relative to normaltissue, including lung, colon, breast and liver tumors.  We believe that because RH1 is bioactivatedin the presence of DTD, it has the potential to provide targeted drug deliveryto these tumor types while limiting the amount of toxicity to normal tissue.

** **

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

** **

In December 2004, we entered into an agreementwith the University of Colorado Health Sciences Center, the University ofSalford and Cancer Research Technology under which we obtained exclusiveworldwide rights to certain intellectual property surrounding RH1.

 

***EFAPROXYN*****TM**** (efaproxiral)**** Development Discontinued**

* *

In mid-2007, wediscontinued the development of EFAPROXYN, our former lead product candidate,after announcing top-line results from ENRICH, a Phase 3 clinical trial ofEFAPROXYN plus whole brain radiation therapy, or WBRT, in women with brainmetastases originating from breast cancer. The study failed to achieve its primary endpoint of demonstrating astatistically significant improvement in overall survival in patients receivingEFAPROXYN plus WBRT, compared to patients receiving WBRT alone.  We are currently pursuing the sale of ourrights to EFAPROXYN although we may not receive any material consideration forany sale.

 

**Resultsof Operations**

 

We are a developmentstage company. Since our inception in 1992, we have not generated any revenuefrom product sales and have experienced significant net losses and negativecash flows from operations. We have incurred these losses principally fromcosts incurred in our research and development programs, clinical manufacturingand from our marketing, general and administrative expenses. Our ability togenerate revenue and achieve profitability is dependent on our ability, aloneor with partners, to successfully complete the development of our productcandidates, conduct clinical trials, obtain the necessary regulatory approvals,and manufacture and market our product candidates. The timing and costs tocomplete the successful development of any of our product candidates are highlyuncertain, and therefore difficult to estimate. The lengthy process of seekingregulatory approvals for our product candidates, and the subsequent compliancewith applicable regulations, require the expenditure of substantial resources.Clinical development timelines, likelihood of success and total costs varywidely and are impacted by a variety of risks and uncertainties discussed inthe “Risk Factors” section of Part II, 

 

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Item 1A below.Because of these risks and uncertainties, we cannot predict when or whether wewill successfully complete the development of any of our product candidates orthe ultimate costs of such efforts. Due to these same factors, we cannot becertain when, or if, we will generate any revenue or net cash inflow from anyof our current product candidates.

 

Even if our clinicaltrials demonstrate the safety and effectiveness of our product candidates intheir target indications, we do not expect to be able to generate commercialsales of any of our product candidates until the second half of 2009, at theearliest. We expect to continue incurring net losses and negative cash flowsfor the foreseeable future.  Although thesize and timing of our future net losses are subject to significant uncertainty,we expect them to increase over the next several years as we continue to fundour research and development programs and prepare for the potential commerciallaunch of PDX.

 

***Comparisonof three and six months ended June 30, 2008 and 2007***

 
| ** **                             | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                             | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                   |       |                                            |       |                                          |       |   |   |   |   |
| Operating  expenses:                   |       |                                            |       |                                          |       |   |   |   |   |
| Research and  development              |       | $                                               | 5,403,924  |                                          | $          | 4,360,787 |   | $ | 11,377,536 |   | $ | 7,650,215 |   |
| Clinical  manufacturing                |       | 1,485,052                                       |       | 1,384,804                                     |       | 3,071,610 |   | 2,532,108 |   |
| Marketing,  general and administrative |       | 5,438,764                                       |       | 5,514,923                                     |       | 10,450,128 |   | 10,262,519 |   |
|                                   |       |                                            |       |                                          |       |   |   |   |   |
| Total operating  expenses              |       | $                                               | 12,327,740 |                                          | $          | 11,260,514 |   | $ | 24,899,274 |   | $ | 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 and licensingfees for our product candidates.

 

Research and developmentexpenses for the three months ended June 30, 2008 and 2007 were $5.4million and $4.4 million, respectively. The $1.0 million increase in research and development expenses in thethree months ended June 30, 2008 as compared to the same period in 2007was primarily due to a $2.0 million increase in clinical trial costs involvingPDX, including increased costs for PROPEL and initiation of patient enrollmentin two new trials involving PDX after the second quarter of 2007.

 

Thisincrease was partially offset by:

 

·                  a $585,000 decrease in clinical trialcosts related to EFAPROXYN, which includes $308,000 of expenses during thethree months ended June 30, 2007 for estimated costs to be incurred inconnection with closing out our EFAPROXYN trials as a result of the discontinuationof the EFAPROXYN development program; and

 

·                  a $290,000 decrease in preclinicalstudy costs, primarily related to PDX.

 

Research and developmentexpenses for the six months ended June 30, 2008 and 2007 were $11.4million and $7.7 million, respectively. The $3.7 million increase in research and development expenses in thesix months ended June 30, 2008 as compared to the same period in 2007 wasprimarily due to the following:

 

·                  a $4.3 million increase in clinicaltrial costs involving PDX, including increased costs for PROPEL and initiationof patient enrollment in two new trials involving PDX after the second quarterof 2007;

 

·                  a $529,000 increase in non-cashstock-based compensation expense, as discussed in more detail below; and

 

·                  a $240,000 increase related to keypersonnel changes and related travel costs, mainly attributable to additionalheadcount and increases in compensation costs year over year.

 

Theseincreases were partially offset by:

 

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·                  a $631,000 decrease in clinical trialcosts related to EFAPROXYN, which includes $308,000 of expenses during the sixmonths ended June 30, 2007 for estimated costs to be incurred inconnection with closing out our EFAPROXYN trials as a result of the discontinuationof the EFAPROXYN development program; and

 

·                  a$727,000 decrease in preclinical study costs, primarily related to PDX.

 

For the second half of2008, we expect our research and development expenses to increase relative tothe amount recorded for the six months ended June 30, 2008 due to thefollowing:

 

·                  increases in costs for our ongoingand planned clinical trials and preclinical studies for PDX;

 

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

 

·                  an increase in non-cash stock-basedcompensation expense related to grants for new employees and a full six-monthsof expense related to our annual grants to existing employees which occurred atthe end of February 2008.

 

*ClinicalManufacturing.* Clinical manufacturing expenses includethe costs of certain personnel, third-party manufacturing costs for developmentof drug materials for use in clinical trials and preclinical studies, and costsassociated with pre-commercial scale-up of manufacturing to support anticipatedregulatory and potential commercial requirements.

 

Clinical manufacturingexpenses for the three months ended June 30, 2008 and 2007 were $1.5million and $1.4 million, respectively. The $100,000 increase in clinical manufacturing expenses in the threemonths ended June 30, 2008 as compared to the same period in 2007 wasprimarily due to increased consulting costs.

 

Clinical manufacturingexpenses for the six months ended June 30, 2008 and 2007 were $3.1 millionand $2.5 million, respectively.  The $540,000increase in clinical manufacturing expenses in the six months ended June 30,2008 as compared to the same period in 2007 was primarily due to a $339,000increase related to key personnel changes and related travel costs, mainlyattributable to additional headcount and increases in compensation costs yearover year.

 

For the second half of2008, we expect our clinical manufacturing expenses to increase relative to theamount recorded for the six months ended June 30, 2008 due to thefollowing:

 

·                  increases in order to support ourrequirements for ongoing and planned clinical trials and pre-commercialscale-up; and

 

·                  an increase in non-cash stock-basedcompensation expense related to grants for new employees and a full six-monthsof expense related to our annual grants to existing employees which occurred atthe end of February 2008.

 

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

 

Marketing, general andadministrative expenses for the three months ended June 30, 2008 and 2007were $5.4 million and $5.5 million, respectively.  The $76,000 decrease in marketing, generaland administrative expenses in the three months ended June 30, 2008 ascompared to the same period in 2007 was primarily due to a $453,000 decrease inmarket research and consulting expenses as a result of the discontinuation ofour EFAPROXYN development program in June 2007, offset by a $480,000increase in PDX portfolio development and commercialization planning activities.

 

Marketing, general andadministrative expenses for the six months ended June 30, 2008 and 2007were $10.5 million and $10.3 million, respectively. The $188,000 increase inmarketing, general and administrative expenses in the six months ended June 30,2008 as compared to the same period in 2007 was primarily due to the following:

 

·      a $568,000 increase in PDX portfoliodevelopment and commercialization planning activities; and

 

·      a $333,000 increase in non-cashstock-based compensation expense, as discussed in more detail below.

 

This increase waspartially offset by a $739,000 decrease in market research and consultingexpenses as a result of the discontinuation of our EFAPROXYN developmentprogram in June 2007.

 

For the second half of2008, we expect our marketing, general and administrative expenses to increaserelative to the amount recorded for the six months ended June 30, 2008 dueto the following:

 

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

 

·       anincrease in costs relating to the preparation for the potential commerciallaunch of PDX, in the event we obtain regulatory approval; and

 

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

 

*Stock-basedCompensation Expense. *Stock-basedcompensation expense for the three and six months ended June 30, 2008 and2007 has been recognized in our Statements of Operations as follows:

 
| ** **                              | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                              | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Research and  development               |       | $                                                   | 661,830    |                                              | $          | 544,111 |   | $ | 1,337,617 |   | $ | 808,411 |   |
| Clinical  manufacturing                 |       | 103,782                                             |       | 46,931                                            |       | 207,012 |   | 82,949 |   |
| Marketing,  general and administrative  |       | 1,223,536                                           |       | 1,222,874                                         |       | 2,559,030 |   | 2,225,936 |   |
| Total  stock-based compensation expense |       | $                                                   | 1,989,148  |                                              | $          | 1,813,916 |   | $ | 4,103,659 |   | $ | 3,117,296 |   |

 

The $2.0 million ofstock-based compensation recognized in the three months ended June 30,2008 was 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 torestricted stock and $14,000 was related to our employee stock purchase plan.The $175,000 increase in stock-based compensation expense in the three monthsended June 30, 2008 as compared to the same period in 2007 was primarilydue to an increase in the number of options granted to new employees.

 

Of the $4.1 million ofstock-based compensation recognized in the six months ended June 30, 2008,$3.8 million was related to our stock option plans, $241,000 related torestricted stock and $25,000 was related to our employee stock purchaseplan.  Of the $3.1 million ofstock-based compensation 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 $986,000 increase in stock-based compensation expense in the six monthsended June 30, 2008 as compared to the same period in 2007 was primarilydue to an increase in the number of options granted to new employees and ourannual grants to existing employees which occurred in February 2008.

 

As of June 30, 2008,the unrecorded stock-based compensation balance related to stock option awardswas $9.4 million and will be recognized over an estimated weighted-averageamortization period of 1.5 years. As of June 30, 2008, the unrecordedstock-based compensation balance related to restricted stock awards was$456,000 and will be recognized over an estimated weighted-average amortizationperiod of 1.4 years.

 

*Interestand Other Income, Net*. Interest income for the three months ended June 30, 2008 and 2007was $504,000 and $909,000, respectively. Interest income, net of interest expense, for the six months ended June 30,2008 and 2007 was $1.1 million and $1.7 million, respectively.  The $405,000 and $614,000 decreases in netinterest income in the three and six months ended June 30, 2008 ascompared to the same periods in 2007 were primarily due to lower averageinvestment balances and lower yields on our cash, cash equivalents andinvestments in marketable securities.

 

**Liquidityand Capital Resources**

 

As of June 30, 2008,we had $106.5 million in cash, cash equivalents, and investments in marketablesecurities.  Since our inception, we havefinanced our operations primarily through public and private sales of ourequity securities, which have resulted in net proceeds to us of$326.2 million through June 30, 2008. We have also generated $22.7 million of net interest income sinceour inception from investing the net proceeds of these financings.

 

We have used $215.1million of cash for operating activities from our inception through June 30,2008.  Net cash used to fund ouroperating activities for the six months ended June 30, 2008 and 2007 was$19.5 million and $15.5 million, respectively.

 

Net cash used ininvesting activities for the six months ended June 30, 2008 and 2007 was$18.1 million and $28.8 million, respectively, and consisted primarily of thepurchase of investments in marketable securities, partially offset by theproceeds 

 

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from maturities ofinvestments in marketable securities.

 

Net cash provided byfinancing activities for the six months ended June 30, 2008 was $68.4million and consisted primarily of the net proceeds from the sale of 12,420,000shares of our common stock in May 2008 in an underwritten public offeringat a price of $5.64 per share (the “May 2008 Financing”) and proceeds fromthe issuance of common stock associated with stock options exercised by ouremployees and sales of stock under our employee stock purchase plan of $3.2million.  We received net proceeds fromthe May 2008 Financing of approximately $65.2 million, after deducting$4.2 million of underwriting commissions and $691,000 of estimated offeringexpenses.  The shares of common stock were sold under our shelf RegistrationStatement on Form S-3, declared effective by the SEC on June 5,2007.  Net cash provided by financingactivities for the six months ended June 30, 2007 was $51.1 million andconsisted primarily of the net proceeds from the sale of 9,000,000 shares ofour common stock in February 2007 in an underwritten offering at a priceof $6.00 per share (the “February 2007 Financing”).  We received net proceeds from the February 2007Financing of approximately $50.3 million, after deducting underwriting commissionsof approximately $3.2 million and other offering expenses of approximately$503,000. The shares of common stock were sold under our shelf RegistrationStatement on Form S-3, declared effective by the SEC on July 10,2006.

 

Based upon the current status of our productdevelopment plans, we believe that our cash, cash equivalents, and investmentsin marketable securities as of June 30, 2008 should be adequate to supportour operations through at least the next 12 months, although there can be noassurance that this can, in fact, be accomplished. Our forecast of the periodof time through which our financial resources will be adequate to support ouroperations is a forward-looking statement that involves risks anduncertainties, and actual results could vary materially.

 

We anticipatecontinuing our current development programs and/or beginning other long-termdevelopment projects involving our product candidates. These projects mayrequire many years and substantial expenditures to complete and may ultimatelybe unsuccessful. Therefore, we will need to obtain additional funds fromoutside sources to continue research and development activities, fund operatingexpenses, pursue regulatory approvals and build sales and marketingcapabilities, as necessary. However, our actual capital requirements willdepend on many factors, including:

 

·       the timing and outcome of our ongoing PROPELtrial;

 

·       costs associated with the commercialization ofour product candidates, if approved for marketing;

 

·       our evaluation of, and decisions with respectto, additional therapeutic indications for which we may develop PDX or RH1;

 

·       our evaluation of, and decisions with respectto, our strategic alternatives; and

 

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

 

We will need to raiseadditional capital to support our future operations, including the potentialcommercialization of PDX in the event the PROPEL trial is positive and weobtain regulatory 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 additional financing will be available when needed, or that, ifavailable, we will obtain such financing on terms that are favorable to ourstockholders or us. In addition, in the event that additional funds areobtained through arrangements with collaborative partners or other sources,such arrangements may require us to relinquish rights to some of ourtechnologies, product candidates or products under development that we wouldotherwise seek to develop or commercialize ourselves. If we are unable togenerate meaningful amounts of revenue from future product sales, if any, orcannot otherwise raise sufficient additional funds to support our operations,we may be required to delay, reduce the scope of or eliminate one or more ofour development programs and our business and future prospects for revenue andprofitability may be harmed.

 

**Obligationsand Commitments**

 

*Royalty and License Fee Commitments for PDX*

* *

In December 2002, weentered into a license agreement with Memorial Sloan-Kettering Cancer Center,SRI International and 

 

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Southern ResearchInstitute, as amended, under which we obtained exclusive worldwide rights to aportfolio of patents and patent applications related to PDX (pralatrexate) andits uses. Under the terms of the agreement, we paid an up-front license fee of$2.0 million upon execution of the agreement and are also required to makecertain additional cash payments based upon the achievement of certain clinicaldevelopment or regulatory milestones or the passage of certain time periods. Todate, we have made aggregate milestone payments of $2.0 million based on thepassage of time. In the future, we could make aggregate milestone payments of$1.0 million upon the earlier of achievement of a clinical developmentmilestone or the passage of certain time periods (the “Clinical Milestone”),and up to $10.3 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, 2008 and 2009. The up-front license fee andall milestone payments under the agreement have been or will be recorded toresearch and development expense when incurred. Under the terms of theagreement, we are required to fund all development programs and will have soleresponsibility for all commercialization activities. In addition, we will paythe licensors a royalty based on a percentage of net revenues arising fromsales of the product or sublicense revenues arising from sublicensing theproduct, if and when such sales or sublicenses occur.

 

*LeaseCommitments*

 

On June 16, 2008, weentered into an amendment to the lease agreement for our corporate headquartersfacility.  As part of the amendment weextended the term of the lease from November 1, 2008 for a period of 39months to expire January 31, 2012.  We also will have the right,subject to the terms of the amendment, to extend the term of the leaseagreement for one additional period of three years thereafter. We reduced thenumber of rentable square feet included in the leased premises to approximately34,536 square feet.

 

**CriticalAccounting Policies**

 

Our discussion andanalysis of our financial condition and results of operations are based uponour financial statements, which have been prepared in accordance withaccounting 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.  Webase our estimates on historical experience, available information andassumptions that we believe to be reasonable under the circumstances.  Actual results may differ from theseestimates under different assumptions or conditions.  For a description of our critical accountingpolicies, please see our Annual Report on Form 10-K for the fiscal yearended December 31, 2007.

 

**RecentAccounting Pronouncements**

 

For a description of ourrecent accounting pronouncements, please see Note 8 of the unaudited June 30,2008 financial statements included herein.

 

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

** **

We do not use derivative financial instruments orauction rate securities in our investment portfolio and have no foreignexchange contracts.  Our financialinstruments as of June 30, 2008 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 invest in marketable securities in accordance withour investment policy.  The primaryobjectives of our investment policy are to preserve principal, maintain properliquidity to meet operating needs and maximize yields.  Our investment policy specifies creditquality standards for our investments and limits the amount of credit exposureto any single issue, issuer or type of investment.  The average duration of the issues in ourportfolio of investments in marketable securities as of June 30, 2008 isapproximately seven months.  As of June 30,2008, our investments in marketable securities of $59.9 million are allclassified as held-to-maturity and were held in a variety of interest-bearinginstruments, consisting mainly of high-grade corporate notes.

 

Investments in fixed-rateinterest-earning instruments carry varying degrees of interest rate risk.  The fair market value of our fixed-ratesecurities may be adversely impacted due to a rise in interest rates.  In general, securities with longer maturitiesare subject to greater interest-rate risk than those with shortermaturities.  Due in part to this factor,our interest income may fall short of expectations or we may suffer losses inprincipal if securities are sold that have declined in market value due to 

 

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changes in interestrates.  Due to the short duration of ourinvestment portfolio, we believe an immediate 10% change in interest rateswould not be material to our financial condition or results of operations.

 

**ITEM 4. CONTROLS AND PROCEDURES**

** **

As of the end of theperiod covered by this report, an evaluation was carried out under thesupervision and with the participation of our management, including ourprincipal executive officer and principal financial officer (the “EvaluatingOfficers”), of the effectiveness of our disclosure controls and procedures, asdefined in Rule 13a-15(e) of the Securities Exchange Act of 1934, asamended (“Exchange Act”).  Based on thatevaluation, our management, including the Evaluating Officers, concluded thatour disclosure controls and procedures were effective as of June 30, 2008to ensure that information required to be disclosed by us in reports that wefile or submit under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in Securities and ExchangeCommission’s rules and forms, and that such information is accumulated andcommunicated to our management, including the Evaluating Officers, asappropriate, to allow timely decisions regarding required disclosure.

 

**NoChanges in Internal Control over Financial Reporting**

 

There were no changes inour internal controls over financial reporting during the three months ended June 30,2008 that have materially affected, or are reasonably likely to materiallyaffect, our internal controls over financial reporting.

 

**PART II.  OTHER INFORMATION**

** **

**ITEM 1.  LEGAL PROCEEDINGS**

** **

The Company and one of its former officers were namedas defendants in a purported securities class action lawsuit filed in May 2004in the United States District Court for the District of Colorado (the “DistrictCourt”). An amended complaint was filed in August 2004. The lawsuit wasbrought on behalf of a purported class of purchasers of our securities duringthe period from May 29, 2003 to April 29, 2004, and soughtunspecified damages relating to the issuance of allegedly false and misleadingstatements regarding EFAPROXYN, one of our former product candidates, duringthis period and subsequent declines in our stock price. On October 20,2005, the District Court granted the defendants’ motion to dismiss the lawsuitwith prejudice. In an opinion dated October 20, 2005, the District Courtconcluded that the plaintiff’s complaint failed to meet the legal requirementsapplicable to its alleged claims.

 

On November 20,2005, the plaintiff appealed the District Court’s decision to the U.S. Court ofAppeals for the Tenth Circuit (the “Court of Appeals”).   On February 6,2008, the parties signed a stipulation of settlement, settling the case for$2,000,000. Neither we nor our former officer admits any liability inconnection with the settlement. The Court of Appeals accordingly has remandedthe case to the District Court for consideration of the settlement. The settlement is subject to various conditions, including withoutlimitation approval of the District Court. We expect that the amount of the settlement in excess of our deductiblewill be covered by our insurance carrier. In the event the settlement does not become final, we intend tovigorously defend against the plaintiff’s appeal. If the Court of Appeals thenwere to reverse the District Court’s decision and we were not successful in ourdefense of such claims, we could be forced to make significant payments to theplaintiffs, and such payments could have a material adverse effect on ourbusiness, financial condition, results of operations and cash flows to theextent such payments are not covered by our insurance carriers. Even if ourdefense against such claims were successful, the litigation could result insubstantial costs and divert management’s attention and resources, which couldadversely affect our business. As of June 30, 2008, we have recorded$2,000,000 in accrued litigation settlement costs, which represents our bestestimate of the potential gross amount of the settlement costs to be paid tothe plaintiffs, and $1,763,000 in prepaid expenses and other assets, whichrepresents the amount we expect to be reimbursed from our insurance carrier.The net difference of $237,000 between these amounts represents the remainingunpaid deductible under our insurance policy, and this amount was recorded tomarketing, general and administrative expenses during the year ended December 31,2006.

 

**ITEM 1A.  RISKFACTORS**

** **

*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*

 

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*identifiedor that we think are immaterial may also materially harm our business,operating results and financial condition. Stockholders andpotential investors in shares of our common stock should carefully consider thefollowing risk factors, which hereby update those risks contained in the “RiskFactors” section of our Annual Report on Form 10-K  for the year ended December 31, 2007, inaddition to other information and risk factors in this report.  We are identifying these risk factors asimportant factors that could cause our actual results to differ materially fromthose contained in any written or oral forward-looking statements made by or onbehalf of the Company.  We are relyingupon the safe harbor for all forward-looking statements in this report, and anysuch statements made by or on behalf of the Company are qualified by referenceto the following cautionary statements, as well as to those set forth elsewherein this report. We consistently update and include our risk factors in ourQuarterly Reports on Form 10-Q. Risk factors which have been substantivelychanged from those set forth in our Annual Report on Form 10-K for theperiod ended December 31, 2007 have been marked with an asteriskimmediately following the heading of such risk factor.*

 

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

** **

Since our inception in 1992, we have not generated anyrevenue from product sales and have experienced significant net losses andnegative cash flows from operations. To date, we have financed our operationsprimarily through the private and public sale of securities.  For the six months ended June 30, 2008,we had a net loss of $23.8 million. As of June 30, 2008, we had accumulated a deficit during ourdevelopment stage of $271.8 million. We have incurred these losses principally from costs incurred in ourresearch and development programs, clinical manufacturing and from ourmarketing, general and administrative expenses. We expect to continue incurringnet losses for the foreseeable future. Our ability to generate revenue andachieve profitability is dependent on our ability, alone or with partners, tosuccessfully complete the development of our product candidates, conductclinical trials, obtain the necessary regulatory approvals, and manufacture andmarket our product candidates. We may never generate revenue from product salesor become profitable. We expect to continue to spend substantial amounts onresearch and development, including amounts spent on conducting clinical trialsfor our product candidates, and in preparing for the potential commerciallaunch of our product candidates. We may not be able to continue as a goingconcern if we are unable to generate meaningful amounts of revenue to supportour operations or cannot otherwise raise the necessary funds to support ouroperations.

 

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

 

We currently have no products that are approved forcommercial sale. Our product candidates are in various stages of development,and significant research and development, financial resources and personnelwill be required to develop commercially viable products and obtain regulatoryapprovals for them. Most of our efforts and expenditures over the next fewyears will be devoted to PDX. Accordingly, our future prospects aresubstantially dependent on the successful development, regulatory approval andcommercialization of PDX for the treatment of patients with relapsed orrefractory PTCL. Even if we receive regulatory approval, PDX is not expected tobe commercially available for this or any other indication until at least thesecond half of 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 wouldnot be 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 unable tosuccessfully develop, obtain regulatory approval for and commercialize PDX forthe treatment of relapsed or refractory PTCL, our ability to generate revenuefrom product sales will be significantly delayed and our stock price wouldlikely decline.

 

**We cannot predict when or if we will obtain regulatoryapproval to commercialize our product candidates. ***

** **

The research, testing, manufacturing, labeling,approval, selling, marketing and distribution of drug products are subject toextensive regulation by the FDA and other regulatory authorities in the UnitedStates and other countries, which regulations differ from country to country.Our product candidates are in the preclinical and clinical stages ofdevelopment and have not been approved for marketing in the United States orany other country. A pharmaceutical product cannot be marketed in the UnitedStates or most other countries until it has completed a rigorous and extensiveregulatory review and approval process. If we fail to obtain regulatoryapproval to market our product candidates, we will be unable to sell ourproducts and generate revenue, which would jeopardize our ability to continueoperating our business. Satisfaction of regulatory requirements typically takesmany years, is dependent upon the type, complexity and novelty of the productand requires the expenditure of 

 

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substantial resources. Of particular significance arethe requirements covering research and development, testing, manufacturing,quality control, labeling and promotion of drugs for human use. We may notobtain regulatory approval for any product candidates we develop, includingPDX, or we may not obtain regulatory review of such product candidates in atimely manner. For a complete description of the regulatory approval process andrelated risks, please refer to the “Government Regulation” section of Item 1 ofour Annual Report on Form 10-K for the year ended December 31, 2007.

 

**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. ***

** **

Our product candidatesmay not prove to be safe and efficacious in clinical trials and may not meetall of the applicable regulatory requirements needed to receive regulatoryapproval. The clinical development and regulatory approval process is extremelyexpensive and takes many years. Failure can occur at any stage of development,and the timing of any regulatory approval cannot be accurately predicted. Inaddition, failure to comply with the FDA and other applicable United States andforeign regulatory requirements applicable to clinical trials may subject us toadministrative or judicially imposed sanctions.

 

 As part of the regulatory process, we mustconduct clinical trials for each product candidate to demonstrate safety andefficacy to the satisfaction of the FDA and other regulatory authoritiesabroad. The number and design of clinical trials that will be required variesdepending on the product candidate, the condition being evaluated, the trialresults and regulations applicable to any particular product candidate. Thedesign of our clinical trials is based on many assumptions about the expectedeffect of our product candidates, and if those assumptions prove incorrect, theclinical trials may not demonstrate the safety or efficacy of our productcandidates. Preliminary results may not be confirmed upon full analysis of thedetailed results of a trial, and prior clinical trial program designs andresults may not be predictive of future clinical trial designs or results.Product candidates in later stage clinical trials may fail to show the desiredsafety and efficacy despite having progressed through initial clinical trialswith acceptable endpoints. For example, we terminated the development ofEFAPROXYN, one of our former product candidates, when it failed to demonstratestatistically significant improvement in overall survival in the targetedpatients in a Phase 3 clinical trial. If our product candidates fail to showclinically significant benefits, they will not be approved for marketing.

 

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 of companiesin the pharmaceutical industry have suffered significant setbacks in advancedclinical trials, even after promising results in earlier trials. As a result,there can be no assurance that our PROPEL trial will achieve its primary orsecondary endpoints. In addition, negative or inconclusive results or adversemedical events during a clinical trial could cause a clinical trial to berepeated or terminated. Also, failure to construct clinical trial protocols toscreen patients 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.

 

We completed patientenrollment in our pivotal Phase 2 PROPEL trial in April 2008. Wecannot assure you that the design of, or data collected from, the PROPEL trialwill be adequate to demonstrate the safety and efficacy of PDX for thetreatment of patients with relapsed or refractory PTCL, or otherwise besufficient to support FDA or any foreign regulatory approval. If the PROPELtrial fails to achieve its safety and efficacy endpoints, we may be unable toobtain regulatory approval to commercialize PDX, and our business and stockprice would be harmed. Further, even if we believe the data from the trial arepositive, the FDA may disagree with our interpretation and determine that thedata are not sufficient to support approval. If we fail to obtain regulatoryapproval for PDX or any of our other current or future product candidates, wewill be unable to market and sell them and therefore may never generatemeaningful amounts of revenue or become profitable.

 

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

** **

We do not know when ourcurrent clinical trials, including our PROPEL trial, will be completed, if atall. We also cannot accurately predict when other planned clinical trials willbegin or be completed. Many factors affect patient enrollment, including thesize of the patient population, the proximity of patients to clinical sites,the eligibility criteria for the trial, 

 

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competing clinical trialsand new drugs approved for the conditions we are investigating. Other companiesare conducting clinical trials and have announced plans for future trials thatare seeking or likely to seek patients with the same diseases as those we arestudying. Competition for patients in some cancer trials is particularlyintense because of the limited number of leading specialist physicians and thegeographic concentration of major clinical centers.

 

As a result of thenumerous factors which can affect the pace of progress of clinical trials, ourtrials may take longer to enroll patients than we anticipate, if they can becompleted at all. Delays in patient enrollment in the trials may increase our costsand slow our product development and approval process. Our product developmentcosts will also increase if we need to perform more or larger clinical trialsthan planned. If other companies’ product candidates show favorable results, wemay be required to conduct additional clinical trials to address changes intreatment regimens or for our products to be commercially competitive. Anydelays in completing our clinical trials will delay our ability to generaterevenue from product sales, and we may have insufficient capital resources tosupport our operations. Even if we do have sufficient capital resources, ourability 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 its special protocol assessment, or SPA process, which allows for FDAevaluation of a clinical trial protocol intended to form the primary basis ofan efficacy claim in support of a new drug application, and provides anagreement that the study design, including trial size, clinical endpointsand/or data analyses are acceptable to the FDA. However, the response rate,duration of response and safety profile required to support FDA approval arenot specified in the PROPEL trial protocol and will be subject to FDA review.In addition, even if we believe PROPEL is positive, a SPA agreement is not aguarantee 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 was 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 PROPEL trial. Therefore, despite thepotential benefits of the SPA agreement, significant uncertainty remainsregarding the clinical development and regulatory approval process for PDX forthe treatment of patients with relapsed or refractory PTCL.

 

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

** **

Clinical trials must beconducted in accordance with the FDA’s current Good Clinical Practices or otherapplicable foreign government guidelines and are subject to oversight by theFDA, other foreign governmental agencies and Institutional Review Boards, orIRBs, at the medical institutions where the clinical trials are conducted. Inaddition, clinical trials must be conducted with product candidates producedunder the FDA’s current Good Manufacturing Practices, or cGMP, and may requirelarge numbers of test subjects. Clinical trials may be suspended by the FDA,other foreign governmental agencies, or us for various reasons, including:

 

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

 

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

 

·                  theproduct candidate may have unforeseen adverse side effects;

 

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

 

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

 

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

 

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·                  quality orstability of the product candidate may fall below acceptable standards; or

 

·                  we may not beable to produce sufficient quantities of the product candidate to complete thetrials.

 

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

 

**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 we may suspend or terminate clinical trials at anytime. We cannot assure you that any of our product candidates will be safe forhuman 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 publicperception of our product candidates might be adversely affected, which couldharm our business and results of operations and cause the market price of ourcommon stock to decline, even if the concern relates to another company’sproduct or product candidate.

 

**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 changedifficult or impossible. Additionally, it may be impossible to find areplacement organization that can conduct our trials in an acceptable mannerand at an acceptable cost.

 

**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 candidatesmay not be approved even if they achieve their endpoints in clinical trials.Regulatory agencies, including the FDA or their advisors, may disagree with ourinterpretations of data from preclinical studies and clinical trials. The FDAhas substantial discretion in the approval process, and when or whetherregulatory approval will be obtained for any drug we develop. For example, eventhough we established a SPA with the FDA for our PROPEL trial, there is noguarantee that the data generated from the PROPEL trial will be adequate tosupport FDA approval. Regulatory agencies also may approve a product candidatefor fewer conditions than requested or may grant approval subject to theperformance of 

 

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post-marketing studiesfor a product candidate. In addition, regulatory agencies may not approve thelabeling claims that are necessary or desirable for the successfulcommercialization of our product candidates.

 

Even if we receive regulatory approvals, our productcandidates may later produce adverse events that limit or prevent theirwidespread use or that force us to withdraw those product candidates from themarket. In addition, a marketed product continues to be subject to strictregulation after approval and may be required to undergo post-approval studies.Any unforeseen problems with an approved product or any violation ofregulations could result in restrictions on the product, including its withdrawalfrom the market. Any delay in or failure to receive or maintain regulatoryapproval for any of our products could harm our business and prevent us fromever 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 cGMP. These regulations cover all aspects of themanufacturing, storage, testing, quality control and record keeping relating toour product candidates. Furthermore, we or our third-party manufacturers mustpass a pre-approval inspection of manufacturing facilities by the FDA and foreignauthorities before obtaining marketing approval and will be subject to periodicinspection by these regulatory authorities to ensure strict compliance withcGMP or other applicable government regulations and corresponding foreignstandards. We do not have control over a third-party manufacturer’s compliancewith these regulations and standards. Such inspections may result in complianceissues that could prevent or delay marketing approval, or require theexpenditure of financial or other resources to address. If we or ourthird-party manufacturers fail to comply with applicable regulatoryrequirements, we may be subject to fines, suspension or withdrawal ofregulatory approvals, product recalls, seizure of products, operatingrestrictions 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. ***

** **

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

 

·       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 we maydevelop PDX or RH1;

 

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

 

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

 

We will need to raise additional capital to supportour future operations, including the potential commercialization of PDX in theevent the PROPEL trial is positive and we obtain regulatory approval to marketPDX. We may seek to obtain this additional capital through arrangements withcorporate partners, equity or debt financings, or from other sources. Sucharrangements, if successfully consummated, may be dilutive to our existingstockholders. However, there is no assurance that additional financing will beavailable when needed, or that, if available, we will obtain such financing onterms that are 

 

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favorable to our stockholders or us. In addition, inthe event that additional funds are obtained through arrangements withcollaborative partners or other sources, such arrangements may require us torelinquish 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.

 

**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 proprietary rightsmay be expensive and result in increased losses. ***

** **

Our success will depend in part on our ability toobtain and maintain meaningful patent protection for our products, both in theUnited States and in other countries. We rely on patents to protect a largepart of our intellectual property and our competitive position. Any patentsissued to or licensed by us could be challenged, invalidated, infringed,circumvented or held unenforceable, based on, among other things, obviousness,inequitable conduct, anticipation or enablement. In addition, it is possiblethat no patents will issue on any of our licensed patent applications. It ispossible that the claims in patents that have been issued or licensed to us orthat may be issued or licensed to us in the future will not be sufficientlybroad to protect our intellectual property or that the patents will not provideprotection against competitive products or otherwise be commercially valuable.Failure to obtain and maintain adequate patent protection for our intellectualproperty would impair our ability to be commercially competitive.

 

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

 

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

 

Furthermore, as with any pharmaceutical company, ourpatent and other proprietary rights are subject to uncertainty. Our patentrights related to our product candidates might conflict with current or futurepatents and other proprietary rights of others. For the same reasons, theproducts of others could infringe our patents or other proprietary rights.Litigation or patent interference proceedings, either of which could result insubstantial costs to us, may be necessary to enforce any of our patents orother proprietary rights, or to determine the scope and validity orenforceability of other parties’ proprietary rights. We may be dependant onthird parties, including our licensors, for cooperation and information thatmay be required in connection with the defense and prosecution of our patentsand other proprietary rights. The defense and prosecution of patent andintellectual property infringement claims are both costly and time consuming,even if the outcome is favorable to us. Any adverse outcome could subject us tosignificant liabilities to third parties, require disputed rights to belicensed from third parties, or require us to cease selling our futureproducts. We are not currently a party to any patent or other intellectualproperty infringement claims.

 

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

** **

We are dependent on thirdparties for the manufacture and storage of our product candidates for clinicaltrials and, if approved, for commercial sale. If we are unable to contract fora sufficient supply of our product candidates on acceptable terms, or if weencounter delays or difficulties in the manufacturing process or ourrelationships with our manufacturers, we may not have sufficient product toconduct or complete our clinical trials or support commercial requirements forour product candidates, if approved for marketing.

 

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Both PDX and RH1 arecytotoxic which requires manufacturers of these substances to have specializedequipment and safety systems to handle such substances. In addition, thestarting materials for PDX require custom preparations, which will require usto manage an additional set of suppliers to obtain the needed supplies of PDX.

 

Given our lack of formalsupply agreements and the fact that in many cases our components are suppliedby a single source, our third party suppliers may not be able to fulfill ourpotential commercial needs or meet our deadlines, or the components they supplyto us may not meet our specifications and quality policies and procedures. Ifwe need to find an alternative supplier of PDX or other components, we may notbe able to contract for those components on acceptable terms, if at all. Anysuch failure to supply or delay caused by such suppliers would have an adverseaffect on our ability to continue clinical development of our productcandidates or commercialize any future products.

 

Even if we obtainapproval to market our product candidates in one or more indications, ourcurrent or future manufacturers may be unable to accurately and reliablymanufacture commercial quantities of our product candidates at reasonablecosts, on a timely basis and in compliance with the FDA’s cGMP. If our currentor future contract manufacturers fail in any of these respects, our ability totimely complete our clinical trials, obtain required regulatory approvals andsuccessfully commercialize our product candidates will be materially andadversely affected. This risk may be heightened with respect to PDX and RH1 asthere are a limited number of fill/finish manufacturers with the ability tohandle cytotoxic products such as PDX and RH1. Our reliance on contractmanufacturers exposes us to additional risks, including:

 

·       delays or failure to manufacture sufficientquantities needed for clinical trials in accordance with our specifications orto deliver such quantities on the dates we require;

 

·       our current and future manufacturers are subjectto ongoing, periodic, unannounced inspections by the FDA and correspondingstate and international regulatory authorities for compliance with strictlyenforced cGMP regulations and similar state and foreign standards, and we donot have control over our contract manufacturers’ compliance with theseregulations and standards;

 

·       our manufacturers may not be able to comply withapplicable regulatory requirements, which would prohibit them frommanufacturing 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;

 

·       our manufacturers might not be able to fulfillour commercial needs, which would require us to seek new manufacturingarrangements and may result in substantial delays in meeting market demands;

 

·       if we need to change to other commercialmanufacturing contractors, the FDA and comparable foreign regulators mustapprove our use of any new manufacturer, which would require additionaltesting, regulatory filings and compliance inspections, and the newmanufacturers would have to be educated in, or themselves develop substantiallyequivalent processes necessary for, the production of our products; and

 

·       we may not have intellectual property rights, ormay have to share intellectual property rights, to any improvements in themanufacturing processes or new manufacturing processes for our products.

 

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

 

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

 

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

 

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

 

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

 

·                  we may berequired to undertake the expenditure of substantial operational, financial andmanagement resources in integrating new businesses, technologies and products;

 

·                  we may berequired to issue equity securities that would dilute our existing stockholders’percentage ownership;

 

·                  we may berequired to assume substantial actual or contingent liabilities;

 

·                  we may not beable to control the amount and timing of resources that our strategic partnersdevote to the development or commercialization of product candidates;

 

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

 

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

 

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

 

·                  disputes mayarise between us and our strategic partners that result in the delay ortermination of the research, development or commercialization of our productcandidates or that result in costly litigation or arbitration that diverts management’sattention and consumes resources;

 

·                  strategicpartners may experience financial difficulties;

 

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

 

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

 

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

 

·                  strategic partnerscould terminate the arrangement or allow it to expire, which would delay thedevelopment and may increase the cost of developing our product candidates.

 

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

** **

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

 

·       the receipt of timely regulatory approval forthe uses that we are studying;

 

·       the establishment and demonstration in themedical community of the safety and efficacy of our products and theirpotential advantages over existing and newly developed therapeutic products;

 

·       ease of use of our products;

 

·       reimbursement and coverage policies ofgovernment and private payors such as Medicare, Medicaid, insurance companies,health maintenance organizations and other plan administrators; and

 

·       the scope and effectiveness of our sales andmarketing efforts.

 

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

 

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

** **

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

 

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

 

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

** **

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

 

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

** **

The FDA has awarded orphan drug status to PDX for thetreatment of patients with T-cell lymphoma. Under the Orphan Drug Act, if weare the first company to receive FDA approval for this drug for the designatedorphan drug indication, we will obtain seven years of marketing exclusivityduring which the FDA may not approve another company’s application for the samedrug for the same orphan indication. Orphan drug exclusivity would not preventFDA approval of a different drug for the orphan indication or the same drug fora different indication.

 

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

** **

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

 

·       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 federalhealth care 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 which 

 

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alsoimposes certain requirements relating to the privacy, security and transmissionof individually identifiable health information;

 

·       federal self-referral laws,such as STARK, which prohibits a physician from making a referral to a providerof certain health services with which the physician or the physician’s familymember has a financial interest; 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, and state laws governing the privacy of healthinformation in certain circumstances, many of which differ from each other insignificant ways and often are not preempted by HIPAA.

 

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

 

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

 

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

** **

We have limitedexperience in sales, marketing and distribution. To directly market anddistribute any products, we must build a sales and marketing organization withappropriate technical expertise and distribution capabilities. We may attemptto build such a sales and marketing organization on our own or with theassistance of a contract sales organization. For some market opportunities, wemay need to enter into co-promotion or other licensing arrangements with largerpharmaceutical or biotechnology firms in order to increase the likelihood ofcommercial success for our products. We may not be able to establish sales,marketing and distribution capabilities of our own or enter into sucharrangements with third parties in a timely manner or on acceptable terms. Tothe extent that we enter into co-promotion or other licensing arrangements, ourproduct revenues are likely to be lower than if we directly marketed and soldour products, and some or all of the revenues we receive will depend upon theefforts of third parties, and these efforts may not be successful.Additionally, building marketing and distribution capabilities may be moreexpensive than we anticipate, requiring us to divert capital from otherintended purposes or preventing us from building our marketing and distributioncapabilities 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 the necessary regulatory approvalsto market PDX or any other product candidate, our commercial opportunity willbe reduced or eliminated if our competitors develop and market products thatare more effective, have fewer side effects or are less expensive than ourproduct candidates. Our potential competitors include large fully integratedpharmaceutical companies and more established biotechnology companies, both ofwhich have significant resources and expertise in research and development,manufacturing, testing, obtaining regulatory approvals and marketing. Academicinstitutions, government agencies, and other public and private researchorganizations conduct research, seek patent protection and establishcollaborative arrangements for research, development, manufacturing andmarketing. It is possible that competitors will succeed in developingtechnologies that are more effective than those being developed by us or thatwould render our technology obsolete or noncompetitive.

 

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

 

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

 

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

 

We have been named as a defendant in a purportedsecurities class action lawsuit seeking unspecified damages relating to theissuance of allegedly false and misleading statements regarding EFAPROXYNduring the period from May 29, 2003 to April 29, 2004 and subsequentdeclines in our stock price. In an opinion dated October 20, 2005, theU.S. District Court for the District of Colorado concluded that the plaintiff’scomplaint failed to meet the legal requirements applicable to its allegedclaims and dismissed the lawsuit. On November 20, 2005, the plaintiffappealed the District Court’s decision to the U.S. Court of Appeals for theTenth Circuit. On February 6, 2008, the parties signed a stipulation ofsettlement, settling the case for $2,000,000. The defendants do not admit anyliability in connection with the settlement. The Court of Appeals has remandedthe case to the District Court for consideration of the settlement. Thesettlement is subject to various conditions, including, without limitation,approval of the District Court.  Weexpect that the amount of the settlement in excess of our deductible will becovered by our insurance carrier. In the event the settlement does not becomefinal, we intend to vigorously defend against the plaintiff’s appeal. If theCourt of Appeals then were to reverse the District Court’s decision and we werenot successful in our defense of such claims, we could be forced to makesignificant payments to the plaintiffs, and such payments could have a materialadverse effect on our business, financial condition, results of operations andcash flows to the extent such payments are not covered by our insurancecarriers. Even if our defense against such claims were successful, thelitigation could result in substantial costs and divert management’s attentionand resources, which could adversely affect our business. As of June 30,2008, we have recorded $2,000,000 in accrued litigation settlement costs, whichrepresents our best estimate of the potential gross amount of the settlementcosts to be paid to the plaintiffs, and $1,763,000 in prepaid expenses andother assets, which represents the amount we expect to be reimbursed from ourinsurance carrier. The net difference of $237,000 between these amountsrepresents the remaining unpaid deductible under our insurance policy, and thisamount was recorded to marketing, general and administrative expenses duringthe year ended December 31, 2006.

 

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

 

We are highly dependent on our President and ChiefExecutive Officer, Paul L. Berns, our Chief Medical Officer, Pablo J. Cagnoni,M.D., and other members of our management team. We are named as the beneficiaryon a term life insurance policy covering Mr. Berns in the amount of$10.0 million. We also depend on academic collaborators for each of ourresearch and development programs. The loss of any of our key employees oracademic collaborators could delay our discovery research program and thedevelopment and commercialization of our product candidates or result intermination of them in their entirety. Mr. Berns and Dr. Cagnoni, aswell as others on our executive management team, have severance agreements withus, but the agreements provide for “at-will” employment with no specified term.Our future success also will depend in large part on our continued ability toattract and retain other highly qualified scientific, technical and managementpersonnel, as well as personnel with expertise in clinical testing, governmentalregulation and commercialization. We face competition for personnel from othercompanies, universities, public and private research institutions, governmententities and other organizations. If we are unsuccessful in our recruitment andretention efforts, our business will be harmed.

 

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

 

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

** **

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

 

As a publicly-traded company, we are subject to significantregulations, some of which have either only recently been adopted, includingthe Sarbanes Oxley Act of 2002, or are currently proposals subject to change.We cannot assure you that we are or will be in compliance with all potentiallyapplicable regulations. If we fail to comply with the Sarbanes Oxley Act of2002 or any other regulations we could be subject to a range of consequences,including restrictions on our ability to sell equity securities or otherwiseraise capital funds, the de-listing of our common stock from the Nasdaq GlobalMarket, suspension or termination of our clinical trials, failure to obtainapproval to market our product candidates, restrictions on future products orour manufacturing processes, significant fines, or other sanctions orlitigation.

 

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

** **

Section 404 of theSarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of ourinternal controls over financial reporting as of the end of each fiscal year,and to include a management report assessing the effectiveness of our internalcontrols over financial reporting in our annual report on Form 10-K forthat fiscal year. Section 404 also requires our independent registeredpublic accounting firm to attest to, and report on, the effectiveness of ourinternal controls over financial reporting.

 

Our management, includingour chief executive officer and principal financial officer, does not expectthat our internal controls over financial reporting will prevent all error andall fraud. A control system, no matter how well designed and operated, canprovide only reasonable, not absolute, assurance that the control system’sobjectives will be met. Further, the design of a control system must reflectthe fact that there are resource constraints, and the benefits of controls mustbe considered relative to their costs. Because of the inherent limitations inall control systems, no evaluation of controls can provide absolute assurancethat all control issues and instances of fraud involving a company have been,or will be, detected. The design of any system of controls is based in part oncertain assumptions about the likelihood of future events, and we cannot assureyou that any design will succeed in achieving its stated goals under allpotential future conditions. Over time, controls may become ineffective becauseof changes in conditions or deterioration in the degree of compliance with policiesor procedures. Because of the inherent limitations in a cost-effective controlsystem, misstatements due to error or fraud may occur and not be detected. Wecannot assure you that we or our independent registered public accounting firmwill not identify a material weakness in our internal controls in the future. Amaterial weakness in our internal controls over financial reporting wouldrequire management and our independent registered public accounting firm toconsider our internal controls as ineffective. If our internal controls overfinancial reporting are not considered effective, we may experience a loss ofpublic confidence, which could have an adverse effect on our business and onthe market price of our common stock.

 

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

** **

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

 

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

** **

On March 2, 2005, we entered into a SecuritiesPurchase Agreement with Warburg Pincus Private Equity VIII, L.P. (“Warburg”)and certain other investors pursuant to which we issued and sold an aggregateof 2,352,443 shares of our Series A Exchangeable Preferred Stock (the “ExchangeablePreferred”) at a price per share of $22.10, for aggregate gross proceeds ofapproximately $52.0 million. On May 18, 2005, at our Annual Meetingof Stockholders, our stockholders voted 

 

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to approve the issuance of shares of our common stockupon exchange of shares of the Exchangeable Preferred. As a result of suchapproval, we issued a total of 23,524,430 shares of common stock upon exchangeof 2,352,443 shares of Exchangeable Preferred. In connection with its purchaseof the Exchangeable Preferred, 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.

 

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

 

On May 29, 2008, we sold 12,420,000 shares of ourcommon stock in an underwritten public offering at a price of $5.64 per share,for aggregate gross proceeds of approximately $70.0 million (the “May 2008Financing”).  Warburg and Baker purchased 3,500,000 and 1,500,000 shares,respectively, of the 12,420,000 shares sold in the May 2008 Financing.

 

As of June 30, 2008, we had 80,756,964 shares ofcommon stock outstanding, of which Warburg owned 26,124,430 shares, orapproximately 32.3% of the voting power of our outstanding common stock, andBaker owned 11,248,621 shares, or approximately 13.9% of the voting power ofour outstanding common stock. Although each of Warburg and Baker have enteredinto a standstill agreement with us, they are, and will continue to be, able toexercise substantial 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.**

** **

Provisions of our amended and restated certificate ofincorporation and bylaws, as well as provisions of Delaware law, could make itmore difficult for a third party to acquire us, even if doing so would benefitour stockholders. In addition, these provisions may frustrate or prevent anyattempts by our stockholders to replace or remove our current management bymaking it more difficult for stockholders to replace members of our board ofdirectors. Because our board of directors is responsible for appointing themembers of our management team, these provisions could in turn affect anyattempt by our stockholders to replace current members of our management team.These provisions include:

 

·       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 by Section 203will not apply to either Warburg or Baker because, prior to the dates on whichthey became interested stockholders, our board of directors approved thetransactions 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, 

 

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in connection with the February 2007 Financing,Baker entered into a standstill agreement agreeing not to pursue certainactivities the purpose or effect of which may be to change or influence thecontrol of the Company.

 

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

 

In May 2003, ourboard of directors adopted a stockholder rights plan that may have the effectof discouraging, delaying or preventing a merger or acquisition of us that ourstockholders may consider beneficial by diluting the ability of a potentialacquirer to acquire us. Pursuant to the terms of the stockholder rights plan,when a person or group, except under certain circumstances, acquires 15% ormore of our outstanding common stock or 10 business days after announcement ofa tender or exchange offer for 15% or more of our outstanding common stock, therights (except those rights held by the person or group who has acquired orannounced an offer to acquire 15% or more of our outstanding common stock)would generally become exercisable for shares of our common stock at adiscount. Because the potential acquirer’s rights would not become exercisablefor our shares of common stock at a discount, the potential acquirer wouldsuffer substantial dilution and may lose its ability to acquire us. Inaddition, the existence of the plan itself may deter a potential acquirer fromacquiring or making an offer to acquire us. As a result, either by operation of the plan or by its potentialdeterrent effect, mergers and acquisitions of the Company that our stockholdersmay consider in their best interests may not occur.

 

Because Warburg owns a substantial percentage of ouroutstanding common stock, we amended the stockholder rights plan in connectionwith Warburg’s purchase of Exchangeable Preferred in March 2005 to providethat Warburg and its affiliates will be exempt from the stockholder rightsplan, unless Warburg and its affiliates become, without the prior consent ofour board of directors, the beneficial owner of more than 44% of our commonstock. Likewise, since Baker owns a substantial percentage of our outstandingcommon stock, we amended the stockholder rights plan in connection with the February 2007Financing to provide that Baker and its affiliates will be exempt from thestockholder rights plan, unless Baker becomes, without the prior consent of ourboard of directors, the beneficial owner of more than 20% of our common stock.Under the stockholder rights plan, our board of directors has express authorityto amend the rights plan without stockholder approval.

 

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

** **

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

 

·       actual or anticipatedresults of our clinical trials, including our pivotal Phase 2 PROPEL trial;

 

·       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;

 

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·       additions or departures ofkey personnel;

 

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

 

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

 

·       sales of large blocks ofour common stock;

 

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

 

·       economic and other externalfactors, including disasters or crises.

 

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

 

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

** **

On January 1, 2006, we adopted SFAS No. 123(Revised 2004), *Share-Based Payment* (“SFAS 123R”),which requires the measurement and recognition of compensation expense for allstock-based compensation based on estimated fair values. As a result, ouroperating results for the three and six months ended June 30, 2008 and2007 include, and future periods will include, a charge for stock-basedcompensation related to employee stock options, restricted stock and discountedemployee stock purchases.  Theapplication of SFAS 123R requires the use of an option-pricing model todetermine the fair value of share-based payment awards.  This determination of fair value is affectedby our stock price as well as assumptions regarding a number of highly complexand subjective variables. These variables include, but are not limited to, ourexpected stock price volatility over the term of the awards, and actual andprojected employee stock option exercise behaviors. Option-pricing models were developedfor use in estimating the value of traded options that have no vesting orhedging restrictions and are fully transferable. Because our employee stockoptions have certain characteristics that are significantly different fromtraded options, and because changes in the subjective assumptions canmaterially affect the estimated value, in management’s opinion the existingvaluation models may not provide an accurate measure of the fair value of ouremployee stock options.

 

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

 

**Substantial sales of shares may impact the marketprice of our common stock.**

** **

If our stockholders sell substantial amounts of ourcommon stock, the market price of our common stock may decline. These salesalso might make it more difficult for us to sell equity or equity-relatedsecurities in the future at a time and price that we consider appropriate. Weare unable to predict the effect that sales may have on the then prevailingmarket price of our common stock.  Wehave entered into a Registration Rights Agreement with Warburg and the otherpurchasers of our Exchangeable Preferred pursuant to which such investors areentitled to certain registration rights with respect to the shares of commonstock that we issued upon exchange of the Exchangeable Preferred.

 

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

 
| **ITEM 2.** | ** ** | **UNREGISTERED SALES OF EQUITY SECURITIES AND USE  OF PROCEEDS** | ** ** | **None**   |
|-------------|------------|------------------------------------------------------------------|------------|------------|
| ** **  | ** ** | ** **                                                       | ** ** | ** ** |
| **ITEM 3.** | ** ** | **DEFAULTS UPON SENIOR SECURITIES**                              | ** ** | **None**   |
| ** **  | ** ** | ** **                                                       | ** ** | ** ** |
| **ITEM 4.** | ** ** | **SUBMISSION OF MATTERS TO A VOTE OF SECURITY  HOLDERS**         | ** ** | ** ** |

 

We held our 2008Annual Meeting of Stockholders on June 24, 2008. At such meeting, thefollowing actions were voted upon:

 

a.         Election of Directors

 
| ** **                      | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|---------------------------------|------------|------------|------------|--------------|------------|
| Stephen J. Hoffman, Ph.D., M.D. |       | 61,575,928 |       | 495,102      |       |
| Paul L. Berns                   |       | 61,565,370 |       | 505,660      |       |
| Michael D. Casey                |       | 59,569,370 |       | 2,501,200    |       |
| Stewart Hen                     |       | 61,574,363 |       | 496,667      |       |
| Jeffrey R. Latts, M.D.          |       | 61,568,828 |       | 502,202      |       |
| Jonathan S. Leff                |       | 51,777,095 |       | 10,293,935   |       |
| Timothy P. Lynch                |       | 59,565,370 |       | 2,505,660    |       |

 

b.           Approval of the Company’s2008 Equity Incentive Plan.

 
| **For**    | ** ** | **Against** | ** ** | **Abstentions** | ** ** |
|------------|------------|-------------|------------|-----------------|------------|
| 54,029,348 |       | 1,172,028   |       | 20,063          |       |

 

c.            Ratification of theselection 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, 2008.

 
| **For**    | ** ** | **Against** | ** ** | **Abstentions** | ** ** |
|------------|------------|-------------|------------|-----------------|------------|
| 61,989,621 |       | 51,475      |       | 29,934          |       |

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

 
| Exhibit No. | ** ** | **Note** | ** ** | **Description**                                                                                                     |
|------------------|------------|----------|------------|---------------------------------------------------------------------------------------------------------------------|
| 10.1             |       | (1)      |       | Allos Therapeutics, Inc. 2008 Equity Incentive  Plan.                                                          |
| 10.2             |       | (2)      |       | Form of  Option Agreement under the 2008 Equity Incentive Plan.                                                |
| 10.3             |       | (3)      |       | Form of  Restricted Stock Award Agreement under the 2008 Equity Incentive Plan.                                |
| 10.5.3*          |       |     |       | Fifth Amendment to Office Lease Agreement dated  June 16, 2008 between Allos and Circle Point Properties, LLC. |
| 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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| *      |   | Confidential treatment has been requested with  respect to portions of this exhibit.  Omitted portions have been filed  with the Securities and Exchange Commission pursuant to Rule 24b-2 of  the Securities Exchange Act of 1934, as amended.                                                                                                                    |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                         |
| #      |   | The certifications  attached as Exhibit 32.1 that accompany this Quarterly Report on  Form 10-Q are not deemed filed with the Securities and Exchange  Commission and are not to be incorporated by reference into any filing of  Allos Therapeutics, Inc. under the Securities Act of 1933, as amended,  or the Securities Exchange Act of 1934, as amended, |
|   |   |                                                                                                                                                                                                                                                                                                                                                                         |

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|   |   | whether made before or after the date of this Form 10-Q,  irrespective of any general incorporation language contained in such filing. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                        |
| (1)    |   | Incorporated by reference to Exhibit 99.1 filed  with our Registration Statement on Form S-8 filed on June 24, 2008.         |
|   |   |                                                                                                                                        |
| (2)    |   | Incorporated by reference to Exhibit 99.2 filed  with our Registration Statement on Form S-8 filed on June 24, 2008.         |
|   |   |                                                                                                                                        |
| (3)    |   | Incorporated by reference to Exhibit 99.3 filed  with our Registration Statement on Form S-8 filed on June 24, 2008.         |

 

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**SIGNATURES**

** **

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
| Date: August 5,  2008 | **ALLOS  THERAPEUTICS, INC.**                 |
|---------------------------------|-----------------------------------------------|
|                            |                                          |
|                            | /s/ Paul L.  Berns                            |
|                            | Paul L. Berns                                 |
|                            | President and  Chief Executive Officer        |
|                            | (Principal  Executive Officer)                |
|                            |                                          |
|                            |                                          |
|                            | /s/ David C.  Clark                           |
|                            | David C. Clark                                |
|                            | Vice President,  Finance and Treasurer        |
|                            | (Principal  Financial and Accounting Officer) |

 

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